Koninklijke DSM N.V. Annual Report 2007

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FY2007 Annual Report · Koninklijke DSM N.V.

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Royal DSM N.V.
Annual Report 2007

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Life Sciences and Materials Sciences

Embracing
the Future

Royal DSM N.V.

P.O. Box 6500
6401 JH Heerlen
The Netherlands
T + 31 (45) 578 8111

www.dsm.com

Every day, millions of people use products
containing our ingredients or materials – often
without realizing that it is a DSM ingredient that
sets these products apart. We supply numerous
innovative ingredients and applications to a wide
variety of producers in various markets all over
the world.

Responsible innovation is the key to our
success. With a relentless drive to innovate we
are defining our future today. At the same time
we focus on more sustainable products to help
secure a better future for the world.

With products and services in Life Sciences and
Materials Sciences we are embracing the future
by supporting a healthier, more sustainable and
more enjoyable way of life.

The Unlimited.DSM brand reflects our
continuous drive to improve – in sports for
example, where innovative development and
improvement in nutrition and materials can make
the difference.

Unlimited.DSM

As the innovative Partner in Sports of the Dutch Olympic Committee (NOC*NSF),
DSM works closely together with sportsmen and women in their quest for success –
and together we help the world of sports move forward. See page 84 for a more
in-depth look at DSM and sports.

Annual Report 2007

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.

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.

Nutrition

Pharma

Performance
Materials

Industrial
Chemicals

€2,543m Net Sales €981m

Net Sales

€2,895m Net Sales €1,937m Net Sales

DSM Nutritional Products
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.

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

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.

- Animal Nutrition and Health
World market leader in vitamins, carotenoids and enzymes for
the feed industry. Its products contribute to animal performance
(for example for gut flora and bone health) and the environment.

DSM Food Specialties
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.

DSM Special Products
DSM Special Products 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 unit supplies to a wide range of markets.

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

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 polyamide 6, a
versatile material that is used in for example sports and leisure
clothes, tires and carpets. It is increasingly used as a high-
performance construction material.

DSM Dyneema
DSM Dyneema is the inventor and manufacturer of Dyneema®,
the world’s strongest fiber™. This polyethylene fiber offers
maximum strength combined with minimum weight. It is up to
15 times stronger than quality steel and up to 40% stronger
than aramid fibers, both on a weight-for-weight basis. The
applications are therefore more or less unlimited.

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 Resins
DSM Resins manufactures and sells high-quality resins which
are used in a wide variety of everyday applications. By focusing
on value-added and eco-friendly solutions, DSM Resins is able
to capture many growth opportunities thanks to its market-
driven innovation efforts.

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

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.

In line with the acceleration of DSM’s strategy program Vision 2010 – Building on Strengths, the strategic clustering of activities
has changed. Below is the new organizational structure, as of 1 January 2008.

Nutrition

Performance Materials

Base Chemicals and Materials

I DSM Nutritional Products

• Human Nutrition and Health
• Animal Nutrition and Health

I DSM Food Specialties

Pharma

I DSM Pharmaceutical Products
I DSM Anti-Infectives

I DSM Engineering Plastics
I DSM Dyneema
I DSM Resins

Polymer Intermediates

I DSM Fibre Intermediates

I DSM Agro
I DSM Elastomers
I DSM Melamine
I DSM Energy

Annual Report 2007

www.dsm.com

Annual Report 2007

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

Pharma

Performance
Materials

Industrial
Chemicals

€2,543m Net Sales €981m

Net Sales

€2,895m Net Sales €1,937m Net Sales

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

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.

Nutrition

Performance Materials

Base Chemicals and Materials

I DSM Nutritional Products

• Human Nutrition and Health
• Animal Nutrition and Health

I DSM Food Specialties

Pharma

I DSM Pharmaceutical Products
I DSM Anti-Infectives

I DSM Engineering Plastics
I DSM Dyneema
I DSM Resins

Polymer Intermediates

I DSM Fibre Intermediates

I DSM Agro
I DSM Elastomers
I DSM Melamine
I DSM Energy

Annual Report 2007

www.dsm.com

Annual Report 2007

www.dsm.com

Royal DSM N.V.

P.O. Box 6500
6401 JH Heerlen
The Netherlands
T + 31 (45) 578 8111

www.dsm.com

Royal DSM N.V.
Annual Report 2007

With products and services in Life Sciences and
Materials Sciences we are embracing the future
by supporting a healthier, more sustainable and
more enjoyable way of life.

The Unlimited.DSM brand reflects our
continuous drive to improve – in sports for
example, where innovative development and
improvement in nutrition and materials can make
the difference.

Unlimited.DSM

Annual Report 2007

www.dsm.com

Key data for 2007

Net sales
(x million)

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

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

€8,757 €823 €558

Net profit
(x million)

Capital expenditure
and acquisitions
(x million)

Net earnings before exceptional
items per ordinary share

€429 €568 €3.07

Dividend per ordinary share

Workforce (at year-end)

CFROI

€1.20 23,254 8.3%

DSM – the Life Sciences and Materials Sciences company
Royal DSM N.V. creates innovative products and services in Life Sciences and
Materials Sciences that contribute to the quality of life. DSM’s products and services
are used globally in a wide range of markets and applications, supporting a healthier,
more sustainable and more enjoyable way of life. End markets include human and
animal nutrition and health, personal care, pharmaceuticals, automotive, coatings
and paint, electrics and electronics, life protection and housing. DSM has annual
sales of almost €8.8 billion and employs some 23,000 people worldwide. The
company is headquartered in the Netherlands, with locations on five continents.
DSM is listed on Euronext Amsterdam. More information: www.dsm.com. 8

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 2007

www.dsm.com

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Table of contents

3 Key financial data

89 Financial statements 2007

4 Letter from the Chairman

Investing in future profitable growth

90 Consolidated financial statements
90 Summary of significant accounting policies
96 Consolidated statements
102 Notes to the consolidated financial statements of Royal

16 Embracing the Future

DSM N.V.

138 Financial statements of Royal DSM N.V.
139 Notes to the Royal DSM N.V. balance sheet

147 Other information
147 Auditor’s report
147 Profit appropriation
148 Special statutory rights

150 DSM figures: five-year summary

153 Explanation of some financial concepts and ratios

Innovation

18 Report by the Managing Board
19 Highlights of 2007
21 Vision 2010 – Building on Strengths accelerated
24
26 Marketing and branding
26 Purchasing
27 Safety, health and the environment
28 Human resources
29 Research and development (R&D)
32 Corporate ICT
32 Corporate governance
34 Macro-economic review
36 Financial results

40 Review of business
42 Nutrition
50 Pharma
54 Performance Materials
60
64 Other activities

Industrial Chemicals

65 Report by the Supervisory Board

68 Corporate organization

70 Remuneration policy regarding the Managing Board and

the Supervisory Board

70 Remuneration policy
73 Remuneration in 2007 and changes expected in 2008

77 Corporate governance, risk management and internal

control
77 Organization
77 Dutch corporate governance code
77 Governance framework
78 Risk-management system
79 Financial policy
80 Risks

Information about the DSM share

Innovation is our Sport™

Annual Report 2007

www.dsm.com

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Key financial data
(consolidated)

Throughout this report:
•
•

operating profit (EBIT) and EBITDA do not include exceptional items;
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 €:

Net profit before exceptional items

Net profit

Dividend

Shareholders’ equity

Ratios (%):

EBIT / net sales

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

2007

8,757

1,247

823

558

(129 )

429

574

1,003

214

475

1,338

5,310

9,828

5,982

3.07

2.35

1.20 1

30.42

9.4

14.2

21.4

8.3

19.9

54.8

9.4

16.6

22,433

23,254

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

1 Subject to approval by the Annual General Meeting of Shareholders.

Annual Report 2007

www.dsm.com

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Letter from the Chairman

Dear reader,

On 1 May 2007 I was pleased to take over the role of
Chairman from Peter Elverding, who contributed a great deal
to DSM.

One of my resolutions was to communicate with all DSM
stakeholders about our direction, developments and
achievements. In my opinion, a dialogue with everyone who
has an interest in DSM is very important.

In this annual report you will read about innovation, which is
at the core of our business. Another element that is at the
heart of our organization is responsibility. And finally, you will
find in this annual report many examples of why we call
ourselves Unlimited .DSM.

The year behind us was in many respects an important and
exciting one. We announced the acceleration of our Vision
2010 – Building on Strengths strategy with ambitious, but
attainable, new growth targets aimed at further value creation.

By accelerating our shift to a Life Sciences and Materials
Sciences company we are convinced that we can contribute
to unmet needs in the area of climate change, health &
wellness and a more sophisticated society.

The unique combination of Life Sciences and Materials
Sciences offers us an interesting platform for growth, amongst
others in (white) biotechnology and biomedical materials.

At the same time we are stepping up our search for
acquisitions, while maintaining our disciplined acquisition
criteria. The businesses that do not fit in with our new strategic
thrust are being carved out and divested or partnered with
other companies. I admire the professionalism of the
employees of these businesses in dealing with their new
futures.

In 2007 we announced several new investments which will
contribute to future growth.

Also, we announced a second share buy-back program of
€750 million and we proposed to increase the annual dividend
for 2007 by 20% to €1.20 per ordinary share, the largest
dividend increase in 12 years.

DSM performed well in 2007. We surpassed our sales growth
objective and our operating profit from continued operations
almost mirrored the record achieved in 2006. Our earnings per
share before exceptional items clearly increased.

All this was achieved despite considerable headwind such as
the weak US dollar, continued high oil and raw-material prices
and the phasing out of some favorable contracts. At the same
time we stepped up our investments in innovations and
expansion, as planned.

Innovation-related sales surpassed €350 million in 2007. We
are well on our way to reaching our objective of €1 billion in
innovation-related sales by the year 2010.

With many new innovative products launched in 2007 and
many more in the pipeline for the coming years, we are
showing that innovation is really embedded in our
organization. It is becoming a part of our culture. The same
goes for knowing what our customers want and need. A
company’s success depends on its ability to anticipate its
customers’ future needs.

Growth in the emerging markets remains very strong. We
have raised our sales target for China from USD 1.0 billion to
USD 1.5 billion in 2010. In 2007 we realized USD 956 million in
sales in China, up 23% from almost USD 775 million in 2006.
For countries such as Brazil, India and Russia we are also
seeing further growth.

In the area of sustainability, we have doubled our energy
savings target from 1% to 2% per year. All our other targets
have been confirmed. Safety, of course, remains a priority for
us. We are once again ranked among the global leaders in
sustainability in our sector and have the ambition to remain
a global leader.

A further reduction of our eco-footprint and increased
utilization of renewable resources are other key elements in
our sustainability policy. Many of our products help reduce
CO 2 and other emissions.

At the end of 2007 we conducted our first employee-
engagement survey on a global scale. An engaged workforce
is critical and I have every confidence that our employees are
able to make Vision 2010 a success. We have proven before
that we are able to transform ourselves.

A word of thanks to Peter Elverding, who in May 2007
stepped down as Chairman of the Managing Board after eight
years. He played a pivotal and inspiring role in guiding DSM
through the transformations set out in especially Vision 2005.

Annual Report 2007

www.dsm.com

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Letter from the Chairman

The DSM Managing Board (from left to right): Jan Zuidam (deputy chairman), Rolf-Dieter Schwalb, Feike Sijbesma (chairman), Nico Gerardu and Stephan Tanda.

With the appointment of Stephan Tanda as member of the
Managing Board, we have completed our management team.
With two of the five current Managing Board members being
non-Dutch nationals, international diversity of our top
management has further increased.

The composition of our Supervisory Board also changed in 2007.
Okko Müller stepped down after serving the maximum term of
twelve years on the Supervisory Board. I would like to thank him
for his commitment and his valuable contribution to DSM.

Our progress in 2007 would not have been possible without the
efforts of all our 23,000 employees and the continued support
of our customers and shareholders. I am confident that our
accelerated Vision 2010 strategy with a focus on Life Sciences
and Materials Sciences will create significant value for all our
eholders in the years to come.
stakeholders in the years to come.

e Sijbebebbebbbbebeebbebbbebebebebbebbebbbbebbbbbebebbbbebbbbbbbeebbbbbbbbbbbbbbbbbbbb sma
Feike Sijbesma

rman of the Managing Board
Chairman of the Managing Board

feike.sijbesma@dsm.com

Annual Report 2007

www.dsm.com

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Investing in future profitable growth

In order to secure sustainable profitable growth in the future,
investments are essential. They form an integral part of the
Vision 2010 – Building on Strengths strategy. DSM is not only
expanding production capacity in several areas, but is also
committed to continued investments in innovation. In order to
achieve external growth, the company has stepped up its
search for acquisitions. Venturing remains an important activity
to explore new technologies and business areas.

In 2007 capital expenditure on intangible assets and property,
plant and equipment (excluding acquisitions) amounted to
€475 million compared to €457 million in 2006. This was
more than the level of amortization and depreciation before
exceptional items. For 2008, DSM expects capital expenditure
to rise versus 2007. As indicated in Vision 2010, DSM expects
the average annual level of capital expenditure to be
approximately €0.5 billion.

DSM acquired three companies in 2007, while six investments
were made by DSM Venturing. Several decisions were taken for
capacity expansions in various parts of the company. In 2008,
too, DSM expects to announce several capacity expansions,
all in line with the Vision 2010 strategy.

An amount of €200 million has been earmarked for venturing
activities over the period 2005-2012. Additional expenses for
innovation will gradually rise to €70 million per year. In 2007
these amounted to more than €50 million compared to 2005.
DSM expects to spend more than €75 million per year on small
new business acquisitions until 2010.

All these investments, in combination with capital expenditure,
will enable DSM to achieve its target of realizing €1 billion in
innovation-related sales in 2010 and an organic sales growth of
more than 5% per year for the period until 2010. This growth
should be complemented by acquisitions.

In the following list all main announcements, especially major
investments and acquisitions made in 2007 are summarized:

30 January

DSM announces the decision to build
a DSM China Campus in the Zhangjian Hi-Tech
Park in the Pudong New Area of Shanghai
(China). The campus will comprise all Shanghai
offices of DSM China and several business
groups as well as the R&D labs of DSM
in China.

19 February DSM announces an equity investment in

15 March

27 March

15 June

28 June

5 July

Harland Medical Systems, Inc. Harland markets
technologies and solutions in medical coating
applications. This is the third investment by
DSM in a biomedical company in one year.
DSM acquires Pamako Engineering AG in
Zurich (Switzerland). The acquisition includes
Pamako’s technology for the production of
UHMWPE (Ultra High Molecular Weight
Polyethylene) based products. DSM will further
develop and improve this technology and
incorporate it in its existing business
for Dyneema® .
DSM announces an investment in a new plant
for producing engineering plastics compounds
in India. The plant will triple DSM’s capacity for
the production of Akulon® PA6, Arnite® PBT and
PET, and Stanyl® PA46 in India.
DSM concludes that the greatest value for DSM
Anti-Infectives will be generated through a
partnering strategy possibly with – partial –
disposals combined with innovation initiatives
and further restructuring to improve profitability.
DSM announces a comprehensive profit
improvement program for DSM Nutritional
Products that, through a mix of cost savings
and increased profits from higher revenues, is
expected to deliver an annual minimum of
€100 million in improved profitability by 2010.
DSM acquires privately owned Pentapharm
Holding Ltd. The company, with sales of some
€40 million per annum, employs about 200
people. Pentapharm holds a globally leading
position in the development and production of
active ingredients and system solutions for the
cosmetics industry.

Annual Report 2007

www.dsm.com

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Investing in future profitable growth

The DSM NeoResins+ expansion in Meppen
(Germany) has been completed successfully.
The new manufacturing unit will manufacture
specialty polyurethane dispersions for high-end
decorative professional and DIY trim paints,
metal and plastic coatings and parquet
lacquers.

5 November DSM Venturing participates in a financing round

6 November

in Ganeden Biotech, Inc., a US probiotics
company which markets dietary supplements
focused on digestive health.
In Jiangyin (China) DSM will expand engineering
plastics compounding capacity by 50%. This
expansion is an enhancement of DSM’s existing
capacity, which was doubled in 2006 with the
opening of this new site.

26 November DSM NeoResins+ successfully completes the

new water-based alkyd manufacturing unit at its
existing site in Hoek van Holland (Netherlands).

5 December DSM announces a €25 million investment in a
new factory for the production of waterborne
acrylic resins in China.

6 December DSM Anti-Infectives signs a partnership with
Mumbai (India) based Arch Pharmalabs Ltd.

20 December DSM Venturing makes an investment in

Novomer, Inc. This US company is engaged in
the development of a technology platform to
use carbon dioxide and other renewable
materials to produce performance polymers,
plastics and other chemicals.

27 August

DSM Venturing makes an investment in Food
Quality Sensor International, Inc. This is the first
equity investment in the field of Specialty
Packaging, one of the Emerging Business
Areas selected in Vision 2010.

26 October

3 September Construction of the DSM China Campus

commences. It will be DSM’s biggest and most
important research facility outside Europe and
the United States.

5 September DSM Venturing invests in Jurilab Oy, a Finnish
company specialized in the discovery of gene-
disease associations and their application to
healthcare.

11 September DSM announces a restructuring of the

manufacturing activities of DSM Nutritional
Products in China and the development of the
Xinghuo site in Shanghai as a strategic
manufacturing base. As a consequence, the
Gonglu site, also in Shanghai, will be closed.
18 September The Dutch government announces that it will

provide funding of €45 million to the BioMedical
Materials program, initiated by DSM and the
University of Maastricht. The program is a
public-private partnership focusing on research
and development of biomedical materials. The
program has a provisional budget of €90 million
and will run for five years.

21 September DSM NeoResins+ announces an investment of

€30 million in a new factory for waterborne
emulsion resins in Waalwijk (Netherlands).

24 September DSM Venturing announces an investment in the
Danish company Upfront Chromatography A/S,
the world’s leading developer of customized
industrial protein chromatography processes.

27 September DSM announces the acceleration of Vision

2010 – Building on Strengths with a focus on
Life Sciences and Materials Sciences. As a
consequence DSM initiates a disposal program
for non-core businesses and a stepped-up
search for acquisitions to achieve external
growth.
DSM announces a €25 million investment in
capacity expansion and modernization of the
caprolactam plant in Geleen (Netherlands).
DSM will invest to expand Dyneema UD
production by 25% in Greenville, North Carolina
(United States). The new line is expected to
come on stream in 2008.

5 October

8 October

Annual Report 2007

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Life Sciences and Materials Sciences

Food ingredients
& Polymers

DSM is one of the biggest suppliers of dairy ingredients in
the world. DSM is also one of the world leaders in polymers
used in many everyday applications.

Annual Report 2007

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Annual Report 2007
Annual Report 2007

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www.dsm.com

9
9

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Life Sciences and Materials Sciences

Vitamins
& Automotive

DSM is the world’s largest supplier of nutritional ingredients
such as vitamins, which are used in a wide variety of food
products, including pet food. Numerous DSM materials can be
found in the automotive industry.

Annual Report 2007

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Life Sciences and Materials Sciences

Taste enhancers
& Electronics

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DSM is a major supplier of ingredients for flavorings and
flavor enhancers. The company also makes many materials
used in components for mobile phones, computers and other
consumer electronics.

Annual Report 2007

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Life Sciences and Materials Sciences

Enzymes
& Synthetic fibers

DSM is a world leader in the development of new enzymes
for the food and beverage industries. It is also the inventor and
producer of ultra-strong fibers that are used in the fishing,
shipping and offshore industries.

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Embracing the Future

In today’s society we need to take care of tomorrow. After all,
our dependency on fossil fuels is putting increasing strain on the
earth’s resources. The continued increase in greenhouse-gas
emissions is leading to growing concern about the environment.

With the continued growth of the emerging economies, it will be
a challenge to balance the population growth combined with
higher standards of living in these countries with lower
emissions on a global scale.

A growing and aging world population increases the need
for health and wellness products. At the same time, a more
connected society is asking for new functionalities – products
that are faster, lighter and easier to use.

For the pharmaceutical industry, too, the supply of innovative
and reliable ingredients is key. Growth in this industry is driven
by technological advancements and demographics. Life
expectancy has grown in the western world. In the emerging
economies, population is rising fast, while life expectancy is
also on the rise thanks to a higher standard of living.

However, our longevity and improved health and well-being
come at a steep price. Spending on healthcare and
pharmaceuticals is growing exponentially. There is increased
pressure on the pharmaceutical industry not only to contain
costs but also to continue delivering new medicines in order to
maintain earnings growth. In this industry reliable, experienced
partners for outsourcing are in high demand.

Addressing all these issues makes innovation more important
than ever. Innovation requires creativity, the ability to think ‘out
of the box’ to come up with new solutions that help to improve
the quality of life and make the world more sustainable. The
future is for us to make, today.

However, while pharmaceutical companies’ expenditure on
research and development (R&D) has increased in recent years,
R&D productivity has declined. In order to improve their
development pipelines, these companies are increasingly

The wealth of health
The western world is being confronted with a rapid increase in
diseases and disorders such as obesity, cardiovascular
disorders and diabetes, which are connected with modern
lifestyle patterns. Close to 80% of medicines used today serve
to combat diseases that are related to nutrition and lifestyle.

Demand for innovative food and food ingredients is growing, as
consumers are increasingly paying attention to their daily diets
and are turning to foods with certain functionalities. In personal
care, too, consumers are placing ever higher demands on the
health and beauty effects of products.

At the same time, many developing countries are facing health
issues related to the daily diet of their population. Staple foods
in these countries are poor in micronutrients, such as vitamins
and minerals. It is widely acknowledged that this ‘hidden
hunger’ is holding back the development of these countries.

looking for new opportunities, for instance in
biopharmaceuticals.

Meeting the rapidly growing demand for protein-rich diets
requires feed ingredients that foster animal growth and reduce
the ecological impact of animal farming, while at the same time
safeguarding the health of both the farmed animal and the
ultimate human consumer. The need to replace conventional
growth promoters in animal feed calls for innovation in
feed ingredients.

Biological drugs such as proteins and monoclonal antibodies,
produced with living cells, are a fast growing and very promising
area with many possibilities to deal with diseases which cannot
be addressed by conventional drugs. More research needs to
be done to improve the yields for these new, still relatively
expensive, drugs.

All this calls for sophisticated ingredients from manufacturers
with expertise in the safety, quality and traceability of the
ingredients they supply.

Based on a growing understanding of the impact of nutrition
on physical and mental health as well as well-being, there is an
increasing belief that the current clear distinction between
pharmaceuticals and nutrition will diminish in the longer term.

Annual Report 2007

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Embracing the Future

Also, people are becoming more concerned about their personal
safety, which increases the need for lightweight materials to
protect both people and their transport means.

In short, performance materials need to be better and stronger.
Stronger, because this means that less material is needed to
deliver the same performance. And less material means
a smaller eco-footprint in both production and use. It also
means less overall costs thanks to increased durability.

Crossing roads
As demand for materials from alternative sources increases,
biotechnology is having an increasing impact on the world of
materials. This results in biodegradable and biorenewable
materials, such as biopolymers, to be used in for example
biomedical and packaging applications.

Apart from the increased popularity of so-called hybrid cars,
biofuels are increasingly considered as an alternative to
traditional fuels. Especially the so-called second generation,
which is not competing with crops that can also be used for
food consumption, could very well be a viable alternative to
fossil fuels. This second generation allows the use of a much
wider range of raw materials, with less impact on the food
chain. They are also more environmentally friendly.

Also, materials are increasingly applied in medical applications.
This opens a new emerging field of biomedical materials. These
will play a key role in enabling medical breakthroughs in
healthcare, such as the introduction of drug-eluting materials.

Although today’s society appears to have many problems, at
the same time new solutions are on the horizon. Dedication to
innovation and research and an open mind to new
technological developments can help in reducing greenhouse-
gas emissions and providing a better quality of life, now and in
the future.

Less is more
Individualization and global networking characterize today’s
society. With the rapid advancement of technology and higher
standards of living in emerging markets, more and more products
are finding their way to an ever-faster growing group of consumers.

Products such as MP3 players, mobile phones and handheld
computers are not only finding increasing usage, but are also
starting to converge, incorporating more functionality.

Environmental concerns and worries about climate change
call for new, advanced and ‘green’ materials with superior
properties. In cars for instance, some metal parts such as
trunks can be replaced by composite resins, helping to reduce
weight resulting in lower fuel consumption.

The electronics industry is on the look-out for new engineering
plastics to deal with the ongoing miniaturization trend, among

other things; the automotive sector is searching for lighter and
stronger materials, to reduce energy use and CO2 emissions.
The building and construction sectors require advanced
materials, partly to replace conventional materials such as
steel.

In the paints and coatings industry, there is increasing demand
– partly due to stricter regulations – for waterborne products
that do not contain harmful solvents. The trend that calls for
more durable and more eco-friendly solutions is also visible
in packaging.

Annual Report 2007

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Report by the Managing Board

DSM performed well in 2007 with good sales growth and strong results
in light of the challenges faced by the company during the year.

Net sales and supplies

x € million

Nutrition

Pharma

Performance Materials

Industrial Chemicals

Other activities

Intra-group supplies

Total, continuing operations

Discontinued operations

Net sales

Supplies

2007

2006

2007

2006

Sales by segment from continuing operations

Nutrition

Pharma

Performance Materials

Industrial Chemicals

Other activities

2,543

2,407

2,590

2,463

981

916

1,031

967

2,895

2,753

2,901

2,759

1,937

1,872

2,205

2,135

401

404

455

422

(425)

(394)

2007

in %

2006

8,757

8,352

8,757

8,352

EBITDA / net sales from continuing operations
in % of net sales

2006
2007

20 (cid:116)

15 (cid:116)

10 (cid:116)

5 (cid:116)

0 (cid:116)

Nutrition

Pharma

Performance
Materials

Industrial
Chemicals

Total DSM

8,757

8,380

8,757

8,380

Operating profit plus depreciation
and amortization (EBITDA)

Operating profit (EBIT)

x € million

Nutrition

Pharma

Performance Materials

Industrial Chemicals

Other activities

2007

2006

x € million

2007

2006

405

174

415

292

(39)

464

Nutrition

146

Pharma

429

Performance Materials

269

Industrial Chemicals

(33)

Other activities

264

321

225

(80)

314

329

196

(69)

Total, continuing
operations

1,247

1,275

Total, continuing
operations

Discontinued operations

(1)

Discontinued operations

823

835

(1)

Total DSM

1,247

1,274

Total DSM

823

834

End-use markets

Health and nutrition

Pharmaceuticals

Agriculture

Electrics / electronics

Metal / building / construction

Packaging

Automotive / transport

Other

Textiles

Sales by origin from continuing operations

Sales by destination from continuing operations

Netherlands

Rest of Europe

North America

China

Asia Paciﬁc

Rest of the World

Netherlands

Germany

France

United Kingdom

Rest of Europe

China

Asia Paciﬁc

North America

Rest of the World

2007

in %

2006

2007

in %

2006

2007

in %

2006

Annual Report 2007

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Report by the Managing Board

Highlights of 2007
Vision 2010 – Building on Strengths accelerated
Innovation
Marketing and branding
Purchasing
Safety, health and the environment
Human resources
Research and development (R&D)
Corporate ICT
Corporate governance
Macro-economic review
Financial results

Highlights of 2007

General
DSM performed well in 2007 with good sales growth and
strong results in light of the challenges faced by the company
during the year. The US dollar weakened significantly and raw-
materials and energy prices remained high. Some favorable
contracts in relation to the acquisition of Roche vitamins
expired during the year and in some business segments DSM
had to deal with strong competition. DSM managed, however,
to increase sales volumes and selling prices and saw only a
slight increase in fixed out-of-pocket costs compared to the
previous year, despite higher expenditure on innovation, being
an important investment in future profitable growth. In anti-
infectives DSM saw a rapid temporary price increase in 2007.
In the area of Nutrition we were able to successfully differentiate
ourselves from the competition.

In 2007, sales from continuing operations increased by 5%.
Organic sales growth amounted to 7%. This is 2% above the
strategic target of 5%. Organic volume growth amounted to
3%, selling prices increased by 4%. Exchange rates on balance
had a negative effect of 3%.

The volume increase was particularly strong in the Nutrition
and Performance Materials clusters. The Industrial Chemicals
cluster succeeded in achieving good volume growth while at
the same time passing on the increased feedstock and energy
costs in selling prices. The strongest price increase was realized
by the Pharma cluster due to temporary shortages on the
market for anti-infectives.

The operating profit from continuing operations amounted
to €823 million, a decrease of 1% compared to the record
of 2006.

Value creation clearly materialized once again in 2007, as
the CFROI of 8.3% surpassed the company’s weighted
average cost of capital by 80 basis points.

Nutrition
The Nutrition cluster realized sales growth of 6%. Organic
volume growth amounted to 7% while prices were 2% higher.
Exchange rates had a negative effect of 4%.

In DSM Nutritional Products both Animal Nutrition and Health
and Human Nutrition and Health achieved solid volume growth.
The negative price trend in the more mature part of the business
was stopped and partly reversed by a differentiation strategy.
Nevertheless, DSM Nutritional Products’ operating profit
declined as higher organic growth did not fully compensate for
the expiration of the Roche contracts, higher energy and raw-
material costs, higher innovation expenditure and negative
exchange-rate effects.

DSM Food Specialties’ sales and operating profit decreased
due to the contractual phasing-out of the phytase tolling
business in 2006. Higher sales volumes and margins as well
as lower fixed costs caused a strong improvement (back to
a small profit) at DSM Special Products.

Pharma
The Pharma cluster saw sales rise by 7% due to the much
higher selling prices at DSM Anti-Infectives. Prices contributed
11% to the sales growth, while volumes declined by 3%.

In 2007 the composition of the Managing Board of DSM changed due to the retirement of Peter Elverding and
the appointment of Stephan Tanda. The Board continues to consist of five members. The following table gives
an overview of the main responsibilities of the individual Managing Board members as from 1 January 2008:

Feike Sijbesma

Chairman

Overall

Jan Zuidam

Deputy Chairman

Pharma, Polymer Intermediates, Special Products

Rolf-Dieter Schwalb

CFO

Finance

Nico Gerardu

Stephan Tanda

Member

Performance Materials, Base Chemicals and Materials

Nutrition

Annual Report 2007

www.dsm.com

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Report by the Managing Board

The operating result of DSM Anti-Infectives improved strongly
from the loss in 2006, as a result of much higher prices and the
effect of restructuring measures. Volumes declined due to
strong inventory effects in the volatile markets. The effect of
higher selling prices had almost disappeared at the end of the
fourth quarter.

The operating profit of DSM Pharmaceutical Products was
close to the level of 2006, as the business group was almost
able to compensate for the expiration of Roche contracts. DSM
increased its innovation effort, specifically in the development
of a new technology platform for active ingredients for generic
drugs.

Performance Materials
Increased volumes and higher selling prices resulted in a sales
increase of 5%. Organic volume growth was 5%. Negative
exchange-rate effects of 2% offset the higher price levels (2%
higher on average). Operating profit decreased slightly, caused
by DSM Engineering Plastics mainly due to a production
outage of DSM Fibre Intermediates’ caprolactam plant.

Higher fixed costs due to a higher activity level and increased
innovation efforts affected the operating profit of all business
groups, as did higher feedstock costs.

DSM Dyneema’s operating profit was higher due to higher
volumes. DSM Resins’ operating profit was slightly higher as a
result of higher sales volumes, margins and fixed costs. DSM
Elastomers posted a slightly higher operating profit; higher
sales volumes were partly offset by lower margins as a result of
strongly increased raw-material prices and a weak US dollar.

Industrial Chemicals
The Industrial Chemicals cluster showed a full-year sales
increase of 3%. Organic volume growth amounted to 3% and
prices were on average 5% higher. Exchange rate effects had a
negative impact of 4%. The strong increases in energy and
raw-material prices could on balance be fully passed on to the
market.

DSM Fibre Intermediates’ result increased thanks to higher
margins. The operating profit of DSM Melamine increased
strongly due to higher selling prices and the positive effect of its
withdrawal from the AMEL joint venture in 2006. Higher
margins led to a higher operating profit for DSM Agro. Lower
prices for gas and a lower production level resulted in a lower
operating profit at DSM Energy.

Corporate strategy
DSM decided to bring forward the mid-term evaluation of its
Vision 2010 – Building on Strengths strategy , originally planned
for 2008. In this mid-term review, the company’s strategic
direction and priorities were scrutinized, and progress made
was evaluated. DSM is convinced that it has chosen the right
strategic direction with Vision 2010 and that its evolution
towards a Life Sciences and Materials Sciences company
should be accelerated. Therefore, DSM will spur the growth of
its core activities in the realms of Life Sciences and Materials
Sciences and has raised its ambitions for organic growth in
these fields. Ongoing commitment to innovation will drive this
growth, actively exploiting the company’s potential created by
its unique and coherent portfolio of market positions and
technologies. Further on, more details will be given.

In addition we announced a number of changes to our financial
policies, such as a new dividend policy. A 20% increase in the
dividend, to €1.20 per ordinary share, will be proposed at the
Annual General Meeting of Shareholders of 2008. Furthermore,
having completed the share buy-back program initiated in
2006, DSM has started a new program for a total consideration
of €750 million, to be completed in 2008. DSM may halt the
buy-back at any time, if a major acquisition needs financing.

DSM also reconfirmed its commitment to sustainability and will
actively pursue this to reach the ambitious targets for 2010 set
in its Triple P (People, Planet, Profit) program.

Vision 2010 targets

Organic sales growth

EBITDA margins :

Nutrition

Pharma

Performance Materials

Polymer Intermediates

Previous target

New target

3-5%

>5%

>18%

≥16%

>18%

>19%

>17%

>13% (average)

Sales in China (by 2010)

USD 1 billion

USD 1.5 billion

Growth from innovation
(by 2010)

CFROI

Specialty profile

Sustainability

€1 billion

€ 1 billion

WACC (8%) +

WACC (7.5%) +

50 basis points

100 basis points

50 ➔ 60%

Towards 60%

Triple P program

Energy savings

targets doubled;

other targets

confirmed

Total shareholder return

Above peer-

group average

Annual Report 2007

www.dsm.com

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Report by the Managing Board

Turane™

DSM Resins developed Turane™ resin technology
for the automotive market. This new technology
reduces cycle times in the manufacture of composite
components for trucks. Turane™ composites equal
epoxy-based materials in terms of performance.
Composite truck parts save weight and thus help
to reduce CO2 emissions. Turane™ was used in the
bodywork of the lightweight Nuna4, the winner of the
Panasonic World Solar Challenge for solar-powered
vehicles. The vehicle weighed barely 200 kg.

PA4T

DSM has developed PA4T, the first new polymer in
the 21st century worldwide. A small-scale market
development plant will open in the first quarter of
2008. PA4T is a new high-performance polymer
and the answer to market trends that call for
miniaturization and convergence of electronic devices
such as cell phones and computers. It will assist
carmakers in continued weight reduction efforts for
better fuel efficiency and lower costs. At selected
customers, pre-marketing has started.

Financials
DSM’s financial position remained strong in 2007. Higher costs
for 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 €2.3 billion
in 2007, increased only slightly compared to the previous year.

The rating institutions maintained their Single A credit rating for
DSM. The company aims to generate a healthy cash flow. In
2007, cash flow from operating activities showed a 31%
increase to €825 million.

Net debt stood at €1,338 million at year-end, an increase of
€417 million. The increase was mainly due to the share buy-
back program. DSM initiated a second €750 million buy-back
program in 2007, after successfully completing the first
program of €750 million. Gearing stood at 20% at year-end.

Capital expenditure (excluding acquisitions) amounted to
€475 million, €51 million more than the level of depreciation and
amortization before exceptional items. As indicated in Vision
2010, DSM expects the annual average level of capital
expenditure to be approximately €0.5 billion.

Vision 2010 – Building on Strengths
accelerated

In October 2005 DSM defined its Vision 2010 – Building on
Strengths strategy . The mid-term evaluation, originally planned
for 2008, was brought forward to 2007. The company’s
strategic direction and priorities were scrutinized, and progress
made was evaluated. DSM is convinced that it has chosen the
right strategic direction with Vision 2010 and that its evolution
towards a Life Sciences and Materials Sciences company
should be accelerated.

In this light a number of activities have been identified that do
not fit in with the strategic thrust. These businesses will be
carved out and divested to new owners for whom there is a
stronger strategic fit and under whose ownership they can
prosper further. These businesses, including DSM Agro, have
been grouped in a new Base Chemicals and Materials cluster
with effect from 1 January 2008.

DSM has concluded that the Citric Acid business will be better
able to strengthen its market position and serve its customers
in a partnership scenario. To facilitate the process towards an
engagement with a third party, Citric Acid was carved out of
DSM Nutritional Products and integrated into the Base
Chemicals and Materials cluster as of 1 January 2008.

Annual Report 2007

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Report by the Managing Board

After studying all options it was concluded that the best way
to generate maximum value from the Anti-Infectives business
would be through a partnering strategy, possibly with partial
disposals. As part of this strategy, DSM Anti-Infectives will be
carved out into a separate entity.

2005. An additional objective is that DSM should become an
intrinsically innovative company, with excellent innovation
practices and an above-average return on innovation
investments and with employees to whom innovation
comes naturally.

DSM Fibre Intermediates, in 2007 part of Industrial Chemicals,
will be reported in a new cluster, Polymer Intermediates. The
activities provide backward integration for DSM Engineering
Plastics and have a strong leadership position.

In 2007, further improvement practices and a uniform
innovation reporting structure were implemented and a
systematic approach towards building an innovation pipeline
was adopted.

As of 1 January 2008, DSM has five reporting clusters: Nutrition,
Pharma, Performance Materials, Polymer Intermediates and
Base Chemicals and Materials.

A stepped-up search for acquisition opportunities will further
accelerate DSM’s evolution towards a Life Sciences and
Materials Sciences company. DSM will maintain its disciplined
acquisition policy. Although DSM in principle wants to
safeguard its current single A credit rating by the major rating
agencies, DSM is willing to accept temporarily a deviation from
single A ratios if an exceptional, strategically very attractive,
large opportunity to strengthen the portfolio requires this.
Even with the share buy-back program there is significant
acquisition headroom available, especially considering the
disposal program.

DSM’s shift will deliver faster growth, higher margins and
improved earnings quality. At the same time the review
confirmed DSM’s key strategic drivers of market-driven growth
and innovation, an increased presence in emerging economies
and operational excellence.

In these processes the DSM Innovation Center, established in
2006 to steer and monitor all developments in the innovation
field, played a leading role . Furthermore, a large number of new
people were hired throughout the company and actions were
taken to be able to focus more specifically on DSM’s
commercialization and launch skills.

To accelerate its innovation efforts, DSM continues to invest in
emerging companies as well as in add-on acquisitions. In 2007
DSM acquired Pamako Engineering AG in Switzerland, owner
of technology for the production of UHMWPE (Ultra High
Molecular Weight Polyethylene) based products. This
technology will be used by DSM Dyneema.

DSM Nutritional Products acquired the privately owned
company Pentapharm Holding Ltd., a global leader in the
development and production of active ingredients and system
solutions for the cosmetics industry. The company is
particularly well known for its capabilities in innovation, which
have won it high regard amongst customers and strong brand
recognition in the industry.

1. Market-driven growth and innovation
DSM aims for sales growth based on existing leadership
positions, accelerated by innovation as well as selective
acquisitions. This should lead to an annual organic sales
growth of more than 5% per year. Organic sales growth in
2007 amounted to 7%.

DSM Venturing invested in Harland Medical Systems, Inc.,
a US company that markets technologies and solutions in
medical coating applications. It also invested in Food Quality
Sensor International, Inc., a US-based company which develops
and commercializes novel technologies to detect the freshness
levels of perishable foods.

Additional innovation spend in 2007 amounted to more than
€50 million compared to 2005. In 2010 this amount will reach
€70 million. DSM is fully committed to its Vision 2010 target of
generating an additional €1 billion in sales from innovation
by 2010.

Furthermore, DSM Venturing invested in Jurilab Oy, a Finnish
company specialized in the discovery of gene-disease
associations and their application to healthcare. DSM Venturing
also participated in an investment round in the Danish company
Upfront Chromatography A/S, the world’s leading developer of
customized industrial protein chromatography processes.

The company is confident that the pipeline of products
currently in development will enable this target to be met. In
2007 innovation-driven sales surpassed €350 million.

To create new business platforms for the medium and long term,
four specific Emerging Business Areas (EBAs) were identified in

DSM Venturing participated in a financing round in Ganeden
Biotech, Inc., a US probiotics company which markets dietary
supplements focused on digestive health. At the end of 2007,
DSM Venturing announced an investment in Novomer, Inc.
This US-based company is developing a technology platform

Annual Report 2007

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Report by the Managing Board

to use carbon dioxide and other renewable materials to produce
performance polymers, plastics and other chemicals. In addition
to the investment, DSM and Novomer intend to sign a
cooperation agreement.

In Jiangyin DSM will increase its engineering plastics
compounding capacity by 50%. In addition a new Akulon®
plant is being built there that will commence operations in the
course of 2008.

DSM has also made additional investments in ventures in which
it already participated and has invested in venturing funds.

An evaluation of the venturing activities resulted in a commitment
to further expand DSM Venturing, as it has yielded positive
results thus far, both financially and strategically. DSM has
therefore earmarked up to €200 million for future venturing
investments until 2012 and has also decided to consider
investing in more grown-up young companies as well as in
companies in the emerging economies.

Over the past few years DSM has been experiencing growth
rates in China of around 20% per year. Sales in China in 2007
amounted to USD 956 million, 23% more than in 2006. This
has enabled us to raise the 2010 sales target for China from
USD 1.0 billion to USD 1.5 billion.

In China, DSM continues to seek government approval for two
joint ventures with North China Pharmaceutical Group
Corporation Ltd. One joint venture is in the area of nutritional
products (especially vitamin C and B12) and the other for anti-
infective products (especially beta lactam antibiotics).

In 2007, DSM invested in a new plant for engineering plastics
compounds in the Ranjangaon MIDC industrial zone, near
Pune (India). With regard to Brazil and Russia, business
opportunities were charted in 2007 and various investment
decisions will be taken in 2008.

3. Operational excellence
Operational excellence continues to be an important area in the
pursuit of sustainable value creation. DSM enjoys a strong track
record in establishing efficiency enhancements which clearly
represent step changes in performance and add to the
bottom line.

2. Increased presence in emerging economies
DSM continues to experience strong growth in the emerging
economies. As a percentage of total revenues, sales in
emerging economies rose from 13% in 2006 to 15% in 2007.
In line with DSM’s increasing internationalization, the company
continues its efforts to accelerate the diversification and
internationalization of its workforce.

DSM remains wholly committed to the pursuit of operational
excellence and intends to continue and further strengthen the
program with new initiatives in advanced manufacturing (for
example yield improvements and energy savings),
commercialization (product launch program) and pricing
(Excellerate program).

In 2007 DSM once again invested heavily in China. The company
announced the start of the construction of the DSM China
Campus in the Zhangjiang Hi-Tech Park in the Pudong New
Area of Shanghai.

DSM also announced the closure of the Gonglu site and the
expansion of the site in Xinghuo, which will become DSM’s
largest multi-product manufacturing location in China. At the
Xinghuo site, the production of vitamins, intermediates and
Teavigo® (the pure and natural green tea extract) will be
expanded. Furthermore, as a strategic site Xinghuo will also
host activities of DSM Desotech, Sizings & Binders (both part
of DSM Resins) and the savory ingredients plant of DSM
Food Specialties.

Mid 2007, the outcome of the strategic review of DSM’s anti-
infectives business was announced. DSM concluded that
the greatest value would be generated through a partnering
strategy, possibly involving disposals combined with innovation
initiatives and further profitability-enhancing measures.
In 2007 progress was made with the planned carve-out of
DSM Anti-Infectives.

In the summer of 2007 DSM launched a comprehensive profit
improvement program at DSM Nutritional Products that will run
through 2009. A mix of cost savings and increased profits from
higher revenues is expected to deliver an annual minimum of
€100 million in improved profitability by 2010. This will enable
the Nutrition business to achieve the targeted EBITDA margin
level of at least 18%.

Annual Report 2007

www.dsm.com

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Report by the Managing Board

In the second year of Vision 2010 – Building on Strengths, DSM
once again created value. The CFROI (Cash Flow Return on
Investment) amounted to 8.3%. This means that DSM achieved
a CFROI that exceeded the annual weighted average cost of
capital (WACC) by 80 basis points. The – revised – target aims
for a difference of 100 basis points.

More than 350 new patent appli cations
In 2007, DSM filed more than 350 new patent applications,
leading to a total of over 14,000 patents. DSM further
strenghtened its Intellectual Property position in the emerging
economies. In India, for example, DSM filed 20% more patent
applications in 2007 compared to 2006.

The EBITDA / net sales margin targets set per cluster

Target

Actual

Nutrition

Pharma

Performance Materials

Industrial Chemicals

>18%

≥ 16%

≥14%
(on average over the cycle)

16%

18%

14%

15%

By realizing the Vision 2010 targets, DSM intends to achieve
a total shareholder return that exceeds the average of its
peer group1.

The new Base Chemicals and Materials cluster includes:

Activity

Previous cluster

2007 sales

(approx.)

Melamine, Urea,
Fertilizers, Energy

Industrial Chemicals

€700 million

Elastomers

Performance Materials €500 million

Special Products

Nutrition

€100 million

Maleic anhydride
including derivatives

Citric Acid

Pharma

Nutrition

€ 75 million

€125 million

For Citric Acid a partnering strategy will be pursued.

Innovation

To strengthen its interaction with leading industry and
technology experts DSM established several scientific advisory
boards in 2007, plus a DSM Chair of Innovation Management
at RSM Erasmus University in Rotterdam, the Netherlands.

Exploiting cross-cluster synergy
In 2007 DSM increased its focus on exploring cross-cluster
opportunities between its Life Sciences and Materials Sciences
activities based on the unique position of being able to combine
a broad range of in-house capabilities in the fields of biotech-
nology, pharmaceuticals, chemistry and materials science.

A good example of the combination of competences was the
opening of a state-of-the-art process flavors plant in China in
May 2007. This was an important milestone in a program in
which extrusion technology developed by DSM Engineering
Plastics was applied to process yeast extracts, enabling the
addition of new ingredients in an innovative way and allowing
for variable process conditions, resulting in an extended
product offering for process flavors.

Many other, still early-phase synergy projects were initiated.
These include bio-based materials for which the materials-
science competences are being combined with DSM’s expertise
in white biotechnology and the development of a fermentative
production process for caprolactam.

DSM’s combined skills in various market and technological
areas also form the basis for the Biomedical, Specialty
Packaging, Personalized Nutrition and White Biotechnology
Emerging Business Areas which are highlighted in the section
on the DSM Innovation Center.

Top 50 innovation projects
All business groups of DSM fine-tuned their own individual
innovation practices in 2007 with a focus on formulating their
innovation strategy, filling their pipelines and/or rejuvenating their
portfolios. In addition, the most important development projects
have been listed in a Top 50 of projects, which are expected to
generate the main part of the €1 billion in innovation-related
sales targeted for 2010 and which all have projections that show
considerably higher margins than DSM’s traditional portfolio.

DSM Innovation Center
The DSM Innovation Center was set up in 2006 to support the
achievement of the DSM innovation targets as set out in Vision
2010 – Building on Strengths . This includes the targets related
to the overall additional sales objective of €1.0 billion from
innovation-related sales in 2010, an extended technology base,
an improved innovation process, an innovation-oriented culture
and the establishment of long-term growth platforms.

1 This peer group consists of Akzo Nobel, BASF, Ciba, Clariant, Danisco, EMS

Chemie Holding, ICI, Lanxess, Lonza Group, Novozymes, Rhodia and Solvay.
(ICI will be removed from the group as the company is no longer listed).

The DSM Innovation Center comprises an Innovation Program
Office, Corporate Technology, Intellectual Property, Licensing

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and Venturing, the Business Incubator, four Emerging Business
Areas and Base-of-the-Pyramid activities.

Halogen-free flame-retardant solutions

In 2007 the DSM Innovation Center initiated a further
enhancement of DSM’s innovation capabilities and
competences. In addition, the efficacy of the innovation
resources was enhanced by actively sharing best practices
throughout the organization and setting up action plans in
cooperation with the various business groups to improve
certain areas.

The Emerging Business Area programs, set up within the
DSM Innovation Center to secure DSM’s long-term innovative
growth, found themselves in various stages of development at
the end of 2007. These Emerging Business Areas optimally
combine expected social and technological trends with DSM’s
current market strongholds and technology positions.

In Specialty Packaging and Personalized Nutrition the first
concepts were patent-protected and venturing investments
were carried out. In the area of White Biotechnology DSM set
up an internal program and engaged in discussions with
premier partners complementing DSM’s skills in life sciences,
chemistry and materials in this field. One of the early concrete
results was a decision to join the €100 million French BioHub
program, in which several life-science companies work
together aiming to develop new materials with specific
performance characteristics from renewable feedstocks.

DSM’s efforts in White Biotechnology are also aimed at the
development of technology to convert specifically those plant
materials that are not suitable for use in the food chain. These
could be agricultural residues such as stems and leaves but
also non-edible plants that can be grown on pasture land. DSM
is working on converting the bulk of the plant into fuels or other
chemicals rather than just the part suitable for food, as is the
case with current technology. Successful commercialization will
among other things require extensive programs for developing
new fermentation organisms that produce biofuels and
biochemicals and for selecting an appropriate set of plant-
hydrolyzing enzymes.

In Biomedical the first medical coatings sales were realized at
several key medical-device customers. In addition, the public/
private partnership Biomedical Materials, co-initiated by DSM,
will receive €45 million in funding from the Dutch government
and started a 5-year €90 million program. Furthermore,
Dyneema Purity® achieved considerable growth. Initial efforts in
developing polymer platforms and technology for drug delivery
were started.

DSM Engineering Plastics successfully developed
halogen-free flame-retardant polyesters. Two
products have been introduced:

Arnite® XG meets international requirements for
electrical equipment and is the answer to the
strong market trend towards sustainable, halogen-
free products. It is used in unattended household
appliances such as washing machines, driers and
dishwashers.

Arnitel® XG is a zero-halogen flame-retardant product
for cable insulation in consumer electronics. The
product tailors to growing needs in the consumer
electronics industry for using materials and
technologies that are environmentally safer.

®claryl

The individual colors in an artwork, print or photo
framed behind window glass can easily look dull. This
is because not enough light can penetrate through
to see them properly. With ®claryl picture glass the
extra light that reaches the picture makes all the
colors much more visible. Each detail will also be
sharper and clearer than with window glass.

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Report by the Managing Board

Apart from the selected Emerging Business Areas, the DSM
Innovation Center started working on identifying potential new
Emerging Business Areas to ensure that innovation in the
company remains aligned with future needs.

DSM is connected to more than 500 business partners via ERP
connections. In 2007 over 5,000 customers placed orders via
the web shop, with an accumulated total of above 42,000
orders last year.

Within the Business Incubator, the Functional Coatings
program resulted in the successful launch of ® claryl picture
glass in various European countries. To extend the
technology/IP platform in this area, DSM acquired a novel
nanoparticle invention from the University of Sheffield (UK).
The licensing deal included a long-term research collaboration
between DSM and the University of Sheffield through which
both parties will benefit from potential new developments.

The objective for the coming years is to further professionalize
the prospect-to-order process with the aid of e-business tools.

DSM continues to develop global e-marketing tools and a
customer information management program. This enables us
to combine our increased marketing efforts with the latest
e-business possibilities.

Marketing and branding

Marketing and brand management are very important to DSM
in the context of the heightened focus on market-driven growth
and innovation as well as its aim of increasing the specialty
portion of its portfolio. It is vital to know what the customer
wants and needs. In 2007 the focus was on continuing the
value-based-pricing activities and further improving the
e-business capabilities of our businesses.

As a next key area, DSM started the implementation of its
program to improve the commercialization capabilities of its
organization with regard to innovations. These activities are
discussed separately below.

Value-based pricing
In 2005 DSM launched a program to support the business
groups in improving their marketing and sales capabilities with
a focus on value-based pricing, stronger market orientation
and the concept to differentiate the steering of markets and
customers. Value-based pricing is about getting a price for a
product that reflects the value DSM creates for its customers
and end-users.

e-Business
DSM’s continued investments in an advanced and robust
e-business architecture and infrastructure enable the company
to increasingly conduct business with key customers and
suppliers in a smooth way.

The expected growth in e-logistics in Europe has been realized
and now the majority of deliveries via road are steered via
e-business. More than 100,000 messages are shared with our
logistic providers on an annual basis. An increase in the use of
this capability is foreseen in the United States.

Commercialization, innovation and product launch
DSM has an internal consulting team specialized in accelerating
the commercialization of innovations. The scope of the initiative
is to strengthen, optimize and accelerate new product launches.
Also, the aim is to develop strategies to shorten time-to-market
and create innovative business models.

Dedicated marketing professionals have been assigned to coach
project teams of innovation projects in all clusters. In 2007 this
resulted in a number of accelerated product launches.

Purchasing

The new global DSM purchasing organization which was set up
in 2006 enabled us to further professionalize our purchasing
activities and to leverage our purchasing competences, realizing
a better total cost of ownership and a corresponding competitive
advantage. The execution of the DSM purchasing strategy is
being supported by standard processes and systems.

DSM Purchasing realized its targets for the year. During the
year risk management (security of supply) and building strong
business intelligence were key topics, while the focus was also
on business growth and innovation. In cooperation with the
DSM Innovation Center, the innovation process was further
developed, resulting in a number of innovative projects.

DSM’s strengthening position in emerging economies also
opens opportunities for DSM Purchasing. Our Low Cost
Country Program proved to be successful and won us the
Dutch Sourcing Award.

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. In this code, the minimum requirements
regarding social and working conditions and safety, security
and environmental aspects are prescribed. This code of

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PER.C6® Manufacturing Platform

DSM Pharmaceutical Products and Crucell have
jointly developed the XD™ process, involving a high-
density cell culture with (human) PER.C6® cells.
This innovation is based on clever design of the
cell-culture processing equipment and can lead to
a paradigm shift in the manufacturing of complex,
costly biopharmaceuticals such as recombinant
proteins including monoclonal antibodies. This
achievement represents another step forward in the
establishment of the PER.C6® protein manufacturing
platform, jointly developed by Crucell and DSM, as
the leading (human) technology in the industry and
will make biopharmaceuticals cheaper and therefore
available to a much wider patient population than
today. In addition, the human PER.C6® cells have
the potential to bestow beneficial properties on the
biopharmaceuticals they are programmed to produce,
and minimize side effects potentially associated with
the use of non-human cell systems. In 2007, a yield of
13 grams per liter was achieved for XD™ and PER.C6®.

conduct is part of the comprehensive program that has been
developed in order to embed sustainable performance in all our
supply-base processes and procedures. At year-end 2007,
more than 500 key suppliers had been approached, covering
52% of spend. The second phase is underway in order to cover
70% of spend and to implement auditing procedures.

Safety, health and the environment

Safety
DSM has set itself the target of reducing the total number of
recordable injuries by 50% between 2005 and 2010. This
target covers both DSM personnel and personnel of
contractors that work on DSM premises. In 2007 the total
number of recordable injuries per 100 employees was 0.82,
compared to 0.95 in 2005, a reduction of 14% in two years. By
continuing our attention and consistently executing our
programs we expect to achieve our ambitious 2010 target of
50% reduction compared to 2005.

Nevertheless, on 11 April a fatal incident occurred. A contractor
employee at DSM Nutritional Products Premix Argentina was
fatally injured during cleaning activities. It became clear that no
effective Lock-Out/Tag-Out (LOTO) procedure (disconnecting
the electrical power) had been applied. The fatality has
triggered a global initiative to check and improve our practices
on Lock-Out/Tag-Out as well as other essential practices
related to operations and maintenance.

Health
In 2007, 18 cases of work-related illness were reported,
compared to 16 in 2006 and 19 in 2005. In 2007 all sites
checked the completeness of their risk assessment with regard
to exposure to substances. As a result, actions were defined to
further streamline the systems and improve the quality of
information on hazards. Against the background of the new
REACH legislation in the European Union it was concluded that
in the coming 10 years DSM will have to participate in the
registration of some 500 substances that occur in our products
and intermediates. DSM has approached 1,200 suppliers to
start communication about their intentions regarding the
registration of the substances in the products they supply.

Environment
DSM has set itself environmental targets for 2010 on the basis
of the principle that all our plants, wherever they are in the
world, should comply with at least the same environmental
standards as in the European Union or the United States. In
addition, DSM aims to achieve a 5% cut in its overall waste
volume compared to 2005 and to eliminate the landfilling of
hazardous waste.

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Report by the Managing Board

In 2007, based on findings in pilots, the target for the reduction
of energy use was doubled from 1% to 2% per year. Significant
steps in 2007 towards the realization of our environmental
targets were the reduction of dust emissions at the DSM Anti-
Infectives site in Zhangjiakou (China) and the reduction of waste
water at the DSM Fibre Intermediates site in Nanjing (China)
and the DSM Food Specialties site in Seclin (France). At the end
of 2007 DSM Agro realized process modifications that will
enable the reduction of N2O emissions. This project will reduce
DSM’s worldwide greenhouse-gas emissions by 15%, which is
in line with our 2010 target. Overall we made good progress in
2007 towards achieving our challenging environment related
reduction targets for the period 2005-2010.

For more information please visit www.dsm.com, Sustainability
section. 8

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

2007

2006

14,343

14,037

7,219

7,124

4,760

3,564

1,196

3,873

278

7,061

6,976

4,145

3,031

1,114

3,690

284

Total DSM

23,254

22,156

Leadership
In 2007 the HR Leadership Board was established, a platform
of HR representatives of all business clusters. The creation of
this Board aims to facilitate the implementation of global human
resource strategies and policies, to support the alignment and
acceleration of HR initiatives at business and company-wide
level, and to further improve the professionalism of the human
resource discipline.

In 2007 our new HR strategy, labeled ‘Passion for People’, was
actively implemented on many fronts, helping to equip our
employees to deal successfully with the challenges of a changing
company operating in a fast-moving global marketplace.

Managing resourcing
The year 2007 saw significant inroads made into the realization
of the recruitment and resourcing priorities established in 2006.

Dedicated resourcing and recruitment teams were established
in both the United States and China in 2007, with plans to
increase this presence in Switzerland, and potentially India,
in 2008.

The year 2007 also saw the preparation of the global employer
branding initiative in an effort to attract, acquire and retain the
talent needed to accomplish key business objectives in an
increasingly competitive labor market. The outcome of this
initiative will be seen in 2008.

Throughout 2007 DSM also focused on developing its presence
in the academic arena as an employer of choice, with the
establishment of strategic collaborations with key European
business schools. The year 2008 will see the replication of
these strategic collaborations with business schools
throughout the United States and China to further strengthen
the talent pipeline. It will also be the launch year for the new
global academic program – designed to boost the talent
pipeline to ensure that DSM is appropriately resourced to retain
its position as one of the pioneers in the life sciences and
materials sciences sectors.

In 2007, 100 academics were hired onto the global internship
programs, an increase of 12% compared to 2006.

•

Number of hires resulting from internship assignments in
2007: 11
Number of hires resulting from internship assignments in
2006: 9

An increased focus on succession planning and talent
pipelining was enabled via the deployment of several
successful Talent Pull programs throughout the year. In 2007,
68 people were hired into key positions across the organization
as a result of the Talent Pull program.

An increased focus on innovation, internationalization and
diversity in the recruitment processes has enabled DSM to
compete for global talent across all the relevant business
sectors. Some examples of this focus can be seen in particular
amongst executives and academic hires:

•

Inflow of total professional hires (non-executives) in 2007 was
608 compared to 420 in 2006 .
Inflow of new academics in 2007 was 175 compared to 128
in 2006 .

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Report by the Managing Board

•

•
•

Inflow of non-Dutch professionals hires in 2007 was 394
compared to 203 in 2006 .
Inflow of experienced professional hires in 2007 was 432
compared to 310 in 2006 .
Inflow of executives in 2007 was 30 compared to 18 in 2006 .
Inflow of non-Dutch executives in 2007 was 17 compared
to 12 in 2006 .

Redesign of management development process
DSM has significantly changed over the past 10 years. We have
acquired businesses, divested activities, our portfolio has
diversified, and we have become more international. In 2007
we embarked on a redesign of our current Management
Development process. The outcome will be a new process
called Career Management. This will facilitate employees’
career development on an annual basis, offering them a clear
sense of ownership of their own careers while providing
management with increased transparency concerning career
opportunities within DSM. This will help to support the
internationalization and diversification of DSM’s activities while
simultaneously fostering performance management and
succession planning. The Career Management process will be
implemented during 2008.

Diversity
Against the background of developments such as the
company’s ongoing expansion and the multinational and
changing character of the markets we serve, DSM has devoted
considerable attention to strengthening diversity, in terms of
both nationality and gender. A broader and more diverse
workforce better reflects the company’s presence in the various
countries and markets around the world, and increases DSM’s
connectivity to its markets and customers. Diverse groups also
enjoy a competitive advantage concerning their ability to make
effective decisions.

The intensified efforts with regard to stimulating diversity during
the year under review have led to the formulation of various new
objectives. The inflow of new non-Dutch executives, 55% of the
total executives inflow in 2007, should increase to 60% by the
end of 2010. In 2007, 6% of DSM executives were female. Over
the period 2008-2010 we want the inflow of female executives
to be 25% annually. Comparable objectives have also been set
with regard to the corporate headquarters. DSM’s task force on
diversity is headed by the chairman of the Managing Board.

DSM Business Support
In 2006 we announced our intention to introduce SAP-HR in
the United States and the Netherlands in 2007. The HR
Business Support Center in the Netherlands commenced
operations on 1 May 2007, while its counterpart in the United
States went live with effect from 1 January 2008. The phased

inclusion of all legal entities will be finalized in mid-2008 for
the United States and with effect from 1 January 2009 for
the Netherlands.

Employee engagement survey
Following the one-time sample Working Climate Analysis in
2004, DSM decided in 2007 to annually conduct a global
employee engagement survey. An engaged, fully committed
workforce is critical for the company in realizing its Vision 2010
ambitions as it delivers a competitive advantage – because
engaged and committed employees are highly motivated to
give their best every day. In December 2007 the questionnaire
was distributed in 18 languages to DSM employees in 44
countries. A total of 11,936 employees responded, 63% of all
employees who had been invited to participate. The main aim
of the survey was to measure DSM’s engagement index. This
index consists of four attributes: commitment, pride, advocacy
and satisfaction. Of the 11,936 responses, 62% scored
favorably on the DSM engagement index. The outcome of the
survey will be assessed by the Managing Board. The Board is
convinced that the survey has tremendous value for DSM and
will therefore actively stimulate the deployment of the survey’s
results in the organization .

Research and development (R&D)

Our R&D plays a key role in the realization of our innovation
strategy. Most of our annual R&D expenditure is directed
towards business-focused R&D programs. In addition we have
a Corporate Research Program in place to build and strengthen
the technological competences we need to execute our
development projects.

R&D expenditure
Expenditure on R&D in 2007 amounted to €372 million (4.2% of
net sales), a 7% rise compared to the €347 million (4.2% of net
sales) in 2006. The R&D expenditure reported for 2007 includes
the associated IP expenditure. This will be standard practice
from now on. To enable comparison with 2006, the overview
of R&D expenditure for 2006 has been updated to include
IP expenditure.

R&D expenditure in the Nutrition cluster amounted to €136
million, compared to €140 million in the previous year. R&D
expenditure in the Pharma cluster was at a level of €68 million
(2006: €59 million). In Performance Materials, R&D expenditure
amounted to €131 million (2006: €115 million) and in Industrial
Chemicals to €23 million (2006: €21 million). At 31 December
2007, a total of 2,130 staff were employed in R&D activities,
representing some 9% of the total workforce.

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Report by the Managing Board

Global Virtual Lab
Given the organizational and geographic spread of our R&D
activities, we seek to ensure synergy and knowledge sharing
across the company with a Global Virtual Lab. We have a
company-level system for the management of competences,
projects and project portfolios and human resources. This
enables us to efficiently steer through our innovation process.
In 2007 we defined the key competence areas for the company
which will be the focus of our company-level competence
development efforts. We see a lot of technological synergy
between Life Sciences and Materials Sciences, our two key
focus areas.

Open innovation
In 2007 we made major progress in establishing a company-
wide open innovation process, in which internal and external
collaboration, licensing, venturing and spinning in and out play
an important part. In line with our open innovation approach,
our R&D activities are carried out in ongoing interaction with the
outside world.

Innovation Awards Program
In 2007 we successfully completed the implementation of our
new Innovation Awards Program, which seeks to recognize
and reward exceptional achievements by our employees as
well as by experts working outside DSM. The awards are an
important means of stimulating innovation and are also useful in
inspirational human resource management.

DSM Innovation Award 2007
Our top internal award for outstanding team-based innovative
achievements is the DSM Innovation Award. The 2007 award
went to a combined DSM Pharmaceutical Products / DSM
Anti-Infectives team that solved a big problem for a major
pharmaceutical customer by developing a recombinant pig liver
esterase (PLE) to replace animal-derived PLE. The
development involved an intensive multi-disciplinary and multi-
site effort and was achieved in record time.

DSM Nutrition Award 2007
The DSM Nutrition Award is one of the awards we have in
place for outside specialists. It is granted every two years,
alternately for human and animal nutrition. The 2007 award
was granted to Dr R. John Wallace, of the Rowett Research
Institute in Aberdeen, Scotland (UK), in recognition of his
pioneering research in the field of animal nutrition. Dr Wallace
is one of the world’s leading ruminant nutritionists and has
published over 150 original scientific papers that have had a
great impact on ruminant nutrition research. The award was
presented to Dr Wallace at the 58th Annual Meeting of the
European Association for Animal Production in Dublin (Ireland)
on 28 August 2007.

DSM Science & Technology Awards
The DSM Science & Technology Awards for outstanding PhD
research by doctoral students were for the first time granted in
two European regions in 2007. The awards went to Dutch
researcher Maaike Kroon of the Delft University of Technology
(Netherlands) and Swiss researcher Bernd Bodenmiller of the
Swiss Federal Institute of Technology in Zurich (Switzerland).

Maaike Kroon was rewarded for her PhD research in the field of
combined reactions and separations. Bernd Bodenmiller was
rewarded for his PhD research in proteomics (the study of
proteins in a cell).

Corporate Research Program
We have a Corporate Research Program in place that not only
enables us to develop our competences but also lays the basis
for new developments achieved by the different R&D groups in
our company. In 2007, various projects were carried out within
the framework of the Corporate Research Program in the six
key competence areas of DSM: Advanced Synthetic Methods,
the Biotechnology Platform, the Nutrition Platform, Chemistry &
Technology of Polymers & Resins, the Materials Science
Platform and Process Technology & Process Design.

Scientific Advisory Board

We have installed an international Scientific Advisory Board.

In 2007 this advisory body, which works closely with DSM’s

internal Science & Technology Council, visited several of our

sites and held discussions with key R&D and technology staff

in order to analyze DSM’s capabilities and current technology

position. The board will advise DSM on science and

technology matters on an ongoing basis.

The board comprises five leading experts:

• Professor Bert Meijer (Eindhoven University of Technology,

Netherlands) (chairman)

• Professor Hannelore Daniel (Munich University of

Technology, Germany)

• Professor Gerhart Eigenberger (University of Stuttgart,

Germany)

• Professor Ed Kramer (University of California, Santa Barbara,

United States)

• Professor Hermann Sahm (University of Dusseldorf and

Julich Research Center, Germany)

R&D in Nutrition and Pharma
In 2007 R&D in the Nutrition cluster resulted in the launch of
a number of new ingredients developed in-house or in
cooperation with partners in the human nutrition, animal

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nutrition and personal care industries. Examples are i-flex™
for joint health, BeauActive™ MTP for an instantly smoother skin
and a more youthful appearance and Ronozyme® P, a more
thermostable phytase complemented by product forms for
different application fields. The innovation capabilities of DSM’s
Nutrition cluster are increasingly being recognized by major
food, beverage and dietary supplement manufacturers as well
as cosmetics companies.

Innovations in specialty ingredients include InsuVital™
a new and safe ingredient for blood glucose management.
Another Food Specialties development is Claristar™
, an
ingredient derived from yeast for the reduction of tartrate in
high-quality white wines .

A new process for a vitamin B1 intermediate was developed by
DSM’s Nutrition cluster R&D. Launched in 1937, the synthesis
of vitamin B1 is still a challenge for organic chemists. The new
process invented by DSM is a major breakthrough in the
manufacturing of the 6-ring part of the molecule, as it reduces
the number of steps and greatly enhances atom efficiency.

A new process was also developed for sodium beta-alaninate,
the first commercially applicable NaAla process that combines
chemistry and process technology know-how to enable less
raw-material and energy use and less waste production
compared to the state-of-the-art processes. A new riboflavin
‘self clone’ strain – the first ultra-high-performance B2
producing strain in the world – was developed, significantly
improving B2 yield on C-source and leading to increased
productivity.

Anti-Infectives R&D successfully scaled up mycophenolate
mofetil. Registration batches were produced and first sales
realized. Pharmaceutical Products R&D developed the XD™
process
PER.C6® cells.

, involving a high-cell-density cell culture with human

, the first new polymer to be

R&D in Performance Materials
A major achievement in Engineering Plastics R&D was the
development of PA4T
introduced in the 21st century worldwide. Also Stanyl® Diablo
was introduced, an innovative new generation of Stanyl®
grades. A third breakthrough was the development of halogen-
free flame-retardant solutions as now brought to the market
under Arnite® XG and Arnitel® XG

DSM Dyneema’s R&D developed new Dyneema® grades for
life-protection applications and introduced these to the market.
Through partnerships with our customers extended
applications were developed. Dyneema® HB50 Unidirectional
results in a lower weight of body armor. Dyneema® HB51

Annual Report 2007

www.dsm.com

InsuVital™

InsuVital™ represents a breakthrough in the manage-
ment of type 2 diabetes. This unique functional food
ingredient enables manufacturers to create products
which are clinically proven to help type 2 diabetes
patients actively manage blood glucose (sugar)
levels after a meal. InsuVital™ can be incorporated
into a wide range of functional food and beverage
applications, such as tablewater, fruit juices, cereal
bars and dairy products.

i-flex™

DSM started selling a specially processed rosehip
powder to help promote joint health in South Africa
in 2007. In the next two years, i-flex™, a dietary
supplement, will be launched in more than 30
countries worldwide. It is DSM Nutritional Products’
first significant foray into the consumer market,
allowing for higher margins. Also, it will provide the
company with knowledge about consumer behavior,
which can be transferred to other areas of the
organization in order to improve marketing. Backed
by thorough scientific research and proven in multiple
clinical trials. i-flex™ is a 100% natural product
that effectively promotes joint health by supporting
mobility and flexibility and thereby promising an
overall improvement in the quality of life.

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Report by the Managing Board

Unidirectional was introduced for best-in-class behind-strike-
face inserts for the US market.

Corporate ICT

In another application area, Dyneema® -based lightweight
composite panels are now replacing aluminum panels in
aviation products such as air cargo containers. On a weight-
for-weight basis, the panels are at least three times as strong as
aluminium. They are also twice as light as aluminum.

DSM has several ICT standardization programs in place.
One of the most important is the standardization of our ICT
infrastructure and ERP systems accross all business groups,
helping us to improve our management processes and controls
and the integration of acquisitions while at the same time
realizing cost reductions.

Fish-farming nets were developed for aquaculture cages that
help reduce the number of fish escapes and require less
maintenance. Cages made with Dyneema® are only one third of
the weight of conventional nets and have smaller twines and
therefore better water flow.

In order to help DSM to realize its Vision 2010 goals, Corporate
ICT implemented several actions to meet changing demands
both now and in the future. During the year, Corporate ICT
implemented an ICT system that enables DSM’s Innovation
Center to execute stage-gate management of research and
innovation projects.

One of the highlights in Resins R&D was the development of
NeoRad® , the world’s first waterborne UV-curing resin offering
the wear resistance, stain resistance and mechanical properties
required for the coating of flexible resilient flooring (PVC and
linoleum). The development of Turane™ resin technology for the
automotive market was another major step forward for
DSM Resins.

In the field of elastomers, based on Keltan ACE™ technology
DSM is developing a unique Keltan® product line for peroxide
cure applications (12-15% of the global EPDM market). The
first product will be launched in 2008. Keltan ACE™ provides
the basis for significant energy reduction in the production of
EPDM and also enables customers to reduce the use of the
hazardous and smelly peroxides required for their
curing process.

R&D in Industrial Chemicals
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 R&D work links up well with that of other clusters
and enables DSM-wide synergy in various areas.

New applications for existing products are being scouted
continuously. Melamine R&D and the DSM Licensing Center
together developed and launched Freshure® , a range of high-
performance clear vacuum barrier coatings for food packaging.
Created using our patented Symphase® technology and
based on the vapor deposition of melamine on plastic film,
Freshure® coatings not only increase the storage life of foods,
but also offer several benefits for both packaging producers
and consumers.

To extend and deepen DSM’s customer base, special attention
was paid to the implementation of several e-PTO (electronic
prospect-to-order) and e-business initiatives, based on an
award-winning infrastructure. e-PTO is focused on disclosing
on-demand information about DSM products to customers
and prospects in a secure, controlled and cost-efficient way.
It is also used to gather information to further improve
DSM’s offerings.

DSM Nutritional Products offers an online tool in which their
Animal Nutrition and Health customers can create formulas for
animal feeds. This online tool is currently available in Latin
America and expansion to other regions is planned for 2008.

To maintain and support DSM’s IT systems and infrastructure,
Corporate ICT’s affiliates in Switzerland, the United States,
Brazil, Singapore and China integrated into a global virtual
organization.

To further support DSM in China, Corporate ICT also
implemented a dedicated service desk to improve local
services and to meet increased demand for ICT services. This
service desk is delivering support for the global ICT services to
users in China. Furthermore, a China ICT Security Forum was
established to increase ICT security awareness within China.

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 77.

The main events and developments at DSM in this field in 2007
can be summarized on the basis of this year’s Annual General
Meeting of Shareholders (28 March 2007). The agenda was to

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a large extent similar to that of previous years. The proposal to
introduce a loyalty dividend was withdrawn before the meeting,
as a consequence of the decision by the Enterprise Chamber of
the Amsterdam Court of Appeal that such a proposal was in
conflict with Dutch legislation. In the meantime this decision
has been overruled by the Dutch Supreme Court in its decision
of 14 December 2007. The intention of the proposal was to
introduce a tool enabling us to get to know our shareholders
and facilitate long-term relationships with them. DSM will keep
looking for ways to reach this goal.

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 introduction of a
Dividend Re-Investment Plan (DRIP) and the incorporation into
the Articles of Association of the option for using electronic
communication media in the decision-making process. The
latter concerns among other things the electronic convening of
general meetings of shareholders, electronic participation in the
meetings and electronic voting prior to the meeting.

For the first time an electronic voting system was used during
the General Meeting of Shareholders. All resolutions that were
tabled were passed, including the appointment of Mr Stephan
Tanda as member of the Managing Board.

Apart from the above-mentioned issues relating to the Annual
General Meeting of Shareholders, no other major
developments are to be reported with regard to DSM’s
corporate governance practices.

For the latest information on the various aspects of DSM’s
corporate governance, see www.dsm.com (Governance
section). 8

Risk management
The Managing Board is responsible for risk management in the
company and has designed and implemented a risk
management system. The aim of the system is to ensure that
the extent to which the company’s strategic and operational
objectives are being achieved is understood, that the
company’s reporting is reliable and that the company complies
with relevant laws and regulations.

The important risks identified, as well as the structure of the
aforesaid risk management system and aspects of its further
development and implementation, are discussed below and in
a more general way in the section on risk management that
begins on page 78 of this Annual Report.

HiTone®

DSM Resins has developed HiTone® polyester resins.
These resins are suitable for developing formulations
of powder coatings with a high hiding power and
excellent flow. This will allow a 33% reduction in layer
thickness while aesthetic appearance is preserved,
or alternatively will create coatings with a significantly
improved appearance thus helping end users reduce
the system costs of coated materials and/or develop
smoother, better-looking coatings. This will facilitate
the replacement of solvent-borne coatings by powder
coatings, leading to lower solvent emissions to the
environment.

Claristar™

A new ingredient, Claristar™, was launched to the
wine industry in 2007. It is a natural ingredient
derived from yeast which prevents the formation of
tartrate crystals in wine. This innovative ingredient
can completely replace cold stabilization, resulting in
considerable savings in energy, water, effluent and
carbon emissions.

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Report by the Managing Board

Risk assessments, internal letters of representation received
from management (all directors of business groups, corporate
staff departments and regions), 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 company’s 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, or
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 best practice II.1.4. of the Dutch
corporate governance code, taking into account the
recommendation of the Corporate Governance Code
Monitoring Committee on the application thereof.

As part of the mid-term evaluation of the Vision 2010 – Building
on Strengths strategy, the Managing Board updated the
Corporate Risk Assessment. On the basis of a list of potential
risks as identified in risk reports from within the company as
well as from outside, a first assessment was made and top
risks were identified. Two risks identified at the launch of Vision
2010 were reconfirmed: the ability to attract and retain the right
people to fulfill the company’s ambitions and the capability to
turn the innovation efforts into profitable business. The
programs that were initiated in order to contain these risks will
be continued with vigor. The threat of deteriorating market
conditions for the existing product portfolio, amongst others
through the influence of low-cost countries, was also
reconfirmed as a top risk. Ongoing efficiency programs and
initiatives to increase sourcing from low cost countries are
DSM’s response to these risks. The acceleration of the
implementation of Vision 2010 means that acquisitions and
disposals have become an even more important part of the
strategy. Connected with this, the related risks have of course
also grown in importance. DSM’s well-tested abilities in these
fields will be used to the full and, if needed, will be further
reinforced to mitigate these risks as much as possible.

Finally, the speed of decision-making is seen as a risk. To
manage this risk the company’s steering model will be made
more transparent and the entrepreneurial spirit of its
workforce enhanced.

In addition to these strategic risks, the currency and commodity
raw material/energy price risks remain of importance.
Sensitivity analyses are made in both areas and hedging
actions are defined if appropriate .

On 1 January 2007, the Corporate Risk Management
department was established. It has the responsibility of
maintaining the risk management system and supporting the
Managing Board and the operational units in its effective
implementation.

Throughout 2007, the focus continued to be on the
implementation of the Corporate Requirements. The aim of
achieving compliance with these requirements for all business
groups by the end of the year was largely met. The main
exceptions concern those units that still have to convert to the
standard business processes supported by SAP software.
These units were allowed to postpone the implementation of
certain requirements until after the conversion. Exceptions
were only allowed after Managing Board approval and on
condition that sufficient mitigating controls were implemented.

During the year under review, DSM’s risk management
practices were compared with those of a number of peers. The
design and implementation of the risk management system
was also discussed with all DSM staff departments and
business groups. These reviews will be the basis for a multi-
year risk management plan setting out the priorities for the rest
of the Vision 2010 period. In the plan, high priority will be given
to the implementation of the standard business processes in
the remaining units; this will ensure sound and efficient internal
control of the goods and money flows.

Macro-economic review

Macro-economic developments in 2007
Global macro-economic developments in 2007 were
characterized by continued strong Asian growth and the US
housing sector problems.

In 2007 the global economy expanded by 3.7%, down slightly
from 3.9% in 2006. This global slowdown was largely caused
by the US housing downturn. The effects of the housing crisis
on the US economy were deeper and wider than previously
anticipated. As a result US GDP growth slowed to 2.2%, down
from 2.9% in 2006. Asian growth seemed unabated, with India

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Report by the Managing Board

and China showing record GDP growth of 8.6% and 11.4%,
respectively. The Japanese economy went through a period of
weakness, mainly caused by slowing consumer spending and
much lower private capital investment in 2007. The Asian
economy as a whole expanded by 5.6%. At 2.9%, the
European economy grew faster than that of the United States
and in line with 2006.

Global industrial production grew by a healthy 3.9% on
average. The construction sector was suffering compared to
the previous years, especially in the United States. Globally the
construction sector managed to grow at the average rate of the
last 25 years. The automotive sectors in the United States and
Western Europe did not quite reach growth levels in line with
the long-term trend levels. Growth in automotive was driven by
the Asian and Eastern European markets. Pharma continued to
grow at trend rate, with an ever increasing percentage of sales
volume being derived from generics.

Commodity prices were at very high levels in 2007, with crude
oil breaking USD 95 per barrel in November and the average
crude oil price hovering around USD 72 per barrel.

Macro-economic outlook for 2008
Risks to the global economy are mainly weighted on the
downside. The main driver is the declining US housing sector
and the effects it has on consumer spending and on other parts
of the global economy, such as the financial sector. The major
upside is slanted towards a higher Asian growth. Europe is
showing mixed signals for the coming year. With the US
slowdown, slowing business investments and a high euro on
the one hand and very low unemployment and robust
consumer spending on the other, 2008 will be a year of
moderate growth for Europe. There are currently no indications
that we have seen the end of the high commodity prices.

According to Consensus Economics, global GDP is forecast to
be 3.3%, while GDP growth in the United States will be 2.1%, in
Europe 2.2% and in Asia 5.3%.

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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.

2007

8,757

164

8,921

(8,098 )

823

(75 )

(2 )

(183 )

(5 )

558

(129 )

429

2006

8,352

210

8,562

(7,727 )

835

(81 )

(199 )

(5 )

551

(4 )

547

Net sales
At €8.8 billion net sales from continuing
operations in 2007 were almost 5%
higher than in the previous year. Organic
volume growth accounted for a 3%
increase in net sales. Selling prices were
on average 4% higher than in 2006.
Exchange rates, acquisitions and
disposals on balance had a negative
effect of 2%.

decreased by €12 million (1%), from
€835 million in 2006 to €823 million in
2007. The EBITDA margin (operating
profit before depreciation and
amortization as a percentage of net sales)
declined from 15.3% in 2006 to 14.2% in
2007 as higher sales volumes and prices
were offset by higher feedstock costs,
lower exchange rates and exceptional
items.

Net finance costs, before exceptional
items, stood at €75 million in 2007,
compared with €81 million in 2006.
Favorable exchange-rate effects and
one-off items compensated for the higher
net debt and increased interest rates.

At 25%, the effective tax rate in 2007 was
lower than in 2006 (26%). The decrease
of 1 percentage point was due mainly to
the lower tax rate in the Netherlands.

Operating costs
Operating costs rose compared to 2006,
closing the year at €8.1 billion. The main
component of these costs, the cost of
raw materials and consumables for
goods sold, corrected for acquisitions
and disposals, rose by approximately
€250 million. Total autonomous fixed
costs increased.

Operating profit
The operating profit from continuing
operations before exceptional items

With selling prices increasing more than
raw-material prices, the average margin
(the selling price per unit of product less
variable costs) was above the 2006 level.

In 2007, an impairment was applied to
the assets of DSM Anti-Infectives for an
amount of €150 million before taxes.

Net profit
The net profit from continuing operations
before exceptional items increased by
€7 million to €558 million. Per share, net
earnings from continuing operations
before exceptional items increased from
€2.85 in 2006 to €3.07 in 2007.

Net profit decreased from €547 million in
2006 to €429 million in 2007. Net profit
per ordinary share declined from €2.83 in
2006 to €2.35 in 2007.

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Report by the Managing Board

Capital expenditure and cash flow
Capital expenditure on intangible assets and property, plant and equipment amounted to €475 million in 2007 and was
€51 million above the level of amortization and depreciation. In 2008 the level of capital expenditure, including small and
new-business-development-type acquisitions, is expected to be substantially above the level of amortization and depreciation.
At €825 million, net cash provided by operating activities was about 9.4% 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

- Sale of subsidiaries

- Divestments

- Other changes

Net cash from investing activities

Dividend

Net cash from financing activities

Effects of changes in consolidation and
exchange differences

Cash and cash equivalents at 31 December

2007

552

1,003

(124 )

(54 )

825

(434 )

(85 )

(394 )

(193 )

(426 )

369

2006

902

998

(4 )

(364 )

630

(458 )

(44 )

135

(8 )

(345 )

(213 )

(407 )

(15 )

552

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Report by the Managing Board

Balance sheet profile

As %

Intangible assets

Property, plant and equipment

Other non-current assets

Cash and cash equivalents

Other current assets

2007

2006

Outlook
Looking ahead to 2008, DSM expects continuing good organic
growth, particularly from emerging markets and the launch of
new products. In addition, the current programs underway in
the Nutrition and Anti-Infectives businesses will result in
improved contributions to profit from these businesses. DSM
also expects a continuation of the improved pricing levels seen
in 2007 in the more mature part of the Nutrition business,
especially in vitamins.

At the same time, DSM is faced with a number of headwinds,
including the continuing weakness of the US dollar, high raw-
material and energy prices as well as the return to lower pricing
in the anti-infectives markets, and the expiration of Roche
contracts in 2007. Despite these headwinds, it remains a core
part of DSM’s strategy to invest in innovation which will deliver
the company’s growth in future years, and DSM will be gearing
up this effort further in 2008.

Guidance on profitability is a difficult task this year, given the
current macro-economic uncertainty. However, assuming a
slowdown in the US economy without substantial effects on
macro-economic conditions elsewhere, a EUR/USD exchange
rate around 1.45 and current raw-material and energy prices
throughout 2008, DSM expects that, with the benefit of the
programs that are in place, it will be possible to approach the
operating profit before exceptional items achieved in 2007.

Overall, DSM remains on track to meet the objectives set out in
the accelerated Vision 2010 strategy, with the continuing
transformation of DSM’s business towards a Life Sciences and
Materials Sciences company, focused on innovation and
capable of delivering sustainable growth.

Total assets

100

Equity

Provisions

Non-current liabilities

Current liabilities

Total liabilities

100

The balance sheet total (total assets) decreased slightly in 2007
and amounted to €9.8 billion at year-end (2006: €10.1 billion).
Equity decreased by €472 million compared with the position
at the end of 2006; this was due mainly to the repurchase of
own shares. Equity as a percentage of total assets decreased
from 58% at the end of 2006 to 55% at the end of 2007. The
current ratio (current assets divided by current liabilities)
increased from 1.61 in 2006 to 1.78 in 2007. Net debt stood at
20% of equity plus net debt at the end of 2007.

The operating working capital was €74 million higher than in
2006. Cash and cash equivalents decreased and amounted to
€369 million.

Dividend
DSM aims to provide a stable and preferably rising dividend.
DSM’s adjusted dividend policy reflects the transformation
of DSM’s portfolio and consequently the increased
profit stability.

The dividend on ordinary shares proposed for the year 2007
amounts to €1.20 per share (2006: €1.00 per share). An interim
dividend of €0.33 per ordinary share having been paid in
August 2007, the final dividend will amount to €0.87 per
ordinary share.

The ex dividend date is 28 March 2008.

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Report by the Managing Board

Equity
as a % of balance sheet total

60 (cid:116)

50 (cid:116)

40 (cid:116)

30 (cid:116)

20 (cid:116)

10 (cid:116)

0 (cid:116)

2003

2004

2005

2006

2007

Capital employed by segment at 31 December 2007
x € billion

2,5 (cid:116)

2,0 (cid:116)

1,5 (cid:116)

1,0 (cid:116)

0,5 (cid:116)

0 (cid:116)

Nutrition

Pharma

Performance
Materials

Industrial
Chemicals

Other
activities

Operating proﬁt by segment from continuing operations
x € million

300 (cid:116)

200 (cid:116)

100 (cid:116)

0 (cid:116)

-50 (cid:116)

Nutrition

Pharma

Performance
Materials

Industrial
Chemicals

Other
activities

R&D expenditure 2006 and 2007 incl. discontinued activities
x € million

2006
2007

150 (cid:116)

100 (cid:116)

50 (cid:116)

0 (cid:116)

Nutrition

Pharma

Performance
Materials

Industrial
Chemicals

Other
activities

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Review of business

In 2007 DSM’s activities were grouped into four clusters: Nutrition,
Pharma, Performance Materials and Industrial Chemicals. In light of the
acceleration of Vision 2010 – Building on Strengths , DSM has regrouped
its activities with effect from 1 January 2008. There are now five clusters:
Nutrition, Pharma, Performance Materials, Polymer Intermediates and
Base Chemicals and Materials.

Net sales and supplies

x € million

Nutrition

Pharma

Performance Materials

Industrial Chemicals

Other activities

Intra-group supplies

Net sales

Supplies

2007

2006

2007

2006

2,543

2,407

2,590

2,463

981

916

1,031

2,895

2,753

2,901

1,937

1,872

2,205

401

404

455

(425 )

967

2,759

2,135

422

(394 )

Total, continuing operations

8,757

8,352

8,757

8,352

Discontinued operations

Total DSM

8,757

8,380

8,757

8,380

EBITDA / net sales

in %

Nutrition

Pharma

Performance Materials

Industrial Chemicals

2007

15.9

17.7

14.3

15.1

2006

19.3

15.9

15.6

14.4

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Review of business

Nutrition
Pharma
Performance Materials
Industrial Chemicals
Other activities

Operating profit plus depreciation and amortization
(EBITDA)

R&D expenditure

x € million

Nutrition

Pharma

Performance Materials

Industrial Chemicals

Other activities

Total, continuing operations

Discontinued operations

2007

2006

405

174

415

292

(39 )

1,247

464

146

429

269

(33 )

Nutrition

Pharma

Performance
Materials

Industrial
Chemicals

1,275

Other activities

(1 )

x € million

as % of net sales

2007

2006

2007

2006

136

140

5.3

6.9

5.8

6.4

131

115

4.5

4.2

1.2

3.5

1.1

3.0

Total DSM

1,247

1,274

Total, continuing
operations

Discontinued
operations

372

347

4.2

Total DSM

372

347

Operating profit (EBIT)

Capital expenditure and acquisitions

x € million

Nutrition

Pharma

Performance Materials

Industrial Chemicals

Other activities

Total, continuing operations

Discontinued operations

Total DSM

2007

2006

x € million

2007

2006

264

321

225

(80 )

823

314

329

196

(69 )

Nutrition

Pharma

Performance Materials

Industrial Chemicals

Other activities

835

Total, continuing operations

(1 )

Discontinued operations

834

Total DSM

145

214

568

113

146

126

501

Capital employed at 31 December

Workforce (year-end)

x € million

Nutrition

Pharma

Performance Materials

Industrial Chemicals

Other activities

Total, continuing operations

Discontinued operations

2007

2006

2007

2006

2,067

1,095

1,815

714

291

5,982

2,159

1,302

1,697

745

407

Nutrition

Pharma

Performance Materials

Industrial Chemicals

Other activities

7,782

5,073

5,139

2,134

3,126

7,711

4,732

4,664

2,183

2,860

6,310

Total, continuing operations

23,254

22,150

(7 )

Discontinued operations

Total DSM

5,982

6,303

Total DSM

23,254

22,156

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Review of business

Nutrition

The Nutrition cluster comprises DSM Nutritional Products, DSM Food
Specialties and DSM Special Products.

The main customers are feed, food, beverages, personal care,
and flavor/fragrance companies across the world. The activities
in this cluster are to a large extent based on DSM’s knowledge
of biotechnology (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.

x € million

Net sales1:

DSM Nutritional Products:

- Animal Nutrition and Health

- Human Nutrition and Health

DSM Food Specialties

DSM Special Products

2007

2006

1,196

890

1,091

867

2,086

1,958

403

101

411

Total

2,590

2,463

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

264

405

145

314

464

113

2,067

2,159

12.6

15.9

136

14.4

19.3

140

Workforce at 31 December

7,782

7,711

1 before elimination of intra-group supplies to other clusters

Supplies of Nutrition
x € million

Operating proﬁt of Nutrition
x € million

2,500 (cid:116)

2,000 (cid:116)

1,500 (cid:116)

1,000 (cid:116)

500 (cid:116)

0 (cid:116)

500 (cid:116)

400 (cid:116)

300 (cid:116)

200 (cid:116)

100 (cid:116)

0 (cid:116)

2005

2006

2007

2005

2006

2007

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Review of business

Nutrition
Pharma
Performance Materials
Industrial Chemicals
Other activities

tiation, this plan is expected to deliver an annual minimum of
€100 million in improved profitability by 2010. For 2008, the first
full year of the program, it is expected that the benefits will at
least offset the negative impact of the phasing out of the
contracts related to the acquisition of Roche Vitamins.

As in 2006, we faced rising costs for raw materials and energy.
We also saw a further weakening of important currencies such
as the US dollar and the Japanese yen, continued strong
competition and a generally volatile market.

However, increasing consumer awareness of quality and
reliability as well as sustainability issues led to a change in the
competitive environment, allowing meaningful price increases
for some of the key products.

As a result, overall performance was good, especially
during the second half of the year when DSM Nutritional
Products’ competitive strength was highlighted in the rapidly
changing environment.

Compared to 2006 DSM Nutritional Products achieved solid
volume growth at higher prices. Total sales rose 7%. Operating
profit decreased because higher organic growth did not fully
compensate for higher energy and raw-materials costs,
higher innovation expenditure, negative exchange-rate effects
and the phasing-out of contracts related to the Roche
Vitamins acquisition.

Business review Human Nutrition and Health
The market for nutritional food ingredients showed an overall
growth of about 2% and DSM Nutritional Products strength-
ened its market position in food and dietary supplements and in
personal care ingredients. Despite the negative exchange-rate
impact and capacity restrictions that partly limited supply,
Human Nutrition and Health sales increased by 3% and
Personal Care sales also grew by 3% in 2007 as a result of
volume growth and especially price increases.

The shift towards a segment approach introduced with the Dual
Track Strategy is starting to bear fruit. The Dual Track Strategy,
introduced in 2006, recognizes the need to sustain the
profitability of established products through reinforced market
shares and product margins by reducing costs as much as
possible and placing special emphasis on product
differentiation. It also 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.

DSM Nutritional Products
Higher costs outweigh solid volume growth

Highlights
•

Higher value recognition from customers and solid volume
growth
Higher consumer awareness of quality and safety creates
opportunities
Profit-improvement program announced

•

Sales (x € million)

Workforce (at year-end)

2,086

6,384

Business and strategy
As the world’s leading supplier of vitamins, carotenoids, other
biochemicals and fine chemicals and premixes, DSM
Nutritional Products is uniquely positioned to capitalize on the

positive dynamics in its markets. The company addresses the
animal and human nutrition and health industries as well as
personal care sectors. With producers and consumers putting
more emphasis on health, wellness and safety, there are many
opportunities to capture.

With 10 large production sites in Europe, the United States and
China, over 45 premix plants across the globe, 5 R&D centers
in Europe and China and 40 sales offices in all main regions of
the world, DSM Nutritional Products is never far away from its
customers.

In 2007 a new profit improvement plan, ‘Aspire to Win’, was
announced. Through a mix of cost savings and increased
profits from higher revenues through innovation and differen-

Examples of the innovative new products are carotenoids
preventing age-related eye deterioration, vitamin D3 for optimal
bone health and antioxidant vitamins used in cardiovascular

Annual Report 2007

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prevention. Consumer research in the main segments such as
beverages or dietary supplements allows DSM Nutritional
Products to tap into very specific needs.

In infant nutrition for example, we systematically address what
is top-of-mind among mothers in relation to their babies,
according to our proprietary surveys. Our offering is structured
along the topics of immunity, mental and physical growth and a
balanced diet.

For each of the above-mentioned cases and many more, DSM
Nutritional Products has a comprehensive strategy in place,
which includes on-site support in dealing with local laws and
regulations, and helping our customers in differentiating
themselves from their competition where it matters most.

In Citric Acid, the overall positive sales development was driven
mainly by the good economy and an upward trend in pricing
towards the end of the year. On the other hand, raw-material
availability in Europe was limited due to the European sugar
regime, which resulted in higher costs. Several producers in
Europe exited the market due to unattractive cost structures.

Business review Animal Nutrition and Health
DSM Nutritional Products is the leading supplier of vitamins,
carotenoids and many more essential ingredients to the world’s
animal-farming industries as well as animal-feed-premix
concepts. Food safety, traceability and reduction of the
environmental impact of animal husbandry are key market
developments. The Animal Nutrition and Health market once
again showed strong growth in 2007.

Human Nutrition and Health is expanding market share with
emphasis on clear differentiation. The successful launch of
Quali-C ™ in 2007 has provided valuable lessons, demonstrating
that products such as vitamin C are not commodities but can
indeed be differentiated through quality, reliability and
traceability, resulting in a premium positioning.

Overall the market for nutritional feed ingredients showed a
growth of more than 4%. DSM Nutritional Products
strengthened its market position for both active ingredients and
premixes. Despite the strong negative dollar impact, sales grew
by 9% as a result of price increases and volume growth.

A new nutritional supplement for joint health, i-flex ™
, was
introduced in 2007. This is a turnkey solution developed by
DSM which is sold via industry partners. i-flex ™ represents our
first large-scale move down the value chain in the direction of
the consumer.

Whenever a consumer anywhere in the world eats farmed
salmon, the chance that it contains a DSM product is very high.
DSM was the first company to market astaxanthin (Carophyll ®
Pink) as well as stabilized vitamin C for animal feed (Rovimix ®
STAY-C 35). These micronutrients, among others, are added to
fish feed to provide fish with a balanced diet.

Another product positioned close to the consumer is Teavigo ® ,
a pure green tea extract which is strongly differentiated not only
through its quality but also by being colorless and neutral in
taste, thus fitting into a wide array of products. Our fully
consumer-driven marketing strategy, supported by proprietary
clinical and safety studies, has been very well received by the
marketplace and our customers. Teavigo ® features on various
consumer brands across the world.

In Personal Care, market conditions remained favorable in
2007. The unbroken trend for better and more efficient anti-
aging ingredients combined with increasing awareness of the
need for UV-protection fueled further growth. With our highly
differentiated actives offering and our strong portfolio of organic
and inorganic UV-filters we benefited from both developments.

DSM’s Animal Nutrition and Health activities play a key role in
providing solutions to the agricultural industries with other
species as well, such as poultry, swine and ruminants, allowing
farmers to reduce the environmental impact of animal
husbandry and at the same time enhance meat production
methods.

The ultra-high-purity benzoic acid VevoVitall ® , for example,
which is an organic acid modulating the intestinal gut flora
towards a stable and healthy status, leads to better nutrients
utilization and a higher growth rate of pigs and piglets. On top
of this VevoVitall ® has a specific metabolism resulting in a
reduction in ammonia emissions from pig houses, offering
additional benefits in terms of environmental protection and
animal welfare.

Also, several new products and concepts were launched such
as BeauActive ™ MTP, a breakthrough in peptide design making
for an instantly smoother skin and a more youthful appearance
by reducing lines and wrinkles in the long term. In 2007, DSM
Nutritional Products acquired Pentapharm, a specialized skin
care actives company. This has further strengthened our
competence base in this area.

Ronozyme ® P (granulate and liquid), which is a product from
the Ronozyme ® range of feed enzymes, has now been
approved for salmon, broilers, layers, turkeys, ducks, sows,
piglets and fattening pigs. The European Food Safety Authority
(EFSA), in charge of scientific evaluation, confirmed the efficacy
and safety of Ronozyme ® P in 2007.

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The number of customers around the world using Rovimix ®
Hy•D ® is rising fast. Rovimix ® Hy•D ® brings to the poultry
industry the solution for better skeleton formation, particularly
strengthening bird legs and allowing genetics to be fully
exploited in order to maximize meat production and to minimize
process losses.

From both a global and a local perspective, Animal Nutrition
and Health today holds clear leadership positions in its
markets. As a consequence, we are committed to further set
the standards, for instance with Optimum Vitamin Nutrition
(OVN ® ). This proprietary specification in feed products
demonstrates how DSM Nutritional Products helps secure not
only the highest food ingredient quality, safety and traceability
as well as environmental compatibility in the industry but also
the quality and safety of end products such as meat, fish,
milk or eggs.

Animal Nutrition and Health was able to increase prices in the
course of 2007, in line with the market dynamics and the raw-
material cost increases due to the impact of crude oil prices. At
the same time, we strengthened our position in the premix
business; the optimization of operations as well as the
investments in the emerging markets made in recent years are
showing very positive results in terms of growth and profitability.
The premix business has also expanded its wide array of state-
of-the-art solutions through the combination of various
products from our own portfolio with quality ingredients from
selected third-party suppliers to meet specific customer needs.

Projects
In June 2007 the Aspire to Win profit improvement program
was announced. Through a mix of cost savings and increased
profits from higher revenues through innovation and
differentiation, the program is expected to deliver an annual
minimum of €100 million in improved profitability by 2010. The
program started in the second half of 2007 and will run through
2009. It should enable the Nutrition business to achieve the
targeted EBITDA margin level of at least 18% as set out in
Vision 2010 . The plan is based on three pillars: cost reductions,
enhancement of differentiation activities and accelerated
innovation.

In the autumn of 2007, we announced the restructuring of our
manufacturing activities in China and the plan to develop our
Xinghuo site in Shanghai as a strategic manufacturing base for
the country. As a consequence, the Gonglu site, also located in
Shanghai, will be closed. This closure is fully supported by the
local government. A social plan and a relocation plan for the
approximately 200 Gonglu employees have been prepared.

PreventASe®

PreventASe® is an enzyme that has been proven to
substantially mitigate the formation of acrylamide
in certain foods. Acrylamide is an undesired side-
product formed during the baking process. In 2007,
the first biscuit producers introduced biscuits
produced with help of PreventASe® to the market. In
addition to biscuits, the product can be used in dough-
based products such as bread, crackers, formed
potato products and cereals. The product received
positive advice from health safety agencies and a
so-called ‘Generally Recognized As Safe’ (GRAS)
notification from the Food and Drug Administration in
the United States in 2007.

Maxarite™

Maxarite™ is a revolutionary taste potentiator which
boosts salty flavors whilst enabling reduction of the
salt content by up to 50% in a range of bakery and
dairy applications. In addition to this, Maxarite™
intensifies flavor profiles and provides strong masking
capabilities. By delivering these taste benefits,
Maxarite™ strongly influences the development of
healthier products with excellent taste.

Annual Report 2007

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Xinghuo will rapidly expand to become DSM’s largest multi-
product manufacturing location in China.

DSM recognized as ‘Good Citizen’ in China.

In addition, a project was started in an attempt to improve and
optimize the business processes, including replacement of a
number of legacy systems by an integrated SAP ERP system.

In close alignment with the profit improvement program, a
comprehensive total-quality-management initiative is currently
being rolled out throughout the organization. This initiative is
based on three pillars: revision of the customer-complaint-
management system, implementation of more process-
oriented methods and extended good manufacturing practice
to keep pace with emerging market needs.

Our ambition of applying our Safety, Health and Environment

(SHE) standards globally was rewarded when Mr Wen Jiabao,

Premier of the State Council of the People’s Republic of China,

visited DSM Citric Acid (Wuxi) Ltd. to recognize the site’s

outstanding achievements in the fields of environmental

protection and Corporate Social Responsibility. Mr Wen

Jiabao, accompanied by Mr Li Yuan Chao, Party Secretary of

Jiangsu Province, and Mr Lian Baohua, Governor of Jiangsu

Province, expressed his official thanks for our beneficial

contribution to the local community, describing DSM as a

’Good Citizen’.

Striving for continuous improvement, the production sites of
DSM Nutritional Products embarked on a program to reduce
costs primarily in the areas of material utilization and energy.

DSM Food Specialties
Global partner in bio-ingredients

The Nutrition Improvement Program (NIP) launched a joint
venture with the Swiss manufacturer Bühler for the production
and sale of nutritious rice kernels under the new brand
NutriRice ® . Through this, NIP will create new markets and at the
same time provide benefits to the ’Base of the Pyramid’, the
millions of people who live on less than USD 2 a day.

Highlights
•
•
•

Successful launch of innovative products
Good underlying growth in all business segments
Continuous improvement in operational excellence

Sales (x € million)

Workforce (at year-end)

403

1,265

NIP is also part of DSM’s initiative for sustainable development
which is dedicated to contributing to the elimination of global
malnutrition by supporting fortification of low-cost foodstuffs,
mainly in Africa, India and China. The battle against malnutrition
directly impacts on the achievement of six of the eight United
Nations Millennium Development Goals and on the lives of two
billion people worldwide.

Business and strategy
DSM Food Specialties is a globally leading supplier of (bio-)
ingredients for the food and beverage industries, based on its
strong technology position in fermentation and enzymes, its
application knowledge and its competence in marketing
performance ingredients to the global food industry.

The control of nutritional anemia is another milestone in
reaching the UN Millennium Development Goals, and it is also
one of the most important objectives of our humanitarian
initiative SIGHT AND LIFE. Every year, hunger and malnutrition
claim more than ten million lives worldwide. Many of these
deaths are caused by so-called hidden hunger, a condition that
involves a lack of essential vitamins and minerals.

The size of the global food ingredients market is around €30
billion, with an average annual growth of 4-5%. This growth
exceeds the average growth of 2-3% of the food market due to
higher organic growth in emerging economies and a shift
towards higher-value ingredients and processed food. Key
market drivers are the demand for healthy nutrition, including
low-salt and low-fat foods, the need for natural ingredients,
convenience, and food safety.

The new book Nutritional Anemia published by DSM offers
valuable information on how to deal with this enormous
challenge; leading scientists, academic institutions and UN
agencies have contributed to it. SIGHT AND LIFE’s measures
to combat nutritional anemia further include food fortification
and micronutrient supplementation, education programs and
disease control. Both SIGHT AND LIFE and NIP are contribu-
ting significantly to DSM’s corporate engagement in a
partnership with the United Nations’ World Food Program.

The 2006 bio-ingredients market was estimated at €2 billion.
This market segment includes specialty products such as yeast
extracts, food enzymes and cultures and is regarded as a
knowledge-intensive market where enzyme technology and
biotechnology are key assets.

DSM Food Specialties comprises four business units and an
Ingredients Development Unit. Dairy Ingredients supplies
enzymes, starter cultures and preservation systems for cheese

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Review of business

Nutrition
Pharma
Performance Materials
Industrial Chemicals
Other activities

and yogurt, and tests for the detection of residues of
antibiotics. DSM is one of the biggest suppliers of dairy
ingredients in the world.

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. Enzymes produces a wide range of food enzymes for
applications such as baking, fruit processing, brewing and
manufacturing of other alcoholic beverages.

Functional Food Ingredients produces ingredients for infant
nutrition, food supplements and functional foods such as
arachidonic acid, probiotics and biopeptides. Metabolic health
is the major priority development area. Together with DSM
Nutritional Products, DSM Food Specialties has a unique
portfolio of products in the area of healthy ingredients for use in
functional foods.

DSM Food Specialties focuses on translating specific
consumer demands into niche and IP-protected ingredients
with a high added value for food manufacturers in terms of
performance and contribution to taste, convenience and
substantiated health benefits.

Business review
The bio-ingredients market showed continuous volume growth
of more than 5% in 2007. Some segments were faced with
price pressure due to increased competition. DSM Food
Specialties’ sales, excluding tolling contracts, showed a
satisfactory increase. The weaker US dollar had a negative
impact on the results. As a result of the contractual phasing-out
of the phytase tolling business, DSM Food Specialties’ sales
declined by 2%. Operating profit decreased in 2007.

DSM Food Specialties strengthened its position by launching a
large number of new products and by pursuing organic
growth, in particular in emerging economies. The organization
was further streamlined according to the need to serve
customers in the most efficient way. The pipeline of radically
new products is well-filled with food enzymes, savory and dairy
ingredients and functional food ingredients, particularly in the
area of metabolic health.

The global dairy industry continues to grow while cheese
consumption is showing limited growth; for cheese
manufacturers ripening speed, development of desired taste
and elimination of off-flavors are critical to success.

Dairy Ingredients successfully introduced the enzyme
Accelerzyme ® CPG offering improved maturation speed. The
product portfolio for cheese production (rennet, cultures, media
and preservation systems) showed satisfactory growth. Prices
in the area of preservation were under pressure.

Yogurt is the most popular carrier for a variety of health
ingredients and bioactives. The satiety ingredient Fabuless ®
showed spectacular growth and is now being added to
fermented milk products in Germany, Italy, the Netherlands,
Portugal, the UK and many other countries.

Sales volumes of antibiotic tests were slightly up. Delvotest ® is
the globally recognized leading standard in antibiotic testing in
milk. In 2007 the Delvotest ® Accelerator was successfully
launched. This new, fully automated testing system offers
milk control stations and dairies rapid and consistent results
and guarantees complete traceability and reduces the
risk of rejection.

Sales of the lactase enzyme Maxilact ® for hydrolyzed milk and
low-lactose milk products strongly increased, in particular in
emerging economies.

The global savory-food market is driven by a growing demand
in emerging economies, a need for more convenient types of
products and a strong consumer demand to improve nutritional
profiles such as reduced salt intake. Savoury Ingredients
recorded strong volume growth, in particular in the specialty-
yeast-extracts segment, which includes the newly launched
products Maxarome ® Select and Maxarite ™ . The latter taste
potentiator boosts salty flavors whilst enabling the salt content
of bread and cheese to be reduced by up to 50%.

A dedicated factory for processed flavors was opened in
Shanghai (China). Apart from the growth market in China, the
plant serves the global culinary industry with unique processed
flavors with milder roasted and boiled notes on the basis of an
innovative extrusion technology.

Enzymes’ sales showed strong growth in particular in the area
of baking, brewing and fruit processing. Brewers Clarex ™
(helping brewers to prevent chill haze formation in beers) and
Maxapal ® (for improved emulsification properties in mayonnaise
and sauces), two enzymes introduced in 2006, contributed to
this growth in a significant way.

is a new, unique technological breakthrough for

In 2007 four new enzymes were introduced on the market.
CakeZyme ™
the cake and pastry industry. Following this introduction, the
Let’s Cake Together ™ concept was presented to the market.
This revolutionary ‘toolkit’ combines three ingredients from

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DSM CakeZyme ™ , Etenia ™ and the taste potentiator Maxarite ™
. It allows manufacturers to respond to the key trends
Delite
currently driving the cake market – indulgence, reduced fat and
saturates and improved costs.

is an enzyme that has been proven to

PreventASe ®
substantially mitigate the formation of acrylamide in certain
foods. Claristar ™
mannoprotein which prevents tartrate crystallization in wine.

is an ingredient extracted from yeast

The enzyme technology is also applied to modify raw materials
in order to develop ingredients with unique characteristics,
sometimes in collaboration with partners. One of these strategic
partnerships between the Dutch starch company AVEBE and
DSM, resulted in the launch of Etenia ™ , a natural ingredient
derived from potato starch designed for a variety of applications.
The combination of DSM’s enzyme expertise and AVEBE’s
starch knowledge will lead to more opportunities for the
development of innovative creaminess-enhancing products.

Two new enzymes and a yeast mannoprotein were introduced
in the fruit processing and wine industry. Rapidase ® Optiflux
improves fruit-juice flux rate during cross-flow filtration and
reduces membrane plugging. Rapidase ® Maxifruit allows the
production of supple and fruity wines and boasts a more stable
and intense cherry red color after alcoholic fermentation.

DSM Food Specialties launched a unique protein hydrolysate
consisting of bioactive peptides that represents a breakthrough
in diabetes management. Thanks to this hydrolysate,
Insuvital ™
been clinically proven to help type 2 diabetes patients actively
control glucose levels after mealtimes.

, manufacturers can create products that have

Functional Food Ingredients saw its sales increase thanks to a
strong sales increase for Fabuless ® , a product that contains a
special emulsion of natural, fractionated palm oil and oat oil and
uses the body’s natural appetite-control mechanism to
reduce calorie intake. Apart from applications in yogurt, the
product found important inroads in 2007 in dietary
supplements in France, the UK and the United States and in
meal-replacement shakes.

Growth of arachidonic acid continued but at a lower pace than
in previous years due to saturation as a significant number of
infant-food manufacturers in the world have been launching
new product lines for infant formula enriched with arachidonic
acid. The penetration level in the United States is still much
higher than in Europe.

Another new hydrolysate consisting of bioactive peptides was
introduced to target the growing global market for blood-
pressure management. This product, Tensguard ™ , works by
supporting the natural processes of the body in maintaining
healthy blood pressure.

DSM Food Specialties continues its sustainability efforts. Our
breakthrough new beer-processing enzyme Brewers Clarex ™
enables the beer industry to shorten the brewing process
considerably, resulting in significant savings in energy. The
enzyme also makes the use of chemicals for the prevention of
haze formation redundant.

DSM Special Products
Strengthened global leadership

Sales of the patented peptide PeptoPro ® increased in particular
in the United States. The Dutch Olympic Committee as well as
the Olympic Committees of other countries will recommend the
use of PeptoPro ® to their athletes in preparation for the 2008
Olympics in Beijing (see also page 87).

Highlights
•
•
•

Market growth outpaced once again
Acceleration of sales growth in innovation areas
Strongly improved financial performance

Projects
DSM Food Specialties’ leading enzyme and fermentation
technology is part of the company’s backbone and enables it to
develop enzymes that help customers to achieve their
manufacturing goals or to develop new products that target the
main consumer trends.

DSM was leading in unraveling the genetic code of the
Aspergillus niger genome and is globally leading in Aspergillus
niger patents. In 2007 the complete genome was published in
Nature Biotechnology .

Sales (x € million)

Workforce (at year-end)

101

133

Business and strategy
DSM Special Products 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 unit supplies a wide range
of markets, including the markets for carbonated soft drinks,
food, animal feed, plasticizers, resins, cosmetics, personal care
products, flavors and fragrances, as well as a diverse range of
industrial applications. The production facilities are located in
Rotterdam (Netherlands).

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CakeZyme™

CakeZyme™ is a groundbreaking enzyme-based
ingredient. It is a unique technological breakthrough
for the cake and pastry industry, boosting the
emulsifying properties of egg yolk, meaning fewer
eggs are needed to produce cake which leads to
overall cost savings. In addition to savings, cake
manufacturers benefit from an improved nutritional
profile and enhanced product quality.

DSM Food Specialties introduced CakeZyme™
in 2007. Dave Moreton, Development Director at
Memory Lane Cakes Ltd. (Finsbury Food Group): ‘We
started to use CakeZyme™ in some of our products in
2007. After further successful trials in 2008 we have
continued to roll out the addition of the ingredient
to other products in our range. We are convinced of
the benefits of CakeZyme™ for our products which
include extended shelf-life and softer crumb over time
in our preservative-free products. Throughout the
development process we have worked closely with
various specialists from DSM Food Specialties.’

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
The year 2007 was a good one for DSM Special Products, in
which it strengthened its global leadership in its core products.
The development of demand was encouraging, especially due
to the successful application innovation projects initiated by
DSM Special Products in the last five years. Growth in
VevoVitall ® , our feed additive that helps pig farmers to
significantly reduce ammonia emissions, continued strongly on
the back of the new registration obtained for the consumption
of VevoVitall ® by piglets, and outpaced expectations once
again. Furthermore, new applications for Purox ® B in
plasticizers for markets such as flooring have been introduced,
laying the groundwork for growth in the coming years. Overall,
DSM Special Products was clearly able to grow faster than the
market in its core products, strengthening its market share and
global leadership.

Increased demand led to an industry wide improvement in
utilization rates, allowing margin recovery. Furthermore, DSM
Special Products was able to make significant cost savings,
especially in the consumption of raw materials. DSM Special
Products saw a strong improvement driven by higher sales
volumes and margins and lower fixed costs. Sales rose 7%.

Projects
DSM Special Products will continue its efforts in application
innovation, and will further grow the business in VevoVitall ® in
collaboration with DSM Nutritional Products.

Especially promising for the coming years is the development of
plasticizer products by customers of DSM Special Products,
based on our Purox ® B. Several competitive products based on
phthalic acid will be withdrawn from the market in the next 24
months, opening up market space in which Purox ® B based
products are superbly positioned to compete.

Due to the improved utilization rates combined with continued
belief in growth opportunities, DSM Special Products has
started the engineering for a debottlenecking of its facilities
which will support a further 30% growth in Purox ® B, VevoVitall ®
and Purox ® S by 2010.

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Pharma

The Pharma cluster comprises the business groups DSM Pharmaceu tical
Products and DSM Anti-Infectives.

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.

x € million

2007

2006

Net sales1:

DSM Pharmaceutical
Products

DSM Anti-Infectives

553

478

605

362

Total

1,031

967

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

174

146

1,095

1,302

7.8

17.7

4.9

15.9

Workforce at 31 December

5,073

4,732

1 before elimination of intra-group supplies to other clusters

Supplies of Pharma
x € million

Operating proﬁt of Pharma
x € million

1,000 (cid:116)

800 (cid:116)

600 (cid:116)

400 (cid:116)

200 (cid:116)

0 (cid:116)

100 (cid:116)

80 (cid:116)

60 (cid:116)

40 (cid:116)

20 (cid:116)

0 (cid:116)

2005

2006

2007

2005

2006

2007

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Review of business

Nutrition
Pharma
Performance Materials
Industrial Chemicals
Other activities

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

DSM Biologics is a provider of biopharmaceutical
manufacturing technology and services. DSM Biologics and
Crucell NV have co-exclusive rights to license the high-
producing PER.C6 ® technology platform to the
biopharmaceutical industry as a production platform for
recombinant proteins and monoclonal antibodies. DSM
Biologics operates a manufacturing facility in Groningen, the
Netherlands, approved by the US Food and Drug
Administration (FDA) for mammalian-cell-based contract
manufacturing and PER.C6 ® process support. DSM Biologics
also offers microbial-cell-based contract manufacturing
services through its operations in Capua, Italy.

DSM Pharmaceuticals, Inc. is a provider of high-quality
finished-dose-form manufacturing services to the
pharmaceutical and biopharmaceutical industries. Operating
from Greenville, North Carolina (United States), the company
manufactures sterile injectables (aseptic liquid and lyophilized),
and solid-dose forms (tablets and capsules) for companies
around the world.

DSM Exclusive Synthesis / Intermediates is a global provider
of custom manufacturing services for the agrochemical
industry and a provider of organic intermediates to the fine-
chemicals industry. Customers are served from the production
site in Linz, Austria.

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 very much in line with
expectations. Sales declined by 9%, mainly due to divestment
of the South Haven site in 2006. Operating profit of DSM
Pharmaceutical Products was close to the level of 2006, as the
business group was almost able to compensate for the
expiration of Roche contracts. DSM Pharma Chemicals
showed a good performance and profited from continued new
business uptake and the growth of existing development
projects and commercial products. DSM Pharmaceuticals, Inc.
showed a lower activity level, primarily due to sterile injectables.

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

Highlights
•
•
•

Solid growth and performance in Pharma Chemicals
Clinical trial line for sterile manufacturing started
Breakthrough XD
biopharmaceutical production

™ process announced for

Sales (x € million)

Workforce (at year-end)

553

2,290

Business and strategy
DSM Pharmaceutical Products is a leading provider of high-
quality custom contract manufacturing and development
services to the pharmaceutical, biopharmaceutical and
agrochemical industries. Customers around the world are
serviced from six manufacturing sites in the United States 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
emerging companies across the globe.

DSM Pharmaceutical Products’ contract manufacturing
services include the production of advanced intermediates,
active pharmaceutical ingredients (APIs), amino acids and
derivatives, mammalian cell production of monoclonal
antibodies and proteins, finished-dose form manufacturing of
solids, scheduled drugs, aseptic liquid and lyophilized
products. DSM focuses the right resources on providing the
highest level of service and quality while applying innovative
solutions to satisfy customers’ unique manufacturing needs.
DSM Pharmaceutical Products consists of four business units.

Annual Report 2007

www.dsm.com

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Review of business

Eleven new products were launched from the Greenville, North
Carolina (United States) facility in 2007, including two sterile
biologics for which the pre-approval inspections were waived
by the FDA (the US Food and Drug Administration).

infections in both humans and animals and as such are of vital
importance for people’s well-being and healthier economics in
farming.

Expansion in the sterile manufacturing area continued on
schedule as the clinical trial materials manufacturing facility in
Greenville was completed and qualified and is in operation for
several new customers. The cytotoxic manufacturing suite is on
schedule for commercial operation in 2008.

The DSM Exclusive Synthesis / Intermediates business
showed a better performance due to restructuring of the
portfolio. As part of the accelerated Vision 2010 strategy, it has
been decided to divest the intermediates business.

DSM Biologics’ activities were centered on providing manu-
facturing services for new and existing customers from the
facility in Groningen (Netherlands) and expanding the PER.C6 ®
Development Center in Boston, United States with joint-venture
partner Crucell NV.

The number of new manufacturing projects increased
compared with 2006. DSM Biologics also announced the
innovative XD ™ process
. This cell-based manufacturing
process tailored to the PER.C6 ® technology platform is capable
of producing much higher yields in manufacturing, and can
create a breakthrough in biopharmaceutical manufacturing.

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 growing its
activities and improving its profitability.

DSM Anti-Infectives
Recovery led by higher selling prices

Highlights
•
•
•

Financial performance improved significantly
In full pursuit of partnering strategy
Strong growth in enzymatic green technologies

Sales (x € million)

Workforce (at year-end)

478

2,783

Business and strategy
Penicillin-based anti-infectives are among the most important
pharmaceutical products in the world in terms of volume. The
products in DSM Anti-Infectives’ current portfolio are very
effective in combating a broad spectrum of bacterial and fungal

As a relatively cheap treatment against infectious diseases,
penicillin-derived pharmaceuticals can be afforded by a large
and growing part of mankind, with pronounced growth in the
developing economies of China, India, other countries in Asia
and Africa. Consumption in the Western world with its highly
regulated markets is more or less stable. DSM Anti-Infectives is
the only penicillin producer outside of China.

In this context DSM Anti-Infectives – as the leading supplier of
bulk active ingredients and important intermediates – has
defined a strategy that is aimed at actively maintaining this
leadership position via customer intimacy in the different
markets and technological innovations leading to both further
improved production (cost effective and leaving less of an
environmental footprint) and a strengthened product portfolio in
generic active ingredients. DSM Anti-Infectives will achieve this
by actively seeking partnerships, and where necessary
rationalizing parts of the portfolio.

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

Contrary to previous years, the global overcapacity (mainly
based on newly installed facilities for the production of penicillin
and derived products in China) did not result in oversupply. The
main cause of this was the temporary output reduction forced
by Chinese authorities on a few major players in the industry in
order to comply with environmental regulations. In 2007 this led
to a temporary shortage in the total value chain for penicillin-
based APIs, leading to significant price increases in raw
material intermediates and all related products. Sales increased
by 32%.

The overall growth of market demand for penicillin equivalents
was 4-6% in 2007. In spite of the weak US dollar versus the
euro and the higher raw-material and energy prices, DSM Anti-
Infectives was able to strongly improve its bottom line. This was
due not just to market circumstances, but also to effective cost
control based on the restructuring programs started in 2005.

This result improvement did not apply to the side-chains part of
DSM Anti-Infectives’ portfolio, where capacity and demand
were not fully in balance, although the company was able to

Annual Report 2007

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increase prices while maintaining market share. The weaker US
dollar however prevented this from being reflected in the results.

Purimox®

Projects
In 2007 the decision was taken to divest the clavulanic acid
business and the manufacturing site in Sweden. At the same
time the efforts to broaden the portfolio to include active
pharmaceutical ingredients that will become generic in the
coming years were increased.

In this program DSM Anti-Infectives is strongly profiting from its
market access to key generic pharma houses, building on its
strong technological knowledge and geographic spread
advantages. Besides the focus on this program, DSM Anti-
Infectives’ R&D efforts continue to concentrate on reducing the
variable costs of its core products, and on green routes to
reduce the group’s environmental footprint even further.

New strategy announced

Every year the CPhI (the leading global convention on

pharmaceutical ingredients and intermediates) is one of the

most important events for DSM Anti-Infectives to meet

customers and partners. This three day event is visited by

about 20,000 professionals, which gives ample opportunity to

develop new business leads and to strengthen ties with

existing relations. In 2007 DSM Anti-Infectives announced a

new strategy. In line with this we introduced our new slogan

’DAI, your partner in generic APIs’.

Testimonials from our many satisfied customers and the large

number of visitors to our CPhI stand showed that DSM Anti-

Infectives is a highly appreciated partner in the generic API

industry. In fact increasingly so, as we have embarked on an

ambitious new journey with the objective of launching a

number of new generic molecules every year; and the many

positive reactions from potential customers have actually

exceeded our expectations.

DSM Anti-Infectives has developed
DSMPureActives™, a new range of high-quality semi-
synthetic penicillins and semi-synthetic cefalosporins
each produced with innovative enzymatic technology.

Mr S.G. Belapure, President, Manufacturing
Formulations at Cadila says: ‘By using
DSMPureActives™ product Purimox®, productivity has
gone up by almost 15% thereby reducing breakdown
time and flowability has also improved. Using
Purimox® has considerably improved the formulation
yield.’

Mr Rajesh Madan, Executive Director, Medicamen
Biotech Ltd. vouches for the quality of Purimox® and
acknowledges the fact that using Purimox® provides
a qualitative competitive edge in the market for
formulations.

Mrs Lata Jain, Executive Director, Purchase at Akums
Drugs and Pharmaceuticals shares similar views on
Purimox®. ‘We have been using Purimox® for more
than two years now, and yield and productivity have
gone up significantly. Purimox® is the product of the
future.’

Annual Report 2007

www.dsm.com

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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. On 1 January 2008 DSM Dyneema became a
business group.

x € million

Net sales1:

DSM Engineering Plastics
(including DSM Dyneema)

DSM Resins

DSM Elastomers

2007

2006

1,068

1,324

509

1,005

1,258

496

All of these units 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 paint and
coatings industry and the construction industry.

Total

2,901

2,759

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

321

415

214

329

429

126

1,815

1,697

18.3

14.3

131

19.3

15.6

115

Workforce at 31 December

5,139

4,664

1 before elimination of intra-group supplies to other clusters

Supplies of Performance Materials
x € million

Operating proﬁt of Performance Materials
x € million

3,000 (cid:116)

2,500 (cid:116)

2,000 (cid:116)

1,500 (cid:116)

500 (cid:116)

0 (cid:116)

500 (cid:116)

400 (cid:116)

300 (cid:116)

200 (cid:116)

100 (cid:116)

0 (cid:116)

2005

2006

2007

2005

2006

2007

Annual Report 2007

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Review of business

Nutrition
Pharma
Performance Materials
Industrial Chemicals
Other activities

DSM Engineering Plastics
Satisfying year despite temporary setbacks

increasingly able to position itself as a valuable, solutions-
oriented business partner.

Highlights
•

Sustained volume growth but impacted by caprolactam force
majeure and slow automotive sales in the United States.
Investment program to build for further growth in China/India
running at full speed
Announcement of PA4T, a new high-performance polymer

•

Sales (x € million, including DSM Dyneema )

Workforce (at year-end, excluding DSM Dyneema)

1,068

1,462

Business and strategy
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) and
extrudable adhesive resins. These materials are used mainly in

technical components for the electrics and electronics,
automotive, engineering and packaging industries.

With a global 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
(United States), Jiangyin (China) and Pune (India).

DSM Engineering Plastics wants to further strengthen its
leadership position with a strong focus on performance
materials and specialties. All 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

Business review
The markets for engineering plastics once again showed
growth in 2007 but this growth was lower than anticipated
because lower consumer confidence resulted in reduced
consumer spending. The automotive market (especially in
the United States) and the electronics markets felt the
impact of this.

Despite these developments, DSM Engineering Plastics saw
sales volumes develop positively in all main markets
(electronics, electrical, automotive, packaging, consumer and
industrial markets). Raw-material prices remained at high
levels, which, together with the unfavorable exchange rates,
kept margins under pressure.

Price increases were not yet sufficient to restore margins to the
required levels. A production outage for our main raw material
caprolactam caused supply problems for our polyamide 6
products in Europe and limited our growth. Sales rose by 2%;
operating profit was lower.

Projects
The construction of new plants continued. In Jiangyin (China) a
new Akulon ® polyamide 6 polymer plant is being built and in
Geleen (Netherlands) the second Stanyl ® polymer plant is under
construction. Both factories are due to start up in 2008.

Investment decisions were taken to develop a new
compounding site in Pune (India) to replace the existing site
with extended capacity to cope with strong demand
development. This site is due to start in 2008. Also a decision
was taken for the first extension of the new compounding site in
Jiangyin (China) that had been inaugurated in 2006. The
capacity is to be increased by 50% at the end of 2008.

, a new

In 2007, DSM announced the development of PA4T
high-performance polymer. Stanyl ® Diablo was also introduced,
an innovative new Stanyl ® technology. Components made of
Stanyl ® Diablo have a very long useful life in extreme
environments where other materials disintegrate. Stanyl ®
Diablo is particularly interesting for the automotive industry,
where it helps increase fuel efficiency and reduces CO 2
emissions by saving weight through metal replacement.

Annual Report 2007

www.dsm.com

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Review of business

DSM Dyneema
Another year of solid growth

Highlights
•
•

Continued strong growth globally
Further expansion of manufacturing capacity in the United
States
Pamako Engineering AG acquisition adds new technology

•

Sales (x € million)

to be disclosed as of 1 January 2008

Workforce (at year-end)

606

Business and strategy
Dyneema ® (a high-modulus polyethylene fiber) is the strongest
fiber in the world on a weight-for-weight basis. It 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 (United States).
DSM Dyneema is also a partner in a high-modulus-polyethylene
(HMPE) manufacturing joint venture in Japan.

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

Business review
The year 2007 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. Total sales increased by 22%. DSM
Dyneema’s operating profit was up from 2006, due to higher
volumes .

Between 1998 and 2007 sales volumes for Dyneema ® more
than 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 in production industries, an
increasing demand for personal-safety products, the growing
demand for easy-to-handle, durable materials in the marine
industry and the increase in leisure time and prosperity.

Production capacity for Dyneema ® in the United States for the
life protection market was expanded by another 25% in 2007.
By adding extra capacity to its highly integrated Greenville site,
DSM remains able to meet increasing demand for its products
and underlines its high commitment to the long-term
development of the US market. Also, a decision was made to
invest in a new technical service center at DSM’s Stanley, North
Carolina (United States) facility. Investing in further growth of
Dyneema ® fiber and UD materials helps DSM maintain its global
market leadership position.

New technology for the production of UHMWPE (Ultra High
Molecular Weight Polyethylene) based products was acquired
in March through the acquisition of Pamako Engineering AG in
Zurich (Switzerland). This new technology is complementary to
the existing business for Dyneema ® fiber and Dyneema ® UD.

Projects
In 2007 several new products were introduced. The new
Dyneema ® HB50 represents the latest top-of-the-line solution
for monolithic (fiber-only) inserts to be used in hard ballistic
armor. The new Dyneema ® HB51, designed for and
manufactured in the American market, is the best-in-class
material for protective backing behind the body armor’s strike
face in a hybrid construction. Both new materials offer the
ideal combination of enhanced ballistic performance and
lightweight comfort.

Also, new spun yarn gloves with Dyneema ® were introduced in
the United States. This introduction opens up a significant new
market for protective gloves. Gloves with Dyneema ® protect
hands against a wide range of mechanical and cut hazards.
They feel softer than cotton, enable better air circulation and
have high abrasion and chemical resistance, which is
undiminished by repeated washings.

In the medical segment, independent studies carried out in
2007 show that Dyneema Purity ® , a high-performance
specialty polyethylene fiber developed by DSM Dyneema
specifically for medical applications promotes better tissue
formation than traditional polyester in orthopedic suture
applications. This is excellent news for orthopedic surgeons,
as one of their most important concerns when using artificial,
non-degradable sutures is rapid healing of the tissue
surrounding the sutures.

In the 2007 prestigious America’s Cup race, all boats including
that of the winning Alinghi team were rigged with state-of-the-
art running rigging made with Dyneema ® . This provided a
number of benefits, including lower stretch and significant
weight savings.

Annual Report 2007

www.dsm.com

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The DSM site in Greenville, North Carolina (United States) that
is used by both DSM Pharmaceuticals, Inc. and DSM
Dyneema was selected as Industry of the Year for 2007 by the
community in Pitt County, where it is located. The award
recognizes a manu facturer or distributor that has done a great
job in the community.

DSM Resins
Innovation drive leads to successful product introductions

Dyneema®

Following a successful eight-month sea trial, COSCO
Dalian, a subsidiairy of China Ocean Shipping Company
has selected mooring lines with Dyneema® fiber for its
newest Very Large Crude Carrier (VLCC). COSCO Dalian
found that, in comparison with steel-wire mooring lines,
ropes made with Dyneema® enabled a 50% reduction
in mooring time and significantly improved crew safety.
DSM Dyneema worked closely with COSCO Dalian
during the sea trial to document performance of the
new ropes.

Zhao Jinwen, General Manager of Technical Department
COSCO Dalian, said: ‘At COSCO we are always looking
for new ways to improve the safety and efficiency of our
operations, and this is why we trialed the lines made with
Dyneema®. We were very impressed with the results.
The mooring ropes are lighter and easier for seamen
to handle, which helps avoid injury at sea and ashore,
and speeds up the mooring process. We dramatically
reduced mooring time, which will help lower port fees
and allow faster turnarounds for our vessels. We are
looking forward to the launch of the Cospearl Lake and
the many benefits Dyneema® technology will bring to
its operation.’

Highlights
•
•

Strong organic sales growth in 2007
DSM NeoResins+ expansion in Meppen (Germany)
completed, new expansions in Waalwijk (Netherlands) and
Shunde (China) announced
Innovative strength recognized by two prestigious awards

•

Sales (x € million)

Workforce (at year-end)

1,324

2,524

Business and strategy
DSM Resins manufactures and sells high-quality resins which
are used in a wide variety of everyday applications. By focusing
on value-added and eco-friendly solutions, DSM Resins is able
to capture many growth opportunities thanks to its market-
driven innovation efforts.

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

Business review
In 2007 DSM Resins made further progress in all of its four
business units and introduced a broad range of new, innovative
products. These will help the business group to achieve its
ambition of double-digit sales growth towards 2010.

DSM Resins’ sales growth in 2007 was mostly volume-driven.
Most facilities operated at full or nearly full capacity during the
year, increasing the need for capacity expansion. DSM
Resins is investing heavily in market-driven innovation by
developing new technologies and products for existing and
new applications.

Successful price management in combination with new
products from innovation efforts, increasing presence in
emerging economies and a strong commitment to operational
excellence will form the basis for the improvement of DSM
Resins’ overall profitability in the coming years.

Annual Report 2007

www.dsm.com

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Review of business

Trends in the market call for eco-friendly systems, driven by
more stringent legislation in combination with the customers’
need for improved durability, lower weight, ease of use and
lower system costs.

The first ever full-composite bridge with products of DSM
Composite Resins was installed in Dronten, the Netherlands.
The bridge is stronger than concrete but at the same time
twelve times lighter. It takes 15 minutes to install, compared to
1 to 2 days for a conventional concrete bridge.

DSM Resins’ innovation drive is aimed at providing solutions
that lead to lower emissions and energy savings. By offering
lightweight composite resins to replace metal, significant
savings can be achieved. Also, waterborne resins for paints
and coatings contribute to a more sustainable world with lower
emissions and superior quality.

In 2007, DSM NeoResins+ made further progress with the
closure, announced in 2006, of the production site in
Landskrona, Sweden. The closure was necessary because of a
reduced demand for alkyd solvent-borne coating systems due
to new regulations in the European Union.

The innovation focus will be in particular on inter-material replace-
ment of metal and concrete by composite resins and emission-
free water-based and powder-coating resin technologies.

DSM Resins aims to achieve about €250 million in extra sales in
2010 through innovation. By the year 2010, 20% of the resins
portfolio will be based on new products. At the same time, the
existing product portfolio will be rejuvenated.

With the award of two prestigious innovation prizes, the
innovative strength of DSM Resins was recognized in 2007.
DSM Composite Resins received the Design and Technology
Awards for best innovative material for Turane ™ at the European
trade fair Materialica. DSM Composite Resins also received the
JEC Innovation Award for best innovation in composite resin
materials (Turane ™ ) during the International China Composites
Expo. Turane ™
was used in the bodywork of the lightweight
Nuna4, the winner of the Panasonic World Solar Challenge for
solar-powered vehicles.

Shortages in raw materials, as witnessed in 2006 for isophthalic
acid, did not occur in 2007. DSM Resins met its target of
achieving strong organic sales growth in 2007 with a slightly
higher operating profit, as a balance of higher sales volumes,
margins and fixed costs.

Projects
In 2007, DSM NeoResins+ introduced Neocryl ® , a water-based
resin for exterior paints in window frames. Apart from reduced
emissions, the product has no odor and dries much faster.
DSM NeoResins+ also introduced NeoRad ®

DSM Desotech’s subsidiary Somos launched a NanoTool, used
for wind-tunnel test parts for optimization in aerodynamics for
Formula 1 racing.

DSM Powder Coatings introduced HiTone ®
polyester resin with enhanced pigment affinity, enabling the
formulation of white and light powder coatings for thin-film
applications.

, a hybrid

DSM NeoResins+ completed the construction of a new factory
for waterborne resins in Meppen, Germany. Also, it announced
an investment of €30 million in the building of a new factory for
waterborne emulsion resins in Waalwijk (Netherlands), due to
open in 2008.

At the same time, DSM Resins is making further progress in
China with the opening of a new plant in Xinghuo for Neoxil ®
sizings and binders.

DSM Elastomers
Higher sales volumes more than compensate for higher costs

Highlights
•
•
•

Strong development of global business
Innovative Keltan ACE
Global branding campaign launched

™ production technology announced

Sales (x € million)

Workforce (at year-end)

509

547

Business and strategy
DSM Elastomers manufactures synthetic rubbers (EPDM) for
use in cars and other transportation vehicles, white goods,
various industrial products and construction materials and as
motor-oil additives. The group is one of the global market
leaders in EPDM rubber with a market share of 20%. DSM
Elastomers has production plants in Geleen (Netherlands) and
Triunfo (Brazil). 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.

DSM Thermoplastic Elastomers is the #2 global producer of
TPVs (EPDM-based – fully vulcanized – thermoplastic
elastomers). These TPVs are used in a wide variety of
applications including automotive, consumer, electrical, food,
building, medical and industrial applications. DSM
Thermoplastic Elastomers operates plants in Genk (Belgium)

Annual Report 2007

www.dsm.com

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Powder Coating Resins

DSM Powder Coating Resins is a global market
leader in polyester resins used for the production
of solvent free powder coatings. These coatings
have proven to be technically strong, economically
attractive and environmentally friendly. ‘We strongly
believe in the future of the powder coatings industry,
as the advantages they offer are obvious: ecological
soundness, cost effectiveness, energy savings and
an excellent product performance,’ Rob Molenaar,
Director of the business unit Powder Coatings of Akzo
Nobel, says. ‘Powder coatings have come a long way
since they were first introduced in the 1960s, and
due to the innovation drive in the industry, we expect
powder coatings to continue their further growth in
the future.’

and Leominster, Massachusetts (United States) and has its
global headquarters in Leominster. DSM Thermoplastic
Elastomers’ strategy is to maximize the growth of TPV, replacing
thermoset rubber and PVC, through the development of new
advanced technology solutions.

Business review
Global demand at DSM Elastomers for EPDM was strong
throughout 2007. Demand in the emerging economies
continued to show healthy growth, mainly driven by growing
demand in the automotive industry. The demand in North
America continued to suffer from the restructuring of the
automotive industry and its suppliers. Moreover, the
downturn in the housing market is affecting the building and
construction industry.

In 2007 DSM Elastomers developed well in all regions,
particularly in Asia and South America. Raw-material prices
continued to increase, especially towards the end of the year.
The company was not able to fully safeguard its margins by
passing on these cost increases to the market. The continuous
weakening of the US dollar caused pressure on both prices
and margins.

At DSM Thermoplastic Elastomers, sales growth exceeded
expectations in 2007, causing shortages in TPV supplies.
Capacity was expanded during 2007 enabling the company to
support continuous growth of TPV demand until a new plant
comes on stream by the end of 2008. Price increases were
implemented in 2007 to compensate for increases in raw-
material costs. In 2007 a new generation of low-hardness
Sarlink ® grades was developed.

Sales of the business group increased by 3% in 2007;
operating profit was slightly higher.

Projects
Substantial progress was made in the development of the
Advanced Catalysis Elastomers (ACE ™ ) technology.
Commercial-scale production of the first innovative range of
products will commence at the end of 2008.

In response to ongoing industry trends in key markets
(automotive and building & construction), DSM Elastomers will
launch several new products in 2008 based on proprietary
technologies to further grow and strengthen its global
market position.

At the end of 2007 a newly built reactive extrusion line
commenced production. This line will focus on producing
specialty elastomeric materials.

Annual Report 2007

www.dsm.com

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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.

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.

x € million

Net sales1:

DSM Fibre Intermediates
(including DSM Acrylonitrile)

DSM Melamine

DSM Agro

DSM Energy

2007

2006

1,475

1,429

222

427

215

403

Total

2,205

2,135

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

225

292

196

269

714

745

30.8

15.1

26.6

14.4

Workforce at 31 December

2,134

2,183

1 before elimination of intra-group supplies to other clusters

Supplies of Industrial Chemicals
x € million

Operating proﬁt of Industrial Chemicals
x € million

2,500 (cid:116)

2,000 (cid:116)

1,500 (cid:116)

1,000 (cid:116)

500 (cid:116)

0 (cid:116)

250 (cid:116)

200 (cid:116)

150 (cid:116)

100 (cid:116)

50 (cid:116)

0 (cid:116)

2005

2006

2007

2005

2006

2007

Annual Report 2007

www.dsm.com

Book EN_v2.indb 60
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Review of business

Nutrition
Pharma
Performance Materials
Industrial Chemicals
Other activities

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.

polypropylene. DSM Fibre Intermediates, with plants in the
Netherlands, the United States and China, is the largest
merchant caprolactam producer in the world with a market
share of 20%. In addition, the business group produces about
1.2 million tons per annum (tpa) of fertilizer (ammonium
sulphate) as a co-product.

DSM Fibre Intermediates
Solid performance in caprolactam and acrylonitrile

Highlights
•
•
•

Good demand for caprolactam and acrylonitrile
Higher acrylonitrile prices in line with raw-material costs
Acrylonitrile debottlenecking project successfully executed

Sales (x € million)

Workforce (at year-end)

1,475

1,421

Business and strategy
DSM Fibre Intermediates produces caprolactam and
acrylonitrile, which are raw materials for synthetic fibers
and plastics.

Caprolactam is the raw material for polyamide 6. This is a
versatile material, which in the form of fibers is used in sports
and leisure clothes, tires and carpets. It is increasingly used as
high-performance construction material in, for example, the
electronics and automotive industries and in packaging materials.

Polyamide 6 has reached the mature phase of its life cycle,
where market demand and selling prices are strongly
influenced by supply/demand cycles. It is facing competition
from other materials, such as polyamide 66, polyester and

Acrylonitrile is a raw material used in textile fibers, ABS plastics,
latex rubber and water-purification products. The business
group’s acrylonitrile production capacity is 260,000 tpa. DSM
Fibre Intermediates also produces about 25,000 tpa of sodium
cyanide, which is used in detergents and in the synthesis of
vitamins. With a market share of 25%, DSM is a major player in
the merchant acrylonitrilemarket in Europe.

DSM Fibre Intermediates’ distinguishing 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 in close cooperation with DSM Engineering Plastics,
for which caprolactam is a very important raw-material. For
acrylonitrile we aim to strengthen our manufacturing base in
Geleen (Netherlands).

Business review
Global demand for caprolactam was good. DSM Fibre
Intermediates’ caprolactam sales growth in 2007 was limited
compared to 2006 due to planned and unplanned caprolactam
production outages. Prices were on average at the same level
as in 2006 as demand was good even in the face of high raw-
material prices. The prices of energy-related raw-materials
such as ammonia remained volatile and high compared to
historical levels, but declined slightly compared to 2006. The
business overall showed good results.

Demand for acrylonitrile was comparable to 2006. The steady
rise in raw-material prices, especially for propylene, could be
recouped with higher selling prices. Following the course set
out in 2006, the business group was able to close the year
2007 with a solid performance. Sales increased by 3%;
operating profit increased as well, thanks to higher margins.

Projects
By expanding our caprolactam plant in Nanjing (China) to
140,000 tpa on the basis of DSM’s HPO Plus ® technology, we
have become the leading supplier in the rapidly growing
Chinese market, and an additional expansion beyond 200,000
tpa to support this market growth is being planned. We
expanded our acrylonitrile plant in Geleen (Netherlands) by
25,000 tpa to 260,000 tpa.

Annual Report 2007

www.dsm.com

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Review of business

Measures to reduce COD (chemical oxygen demand)
discharges in Nanjing were taken. Investments to bring DNCC
in China up to the highest standards are scheduled for 2008. In
the United States substantial energy reductions have been
realized over the last couple of years. The feasibility of further
projects focusing on energy reductions and better use of raw
materials is being evaluated. In Europe a series of investments
within the framework of a lifetime extension project will improve
the reliability and the integrity of the plant. Recently, in
acrylonitrile a catalyst exchange and a debottlenecking resulted
in a reduction in the usage of raw-materials and energy.

DSM Melamine
Strong improvement in operating profit

Highlights
•
•
•

Improved global supply-demand balance
Higher prices of competing exports from China
Margins recovering but not satisfactory yet

Sales (x € million)

Workforce (at year-end)

222

281

Business and strategy
The main application of melamine is in wood-based panels and
laminates used for furniture and flooring. Melamine is also used
in car paints, durable plastic tableware and flame retardants.
The growing number of consumers in emerging economies,
notably China, is driving demand.

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. The growing
scarcity of hardwood stimulates the use of melamine. Stricter
legislation on emission of formaldehyde is expected to have a
positive impact as well.

The market for melamine is growing at an average rate of 4%
per annum. Several new plants of a small scale are being built in
China. Total capacity in China still exceeds local demand. In
addition, new world-scale plants will be built in areas with low-
priced natural gas in the next few years.

With a market share of close to 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.

DSM Melamine has plants in Geleen (Netherlands) and in
Bontang (Indonesia). The latter plant is a joint venture with P.T.
Pupuk Kalimantan Timur and P.T. Barito Pacific Lumber
Company.

Business review
Sales increased by 3% in 2007; operating profit increased
strongly. Margins improved significantly in 2007, mainly due to the
increase in selling prices in the second half of the year. Supply-
demand conditions, which had been unfavorable since 2004,
changed for the better in 2007. The prices of material exported
from China increased strongly over the year. The reasons are a
change in Chinese VAT legislation, the higher cost of transport
and an unforeseen reduction in production capacities.

In the United States we succeeded in maintaining our market
position based on imported material. Production at the DSM
Kaltim Melamine joint venture plant in Indonesia was restricted
by low on-stream factors of connected plants on site. In Geleen
(Netherlands) we realized a production level that was higher
than in the previous year.

Projects
DSM Melamine’s objective is to consolidate its leading position
and improve profitability. In China we intend to establish a
position in the high end of the market based on locally sourced
products. For this purpose DSM Melamine is developing a
49/51 joint venture with Shanxi Fengxi Fertilizers.

DSM will continue its efforts together with customers to grow the
market via innovation. Examples are cost reduction across the
value chain, exploitation of the handling advantages of melamine-
based resins over competing glue systems based on phenol or
isocyanates, and the use of alternative fibers for panels.

DSM Agro
Higher grain prices drive demand

Highlights
•

Reversal of demand decline of nitrogen fertilizers in
Northwest Europe supported by growth of bio-energy crops
Plants upgraded to reduce greenhouse-gas emissions by 80%
Strong improvement of financial performance

•
•

Sales (x € million)

Workforce (at year-end)

427

Business and strategy
DSM Agro is specialized in supplying products and services for
responsible fertilization. The company produces and markets
nitrogenous mineral fertilizers and industrial products, mainly

Annual Report 2007

www.dsm.com

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Review of business

Nutrition
Pharma
Performance Materials
Industrial Chemicals
Other activities

for the Northwest European market. DSM Agro operates
production sites at Geleen and IJmuiden in the Netherlands.
DSM Agro produces and sells about 2.4 million tons of
fertilizers per year. DSM Agro also produces products that
serve as raw materials for other DSM business groups.

Business review
DSM Agro benefited from the change in market sentiment in
the course of the year. A strong worldwide market positively
influenced the Northwest European market. Driven by a
growing global food and feed demand as a result of positive
economic developments in the large new economies in Asia,
world grain prices rose considerably, leading to increasing
demand for fertilizers.

The growing trend towards bio-fuels further strengthened this
development. This in turn had a positive effect on international
fertilizer prices. As a result, DSM Agro improved its operating
profit in comparison with previous years. Sales rose by 6%.

Projects
Towards the end of 2007 the nitric acid plants in both Geleen
and IJmuiden were upgraded in order to significantly reduce
greenhouse-gas emissions.

Apart from being ISO 9001 certified, DSM Agro is also a
member of EFMA (European Fertilizer Manufacturers
Association) and complies with its Product Stewardship
requirements.

The Product Stewardship program is to ensure that fertilizers
and their raw materials, additives and intermediate products
are processed and manufactured, handled, stored, distributed
and used in a safe way with regard to health, occupational and
public safety, environment and security. This includes supplying
plant nutrients which satisfy society’s requirements with regard
to safe food production and animal feed.

Sales (x € million)

Workforce (at year-end)

Business and strategy
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 participates as non-
operator with a stake of up to 25% in the oil and gas joint
ventures and up to 40% in pipeline systems. At year-end, the
business group had a share in twenty producing oil and gas
fields and participated in two gas field developments. All fields
are located in fifteen production licenses. DSM Energy’s
strategic mission is to maximize cash flow by minimizing cost
and maximizing production in the existing licenses.

Business review
The oil market saw very large price increases at the end of the
year. Over the entire year the price was higher than in 2006.
Due to a very mild winter, the market prices for natural gas were
below 2006. Nevertheless the business group’s operating profit
was at a high level, although lower than in 2006.

In 2007 an exploration well was drilled in offshore block Q1 as a
follow-up to the Q1-B gas discovery. Unfortunately the well was
dry. A well in block F17-S1 was still being drilled at year-end.
Studies for a possible well on Horizon West have nearly been
completed and drilling is planned for 2008. One development
project, G14-C, was carried out successfully with first gas mid
November 2007. Two further development projects, the A12a
and M7-A fields, are in progress with first gas expected early
2008 and year-end 2008, respectively.

The business group’s total production of 1.9 million barrels of oil
equivalent in 2007 was slightly less than in 2006. The remaining
reserves at the end of the year were about 8.1 million barrels of
oil equivalent, of which 7.4 million in the producing fields.

DSM Agro promotes good agricultural practices by
encouraging farmers to use correct amounts of fertilizers of the
required quality at the required time, applied by means of
properly adjusted fertilizer spreaders. To this end, DSM Agro
provides its customers with high-quality fertilizers plus services
to ensure that these are used in a responsible manner.

Projects
In 2007 three master theses on coal development were
finalized with DSM Energy’s assistance. Together with RWTH
Aachen (Germany) and Delft University of Technology
(Netherlands) investigations into the CO2-capturing capabilities
of coal were started.

DSM Energy
Operating profit at continued high level

Highlights
•
•

Better-than-expected performance
New field (G14-C) taken into production

DSM Energy became one of the founding members of the
DAP foundation (Delft Aardwarmte Project). Wells will be drilled
to produce warm water for the energy benefit of the entire Delft
University campus.

Annual Report 2007

www.dsm.com

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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 sales1

2007

2006

455

422

DSM Licensing Center
DSM Licensing Center (DLC, formerly Stamicarbon) uses its
long-standing experience and licensing best practices to
generate added value from DSM’s intellectual property (IP). It
had a successful year both in licensing urea technology and in
broadening its portfolio.

Operating profit

Operating profit plus
amortization and depreciation

Capital expenditure and
acquisitions

(80 )

(39 )

(69 )

(33 )

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.

Workforce at 31 December

3,126

2,860

1 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 the volume of these activities can be subject to
change. They normally have a negative operating result.

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 cannot 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 Innovation on page 24. As a result of the structural
increase in innovation efforts in the DSM Innovation Center itself
and in the Emerging Business Areas the costs of the Innovation
Center increased, which had a negative impact on the result of
Other activities.

DSM Venturing
DSM Venturing participates in external start-up companies or
funds and is constantly on the lookout for investment
opportunities in innovative businesses or technologies in the
fields of life sciences and materials sciences. DSM Venturing
plays an important part in DSM’s open innovation policy and
invests in activities that are of immediate or potential relevance
to DSM. A total of six new participations were realized in 2007.
These include participations in Harland Medical Systems
(technologies and solutions in medical coating applications),
Food Quality Sensor International (freshness detection for
perishable goods), Jurilab (discovery of gene-disease
associations) and Upfront Chromatography (purification
technology). In addition to direct investments DSM Venturing is
also involved in a number of venture capital funds. For more
information see page 22.

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
(Netherlands).

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%.

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 compensations for the group. The captive
insurance company posted better results in 2007 due to a
reduction in damages compared to the previous year.

Associates
DSM has a small share in a limited number of associates. The
contribution to the result was negligible.

Heerlen, 11 February 2008

The Managing Board

Feike Sijbesma, chairman
Jan Zuidam, deputy chairman
Rolf-Dieter Schwalb, CFO
Nico Gerardu
Stephan Tanda

Annual Report 2007

www.dsm.com

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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. According to the
rotation scheme Mr Okko Müller’s term came to an end. He
stepped down from the Supervisory Board on 28 March 2007
since he had served the maximum term of twelve years. The
Supervisory Board is grateful to Mr Müller for his commitment
to the company during his membership and his constructive
and valuable contribution to the Board’s work.

The composition of the Audit Committee changed in 2007. Mr
Cor Herkströter and Mr Okko Müller stepped down and were
succeeded by Mr Tom de Swaan and Mr Claudio Sonder. The
Audit Committee, thus consisting of Messrs Henk Bodt
(chairman), Tom de Swaan and Claudio Sonder, met three
times in 2007. The external auditor was in attendance at these
meetings, and at all meetings the internal – operational –
auditor was present as well.

Mr Peter Elverding stepped down as chairman of the Managing
Board as of 1 May 2007. He was succeeded by Mr Feike
Sijbesma as of the same date. The Supervisory Board would like
to express its sincere appreciation for all that Mr Peter Elverding
did for the company during the years he worked for DSM in
various positions, especially when he served on the Managing
Board, first as a member and subsequently as chairman.

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. The dividend proposal for the year 2006 was discussed.
The committee acknowledged the receipt of the independence
letter of the external auditor.

To fill the vacancy arisen from Mr Feike Sijbesma’s appointment
as chairman of the Managing Board replacing Mr Peter
Elverding, the Annual General Meeting of Shareholders held on
28 March 2007 appointed Mr Stephan Tanda as a member of
the Managing Board with effect from 1 May 2007 for a period of
four years.

The Supervisory Board approved the distribution of Managing
Board responsibilities as from 1 May 2007 and the
redistribution as from 1 January 2008.

At the June Audit Committee meeting the 2007 audit plan for the
external auditor was discussed and approved. The committee
furthermore discussed the work of the Corporate Operational
Audit department and approved its audit plan. The review of
strategic and operational risks reported by the business groups
was discussed. The system and status of the Letters of
Representation issued by the managers directly reporting to the
Managing Board were evaluated. The positive outcome of the
review of the DSM Annual Report by the AFM, the Netherlands
Authority for the Financial Markets, was reported.

The main topics discussed during the meeting held in
December were the potential provisions and impairments for
2007, findings from the interim audit performed by the external
auditor, the basis upon which the Internal Control statement
was to be based, the activities of the Corporate Operational
Audit department, the 2007 status of the Whistleblower
systems and the Corporate Risk Assessment for 2007.

The composition of the Nomination & Remuneration Committee
did not change in 2007. The committee, consisting of Messrs
Cor Herkströter (chairman), Cees van Woudenberg and Ewald
Kist, met five times in 2007. 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 70 of this annual report.

The Supervisory Board held five 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 subjects
discussed in these regular Supervisory Board meetings outside
the presence of the Managing Board included the establishment
and the outcome of the Managing Board bonus targets and the
Managing Board overall remuneration package, all of which
were prepared by the Nomination & Remuneration Committee.

In addition to remuneration subjects, this part of the
Supervisory Board meetings was used for pre-discussion of for
instance corporate-governance issues. 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 2007 were attended by virtually all of the
Board’s members.

Annual Report 2007

www.dsm.com

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Report by the Supervisory Board

The committee discussed the effectiveness and outcome of the
remuneration policy. An assessment was made as to whether
the remuneration policy was consistent with Vision 2010 .
Proposals were formulated to the full Supervisory Board on the
short-term incentive targets for 2007, the realization of the
2006 targets and the increase in the base salary of the
Managing Board with effect from 1 July 2007. The committee
also prepared a proposal to the Supervisory Board on various
other remuneration aspects such as a change in the 2008
bonus-related financial targets and a revision of the Dutch
labor-market peer group for 2008. Other issues covered in the
proposal were a change in the base salary for the chairman with
effect from 1 January 2008, as announced in the annual report
for 2006 and an increase in the maximum percentage
overachievement of the financial bonus targets.

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. The remuneration of the members of the
Managing Board was also discussed.

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
in 2005. The Board discussed the Annual Strategic Review.
Furthermore, the Supervisory Board held in-depth discussions
with the Managing Board on a strategic mid-term review of the
Vision 2010 program. The Board approved the acceleration of
the Vision 2010 program, that is, the acceleration of the shift to
a specialty Life Sciences and Materials Sciences company,
delivering faster growth, higher margins and improved earnings
quality. More specifically the Board approved the related
portfolio adjustments and the initiation of a disposal or
partnering program for non-core businesses. The Annual
Strategic Review as well as the review of the Vision 2010
program included an overview and an assessment by the
Managing Board of the main risks to the company. The
Supervisory Board also discussed the organizational alignment
in relation to the acceleration of the Vision 2010 program.
Furthermore the Supervisory Board discussed the outcome of
the Corporate Risk Assessment for 2007.

The Supervisory Board held discussions with the Managing
Board on possible future acquisitions that would fit in with the
strategy, one of the aims being to strengthen the Performance
Materials and Nutrition clusters. The Supervisory Board
approved the acquisition of cosmetic-active-ingredient
specialist Pentapharm. The Supervisory Board discussed and
approved a profit improvement program for DSM Nutritional
Products and a partnering strategy (possibly with – partial –
disposals) for the Anti-Infectives business combined with
innovation initiatives and further restructuring measures to
improve profitability.

The Supervisory Board discussed and approved the Capital
Expenditure and Financing and Guarantee Plan for 2007.

The Supervisory Board agreed with proposals that were
subsequently presented to the Annual General Meeting of
Shareholders (March 2007) for amending the Articles of
Association. The proposals related to the introduction of a
loyalty dividend concept, offering a Dividend Re-Investment
plan (DRIP) to the shareholders and the incorporation into the
Articles of Association of the possibility of using electronic
communication media in the decision-making process.

The Supervisory Board was informed in detail about the –
negative – decision of the Enterprise Chamber of the
Amsterdam Court of Appeal on whether the shareholders were
allowed to vote on the loyalty dividend proposal during the
Annual General Meeting of Shareholders on 28 March 2007. In
September 2007 the Solicitor General ( Advocaat-generaal ) at
the Dutch Supreme Court lodged a request for cassation
against the decision of the Enterprise Chamber. The Supreme
Court overruled the Enterprise Chamber’s decision in its
decision of 14 December 2007.

The Supervisory Board approved an update of the Commercial
Paper program involving cancellation of the existing USD 0.4
billion Commercial Paper program, an update of the existing
€0.9 billion Commercial Paper program and an increase in the
nominal amount of the Commercial Paper program to €1.5
billion. The Supervisory Board also approved an increase in the
planned bond issue from €400 million to €750 million.

Furthermore, the Board approved a second share buy-back
program worth €750 million, to be executed in 2007 and 2008.
The Supervisory Board approved the interim dividend to be
paid for 2007. The Board approved the new formulation of the
dividend policy: ’DSM aims to provide a stable and preferably
rising dividend’. The Board also approved the announcement
of the recommendation to the Annual General Meeting of
Shareholders om 26 March 2008 of a dividend increase of 20%
per ordinary share and the proposal made to the Annual

Annual Report 2007

www.dsm.com

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General Meeting of Shareholders regarding the final dividend to
be paid out for 2007.

NeoRad®

NeoRad® UV-curing resins, both waterborne and
100% solids, combine eco-friendliness with low
energy usage and low coating weights. UV curing
coatings represent the world’s fastest growing
innovative resin technology. NeoRad® offers the
excellent wear resistance, stain resistance and
mechanical properties required for industrial wood
coatings, plastic coatings and the graphic arts
industry. End applications include flexible resilient
flooring (PVC and linoleum), parquet flooring, luxury
packaging and furniture coatings.

As in previous years, the Supervisory Board invited managers
from a number of business groups and corporate staff
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 2007. The Report by
the Managing Board and the financial statements for 2007 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 12 February 2008. The financial
statements were audited by Ernst & Young Accountants, who
issued an unqualified opinion (see page 147 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 147 of this report.

DSM succeeded in recording good results for 2007. In 2007
the company embarked on an acceleration of the shift to a Life
Sciences and Materials Sciences company and set ambitious
new growth targets. The Supervisory Board wishes to express
its sincere appreciation for all the efforts made by the
employees and the Managing Board.

Heerlen, 12 February 2008

The Supervisory Board

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

Annual Report 2007

www.dsm.com

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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 NV and chairman of
the Committee of Managing Directors of Royal Dutch/Shell
Group.

Nationality : Dutch.
Supervisory directorships and other positions held : 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 of 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

Royal Philips Electronics NV.

Nationality : Dutch.
Supervisory directorships and other positions held : member of

the Supervisory Board of Neopost SA.

Pierre Hochuli (1947, m)
First appointed : 2005. End of current term: 2009.
Position : retired; last position held: Chairman of the Board of

Directors of Devgen NV.

Nationality : Swiss.
Supervisory directorships and other positions held : None.

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 NV, Royal
Philips Electronics NV, Stage Entertainment and Moody’s
Investor Services, member of the Board of Governors of the
Peace Palace in The Hague (Netherlands) and of the
Netherlands America Foundation.

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., Lojas Renner S.A., RBS-Media Group, Cyrela
Brazil Realty S.A., Hospital Albert Einstein and member of the
Board of the Latin-America Association, Hamburg (Germany).

Cees van Woudenberg (1948, m)
First appointed : 1998. End of current term: 2010.
Position : retired; last position held: member of the Executive

Committee of Air France-KLM.

Nationality : Dutch.
Supervisory directorships and other positions held : member of
the Supervisory Boards of Transavia CV, Royal Grolsch NV,
Mercurius Group Wormerveer BV, Coöperatieve
Bloemenveiling FloraHolland UA and Royal Boskalis
Westminster NV, 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,
member of the Supervisory Boards of Corporate Express NV,
Royal Ahold NV and Van Lanschot Bankiers NV, Board
member of Royal Concertgebouw Orchestra and member of
the Supervisory Board of Netherlands Cancer Institute-Antoni
van Leeuwenhoek Hospital.

Annual Report 2007

www.dsm.com

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Corporate organization

Managing Board

Feike Sijbesma (1959, m), chairman.
Position : chairman of DSM’s Managing Board since May 2007;

member of DSM’s Managing Board since July 2000.

Nationality : Dutch.
Supervisory directorships and other positions held : board
member of Cefic (European Chemical Industry Council),
board member of BIO (Biotechnology Industry Organization,
United States), member of the Supervisory Board of Utrecht
University (Netherlands) and the Supervisory Board of the
Dutch Genomics Initiative, member of the Dutch Innovation
Platform 2.0, member of the Advisory Boards of RSM
Erasmus University and of EPC.NL.

e-mail: feike.sijbesma@dsm.com

member of EuropaBio (European Biotechnology Industries
Association) and board member of SGCI (Swiss Chemical and
Pharmaceutical Industry Association).

e-mail: stephan.tanda@dsm.com

Other corporate officers
(as of 1 January 2008)

Directors of business groups

DSM Nutritional Products

Leendert Staal (1953)

DSM Nutritional Products
Human Nutrition and Health

DSM Nutritional Products
Animal Nutrition and Health

Mauricio Adade (1963)

Antonio-Ruy Freire (1949)

Jan Zuidam (1948, m), deputy chairman.
Position : deputy chairman of DSM’s Managing Board since

DSM Food Specialties

Alexander Wessels (1964)

DSM Pharmaceutical Products

Bob Hartmayer (1952)

January 2001; member of the Managing Board since January
1998.

DSM Anti-Infectives

DSM Resins

Gerard de Reuver (1956)

Ben van Kooten (1951)

Nationality : Dutch.
Supervisory directorships and other positions held : member of
the Supervisory Board of Gamma Holding NV, chairman of the
Dutch Chemical Industry Association (VNCI), chairman of the
Supervisory Board of the ORBIS medicare group, member of
the Netherlands Academy of Technology and Innovation,
member of the Platform Beta / technology (Netherlands),
member of the Board of Recommendation of Leaders for
Nature, member of the Supervisory Board of the Bonnefanten
Museum in Maastricht (Netherlands), member of the Advisory
Board of SenterNovem.

DSM Engineering Plastics

Jos Goessens (1951)

DSM Dyneema

DSM Elastomers

DSM Fibre Intermediates

DSM Melamine

DSM Agro

DSM Energy

Christophe Dardel (1960)

Jan Paul de Vries (1958)

Edward Sheu (1953)

Anton Robek (1959)

Renso Zwiers (1955)

Frank Chouffoer (1951)

e-mail: jan.zuidam@dsm.com

Directors of corporate staff departments and services

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

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 Board of Voestalpine Polynorm NV and
chairman of the Supervisory Board of Holland Colours NV.

e-mail: nicolaas.gerardu@dsm.com

Stephan Tanda (1965, m)
Position : member of DSM’s Managing Board since May 2007.
Nationality : Austrian.
Supervisory directorships and other positions held: board

Corporate Secretariat

Control & Accounting

Human Resources

Strategy & Acquisitions

DSM Innovation Center

Paul Fuchs (1946)

Loek Radix (1956)

Ben van Dijk (1951)

Hein Schreuder (1951)

Rob van Leen (1957)

Communications

Angelique Paulussen (1959)

Marketing

Legal Affairs

Operational Audit

Safety, Health, Environment &
Manufacturing

ICT

Sourcing

DSM Nederland

DSM China

Strategic Projects

Vacancy

Pieter de Haan (1954)

Roelof Mulder (1946)

John Prooi (1946)

Aloys Kregting (1967)

Ton Trommelen (1950)

Jos Schneiders (1951)

Wei-Ming Jiang (1956)

Hans van Suijdam (1950)

Annual Report 2007

www.dsm.com

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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 (6 April 2005). The second part
contains details of the remuneration in 2007 and the changes
expected in 2008.

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 this 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 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
this 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

Getronics1

Heineken

KPN

Numico1

Nutreco

Océ

TNT

Wolters Kluwer

1 Since they are no longer listed on the stock exchange, Getronics and Numico will

be eliminated from the peer group and replaced by other companies.

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. 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 labor-market
peer group.

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 amounts to 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
amounts to 18% of the base salary and cannot increase
beyond that. Targets are defined in the areas of the company’s
strategic development and Triple P.

Annual Report 2007

www.dsm.com

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Remuneration Policy regarding the
Managing Board and the Supervisory Board

Remuneration policy
Remuneration in 2007 and changes expected
in 2008

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

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.

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 (EBIT) and net cash,
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 net cash 9% of annual
base salary for on-target performance.

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

Maximum pay-out
(% of base salary)

Targets

Financial targets:

- CFROI

- Operating profit

- Net cash

21.0

12.0

9.0

31.5

18.0

13.5

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.

Non-financial targets

18.0

Total

60.0

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
follows1 .

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 net cash. These can be derived from the financial
statements and are defined as follows:

•
•

Operating profit: EBIT before exceptional items
Net cash: cash provided by operating activities

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 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 of
Shareholders 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 Euronext
Amsterdam.

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 2007 consists of the following
companies:

1 Recurring EBITDA is defined as EBIT excluding exceptional items plus

depreciation and amortization as reported in the income statement. Related
annual tax is defined as effective tax expense from continuing operations before
exceptional items as reported in the income statement. 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 intangible assets
and property, plant and equipment plus average annualized working capital.
Working capital is defined as inventories plus receivables minus other current
liabilities as reported in the balance sheet.

Akzo Nobel

BASF

Ciba

Clariant

Danisco

EMS Chemie Holding

ICI2

Lanxess

Lonza Group

Novozymes

Rhodia

Solvay

2 ICI will be eliminated from the peer group because the company is no longer listed.

Annual Report 2007

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Remuneration policy regarding the Managing Board and
the Supervisory Board

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 that 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) that
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
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

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 have been 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 &
Remuneration Committee 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.

≥ 20

> 10 and < 20

> (10) and < 10 (target)

> (20) and < (10)

≤ (20)

100

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 (that is, 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).

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 DSM Executive Services BV employed in
the Limburg area.

Annual Report 2007

www.dsm.com

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Remuneration Policy regarding the
Managing Board and the Supervisory Board

Remuneration policy
Remuneration in 2007 and changes expected
in 2008

Remuneration in 2007 and changes
expected in 2008

Remuneration of Managing Board in 2007
The remuneration package for the Managing Board is subject
to annual review. The market competitiveness of the
remuneration package of the Managing Board for 2007 was
reviewed, based on the Dutch labor-market peer group. The
data reflect the July 2007 remuneration levels.

On-target bonuses 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 method.

Furthermore, data are presented as median actual levels.

Benchmark against Dutch labor-market peer group 2007

Managing Board Chairman

DSM

Peer-group

(1 July 2007)

median

Base salary

On-target bonus

Total cash on target

€676,000

€745,000

60%

100%

€1,081,600

€1,490,000

Annualized stock incentive value

30%

120%

Total direct compensation

€1,284,400

€2,384,000

Other Board members

DSM

Peer-group

(1 July 2007)

median

External and internal circumstances justified a general increase
in the base salary of the Managing Board of 2.5% as of 1 July
2007 to cope with inflation and labor-market developments.

Bonus for 2007
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 2007 annual report presents the bonuses that have been
earned on the basis of results achieved in 2007. These
bonuses will be paid out in 2008.

The Supervisory Board has established the extent to which the
targets for 2007 were achieved. The realization of the 2007
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 all met and partially even exceeded.
The other, non-financial targets were also fully realized. The
average realization percentage (annualized) was 65%.

Base salary

On-target bonus

Total cash on target

€494,000

€500,000

60%

70%

See page 74 for tabular overviews on the actual bonus pay-out
per individual Board member in 2007.

€790,400

€850,000

Stock options and performance shares in 2007

Stock incentives granted in 2007
In 2007 performance-related stock options and performance
shares were granted to the Managing Board on 30 March 2007
at an exercise price of €33.60. The following table shows
the number of stock incentives granted to the individual
Board members:

Annualized stock incentive value

41%

110%

Total direct compensation

€992,940

€1,400,000

Base salary in 2007
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 well below the median 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. As stated in the annual report 2006, it
is the intention to close the gap with the median of the
benchmark by 2008, see page 75.

Annual Report 2007

www.dsm.com

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Remuneration policy regarding the Managing Board and
the Supervisory Board

Number of stock incentives granted

Stock options Performance shares

pension cost and the changed composition of the
Managing Board.

Peter Elverding

Jan Zuidam

Feike Sijbesma

Nico Gerardu

Rolf-Dieter Schwalb

Stephan Tanda

37,500

30,000

Overview of remuneration awarded to the Managing Board in
2007
The tables below show the remuneration awarded to the
Managing Board in 2007.

10,000

8,000

Fixed annual salary

8,000

in €

1 July 2007

1 July 2006

Peter Elverding
(until 1 May 2007)

Jan Zuidam

Feike Sijbesma
(chairman since 1 May 2007)

Nico Gerardu

Rolf-Dieter Schwalb

Stephan Tanda
(as from 1 May 2007)

Bonus

in €

Peter Elverding
(until 1 May 2007)

Jan Zuidam

Feike Sijbesma

Nico Gerardu

Rolf-Dieter Schwalb

Stephan Tanda
(as from 1 May 2007)

494,000

676,000

494,000

660,000

482,000

2007 2

2006 1

143,200 3

317,200

395,633

317,200

319,235

233,240

175,665

59,286 3

212,767 3

1 Bonus paid in 2007 based on results achieved in 2006.
2 Based on results achieved in 2007 and therefore payable in 2008.
3 Pro-rated bonus

Pensions in 2007
The members of the Managing Board are participants in the
Dutch pension fund Stichting Pensioenfonds DSM Nederland
(PDN). The pension scheme (revised as of 1 January 2006)
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 €11,872 (reviewed annually) at a rate of 2%.
Employee’s contribution of 2.5% of base salary up to
€52,608 and 6.5% of pensionable salary above this amount
(to be reviewed annually).
Conditional defined benefit: indexation of pensions and
pension rights, conditional depending on PDN’s financial
returns.

Members of the Managing Board born before 1 January 1950
(Jan Zuidam) continue to participate in the old pension plan.
Other Board members participate in the revised PDN pension
plan (due to changed legislation on pre-pensions). For Mr
Sijbesma a transitional arrangement is applicable.

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

Purchasing shares
As announced in the press release on the third quarter results
of 2007, members of the Managing Board have decided to
purchase more shares in the company to emphasize their
confidence in the strategy. Shares purchased are private
transactions with private money.

Total remuneration
The total remuneration (including pension costs relating to
current and former Board members) of the Managing Board
amounted to €3.8 million in 2007 (2006: €4.3 million). The
decrease of €0.5 million was mainly due to a discount on

Annual Report 2007

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Remuneration Policy regarding the
Managing Board and the Supervisory Board

Remuneration policy
Remuneration in 2007 and changes expected
in 2008

Pension costs (employer)

Accrued pension
as of age 65

in €

Annual fixed fee Committee fee

Total

Supervisory Board remuneration in 2007

Pensions

in €

Peter Elverding
(until 1 May 2007)

Jan Zuidam

Feike Sijbesma

Nico Gerardu

Rolf-Dieter Schwalb

Stephan Tanda
(as from 1 May 2007)

2007 1

2006

31 Dec.
2007

31 Dec.
2006

111,379

323,573

81,968

256,509

240,446

91,248

167,562

153,897

1 Discount on employer contribution.
2 Including additional accrual (one-off) for compensation of loss of pension from

previous employer.

Remuneration package of Supervisory Board in 2007
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.

Cor Herkströter,
chairman

Henk Bodt,
deputy chairman

Okko Müller
(until 28 March 2007)

Pierre Hochuli

Claudio Sonder

Tom de Swaan

50,000

8,750

58,750

35,000

7,500

42,500

8,750

35,000

1,250

5,000

10,000

40,000

35,000

3,750

5,000

38,750

40,000

Total

268,750

36,250

305,000

Changes expected in 2008
To close the gap with the median of the benchmark (Dutch
labor-market peer group), an extra 10% increase in the base
salary of the Managing Board chairman has taken place on
1 January 2008.

49,493

261,615

148,575

Cees van Woudenberg

17,990

11,755

2,352

Ewald Kist

28,208 2

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.

The Supervisory Board will review in the second quarter of
2008 whether circumstances justify adjustment of the base-
salary levels of the Managing Board with effect from 1 July 2008
to compensate for inflation and to reflect market developments.
This review will among other things be based on the labor-
market peer group.

If any shareholdings in DSM are held by Supervisory Board
members, they serve as a long-term investment in the
company. At year-end 2007 the members of the Supervisory
Board together held 6,084 shares in Royal DSM NV.

Since Numico and Getronics are no longer listed, they will be
eliminated from the Dutch labor-market peer group and need to
be replaced.

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 following table gives an overview of the remuneration paid
to the Supervisory Board in 2007.

Recent changes in the AEX/AMX index will limit DSM’s options
to compose a specific Dutch labor-market peer group based
on the AEX/AMX only. Moreover, Eumedion (a platform of
institutional investors) has issued guidelines to the effect that a
labor-market peer group should consist of at least 12
companies. It is to be expected that corporate-governance-
regulating bodies wil adopt this guideline.

As a consequence, the Supervisory Board has requested
independent remuneration experts to propose an alternative
labor-market peer group.The proposed peer group will consist
of Dutch listed companies that are more or less comparable to
DSM in terms of size and complexity and some industry-
specific European specialty-chemicals companies. The
following peer group is being proposed, subject to approval of
the Annual General Meeting of Shareholders:

Annual Report 2007

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Remuneration policy regarding the Managing Board and
the Supervisory Board

Aegon

Akzo Nobel

Ciba

Clariant

Heineken

KPN

Nutreco

Océ

Rhodia

Solvay

TNT

Wolters Kluwer

In December 2007 the Supervisory Board reviewed the
financial targets of the short-term incentive scheme for the
Managing Board. A proposal will be submitted to the 2008
Annual General Meeting of Shareholders to modify the short-
term incentive scheme for the Managing Board. The proposal
consists of the following elements.

•

Replacement of CFROI as financial target by net-sales
growth (organic) to reduce overlaps and correlation between
financial targets. Moreover net-sales growth as a target fits in
with the organic sales growth target of > 5% on average per
year as part of the accelerated Vision 2010 strategy.
An increase in the percentage bonus for overachievement of
financial targets from 150% to 200% of the base bonus to
close the gap with the median of the market for total cash
compensation.
Abolition of the adjustment mechanism for the
euro/dollar ratio.

Financial targets within the bonus scheme account for a bonus
amounting to 42% of base salary (84% for outstanding financial
performance) and relate to:

•
•
•

operating profit (EBIT)
net cash
net-sales growth (organic)

21%
12%
9%

(42%)
(24%)
(18%)

The bonus part related to non-financial targets amounts to 18%
of the base salary and cannot increase beyond that. No change
is being proposed with respect to non-financial targets.

In 2008 a proposal will be prepared to further align the
remuneration of the Managing Board and other executives with
the long-term strategy of the company by making the Long-
Term Incentive (LTI) a more important element of the total
remuneration package than the Short-Term Incentive (STI).

Annual Report 2007

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Corporate governance, risk management and internal control

In the 2004 annual report, an extensive account was given of
the way in which DSM conducts its governance, risk
management and control. In this section, the main elements are
reported, the overall governance framework is described, and
the risk management and control system is explained
(see www.dsm.com, Governance section). 8

Organization

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
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 8. 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 was
discussed in the Annual General Meeting of Shareholders in
2005, where it met with no objections.

With respect to Best Practice provision II.1.7 it is to be reported
that in the course of 2007 Mr Nico Gerardu, member of the
Managing Board, assumed the duties of chairman of the
Supervisory Board of a listed company (see page 69). This is a
temporary arrangement pending the appointment of a
successor as chairman of the Supervisory Board of this listed
company.

With respect to the appointment of members of the Managing
Board for a period of at most four years (Best Practice II.1.1) it
should be noted that DSM has adhered to this Best Practice
since the introduction of the corporate governance code in
2004. Since DSM respects agreements made before the
introduction of said code two members of the Managing Board
will remain appointed for an indefinite period.

All documents related to the implementation at DSM of the
Dutch corporate governance code can be found at the
corporate website (www.dsm.com). 8

Governance framework

DSM’s business-steering model remained unchanged in 2007,
after having been adapted to the Vision 2010 strategy in 2006.
The business groups are the main building blocks of the
organization; they have integral long-term and short-term
business responsibility and have at their disposal all functions
that are crucial to their business success. 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 are grouped into clusters. The
business groups within a specific cluster report to one member
of the Managing Board. This Board member has the
responsibility of managing synergy within the cluster. In order to
ensure sufficient independence with regard to financial
management, the Chief Financial Officer has no business
groups reporting to him.

In 2007, a management framework for the corporate level was
created, providing a description of the relations between the

Annual Report 2007

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Corporate governance, risk management and internal control

main building blocks mentioned above and geographical and
functional management. It also describes the most important
(decision) processes, responsibilities and ’rules of the game’ at
the Managing Board and corporate staff levels and includes the
governance relations with the next-higher levels (Supervisory
Board / shareholders) and the operational units. The framework
reinforces governance by pulling together information that was
previously available in a fragmented form.

One of the outcomes of the Vision 2010 mid-term review was
the decision to accelerate growth in life sciences and materials
sciences and divest other activities. This move is reflected in
the change – as of 1 January 2008 – from four clusters
(Nutrition, Pharma, Performance Materials and Industrial
Chemicals) to five (Nutrition, Pharma, Performance Materials,
Polymer Intermediates and Base Chemicals and Materials). The
activities in the latter cluster will be carved out in order to
facilitate their disposal.

•

As stated before, there were no major changes to DSM’s overall
governance framework in 2007. The figure below depicts this
framework and the most important governance elements and
regulations at each level.

Shareholders

Articles of Association

Framework for the corporate level. This implies amongst
other things that they adhere to the DSM Values and
applicable corporate policies and requirements, and set the
company’s strategic direction and objectives in the
Corporate Strategy Dialogue (CSD). The framework further
defines 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. In addition,
they maintain the Management Framework for the
operational units.
The operational units conduct their business within the
parameters of this Management Framework. This implies
amongst other things that the operational units establish the
strategy and objectives of their business according to the
Business Strategy Dialogue (BSD), in which process various
scenarios and related risk profiles are investigated. The
framework further stipulates that the strategy implementation
must take place in line with corporate policies and multi-year
plans in several functional areas and in compliance with the
Corporate Requirements. Whenever 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).

Supervisory
Board

(cid:114)(cid:1)(cid:1)(cid:51)(cid:70)(cid:72)(cid:86)(cid:77)(cid:66)(cid:85)(cid:74)(cid:80)(cid:79)(cid:84)(cid:1)(cid:80)(cid:71)(cid:1)(cid:85)(cid:73)(cid:70)(cid:1)(cid:52)(cid:86)(cid:81)(cid:70)(cid:83)(cid:87)(cid:74)(cid:84)(cid:80)(cid:83)(cid:90)(cid:1)(cid:35)(cid:80)(cid:66)(cid:83)(cid:69)
(cid:114)(cid:1)(cid:36)(cid:73)(cid:66)(cid:83)(cid:85)(cid:70)(cid:83)(cid:1)(cid:80)(cid:71)(cid:1)(cid:85)(cid:73)(cid:70)(cid:1)(cid:34)(cid:86)(cid:69)(cid:74)(cid:85)(cid:1)(cid:36)(cid:80)(cid:78)(cid:78)(cid:74)(cid:85)(cid:85)(cid:70)(cid:70)
(cid:114)(cid:1)(cid:36)(cid:73)(cid:66)(cid:83)(cid:85)(cid:70)(cid:83)(cid:1)(cid:80)(cid:71)(cid:1)(cid:85)(cid:73)(cid:70)(cid:1)(cid:47)(cid:80)(cid:78)(cid:74)(cid:79)(cid:66)(cid:85)(cid:74)(cid:80)(cid:79)(cid:1)(cid:66)(cid:79)(cid:69)(cid:1)
(cid:1) (cid:51)(cid:70)(cid:78)(cid:86)(cid:79)(cid:70)(cid:83)(cid:66)(cid:85)(cid:74)(cid:80)(cid:79)(cid:1)(cid:36)(cid:80)(cid:78)(cid:78)(cid:74)(cid:85)(cid:85)(cid:70)(cid:70)

Managing
Board /
Corporate

Operational
units

(cid:46)(cid:66)(cid:79)(cid:66)(cid:72)(cid:70)(cid:78)(cid:70)(cid:79)(cid:85)(cid:1)(cid:39)(cid:83)(cid:66)(cid:78)(cid:70)(cid:88)(cid:80)(cid:83)(cid:76)(cid:1)(cid:71)(cid:80)(cid:83)(cid:1)(cid:80)(cid:81)(cid:70)(cid:83)(cid:66)(cid:85)(cid:74)(cid:80)(cid:79)(cid:66)(cid:77)(cid:1)(cid:86)(cid:79)(cid:74)(cid:85)(cid:84)

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 the Managing Board and the 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
Whistleblower Policy.

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.

Risk-management system

For the sake of clarity, a short summary of the main aspects of
the framework at Managing Board / corporate level and
operational level is given here:

•

The Managing Board adheres to the Regulations of the
Managing Board.
In addition, the Managing Board and corporate staff
departments / services work according to the Management

The DSM risk-management system is based on the COSO-
ERM Framework. It aims to achieve maximum integration of the
risk-management process in the normal business processes. It
also provides for controls for those risks that commonly occur
in the company. For a large part, these controls have been ’built
into’ the standard business processes and tools have been
developed to support their implementation and to monitor their
effectiveness in operation. One of these tools is the system of

Annual Report 2007

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Corporate governance, risk management and
internal control

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

letters of representation by top managers to report to the
Managing Board the degree of compliance and effectiveness of
risk management and internal controls. In this way, a high level
of internal control can be achieved efficiently.

In 2007 the system was further enhanced and adapted to the
Vision 2010 developments. I mprovements include the
introduction of better tools to check the occurrence of
segregation-of-duty issues.

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 Life Sciences and Materials
Sciences 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.

Practices and training programs were developed to support the
operational units in embedding risk management in their daily
operations while preventing this from becoming a bureaucratic
’tick the box’ affair. The practices focus on behavior and
principles and connect with business process optimization
actions. They were successfully piloted in a number of business
groups and corporate training programs.

Much attention was given to the accessibility of the system,
which is provided via the Corporate Risk Management intranet
site. Part of the system is an improved Business Portal that can
be used by business groups as a management-information
system (including risk management).

A full description of the latest version of the DSM risk-
management system can be found on the DSM Internet site. 8

For 2008, the focus will be on ’closing the risk control loop’,
that is, on monitoring the effectiveness of the risk responses
and controls as well as on actions and system improvements to
increase this effectiveness. These actions and system
improvements will go hand in hand with business-process-
optimization actions.

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 71) which
exceeds the weighted average cost of capital (WACC) by at
least 100 basis points. DSM further aims for a net debt which is
between 30 and 40% of equity plus net debt 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.

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 so far as this is desirable and feasible.

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 cash
earnings per share from the very beginning and to meet the
company’s profitability and growth 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 accounting-and-control function is responsible for
transaction 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.

Annual Report 2007

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Corporate governance, risk management and internal control

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 main 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 and
economics. Compliance with the requirements for accounting
and reporting is confirmed by means of a quarterly written
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 full Supervisory
Board. Quarterly financial reports are discussed by the
Managing Board with the Audit Committee and the
external auditor. The company uses a release calendar for
financial results.

Risks

The top risks that are considered to have the largest potential
influence on the company’s success in achieving its strategic
and operational objectives are mentioned in the following list,
where they are indicated with an asterisk. The list also gives an
overview of other risks that have been identified as potentially
important. A description of the nature of all risks is given on the
DSM website. Furthermore, information on financial risks is
provided in the financial statements on page 123 .

Generic risks

• Macro-economic trends

• General market developments

• Low-cost competition*

• Political risks

• Currency risks* and interest risks

• Risks of derivatives used for hedging purposes

Strategic risks

• Acquisitions, disposals and joint ventures*

• Innovation (new markets, products and technologies)*

• Ability to attract and retain people*

• Organizational and cultural risks*

Specific risks

• Corporate-reputation risks

• Customer risks

• Production-process risks

• Raw material / energy price and availability risks*

• Product-liability risks

• Non-insurable risks

• ICT risks

• Intellectual Property protection risks*

• Project risks

• Financial risks

• Pension risks

• Control failures

See www.dsm.com, Governance section . 8

For the management of all risks mentioned, strategies, controls
and/or mitigating measures have been put in place as part of
our risk-management practices. These nevertheless involve
uncertainties that may lead to the actual results differing from
those projected. There may also be 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.

Annual Report 2007

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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).

As resolved by the Annual General Meeting of Shareholders on
29 March 2006 and 28 March 2007, the shares bought back
under the above program were cancelled. This means that
DSM cancelled 20,528,008 shares in 2007.

On 27 September 2007 DSM announced a second share buy-
back program, identical to the program launched in 2006. The
first phase of this second program started on 1 October 2007
and continued until 12 December 2007. During this phase the
company bought 6,855,000 shares for a total consideration of
€250 million. The remainder of the program will be executed in
2008, subject to the approval of the Annual Meeting of
Shareholders in March 2008. The company will only cancel
shares bought under the second program if the 10%
shareholding threshold for own shares is exceeded, to keep
flexibility for major acquisitions. In addition, of course, we
may halt the buy-back at any time, if a major acquisition
needs financing.

The total number of ordinary DSM shares outstanding
decreased by 17,952,977 in 2007 as a result of the share buy-
back programs. On 31 December the company had
166,896,860 shares outstanding.

The average number of ordinary shares outstanding in 2007
was 178,540,706. All shares in issue are fully paid.

Dividend Re-Investment Plan for shareholders of
Royal DSM N.V.
ABN AMRO Bank NV offers DSM’s shareholders the option of
participating in a Dividend Re-Investment Plan (DRIP). By
participating in this plan, DSM shareholders are able to directly
reinvest their net dividends in additional DSM shares.

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. 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.

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 77, notes 17
(page 117), 19 (page 120) and 27 (page 134 to the financial
statements and the Other information section starting on
page 147).

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. In 2006 the company
had purchased a total of 6,700,000 shares under the first
phase of this program for a total consideration of
€242.1 million. On 27 April 2007, the company initiated the
second phase of the program. During this second phase the
company bought 13,828,008 shares for a consideration of
€507.9 million. The second phase, and hence the first program,
was completed on 10 September 2007.

Annual Report 2007

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Information about the DSM share

Development of the number of ordinary DSM shares

Balance at 31 December 2006

Changes:

Reissue of shares in connection with exercise of option rights

Repurchase of own shares

Cancellation of own shares

Issued

Repurchased

Outstanding

201,953,008

17,103,171

184,849,837

(2,730,031)

2,730,031

20,683,008

(20,683,008)

(20,528,008)

Balance at 31 December 2007

181,425,000

14,528,140

166,896,860

Average number of shares outstanding

178,540,706

DSM share prices on Euronext Amsterdam (€ per ordinary share) :

Highest closing price

Lowest closing price

At 31 December

39.87

31.63

32.33

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
shareholders had disclosed that they owned between 5 and
10% of DSM’s total share capital on 1 January 2008:

•
•
•
•
•

Fortis Utrecht N.V.
Barclays Global Investors
ING Groep N.V.
Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A.
Aviva plc

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 28 March 2007 the Managing Board was
authorized to acquire own shares for a period of 18 months
from said date.

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 28 March 2007 this power was extended up to
and including 28 September 2008, 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

DSM Managing Board members’ holdings in DSM shares
In October 2007, after the announcement of the acceleration
of Vision 2010, all DSM Managing Board members privately
invested in DSM shares. The cumulative holdings of the
five board members increased in 2007 from 1,836 to
12,036 shares.

Board member

Feike Sijbesma

Jan Zuidam

Rolf-Dieter Schwalb

Nico Gerardu

Stephan Tanda

Holdings on 31
December 2006

Holdings on 31
December 2007

1,836

2,500

2,336

2,500

2,200

These shareholdings serve as a long-term investment in the
company.

Annual Report 2007

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Information about the DSM share

Geographical spread of DSM shares (excl. cumprefs A)

In %

2007

2006

DSM share price development versus AEX and
Dow Jones Euro Stoxx Chemical Index, 2007

Netherlands

North America

Belgium / Luxemburg

France

United Kingdom

Germany

Switzerland

Other countries

DSM share
The year 2007 was a turbulent one for stock markets
worldwide. The development of the DSM share was no
exception. After considerable outperformance in most of
the recent years, the DSM share departed from this pattern
in 2007.

In February 2007 the company gave a full-year guidance that,
according to analysts, disappointed the market. The share
price fell 10.6% on the day of the announcement but showed
recovery in the weeks thereafter.

After the company raised its outlook twice, the recovery gained
further momentum. After the announcement of the acceleration
of the Vision 2010 – Building on Strengths strategy in
September, the share price reached a record for the year of
€39.95 on 10 October 2007.

In the last few months of the year the DSM share – in line with
the broader market – came under pressure. DSM closed 2007
at €32.33.

DSM
DJ Euro Stoxx Chemical Index
AEX Index

R
U
E

20
1/07 2/07 3/07 4/07 5/07 6/07 7/07 8/07 9/07 10/07 11/07 12/07

Trading volumes DSM shares 2007
(on a monthly basis)
x million

December

November

October

September

August

July

June

May

April

March

February

January

(cid:116)(cid:1)(cid:17)

(cid:116)(cid:1)(cid:18)(cid:17)

(cid:116)(cid:1)(cid:19)(cid:17)

(cid:116)(cid:1)(cid:20)(cid:17)

(cid:116)(cid:1)(cid:21)(cid:17)

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Life Sciences and Materials Sciences

Innovation
is our
Sport™

DSM is the world’s largest supplier of nutritional ingredients,
DSM innovations are found in many different sports disciplines. The Swiss Fencing Team,
members of DSM’s Unlimited Sports Team, wear protective garments containing Dyneema®
such as vitamins that are used in a wide variety of food
that allow for maximum mobility and comfort while providing safety for the athlete.
products, such as pet food. Numerous DSM applications can
be found in the automotive industry.

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The Beijing Olympics 2008
The 2008 Olympic Games will be held in Beijing from 8 until 24
August 2008. During the event approximately 10,500 athletes
are expected to participate in 28 different sports. A total of 302
gold medals will be awarded. Around 70,000 volunteers will
offer their help.

The Paralympic Games will be held from 6 until 17 September
2008. A total of 4,000 athletes will compete in 20 sports and
more than 450 gold medals are to be won. Approximately
30,000 volunteers will be present.

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Innovation is our Sport™

In 2007 DSM launched the Innovation is our Sport ™ campaign.
It serves as the umbrella of DSM’s activities in the field of sports,
linking sports, technology and innovation. An important
element is our partnership with the Dutch Olympic Committee
(NOC*NSF). Together with the athletes we take great pride in
performing beyond expectations.

Innovation is one of the main spearheads of DSM’s strategic
course. Innovation is equally important in the world of sports,
where innovative developments and improvements based on
nutrition and materials can support sportsmen and
sportswomen in their daily practice and in competition, and can
mean the difference between victory and defeat. There are
many commonalities between sports and the marketplace in
which DSM is operating.

DSM and the Dutch Olympic Committee have been Partners in
Sport since 2001. DSM is developing new products in nutrition
and materials together with the athletes and coaches of the
Dutch Olympic team. During the Athens 2004 Olympics,
PeptoPro ® , heat-regulating garments and a revolutionary
rowing helmet were introduced; in Turin DSM came up with
innovations in bobsleighs. Here we present a number of
highlights of our innovations that will be used during the
Olympic Games of 2008.

New sports innovations
In August 2007, DSM started the pre-olympic year with two
innovations in sports nutrition: PeptoPro ® powder and a special
grade of Lafti ® for sportspeople. The Lafti ® grade has been
developed in cooperation with the Dutch athletes. Further
closing in on the Beijing Olympics, DSM launched a comfort
cooling system at the end of 2007.

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Boosting natural resistance
The Lafti ® drink contains probiotics: living bacteria that have a
beneficial effect on the intestinal tract. The Lafti ® range
combines several lactic acid bacterial strains whose probiotic
properties have been scientifically proven. This innovation
should help the Olympic athletes to boost their natural
resistance and maintain a well-balanced intestinal flora. Top
athletes are often prone to develop intestinal complaints and a
weakened immune system, particularly in weather conditions
such as in China during the summer.

Improving recovery
PeptoPro ® powder is the latest form of PeptoPro ® , a casein
hydrolysate – a protein cut into fragments – that ensures a
quick recovery after intense training. Following the successful
launch of PeptoPro ® drink during the Athens Olympics in 2004,
DSM has worked hard to further improve the product. This has
resulted in the present powder form that has a strongly
improved stability and a better taste.

Athletes can use the PeptoPro ® powder to prepare the sports
drink at the place and time at which they need it. Many of them
had expressed this wish. The Dutch Olympic Committee and
the Olympic Committees of several other countries have
recommended the use of PeptoPro ® to their athletes preparing
for the Olympics 2008 in Beijing.

Cooling products
The heat and high humidity that are characteristic of Chinese
summers have a large impact on the human body. Effectively
cooling the body under such conditions can greatly enhance an
athlete’s ability to deliver a top-level performance and to recover
quickly from this performance. As part of its Olympic Innovation
Program, DSM has developed an all-round cooling concept.

During the previous Summer Games in Athens in 2004 the
Dutch Olympic rowers already used special cooling products.
In the run-up to Beijing 2008, DSM and the Dutch Olympic
Committee in close consultation with athletes and their
coaches have looked at possibilities for improvement and have
developed and tested various new prototypes. This has
resulted in the ‘mobile’ and fully modular comfort cooling
system that was presented in December 2007 in the Olympic
Stadium in Amsterdam.

The Unlimited Sports Team
The Unlimited Sports Team brings DSM and sports closer
together. The company is sponsoring ambitious sportsmen and
women that compete in Olympic sports disciplines.

The Unlimited Sports Team currently consists of Sharon
Walraven (wheelchair tennis, Netherlands), Rens Blom (pole
vault, Netherlands), the Netherlands volleyball team, two
Netherlands sailing teams (470 class) and the Swiss fencing
team (men and women).

Sharon Walraven started to play wheelchair tennis in 1994 and
has won many tournaments around the world. She won silver
at the Paralympics in Sydney 2000 and at the end of 2007 held
the third place in the world ranking.

Rens Blom was the first Dutch athlete ever to win a gold medal
at a World Athletics Championship and holds a personal and
Dutch national pole vaulting record of 5.81 meters.

The Dutch national men’s volleyball team won the Olympic gold
medal at the Atlanta 1996 games. Both the Dutch men’s and
women’s volleyball teams achieved good results in the last
decennia.

The Dutch men’s and women’s 470 class sailing teams are both
medal contenders for the 2008 Olympics. The brothers Sven
and Kalle Coster are multiple Dutch champions. Lobke
Berkhout and Marcelien de Koning won their third consecutive
world title in 2007.

The Swiss fencing team will be a major medal contender at the
2008 Beijing Olympics. The team is led by Marcel Fischer, who
won the Olympic gold medal in Athens in 2004.

For more information visit the DSM and sports section on our
website 8, or e-mail to: info.olympics@dsm.com.

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Financial statements 2007

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Financial statements 2007
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
pronouncements of the International Financial Reporting
Interpretation Committee (IFRIC) effective at 31 December 2007.

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.

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Financial statements 2007

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

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, which
vary from 5 to 15 years.

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.

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 an
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.

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.

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.

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 participations comprise equity interests in entities in which
DSM has no significant influence; they are accounted for as
available-for-sale securities. These other participations 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 other
participations are released from equity and included in the
income statement. If a reliable fair value cannot be established,
the other participations are recognized at cost. The proceeds
from these other participations and the gain or loss upon their
disposal are recognized in the income statement.

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Financial statements 2007
Consolidated financial statements

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.

current investments. They are measured at amortized cost.
Proceeds from these deposits are recognized in the income
statement.

Impairment of assets
When there are indications that the carrying amount of a non-
current asset (an intangible asset or an item of 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.

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. Impairment losses for goodwill and
other participations will never be reversed.

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 to 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

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.

Discontinued operations
Discontinued operations comprise those activities that have
been disposed of during the period or which have been classified
as held for sale at the end of the period, and represent a separate
major line of business or geographical area that can be clearly
distinguished for operational and financial reporting purposes.
DSM has identified its cash generating units as the components
of the company that will be reported as discontinued operations
in the event of their disposal.

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 dividend proposal.

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

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Financial statements 2007

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

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.

grant on a systematic basis to the cost 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 on the date on 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.

Emission rights
DSM is subject to legislation encouraging reductions in
greenhouse gas emissions 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.

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.

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

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.

Annual Report 2007

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Financial statements 2007
Consolidated financial statements

To provide a better understanding of the underlying results of the
period, exceptional items are reported separately if the
aggregate amount of the specific event or project exceeds
€10 million.

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.

or liability. If the hedged item is a financial asset or liability the
cumulative gain or loss is transferred to profit or loss. 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 and the change
in fair value is caused by changes in currency exchange rates.
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.

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.
Prepaid pension costs that do not meet this recoverability
criterion are charged to equity in the period in which they occur
and are referred to as effects of the asset ceiling. Payments to
defined-contribution plans are charged as an expense as they
fall due.

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.

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.

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 of the hedged item if it is a non-financial asset

Effect of new accounting standards
The IASB and IFRIC have issued new standards, amendments
to existing standards and interpretations that are not yet effective
or not yet endorsed by the European Union. DSM has introduced
the new and amended IFRS and IFRIC interpretations that
became effective in 2007. Adoption of these revised standards
and interpretations did not have any effect on the group's
financial performance or position. The introduction of IFRS 7,
'Financial Instruments: Disclosures', and the application of the
amendments to IAS 1, 'Presentation of Financial Statements',
resulted in a number of additional disclosures. The adoption of
standards and interpretations with an effective date after the
date of these financial statements is not expected to have a
material impact on the financial statements. Certain additional
disclosures will be required and will be introduced as of the
effective date of the new standards and interpretations. The
following standards and interpretations are not yet being applied
by DSM.

Annual Report 2007

www.dsm.com

Book EN_v2.indb 94
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Financial statements 2007

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 amendment to IAS 23, 'Borrowing Costs', removes the
option of immediately recognizing as an expense borrowing
costs that are directly attributable to the acquisition, construction
or production of qualifying assets. This amendment will not have
any effect on the consolidated financial statements because the
option is not applied by DSM.

IFRS 8, 'Operating Segments', issued in November 2006, which
introduces the requirement to report financial and descriptive
information about operating segments on the same basis as is
used internally for evaluating operating segment performance
and deciding how to allocate resources. DSM uses the same
performance measures and reporting structures for internal
performance management as are used for external financial
reporting and therefore this new standard is not expected to
have any effect on the consolidated financial statements.

IFRIC 11, 'Group and Treasury Share Transactions', IFRIC 12,
'Service Concession Arrangements', and IFRIC 13, 'Customer
Loyalty Programs', will have no effect on the consolidated
financial statements.

IFRIC 14, 'IAS 19 - The Limit on a Defined Benefit Asset,
Minimum Funding Requirements and their Interaction', provides
further clarification on the recognition of defined benefit assets
for economic benefits available in the form of refunds from a
defined benefit plan or reductions of future contributions to the
plan, particularly when a minimum funding requirement exists.
The interpretation is applicable to certain defined benefit plans
of the group but it is not expected to have a material effect on
the consolidated financial statements.

Annual Report 2007

www.dsm.com

Book EN_v2.indb 95
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Financial statements 2007
Consolidated financial statements

Consolidated statements

Consolidated income statement for the year ended 31 December 2007

x € million

Notes

Continuing operations

Discontinued

Total

Before

Exceptional

Total

operations

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

exceptional

items

8,757

164

8,921

(4,793)

(1,522)

(1,389)

(424)

(95)

823

(85)

(2)

746

(183)

items

(note 9)

(150)

(26)

(176)

8,757

164

8,921

(4,793)

(1,522)

(1,389)

(574)

(121)

647

(85)

(2)

570

(136)

Profit for the year

563

(129)

434

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

558

(129)

429

558

(10)

(129)

429

(10)

Net profit available for holders of ordinary shares

548

(129)

419

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

3.07

3.05

(0.72)

2.35

2.33

Annual Report 2007

www.dsm.com

8,757

164

8,921

(4,793)

(1,522)

(1,389)

(574)

(121)

647

(85)

(2)

570

(136)

434

429

(10)

419

178,541

1,475

180,016

2.35

2.33

1.00

1.20

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Financial statements 2007

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 2006

x € million

Notes

Continuing operations

Discontinued

Total

Before

Exceptional

Total

operations

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

Profit for the year

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

exceptional

items

8,352

210

8,562

(4,536)

(1,481)

(1,338)

(440)

(34)

835

(84)

755

(199)

556

551

(10)

541

items

(note 9)

(11)

(97)

(26)

(22)

(4)

8,352

283

8,635

(4,536)

(1,481)

(1,329)

(451)

(131)

809

(84)

733

(181)

552

547

(10)

537

2.85

2.84

(0.02)

2.83

2.82

Annual Report 2007

www.dsm.com

(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

Book EN_v2.indb 97
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19-02-2008 12:53:41

Financial statements 2007
Consolidated financial statements

Consolidated balance sheet as at 31 December

x € million

Assets

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

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

Total

Notes

2007

1,037

3,440

346

1,169

126

6,138

1,547

1,452

235

369

3,690

9,828

5,310

5,383

344

273

170

1,560

2,382

192

1,124

605

2,063

9,828

2006

1,008

3,655

496

918

100

6,203

1,515

1,377

362

552

3,888

10,091

5,784

5,855

383

304

188

907

1,826

127

607

1,091

523

2,410

10,091

Annual Report 2007

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Book EN_v2.indb 98
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Financial statements 2007

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 statement of recognized income and expense

x € million

Other

Retained earnings

Total

reserves

Actuarial

Other

Minority

interests

Total

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

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

Recognized income and expense for the period

2007
Exchange differences on translation of foreign
operations
Balance of actuarial gains and losses and asset
ceiling
Change in fair value reserve
Change in hedging reserve
Income tax expense

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

Recognized income and expense for the period

gains

and

losses

(126)

(10)

(91)

382

(99)

283

(133)

(9)

(14)

(135)

146

(38)

108

547

429

(126)

382

(109)

192

547

739

(5)

(131)

(5)

382

(109)

187

552

739

(133)

(4)

(137)

146

(9)

(52)

(27)

429

402

(4)

146

(9)

(52)

(31)

434

403

Annual Report 2007

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Book EN_v2.indb 99
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Financial statements 2007
Consolidated financial statements

Consolidated statement of changes in equity (notes 17 and 27)

x € million

Treasury

Other

Retained earnings

Total

Minority

capital

premium

reserves

Actuarial

Other

interests

Total

Equity

Balance at 1 January 2006

370

545

(376)

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
Reclassifications

(1)

(318)

Balance at 31 December 2006

370

544

(641)

Dividend paid
Options granted
Options/performance shares
exercised/cancelled
Repurchase of shares
Cancellation of own shares
Proceeds from reissued shares
Change in DSM's share in subsidiaries

Recognized income and expense for
the period
Reclassifications

(31)

(55)

(758)

750

(91)

(2)

(4)

gains and

losses

4,843

5,501

5,568

(213)

(318)

(1)

283

547

739

(1)

(214)

(318)

(1)

739

317

5,192

5,784

5,855

(193)

(664)

(21)

(193)

(758)

(2)

(195)

(758)

403

(135)

108

(3)

429

402

Balance at 31 December 2007

339

489

(575)

(123)

422

4,758

5,310

5,383

Annual Report 2007

www.dsm.com

100

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Financial statements 2007

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

(75)

136

(156)

(71)

(102)

(48)

(386)

(85)

(44)

753

(466)

(6)

(193)

(758)

(1)

2007

434

(5)

429

574

(10)

(55)

141

(139)

984

(124)

(35)

825

(394)

(619)

(188)

552

(6)

369

(101)

180

(109)

(144)

(49)

(77)

122

(40)

(418)

(44)

135

(15)

(205)

(213)

(318)

(1)

2006

552

(5)

547

451

(75)

(83)

(125)

826

(4)

(192)

630

(345)

(620)

(335)

902

(12)

(3)

552

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
- Received/(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 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 and associates
Cash from net investment hedge
Proceeds from disposal of subsidiaries and businesses
Other financial assets:
- Capital payments and acquisitions
- Change in loans granted
- Proceeds from disposals

Cash used in investing activities

Financing activities
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 relating to cash held
Changes in the scope of the consolidation

Cash and cash equivalents at 31 December

Annual Report 2007

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Financial statements 2007
Consolidated financial statements

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

1 General information

Unless stated otherwise, all amounts are in € million.

1 euro =

Exchange rate at balance

Average exchange rate

US dollar
Swiss franc
Pound sterling
100 Japanese yen

sheet date

2007

2006

2007

2006

1.47

1.66

0.73

1.66

1.32

1.61

0.67

1.57

1.37

1.64

0.68

1.61

1.26

1.57

0.68

1.46

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 has been filed with the Chamber of
Commerce for Zuid-Limburg in Maastricht (Netherlands) and is
available from the company upon request. The list can also be
downloaded from 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 to be most
important to the presentation of financial condition and results of
operations are discussed in the relevant notes. The same holds
for the issues that require management judgments or estimates
about matters that are inherently uncertain. Management
cautions that future events often vary from forecasts and that
estimates routinely require adjustment. Areas of judgment that
have the most significant effect on the amounts recognized in
the financial statements relate to the categorization of certain
items as 'exceptional', the identification of cash generating units
and the classification of activities as 'held for sale' and
'discontinued operations'.

Estimates that need to be made by management relate to the
useful lives of non-current assets (notes 11 and 12), the
establishment of provisions for retirement and other post-
employment benefits (note 24), income taxes (note 10) and the
determination of fair values for share-based compensation
(note 27). Estimates are based on historical experience and other
assumptions that are considered reasonable under the
circumstances.

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

Annual Report 2007

www.dsm.com

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Financial statements 2007

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

2 Change in the scope of the consolidation

Acquisitions

2007

The impact of all acquisitions made in 2007 on DSM’s
consolidated balance sheet, at the date of acquisition, is
summarized in the next table:

Pentapharm

Other

Opening

acquisitions

balance

In July, DSM acquired 100% of the cosmetic active ingredients
specialist Pentapharm Holding Ltd. Pentapharm has annual net
sales of some €40 million and employs about 200 people at
locations in Switzerland, Japan and Brazil. The goodwill of
€31 million primarily results from the know-how of the employees
and from the fact that the acquisition provides DSM Nutritional
Products with a stronger position in the market for active
ingredients for the cosmetics industry. The impact of the
acquisition of Pentapharm on DSM’s consolidated balance
sheet, at the date of acquisition, is shown in the next table:

Carrying

Adjustments

Opening

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

amount

to fair

value

balance

DSM

Total assets

Liabilities
Minority interest
Deferred tax liabilities
Other non-current
liabilities
Current liabilities

Total liabilities

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

Consideration paid

Goodwill

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

Total assets

Liabilities
Deferred tax liabilities
Other non-current
liabilities
Current liabilities

Total liabilities

Net assets
Acquisition price (in cash)
Acquisition price (payable)
Acquisition costs

Goodwill

DSM

104

The acquisitions in 2007 contributed €23 million to net sales. If
all acquisitions had occurred on 1 January 2007, additional net
sales would have been €41 milion. The acquisitions in 2007 only
made a marginal contribution to profit for the year; this would
have been the case even if they had all occurred on 1 January
2007.

Annual Report 2007

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Disposals

2007

In 2007 DSM disposed of various smaller participations.

2006

Discontinued operations
DSM Minera was sold on 19 January 2006 for a total cash
consideration of €74 million. The business had already been
classified as held for sale as at 31 December 2005. Furthermore,
DSM disposed of various small participations.

Financial statements 2007
Consolidated financial statements

On 16 January 2008 DSM announced the acquisition of the US-
based company Soluol, a developer, producer and marketer of
high performance urethane resins which are used in a wide range
of applications, with annual sales of USD 20 million. The
acquisition of Soluol enhances DSM’s specialty-resins presence
in North America and adds new technology as well as a state-
of-the-art production facility in Rhode Island. The acquired
company will be grouped under the DSM NeoResins+ business
unit, part of the DSM Resins business group. Further disclosures
will only be provided in next years annual report in view of the
fact that reliable information is not yet available.

2006

In 2006 DSM acquired CRINA SA, the remaining 73% of the
share capital of Lipid Technologies Provider AB and the
remaining 50% of the share capital of Fersinsa GB SA de CV.
These acquisitions 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
Defered tax liabilities
Other liabilities

Total liabilities

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

Goodwill

(3)

Annual Report 2007

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Financial statements 2007

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

3 Segment information

Business segments 1

2007

Nutrition

Pharma Performance

Industrial

Other

Elimina-

Total

Materials

Chemicals

activities 2

tions

Continuing operations

Discon-

tinued

operations

Financial performance
Net sales
Supplies to other clusters

2,543

981

2,895

1,937

268

401

8,757

(425)

Supplies

2,590

1,031

2,901

2,205

455

(425)

8,757

Operating profit before
exceptional items
Exceptional items

264

(22)

(154)

321

225

(80)

Operating profit

242

(61)

321

225

(80)

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

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

141

136

5.3

6.9

131

4.5

(1)

1.2

(1)

3.5

469

206

291

282

3,527

1,661

2,067

145

1,669

1,463

1,095

2,958

1,484

1,815

214

1,478

913

714

9,749

4,013

291

EBITDA / net sales (in %)

15.9

17.7

14.3

15.1

Workforce 3
Average
Year-end

7,508

7,782

5,013

5,073

4,826

5,139

2,141

2,134

2,945

3,126

(9,553)

(5,089)

823

(176)

647

424

(2)

372

4.2

1,347

9,828

4,445

5,982

568

22,433

23,254

Total

8,757

823

(176)

647

424

(2)

372

4.2

1,347

9,828

4,445

5,982

568

22,433

23,254

1 For a description of the types of products and services of each segment please refer to the review of business on pages 42 to 64.

2 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.

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

Transfers between segments were fairly limited and were generally executed at market-based prices.

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Financial statements 2007
Consolidated financial statements

Business segments 1

2006

Nutrition

Pharma Performance

Industrial

Other

Elimina-

Total

Materials

Chemicals

activities 2

tions

Continuing operations

Discon-

tinued

operations

Financial performance
Net sales
Supplies to other clusters

2,407

916

2,753

1,872

263

404

8,352

(394)

Supplies

2,463

967

2,759

2,135

422

(394)

8,352

Operating profit before
exceptional items
Exceptional items

Operating profit

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

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

314

(44)

270

150

140

5.8

(14)

6.4

100

115

4.2

455

204

270

3,466

1,688

2,159

113

1,734

1,524

1,302

146

2,998

1,395

1,697

126

329

196

(6)

(69)

340

190

(42)

1.1

1,390

855

745

3.0

260

9,690

3,851

407

Total

8,380

834

(26)

808

440

107

347

4.2

1,288

10,091

4,236

6,303

501

(1)

(7)

835

(26)

809

440

107

347

4.2

1,286

(9,187)

10,091

4,236

6,310

501

(5,077)

EBITDA / net sales (in %)

19.3

15.9

15.6

14.4

Workforce 3
Average
Year-end

7,466

7,711

4,558

4,732

4,410

4,664

2,187

2,183

2,788

2,860

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 to 64.

2 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.

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

Transfers between segments were fairly limited and were generally executed at market-based prices.

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Financial statements 2007

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

Geographical segments

2007

Net sales by origin
In € million
In %

Net sales by destination
In € million
In %

The

Rest of

North

China

Rest of

Elimina-

Total

Netherlands

Europe

America

Asia-

the world

tions

Continuing operations

3,829

2,477

1,143

793

3,726

1,566

Pacific

433

1,162

536

698

339

812

8,757

100

8,757

100

Total assets

9,415

4,793

1,447

587

393

545

(7,352)

9,828

Property, plant and equipment
Capital expenditure
Carrying amount

212

1,328

1,265

488

272

Workforce 1 at year-end

7,219

7,124

2,768

3,564

1,268

1,311

2006
Net sales by origin
In € million
In %

Net sales by destination
In € million
In %

3,802

2,276

1,193

808

3,537

1,617

451

618

376

1,090

254

682

427

3,440

23,254

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

Workforce 1 at year-end

7,057

6,976

2,659

3,031

1,188

1,239

418

3,655

22,150

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

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Financial statements 2007
Consolidated financial statements

4 Other operating income

7 Other operating costs

2007

2006

2007

2006

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

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

Total

8 Net finance costs

Total

164

210

2007

2006

5 Employee-benefits costs

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

2007

2006

1,137

210

1,104

182

Total

1,389

1,338

6 Depreciation and amortization

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

Total

2007

2006

373

424

400

440

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

Total

Net finance costs

(84)

(5)

(85)

(2)

(75)

(82)

(4)

(84)

(7)

(4)

(81)

In 2007 the interest rate applied in the capitalization of interest
during construction was 5% (2006: also 5%).

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Financial statements 2007

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

and further restructuring was the best way forward. In the
context of this study the cash generating unit was tested for
impairment in view of persistent operating losses. It was
concluded that the recoverable amount of DSM Anti-Infectives
was below the carrying amount and therefore an impairment
loss of €150 million was recognized in the Pharma segment.
The recoverable amount was determined on the basis of the
value in use of the cash generating unit. The discount rate that
was used amounted to 10% before tax, which is equal to the
rate used for impairment testing in previous years. The
impairment charge was allocated to property, plant and
equipment (98%) and intangible assets (2%). Restructuring
charges (€4 million) have been recognized in connection with
the planned transfer of part of the production of side chains to
China at DSM Anti-Infectives.

- Restructuring charges (€22 million) have been recognized in

the Nutrition cluster in relation to the redesign of the business
model of the cluster, which encompasses cancellation of
existing contracts and the introduction of new ways of working
at both DSM Nutritional Products and DSM Food Specialties.

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
(United States).

- 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).

- 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).

9 Exceptional items

Exceptional income:
- Gain from the disposal of

activities

- Release of 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

Total exceptional expense

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

2007

2006

(26)

(150)

(176)

(129)

(84)

(11)

(13)

(99)

(26)

(22)

(4)

The exceptional items in 2007 are listed below:

- The impairment of intangible assets and property, plant and
equipment relates to the cash generating unit DSM Anti-
Infectives. In June 2007 DSM announced that it had studied
the strategic options for this cash generating unit and decided
that a partnering strategy combined with innovation initiatives

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Financial statements 2007
Consolidated financial statements

- 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.

As a %

Domestic income tax rate

Tax effects of:
- Deviating rates
- Tax-exempt income and
non-deductible expense

- Other effects

10 Income tax

2007
25.5

2.4

0.3

(3.7)

2006

29.6

(4.7)

0.5

1.0

Effective tax rate

24.5

26.4

The balance of deferred tax assets and deferred tax liabilities
decreased by €111 million owing to the changes presented in
the table below:

2007

2006

The income tax expense on the total result was €136 million
(2006: €180 million) and can be broken down as follows:

2007

2006

Current tax expense:
- Current year
- Prior-year adjustments

Deferred tax expense:
- Originating from a reversal
of temporary differences

- Prior-year adjustments
- Change in tax rate
- Benefit of tax losses and tax

credits recognized

(65)

(17)

(82)

(83)

(7)

(10)

(54)

(76)

(12)

(88)

(99)

(25)

(92)

Total

(136)

(180)

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

Balance at 31 December

Of which related to:
- The result from

discontinuing operations
- The result from exceptional

items

- The result from continuing

operations

Of which:
- Deferred tax assets
- Deferred tax liabilities

(183)

(199)

The effective income tax rate on the result from continuing
operations was 24.5% in 2007 (2006: 26.4%). The relationship
between the income tax rate in the Netherlands and the effective
tax rate on the result from continuing operations is as follows:

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. In determining the
probability of realization of deferred tax assets and liabilities these
uncertainties are taken into account.

496

(383)

113

(54)

(52)

(9)

(16)

346

(344)

533

(219)

314

(92)

(110)

(6)

(25)

113

496

(383)

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Financial statements 2007

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 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

Deferred tax

2007

Deferred

2006

Deferred

assets

tax liabilities

tax assets

tax liabilities

340

368

(362)

346

(49)

(261)

(313)

(31)

(8)

(4)

(2)

(13)

(22)

(3)

(706)

362

(344)

309

419

(232)

496

(42)

(285)

(213)

(29)

(10)

(5)

(2)

(11)

(14)

(4)

(615)

232

(383)

No deferred tax assets were recognized for losses carried forward amounting to €48 million (2006: €70 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 company’s financial position and net
profit.

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Financial statements 2007
Consolidated financial statements

11 Intangible assets

Balance at 1 January 2006
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

Changes in carrying amount:
- Capital expenditure
- Acquisitons
- Disposals
- Amortization and impairments
- Exchange differences
- Reclassifications

Balance at 31 December 2007
Cost
Amortization

Carrying amount

Total

Goodwill

Licences

Other

and patents

1,110

107

1,003

(40)

(42)

(3)

1,156

148

1,008

(3)

(49)

(41)

1,224

187

1,037

742

(38)

(17)

725

(37)

(1)

725

724

(10)

(2)

(3)

127

(17)

(2)

139

275

206

(30)

(2)

(1)

304

205

(3)

(32)

(2)

360

129

231

Over the past few years DSM has 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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Financial statements 2007

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 carrying amount of goodwill as at 31 December 2007 mainly includes an amount of €6 million relating to the acquisition of
DSM Japan Engineering Plastics in 1997, an amount of €295 million (31 December 2006: €329 million) relating to the acquisition
of Catalytica in 2001, an amount of €358 million (31 December 2006: €358 million) relating to the acquisition of NeoResins in 2005,
an amount of €9 million relating to the acquisition of Syntech in 2005, an amount of €14 million (31 December 2006: €14 million)
relating to the acquisition of Lipid Technologies Provider in 2006, an amount of €6 million (31 December 2006: €6 million) relating
to the acquisition of CRINA in 2006, and an amount of €31 million relating to the acquisition of Pentapharm in 2007. For impairment
testing reasons, goodwill has been allocated to the following cash-generating units: the goodwill related to CRINA and Pentapharm
to the DSM Nutritional Products business group, the goodwill related to Catalytica to the DSM Pharmaceutical Products business
group, the goodwill related to NeoResins and Syntech to the DSM Resins business group, the goodwill related to Lipid Technologies
Provider to the DSM Food Specialties business group and the goodwill related to DSM Japan Engineering Plastics to the DSM
Engineering Plastics business group.

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.

The other intangible assets are listed in the table below:

Application software
Marketing-related
Customer-related
Technology-based
Other

Total

Total 2006

Cost

Amortization

Carrying

Of which

Acquisition

amount

acquisition

2007

2006

134

186

360

304

(64)

(4)

(3)

(50)

(8)

(129)

(99)

136

231

205

102

121

129

114

129

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Financial statements 2007
Consolidated financial statements

12 Property, plant and equipment

Balance at 1 January 2006
Cost
Depreciation and impairment losses

Carrying amount

Changes in carrying amount:
- Capital expenditure
- Put into operation
- Acquisitions
- Disposals
- Depreciation
- Impairment losses
- Change in estimate of decommisioning costs
- Exchange differences
- Reclassifications
- Other changes

Balance at 31 December 2006
Cost
Depreciation and impairment losses

Carrying amount

Balance at 31 December 2007
Cost
Depreciation and impairment losses

Carrying amount

Total

Land and

Plant and

buildings

machinery

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

427

(38)

(373)

(152)

(99)

(21)

(1)

(215)

(15)

(56)

(1)

(28)

(1)

(17)

208

(23)

(307)

(150)

(52)

(12)

(276)

8,688

5,248

3,440

1,634

693

941

6,309

4,342

1,967

Other

equip-

ment

284

252

(10)

(1)

242

204

(10)

(1)

246

203

Under

Not used

construc-

for operating

tion

activities

343

306

318

(195)

(2)

(16)

(7)

428

404

386

(270)

(1)

(19)

(22)

(1)

481

478

(1)

Property, plant and equipment includes assets acquired under finance lease agreements with a carrying amount of €17 million
(31 December 2006: €27 million). The related commitments are included under Borrowings and amount to €8 million
(31 December 2006: €11 million). The total of the minimum lease payments at the balance sheet date amounts to €10 million
(31 December 2006: €11 million) and their present values to €9 million (31 December 2006: €10 million).

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Financial statements 2007

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

Overview of minimum lease payments in time:

14 Other financial assets

2008
2009-2012
After 2012

Total

In 2007, €152 million in impairment losses was recognized
(2006: €12 million). In 2007 the asset impairment losses mainly
related to DSM Anti-Infectives (€146 million).

The impairment losses on Property, plant and equipment in 2006
amounted to €12 million and 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).

13 Associates

Balance at 1 January

Changes:
- Share of profit
- Dividend received
- Disposals
- Impairments
- Transfers
- Exchange differences
- Other changes

Balance at 31 December
Of which loans granted

2007

2006

(1)

(2)

(1)

(6)

(8)

(2)

Total

Other

participa-

receivables

deferred

tions

items

189

123

(6)

(14)

(5)

(20)

(92)

(2)

(3)

(14)

(5)

(3)

(20)

(92)

(2)

(1)

(3)

(6)

100

(7)

(4)

(2)

(1)

(7)

(4)

(1)

(7)

(2)

(1)

(10)

(7)

126

Balance at
1 January 2006

Changes:
- Charged to the income

statement

- Capital payments
- Acquisitions
- Disposals
- Impairments
- Loans granted
- Repayments
- Transfer to current loans
- Exchange differences
- Other transfers
- Other changes

Balance at
31 December 2006

Changes:
- Charged to the income

statement

- Capital payments
- Acquisitions
- Disposals
- Loans granted
- Repayments
- Exchange differences
- Transfers
- Changes in fair value
- Other changes

Balance at
31 December 2007

Other participations relate to equity instruments in companies
with activities that support DSM’s business, which can be
quoted or unquoted. In Other participations an amount of
€35
fair value cannot be measured reliably (2006: €40 million).
These interests are therefore measured at cost.

million is included that relates to equity instruments whose

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Financial statements 2007
Consolidated financial statements

15 Inventories

Raw materials and
consumables
Intermediates and finished
goods

Adjustments to lower net
realizable value

2007

2006

Deferred items comprise €34 million (31 December 2006:
€29 million) of prepaid expenses that will impact on profit or loss
in future periods but have already been paid.

With respect to trade accounts receivable that are neither
impaired nor past due, there are no indications that the debtors
will not meet their payment obligations. Of the total trade
receivables 85% are neither past due nor impaired, 11% are
between 1 and 29 days overdue, 1% are between 30 and 89
days overdue and 3% are more than 90 days overdue.

461

448

1,128

1,124

1,589

1,572

(42)

(57)

Total

1,547

1,515

The carrying amount of inventories adjusted to net realizable
value was €165 million (2006: €127 million); the value adjustment
of inventories recognized in the income statement was
€17 million income (2006: €30 million expense).

16 Receivables

Trade receivables
Trade accounts receivable
Receivables from associates

Adjustments for bad debts

2007

2006

1,458

1,469

(17)

1,386

1,399

(22)

Total

1,452

1,377

Other receivables
Income taxes receivable
Other taxes and social security
contributions
Government grants
Loans
Other receivables
Deferred items

Total

128

235

108

362

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Financial statements 2007

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

2007

5,855

434

(144)

154

(46)

(195)

(758)

2006

5,568

552

(133)

290

(7)

(214)

(318)

17 Equity

Balance at 1 January

Net profit
Exchange differences, net of income tax expense
Net actuarial gains/(losses) on defined benefit obligations
Net asset ceiling related to defined benefit obligations
Dividend paid
Repurchase of ordinary shares
Proceeds from reissue of ordinary shares
Other changes

Balance at 31 December

5,383

5,855

After the balance sheet date the following dividends were declared by the Managing Board:

Per cumulative preference share A: €0.23 (2006: €0.23)
Per ordinary share: €1.20 (2006: €1.00)

Total

2007

204

214

2006

187

197

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 2007 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 2007 are shown in the table below.

Issued shares

Treasury shares

Ordinary

Cumprefs A

Cumprefs C

Ordinary

Cumprefs C

Balance at 1 January 2007
Reissue of shares in connection with exercise of option
rights
Repurchase of own shares
Cancellation of own shares

201,953,008

44,040,000

37,500,000

17,103,171

37,500,000

(20,528,008)

(2,730,031)

20,683,008

(20,528,008)

Balance at 31 December 2007
Number of treasury shares at 31 December 2007

181,425,000

44,040,000

37,500,000

14,528,140

37,500,000

14,528,140

37,500,000

Number of shares outstanding at
31 December 2007

166,896,860

44,040,000

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Financial statements 2007
Consolidated financial statements

The average number of ordinary shares outstanding in 2007 was 178,540,706. All shares issued are fully paid.

Share premium
Of the total Share premium of €489 million, an amount of €125 million can be regarded as entirely free of tax.

Treasury shares
On 31 December 2006 DSM possessed 17,103,171 ordinary shares (nominal value €26 million, 6.9% of the share capital). In 2007,
DSM used 2,730,031 ordinary shares for servicing option rights.

On 31 December 2007 DSM possessed 14,528,140 ordinary shares (nominal value €22 million, 6.4% of the share capital). The
average purchase price of the ordinary treasury shares was €31.80. In 2007, 20.7 million ordinary treasury shares were repurchased
as part of the first and second phase of the share buy-back program of Vision 2010. A total of 20.5 million of the shares bought
back related to the Vision 2010 progam were cancelled in 2007. The number of treasury shares at 31 December 2007 included
6.9 million shares related to the share buy-back program of Vision 2010. The remaining ordinary treasury shares will be used for
servicing management and personnel share-option rights.

Other reserves in Shareholder's equity

Total

Translation

Hedgingreserve

Reserve for

Fair value

reserve

share-based

reserve

compensation

Balance at 1 January 2006

Fair-value changes of cash flow hedges
Exchange differences, net of income tax
Changes in option rights
Reclassifications

(128)

(2)

(128)

(2)

Balance at 31 December 2006

(53)

Fair-value changes of cash flow hedges
Fair-value changes of other financial assets
Exchange differences, net of income tax
Options and performance shares granted
Options and performance shares exercised/cancelled
Reclassifications

(9)

(140)

(4)

(140)

(3)

Balance at 31 December 2007

(123)

(193)

(4)

(9)

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Financial statements 2007

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

18 Provisions

Restructuring costs and termination benefits
Environmental costs
Other long-term employee benefits
Other provisions

Total

112

261

2007

Of which

current

Total

105

138

315

2006

Of which

current

127

In cases 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 by 75
to 100 basis points depending on those terms. The balance of provisions measured at present value increased by €5 million in
2007 in view of the passage of time and changes in the discount rate.

The Provisions for restructuring costs and termination benefits mainly relate to the costs of redundancy schemes connected 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 Provisions for environmental costs relate 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. These provisions have an average life
of 5 to 10 years.

The total of non-current and current provisions decreased by €54 million. This is the balance of the following changes:

Restructuring costs and termination benefits
Environmental costs
Other long-term employee benefits
Other provisions

Total

Balance at

Additions

Releases

Uses

Exchange

Other

Balance at

1 January

2007

105

138

315

differences

changes

31 December

(13)

(0)

(4)

(48)

(10)

(2)

(60)

(17)

(120)

(1)

(0)

(3)

(5)

2007

112

261

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 Provisions for restructuring costs and termination benefits mainly relate to the Nutrition cluster (€16 million)
and to Other activities (€10 million). The withdrawal from this provision concerns expenditure related to restructuring operations at
DSM Nutritional Products, DSM Food Specialties, DSM Pharmaceutical Products, DSM Anti-Infectives, DSM Resins and DSM
Industrial Services (Copernicus project).

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Financial statements 2007
Consolidated financial statements

The additions to the Other provisions mainly relate to a provision for claims relating to the Nutrition, Pharma and Performance
Materials clusters. The withdrawal from this provision relates to expenditures regarding an onerous contract at DSM Nutritional
Products and regarding the restructuring of the Geleen (Netherlands) and Linz (Austria) sites and profit improvement activities at
DSM Nutritional Products.

19 Borrowings

2007
Total Of which

2006

Total Of which

current

Debenture loans
Private loans
Finance lease
liabilities
Credit institutions

1,210

385

149

886

460

159

403

159

Total

1,752

192

1,514

607

In agreements governing loans with a residual amount at year-end 2007 of €1,417 million, none of which were of a short-term
nature (31 December 2006: €1,118 million, of which €403 million short term), clauses have been included which restrict the provision
of security. The documentation of the €300 million bond issued in November 2005 and the documentation of the €750 million bond
issued in October 2007 include 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 2007, borrowings to a total of €1,316 million had a remaining term of more than 5 years.

The schedule of repayment of borrowings (excluding debt to credit institutions) is as follows:

2008
2009
2010
2011 and 2012
2013 through 2017
After 2017

Total

225

1,316

1,603

A breakdown of the borrowings by currency (excluding debt to credit institutions) is given in the following table:

EUR
USD
CNY
Other

Total

2007

1,150

384

2006

823

424

1,603

1,355

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Financial statements 2007

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

On balance, total borrowings increased by €238 million owing to
the following changes:

2005 by means of a forward starting swap, which led to a lower
effective fixed interest rate of 3.66%.

The 5.25% EUR loan 2007-2017 was partly swapped into CHF
in 2007 for an amount of €650 million to hedge the currency risk
of net investments in CHF-denominated subsidiaries. This loan
was partly pre-hedged (cash flow hedge) in 2006 and 2007 by
means of forward starting swaps, which led to a lower effective
fixed interest rate of 4.89% for the full loan.

A breakdown of private loans is given below:

4.34%

floating

(6 months)

floating

(indefinite)

5.51%

5.61%

NLG loan
NLG loan

CNY loan

USD loan
USD loan
Other loans

Total

2007

2006

1998-2008

2000-2014

2002-2009

2003-2013

2003-2015

103

102

115

114

385

460

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 maturity,
leading to an effective fixed USD interest rate of 4.29% for the
loan. This 5.51% USD loan was assigned as a net investment
hedge to hedge the currency risk of net investment in USD-
denominated subsidiaries.

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.

Balance at 1 January

1,514

1,710

2007

2006

Loans taken up
Repayments
Changes in fair value
Acquisitions
Changes in debt to credit
institutions
Exchange differences
Other changes

753

(466)

(10)

(47)

(205)

(15)

(58)

Balance at 31 December

1,752

1,514

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
outstanding in 2007, including financial instruments related to
these borrowings, amounted to 4.5% (2006: 4.3%).

A breakdown of debenture loans is given below:

6.38%

6.75%

4.00%

5.25%

EUR loan
USD loan
EUR loan
EUR loan

Total

2007

2006

2000-2007

1999-2009

2005-2015

2007-2017

169

300

741

403

183

300

1,210

886

All debenture loans have a fixed interest rate.

The 6.38% EUR loan 2000-2007 matured in December 2007
and was fully repaid.

The fixed interest rate of the 6.75% USD loan 1999-2009 has
been swapped to floating rates by means of interest-rate swaps
(fair-value hedges). This loan was assigned as a net investment
hedge to hedge the currency risk of net investments in USD-
denominated subsidiaries.

The 4% EUR loan 2005-2015 was swapped into CHF to hedge
the currency risk of net investments in CHF-denominated
subsidiaries. This loan was pre-hedged (cash flow hedge) in

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Financial statements 2007
Consolidated financial statements

20 Other non-current liabilities

The commitments for operating leases and rents are spread as
follows:

2007

2006

Investment grants
Other deferred items

Total

21 Current liabilities

Trade payables
Received in advance
Trade accounts payable
Notes and cheques due
Owing to associates

2008
2009
2010
2011 and 2012
After 2012

Total

2007

2006

1,103

1,074

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.

Total

1,124

1,091

Other current liabilities
Income taxes payable
Other taxes and social-security
contributions
Pensions
Other liabilities
Deferred items

Total

22 Contingent liabilities

Operating leases and rents
Guarantee obligations on
behalf of associates and third
parties
Outstanding orders for
projects under constructions
Other

216

254

605

179

235

523

2007

2006

Total

116

114

Most of the outstanding orders for projects under construction
will be completed in 2008. Property, plant and equipment under
operating leases primarily concern catalysts, buildings and
various equipment.

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Financial statements 2007

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

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, currency risk and price
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 (2006: also two
confirmed credit facilities amounting to a total of €900 million) and a commercial-paper program amounting to €1,500 million (2006:
€900 million). The USD 400 million USD commercial-paper program has been cancelled (2006: USD 400 million). The company
will use the commercial-paper program to a total of not more than €900 million (2006: €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-rate and fixed-rate borrowings analyzed by maturity are summarized below. Borrowings excluding credit institutions are
shown after taking into account related interest-rate derivatives in designated hedging relationships.

Fixed-rate

Floating-rate

2007

Total

Fixed-rate

Floating-rate

borrowings

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

1,247

211

225

1,316

1,276

327

1,603

531

563

442

227

792

1,355

2006

Total

448

241

606

On 31 December 2007, the notional amount of interest-rate swaps in relation to long-term borrowings was €170 million (2006:
€590 million). For these swaps fair value hedge accounting was applied. There was no material ineffectiveness in relation to these
hedges. For fair value hedges, including fair value hedges ended before 31 December 2007, an immaterial amount was recognized
in the profit or loss for the year which offsets a similar amount recognized in relation to the hedged risk. Both are reported in other
financial income and expense.

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Financial statements 2007
Consolidated financial statements

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 2007, with all other variables held
constant. As in 2006, a 1% reduction in interest rates would not result in a material change in profit and loss or equity on the basis
of the composition of financial instruments on 31 December 2007, as floating-rate borrowings are balanced by floating-rate assets
(mainly cash). The same applies in the case of a 1% increase in interest rates. The sensitivity of the fair value of financial instruments
on 31 December 2007 to changes in interest rates is set out in the following table. For 2006 the total sensitivity of fair values ranged
between +€49 million (+1% interest change) and (€54) million (-1% interest change).

Current investments
Cash and cash equivalents
Short-term borrowings
Long-term borrowings
Interest-rate swaps (fixed to floating)

Pre-hedges

Carrying amount

Fair value

Sensitivity of fair value to change in interest of:

369

(192)

369

(192)

(1,560)

(1,509)

(1)

+1%

(2)

(1%)

(97)

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 its long-term euro debt. The
5.25% EUR loan 2007-2017 was pre-hedged for an amount of €625 million in 2006 and 2007 by means of forward-starting swaps
for a locked interest rate of 4.1% (excluding credit spread). Including the unhedged €125 million and credit spread, the effective
interest rate of this loan amounts to 4.89%. On 31 December 2007 no prehedges for highly probable refinancing were outstanding
(the notional amount of the related interest-rate swaps at year-end 2006 was €400 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 – under strict conditions – opt 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. The risks arising from currency exposures are regularly reviewed by the business groups and hedged when
appropriate. DSM uses average-rate currency forward contracts, currency forward contracts, spot contracts, and 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 currencies other than the functional currency of the
subsidiaries, DSM uses currency swaps or forward contracts. Hedge accounting is not applied for these instruments. On
31 December 2007, the notional amount of the currency forward contracts was €1,556 million (2006: €1,156 million).

In 2007 DSM hedged USD 718 million (2006: USD 432 million) of its projected net cash flow in USD in 2008 (partly against CHF)
by means of average-rate currency forward contracts and average-rate currency options at an average exchange rate of USD 1.40
per euro for the four quarters of 2008. In 2007 DSM also hedged JPY 5,375 million (not applicable in 2006) of its projected net
cash flow in JPY in 2008 (most against CHF) by means of average-rate currency forward contracts at an average exchange rate
of JPY 152.31 per euro for the four quarters of 2008. These hedges have fixed the exchange rate for part of the USD and JPY
receipts in 2008. Cash flow hedge accounting is applied for these hedges. As a result of these hedges, in 2007 €27 million
(2006: €6 million) was recognized in the operating income of the segments involved in accordance with the realization of the
expected cash flows. There was no material ineffectiveness in relation to these hedges.

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 1,760 million).

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Financial statements 2007

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

USD-denominated net assets have partially been hedged through USD loans (USD 400 million). There was no material
ineffectiveness

in relation to these hedges.

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 2007, 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. For 2006 the sensitivities that could impact profit and loss ranged between (€65) million (+10% exchange rate change)
and +€57 million (-10% exchange rate change) whereas the sensitivities related to cash flow hedges that would impact equity ranged
between (€7) million (+10% exchange rate change) and +€4 million (-10% exchange rate change).

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
Average-rate currency options used for economic hedging

Carrying amount

Fair value

Sensitivity of fair value to change in all

exchange rates of:

+10%

(10%)

369

(192)

369

(192)

(1,560)

(1,509)

(28)

(7)

(48)

(67)

(119)

(27)

(11)

(10)

The following sensitivity analysis of net borrowings and derivative financial instruments to currency movements against the euro
assumes a 10% change in the USD against all foreign currencies and the euro from the level on 31 December 2007, with all other
variables held constant. A +10% change indicates a strengthening of the USD and a -10% change represents a weakening of the
USD. For 2006 USD sensitivities were similar.

Carrying amount

Fair value

Sensitivity of fair value to change in USD

369

(192)

369

(192)

(1,560)

(1,509)

(28)

+10%

(1)

(43)

(107)

(42)

(10%)

(2)

(10)

Fair-value changes on these positions will generally be recognized in profit or loss with the exception of the instruments for which
cash-flow hedge accounting or net-investment hedge accounting is applied. Cash flow hedge accounting is applied for the average
rate forwards and average-rate currency options used for economic hedging; the fair-value changes of these derivatives are
recognized in the hedging reserve in equity until recognition of the related cash flows. Net-investment hedge accounting is applied
for the cross currency swaps used to protect net-investments in foreign entities; the fair value changes of these derivatives are
recognized in the translation reserve in equity until the net-investment is disposed of, to the extent that the changes in fair value
are caused by changes in currency exchange rates.

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Financial statements 2007
Consolidated financial statements

Price risk
Financial instruments that are subject to changes in stock exchange prices or indexes are subject to a price risk. At year-end 2007
DSM was not exposed to any material price risk in relation to investments in available-for-sale securities.

Credit risk
DSM manages the credit risk to which it is exposed by applying 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.

With regard to treasury activities it is ensured that financial transactions are only concluded with counterparties that have at least
a Moody's credit rating of P1 for short-term instruments and A3 for long-term instruments. At business group level, outstanding
receivables are continuously monitored by the management of the operating companies. Appropriate allowances are made for
credit risks that have been identified (as listed in note 16). It is therefore unlikely that significant losses will arise in relation to
receivables that have not been provided for.

The maximum exposure to credit risk is represented by the carrying amounts of financial assets that are recognized in the balance
sheet, including derivative financial instruments with a positive market value. No significant agreements or financial instruments
were available at the reporting date that would reduce the maximum exposure to 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 participations
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

31 December 2007

31 December 2006

Carrying amount

Fair value

Carrying amount

Fair value

1,687

369

1,560

192

1,729

1,687

369

1,509

192

1,729

1,739

552

907

607

1,739

552

876

607

1,614

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.

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Financial statements 2007

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 following table shows the carrying amounts of the financial derivatives recognized, broken down by type and purpose:

Current assets

Current liabilities

Total

Interest-rate swaps
Currency swaps

Total financial derivatives related to borrowings

Currency forward contracts
Currency options

Balance at 31 December 2006

Interest-rate swaps
Currency swaps

Total financial derivatives related to borrowings

Currency forward contracts
Currency options

Balance at 31 December 2007

(6)

(25)

(31)

(10)

(41)

(1)

(30)

(31)

(11)

(42)

(1)

(3)

(4)

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Financial statements 2007
Consolidated financial statements

24 Post-employment benefits

2007

2006

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.

The charges for pension costs recognized in the income
statement (note 5) relate to the following:

2007

2006

Defined benefit plans
Healthcare plans
Other pension-related
expenses
Defined contribution plans

Total

Of which pension costs related
to:
- Continuing operations
- Exceptional items
- Discontinued operations

(9)

For 2008 costs related to pensions and post-employment
healthcare and other costs, excluding gains and losses on
curtailments and settlements, will be lower than the costs for
2007 (€14 million).

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

Balance at 1 January

Changes:
- Balance of actuarial gains/

(losses)

- Employee benefits costs
- Acquisitions and disposals
- Contributions by employer
- Exchange differences
- Other changes

Total changes

Balance at 31 December

Of which:
- Prepaid pension costs
- Employee benefits liabilities

918

(325)

593

146

(17)

156

294

887

478

(406)

382

(19)

144

521

593

1,169

(282)

918

(325)

The Employee benefits liabilities of €282 million (2006:
€325 million) consist of €229 million (2006: €267 million) related
to defined benefit plans, €33 million (2006: €33 million) related
to healthcare and other costs and €20 million (2006: €25 million)
to other pension-related expenses.

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. The plans are
based on local legal and contractual obligations.

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. The
German and the Austrian plan are wholly unfunded. Together
they represent 4% of the total defined benefit obligation.

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Financial statements 2007

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

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

Balance at 1 January
Changes:
- Expected return on plan

assets

- Actuarial gains/(losses)

Actual return on plan assets
- Settlements
- Acquisitions/disposals
- Contributions by employer
- Contributions by employees
- Exchange differences on

foreign plans
- Benefits paid
- Other changes

2007

2006

5,466

5,231

321

(331)

(10)

146

(32)

(224)

308

333

(11)

119

(16)

(212)

Balance at 1 January
Changes:
- Service costs
- Interest costs
- Contributions by employees
- Actuarial (gains)/losses
- Curtailments
- Settlements
- Past service costs
- Acquisitions/disposals
- Exchange differences on

foreign plans
- Benefits paid
- Other changes

2007

4,906

224

(541)

(35)

(224)

Balance at 31 December

4,478

4,906

2006

Balance at 31 December

5,400

5,466

5,064

The amounts recognized in the balance sheet are as follows:

107

209

(365)

(20)

121

(20)

(212)

Present value of funded
obligations
Fair value of plan assets

Present value of unfunded
obligations

Funded status
Unrecognized past service
costs
Effect of asset ceiling

Net assets

Of which:
- Liabilities (provision for

post-employment benefits)

- Assets (prepaid pension

costs)

2007

2006

(4,276)

5,400

1,124

(202)

922

(81)

940

(229)

1,169

(4,685)

5,466

781

(221)

560

107

(16)

651

(267)

918

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Financial statements 2007
Consolidated financial statements

The changes in the net assets recognized in the balance sheet are as follows:

2007

2006

Balance at 1 January
Net expense recognized in the income statement
Actuarial gains/(losses) recognized directly in equity during the year
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

In 2008 DSM is expected to contribute €117 million to its defined-benefit plans.

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:

Current service costs
Interest on obligation
Expected return on plan assets
Past service costs
(Gains)/losses on curtailments and settlements

Costs related to defined benefit plans

651

(11)

210

(62)

146

940

2007

51%

44%

2007

224

(321)

160

(13)

390

(9)

119

651

2006

48%

43%

2006

107

209

(308)

(9)

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Financial statements 2007

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 main actuarial assumptions for the year (weighted averages) are:

The Netherlands

Foreign

The Netherlands

2007

Discount rate
Price inflation
Salary increase
Pension increase
Expected return on plan assets

5.50%

1.75%

6.25%

5.00%

2.19%

3.14%

1.69%

4.70%

1.75%

4.5%-8.5%

5.3-6.0%

4.5-8.5%

2006

Foreign

4.37%

2.03%

3.05%

2.00%

The assumptions for the expected return on plan assets are based on a review of historical returns of the asset classes in which
the assets of the pension plans are invested and the expected long-term allocation of the assets over these classes.

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/(loss)
Experience adjustments on plan liabilities, gain/(loss)
Assumed gain/(loss) on liabilities

2007

(4,478)

5,400

922

(331)

519

2006

2005

2004

(4,906)

5,466

(5,064)

5,231

(4,775)

4,616

560

(94)

459

167

430

(149)

(1)

(159)

175

(407)

(1)

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 obligation
Fair value of plan assets (including reimbursement rights)

Present value of unfunded obligations
Unrecognized past service costs

Liability (provision for post-employment benefits)

2007
(35)

(27)

(5)

(1)

(33)

2006

(34)

(26)

(6)

(1)

(33)

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Financial statements 2007
Consolidated financial statements

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)/losses on curtailments or settlements

Costs related to healthcare plans

2007

2006

(1)

(0)

(1)

(0)

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:

Balance at 1 January

Expense recognized in the income statement
Actuarial gains/(losses) recognized directly in equity
Benefits paid/employer contributions
Acquisitions/disposals
Exchange differences

Balance at 31 December

2007

(33)

(3)

(2)

(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)

2007

6.0%

3.0%

4.0%

8.0%

4.75%

2006

(57)

(4)

(1)

(33)

2006

6.0%

3.0%

4.0%

7.3%

4.7%

The impact of a one-percentage-point change in assumed healthcare cost trend rates would have the following effects:

One-percentage-

point increase

point decrease

Effect on the aggregate of the service costs and interest costs, (increase)
Effect on defined obligation, (increase)

(1)

(5)

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Financial statements 2007

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

Amounts for the current and previous periods are as follows:

Defined benefit obligations
Plan assets (including reimbursement rights)

Funded status of asset/(liability)

Experience adjustments of plan liabilities, (loss)

25 Net debt

2007

2006

2005

2004

(40)

(32)

(40)

(32)

(69)

(56)

(4)

(55)

(44)

(7)

Net debt is an important parameter for DSM's financial policy. In order to maintain a single A credit rating DSM aims for a net debt
which is between 30 and 40% of net debt plus equity. Furthermore, operating profit before amortization and depreciation should
at least amount to 8.5 times the balance of financial income and expense. The financial policy is discussed in depth in the section
on Financial policy on page 79.

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

2007

2006

1,560

192

1,752

(4)

(369)

(83)

1,338

907

607

1,514

(3)

(552)

(79)

921

Cash at year-end 2007 was not being used as collateral and was therefore not restricted (2006: also zero).

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Financial statements 2007
Consolidated financial statements

26 Notes to the cash flow statement

27 Share-based compensation

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.

Under the DSM Stock Incentive Plan, performance-related 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
that 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. If employment
is terminated prior to the vesting date, 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).

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:

In % of

net sales

(from

continuing

operations)

21.6

21.4

Operating

working

capital

Balance at 1 January 2007
Balance at 31 December 2007

1,801

1,875

Balance sheet change

Adjustments:
- Exchange differences
- Changes in consolidation
- Transfers

Total

Change in cash flow

(19)

124

(124)

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Financial statements 2007

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

Overview of stock options and Stock Appreciation Rights for management

Year of issue

Out-

In 2007

Out-

Fair value

Exercise

Expiry date

Granted

Exercised

Forfeited

Expired

standing

on grant

price (€)

on 31 Dec.

date (€)

standing

on 31 Dec.

2006

4,000

81,000

395,350

688,800

1,056,323

188,150

2,753,826

2,681,278

2,984,975

(4,000)

(66,000)

(165,725)

(178,500)

(424,323)

(95,950)

2007

15,000

229,625

510,300

632,000

92,200

(1,456,055)

(16,950)

(2,500)

1,278,321

(80,000)

(160,250)

(2,500)

(6,000)

(164,750)

(88,500)

2,441,028

2,817,725

3,176,800

1.62

3.52

3.88

5.22

3.09

3.64

2.97

6.15

8.95

7.69

13.005

14 Jan.

2007

18.240

31 Mar.

2008

19.990

30 Mar.

2009

23.505

18.195

19.770

17.895

29.050

38.300

33.600

4 Apr.

2010

4 Apr.

2011

3 Nov.

2011

2 Apr.

2012

8 Apr.

2013

31 Mar.

2014

30 Mar.

2015

3,271,300

10,833,702

3,271,300

(2,479,053)

(430,450)

(2,500) 11,192,999

2,831,473

at 31 Dec. 2005

3,330,396

at 31 Dec. 2006

10,936,871

3,122,725

(2,526,944)

(698,950)

10,833,702

2,342,541

2,831,473

1999

2000

2001

2002

2003
2003 1
2004 2 3
2005 2
2006 2
2007 2

2007
Total
Of which
vested

2006
Total
Of which
vested

1 On 3 November 2003 a select group of DSM Nutritional Products employees received stock options and SARs on a one-off basis.

2 Stock options will partly vest, and may therefore immediately be exercised, upon termination of employment in connection with retirement or early retirement.

3 The remaining term to exercise stock options and SARs after their vesting as a result of retirement or early retirement is limited to three years (the remaining term to exercise in

the case of regular vesting is five years).

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.

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Financial statements 2007
Consolidated financial statements

Overview of stock options for employees

Year of issue

Outstanding

In 2007

Outstanding

Fair value

Exercise price

Exercise period

on 31 Dec.

Granted

Exercised

Forfeited

Expired

on 31 Dec.

on grant date

2007

(€)

2006

128,116

63,522

205,248

605,084

(117,272)

(13,188)

(19,320)

(120)

(1,516)

(4,560)

(15,991)

(10,844)

50,214

184,412

584,533

599,488

3.67

2.33

4.29

6.03

4.27

23.11 until Apr. 2007

18.19 until Apr. 2008

29.05 until Apr. 2010

38.30 until Mar. 2011

33.60 until Mar. 2012

648,828

(43,863)

(5,477)

1,001,970

648,828

(198,203)

(23,104)

(10,844)

1,418,647

639,471

(167,120)

(41,877)

(5,962)

2002
2003
2005
2006
2007

Total

Changes in
2006

Based on the 2006 result, 648,828 employee option rights were granted in 2007.

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:

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 of
management option rights
Stock-price volatility of
employee option rights

2007

2006

4.20%

3.93%

6 years

8 years

2.5 years

5 years

26%

20%

26%

In the costs for wages and salaries an amount of €9 million is
included for share-based compensation (2006: €21 million).

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Financial statements 2007

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

28 Interests in joint ventures

2007

2006

DSM’s share in its most important joint ventures is disclosed
below:

Company

Location

Country

DSM Interest

Non-current assets
Current assets
Non-current liabilities
Current liabilities

DEX-Plastomers VoF
Noordgastransport BV
EdeA VoF

Heerlen

Zoetermeer

Geleen

50%

40%

50%

Net assets

Net sales
Net result

(5)

(54)

217

(1)

(7)

(48)

255

(1)

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:

2007

2006

Non-current assets
Current assets
Non-current liabilities
Current liabilities

Net assets

Net sales
Expenses

Net profit

151

(100)

(38)

121

(82)

165

(108)

(49)

158

(125)

29 Interests in associates

DSM’s share in its most important associates is disclosed below:

Company

Location

Country

DSM Interest

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.

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 expenditures and
other commitments) of the members of the Managing Board
amounted to €3.8 million (2006: €4.4 million). This includes fixed
annual salary to the amount of €2.7 million (2006: €2.3 million),
bonuses to the amount of €1.0 million (2006: €1.6 million), no
pension expenditure due to pension discount by the Pension
Fund (2006: €0.4 million), and other items to the amount of
€0.1 million (2006: €0.1 million). For further information about the
remuneration of the members of the Managing Board see note
10 on page 142.

Members of the Supervisory Board received a fixed
remuneration (included in Other operating costs) totaling
€0.3 million (2006: €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 70 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 2007 amounted
to €4.9 million for audit services (2006: €5.2 million), €2.1 million
for tax services (2006: €2.0 million) and €0.8 million for sundry
services (2006: €0.7 million).

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Financial statements 2007
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.

Annual Report 2007

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138

Notes

2007

2006

409

9,738

10,173

473

503

368

8,647

9,046

513

560

10,676

9,606

5,310

5,784

217

1,417

1,636

3,691

3,730

10,676

203

715

920

403

2,463

2,902

9,606

2007

2006

529

(100)

429

652

(105)

547

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Financial statements 2007

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 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 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 of DSM participations has been filed with the Chamber of Commerce for Zuid-Limburg in Maastricht (Netherlands) and is
available from the company upon request. The list can also be downloaded from the company’s website www.dsm.com.

2 Intangible assets

The intangible assets mainly comprise goodwill. The intangible assets consist of the goodwill paid for the acquisition of NeoResins
in 2005 (€358 million), CRINA in 2006 (€6 million) and Pentapharm in 2007 (€31 million).

3 Property, plant and equipment

This item mainly relates to land and buildings and corporate IT projects. Capital expenditure in 2007 was €10 million, while the
depreciation charge in 2007 was €3 million. The historic cost of property, plant and equipment as at 31 December 2007 was
€62 million; accumulated depreciation amounted to €36 million.

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Financial statements 2007
Financial statements of Royal DSM N.V.

4 Financial assets

Total

Subsidiaries

Other

Other loans

Share in equity

Loans

participations

Balance at 1 January 2006

8,016

7,500

405

Changes:
- Share in profit
- Dividend received
- Capital payments
- Goodwill
- Net actuarial gains/(losses)
- Net asset ceiling
- Repayments
- Transfer to current loans
- Intra-group transactions
- Value adjustments
- Exchange differences
- Other changes

652

(1,514)

652

(1,514)

312

(6)

290

(7)

(17)

(91)

308

(6)

290

(7)

1,170

1,171

(32)

(140)

(27)

(140)

(1)

Balance at 31 December 2006

8,647

8,242

404

Changes:
- Share in profit
- Dividend received
- Capital payments
- Goodwill
- Net actuarial gains/(losses)
- Net asset ceiling
- Intra-group transactions
- Value adjustments
- Exchange differences
- Other changes

529

(103)

485

(31)

154

(46)

234

(10)

(164)

529

(103)

455

(31)

154

(46)

234

(10)

(164)

(1)

(5)

Balance at 31 December 2007

9,738

9,299

408

5 Receivables

Receivable from subsidiaries
Loans
Other receivables

Total

2007

418

473

108

(17)

(91)

2006

326

513

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Financial statements 2007

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

2007

5,784

429

(140)

154

(46)

(193)

(758)

2006

5,501

547

(128)

290

(7)

(213)

(318)

6 Royal DSM N.V. Shareholders' equity

Balance at 1 January

Net profit
Exchange differences, net of income tax expense
Net actuarial gains/(losses) on defined benefit obligations
Net asset ceiling related to defined benefit plans
Dividend paid
Repurchase of ordinary shares
Proceeds from reissue of ordinary shares
Other changes

Balance at 31 December

5,310

5,784

For details see the consolidated statement of changes in equity on page 117.

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 €193 million is included for Translation reserve, €48 million for Hedging reserve and €(9) million for Fair value reserve.

7 Provisions

Environmental costs
Other provisions

Total

2007

2006

Total

Of which current

Total

Of which current

The total of non-current and current provisions decreased by €1 million. This is the net effect of the following changes:

Environmental costs
Other provisions

Total

Balance at

Additions

Releases

Uses

Balance at

1 January

2007

31 December

2007

(2)

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Financial statements 2007
Financial statements of Royal DSM N.V.

8 Borrowings

Debenture loans
Private loans
Credit institutions

Total

Of the total amount of borrowings outstanding at 31 December
2007, €1,246 million had a remaining term of more than five
years.

The repayment schedule for borrowings is as follows:

2008
2009
2010
2011 and 2012
2013 through 2017
After 2017

Total

170

1,246

1,417

In agreements governing loans with a residual amount at year-
end 2007 of €1,417 million, none of which were of a current
nature (31 December 2006: €1,118 million, of which €403 million
current), clauses have been included which restrict the provision
of security.

9 Other current liabilities

Owing to subsidiaries
Other liabilities
Deferred items

2007

2006

3,612

2,387

Total

3,691

2,463

Contingent liabilities
Guarantee obligations on behalf of affiliated companies and third
parties amounted to €247 million (31 December 2006:
€268 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.

2007

2006

Total

Of which current

Total

Of which current

1,210

207

1,420

886

232

1,118

403

10 Remuneration of the members of the Managing Board

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 2007 and subsequent years as
approved by the Annual General Meeting of Shareholders on
28 March 2007. More details about the remuneration policy are
included in the remuneration report (page 70).

The total remuneration (including pension expenditure and other
commitments) of the members of the Managing Board
amounted to €3.8 million (2006: €4.4 million). The remuneration
of the individual members of the Managing Board was as follows:

Feike Sijbesma (CEO as of 1 May 2007): salary €609,000 (2006:
€476,000), bonus €233,000 (2006: €291,000), pension
expenditure zero (2006: €91,000), other items €34,000 (2006:
€6,000); Peter Elverding (until 1 May 2007): salary €220,000
(2006: €652,000), bonus €319,000 (2006: €379,000), pension
expenditure zero (2006: €111,000), other items €60,000 (2006:
€4,000); Jan Zuidam: salary €488,000 (2006: €476,000), bonus
€233,000 (2006: €291,000), pension expenditure zero (2006:
€82,000), other items €27,000 (2006: €4,000); Nico Gerardu:
salary €488,000 (2006: €358,000), bonus €176,000 (2006:
zero), pension expenditure zero (2006:€52,000), other items
€4,000 (2006: €3,000); Rolf-Dieter Schwalb: salary €488,000
(2006: €120,000), bonus €59,000 (2006: zero), pension
expenditure zero (2006: €18,000), other items €5,000 (2006:
€2,000); Stephan Tanda (as of 1 May 2007): salary €327,000,
bonus zero, pension expenditure zero, other items €5,000.

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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Financial statements 2007

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

Overview of performance shares and stock options

Year of issue Outstanding on

In 2007

Outstanding on

Exercise price

Expiry date

31 Dec. 2006

Granted

Exercised

Forfeited/

31 Dec. 2007

(€)

expired

Feike Sijbesma
Stock options

Of which vested

Performance shares

Of which vested

Jan Zuidam
Stock options

Of which vested

Performance shares

Of which vested

2001

2002

2003

2004

2005

2006

2007

Total

2005

2006

2007

Total

2001

2002

2003

2004

2005

2006

2007

Total

2005

2006

2007

Total

60,000

30,000

300,000

180,000

8,000

16,000

60,000

30,000

300,000

180,000

8,000

16,000

30,000

8,000

30,000

8,000

60,000

30,000

330,000

240,000

8,000

24,000

60,000

30,000

330,000

240,000

8,000

24,000

19.990 30 March '09

23.505

18.195

17.895

29.050

4 April '10

4 April '11

2 April '12

8 April '13

38.300 31 March '14

33.600 30 March '15

29.050

38.300

33.600

19.990 30 March '09

23.505

18.195

17.895

29.050

4 April '10

4 April '11

2 April '12

8 April '13

38.300 31 March '14

33.600 30 March '15

29.050

38.300

33.600

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Financial statements 2007
Financial statements of Royal DSM N.V.

Year of issue Outstanding on

In 2007

Outstanding on

Exercise price

Expiry date

31 Dec. 2006

Granted

Exercised

Forfeited/

31 Dec. 2007

(€)

expired

Nico Gerardu
Stock options

Of which vested

Performance shares

Of which vested

Rolf-Dieter Schwalb
Stock options

Of which vested

Performance shares
Of which vested

Stephan Tanda
Stock options

Of which vested

Performance shares
Of which vested

2002

2003

2004

2005

2006

2007

Total

2006

2007

Total

2007

36,000

30,000

174,000

72,000

8,000

30,000

8,000

30,000

8,000

30,000

8,000

36,000

30,000

204,000

108,000

8,000

16,000

23.505

18.195

17.895

29.050

4 April '10

4 April '11

2 April '12

8 April '13

38.300 31 March '14

33.600 30 March '15

38.300

33.600

30,000

33.600 30 March '15

8,000

33.600

30,000

33.600 30 March '15

8,000

33.600

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Financial statements 2007

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

Out-

In 2007

Out-

Exercise price

Average

Expiry date

standing on

Granted

Exercised

Forfeited/

standing on 1

(€)

31 Dec. 2006

expired

May 2007

price at

exercise (€)

Peter Elverding 1

Stock options

Of which vested

Performance
shares

Of which vested

2000

2001

2002

2003

2004

2005

2006

2007

Total

2005

2006

2007

Total

45,000

75,000

37,500

420,000

270,000

10,000

20,000

37,500

10,000

(45,000)

(18,750)

75,000

18,750

(45,000)

(56,250)

356,250

5,000

15,000

(5,000)

(15,000)

18.240

32.515 31 March '08

30 March '09

4 April '10

4 April '11

2 April '12

8 April '13

31 March '14
30 March '15

19.990

23.505

18.195

17.895

29.050

38.300

33.600

29.050

38.300

33.600

1 Upon retirement or early retirement, 50% of any unvested stock options and unvested performance shares vest (and become exercisable); the remaining 50% are forfeited.

Overview of performance shares

Year of issue

Outstanding

In 2007

Outstanding

Share price

on 31 Dec.

Granted

Vested

Forfeited

on 31 Dec.

2006

26,000

34,000

50,000

2005 1

2006 1

2007 1

2007

date of grant

(5,000)

16,000

24,000

40,000

(€)

29.050

38.300

33.600

60,000

50,000

(15,000)

80,000

At 31 Dec.

2005

At 31 Dec.

2006

42,000

34,000

(16,000)

60,000

Total 2007
Of which vested

Total 2006
Of which vested

1 Upon retirement or early retirement, 50% of any unvested performance shares vest; the remaining 50% are forfeited.

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Financial statements 2007
Financial statements of Royal DSM N.V.

Shares
At year-end 2007 the members of the Managing Board together held 12,036 shares (year-end 2006: 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 (2006: €0.3 million).

The remuneration of the individual members of the Supervisory Board was as follows:

In €

Annual fixed fee

Committee fee

Other costs

Total

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

50,000

35,000

8,750

35,000

8,750

7,500

5,000

1,250

3,750

5,000

3,241

1,250

3,241

313

1,250

3,241

1,748

61,991

45,741

36,250

43,241

10,313

40,000

43,241

41,748

Total

268,750

36,250

17,525

322,525

At year-end 2007 the members of the Supervisory Board together held 6,084 shares (2006: 9,584 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, 11 February 2008

Heerlen, 12 February 2008

MANAGING BOARD,

SUPERVISORY BOARD,

Feike Sijbesma

Jan Zuidam

Nico Gerardu

Rolf-Dieter Schwalb

Stephan Tanda

Cor Herkströter

Henk Bodt

Pierre Hochuli

Ewald Kist

Claudio Sonder

Tom de Swaan

Cees van Woudenberg

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Financial statements 2007
Other information

Royal DSM N.V.

Attn. Managing Board of Directors

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, 2007, the
income statement, statement of recognized income and
expense 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, 2007, 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.

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, 2007, 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, 2007, 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 management board report is consistent
with the financial statements as required by 2:391 sub 4 of the
Netherlands Civil Code.

Maastricht, 12 February 2008
for Ernst & Young Accountants

was signed by P.J.A.M. Jongstra

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
2007 the net profit is €429 million and the amount to be
appropriated to the reserves has been established at
€215 million. From the subsequent balance of the net profit
(€214 million), dividend is first distributed on the cumulative
preference shares B. At the end of 2007 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

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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 2007.

On 31 December 2007 the Foundation Committee was
composed as follows:

Floris Maljers, chairman
Maarten van Veen, vice-chairman
Mick den Boogert

The Foundation Committee

Financial statements 2007
Other information

per cumulative preference share A. For 2007 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 2007, the final dividend will then
amount to €0.15 per cumulative preference share A.

The profits remaining after distribution of these dividends
(€204 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.

In view of the above, the proposed dividend on ordinary shares
outstanding for the year 2007 would amount to €1.20 per share.
An interim dividend of €0.33 per ordinary share having been paid
in August 2007, the final dividend would then amount to €0.87
per ordinary share.

If the Annual General Meeting of Shareholders makes a decision
in accordance with the proposal, the net profit will be
appropriated as follows:

In € million

Net profit

Profit appropriation:
- To be added to the reserves
- Dividend on cumprefs A
- Interim dividend on ordinary

- Final dividend payable on

ordinary shares

Special statutory rights

2007

429

215

145

2006

547

350

124

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
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 an 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.

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Declaration of indepence
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 as referred to in article 5:71, first paragraph, under
c of the Dutch Act on Financial Supervision (Wet op het financieel
toezicht).

The Managing Board of Royal DSM N.V.

The Foundation Committee

Financial statements 2007

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 general Meeting of Shareholders
The Annual General Meeting is to be held at the DSM
head office in Heerlen (Netherlands) on Wednesday, 26
March 2008 at 14.00 hours.

Important dates
Ex-dividend quotation
Publication of first-quarter
results
Publication of second-
quarter results
Publication of third-quarter
results
Annual report 2008
Annual General Meeting of
Shareholders

Friday, 28 March 2008

Tuesday, 29 April 2008

Tuesday, 29 July 2008

Monday, 27 October 2008

Monday, 16 February 2009

Wednesday, 1 April 2009

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Financial statements 2007
DSM figures: five-year summary

Balance sheet

x € million

Assets

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

Equity and liabilities

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 debt 2

Ratios 2
- Net sales / average capital employed
- Current assets / current liabilities
- Equity / total assets
- Gearing (net debt / equity plus net debt)

2007 1

2006 1

2005 1

2004 1

2004

2003

1,037

3,440

346

1,169

126

6,138

1,547

1,687

369

3,690

9,828

5,310

5,383

344

273

170

1,560

2,382

192

1,729

2,063

9,828

5,982

475

424

1,338

1.43

1.78

0.55

0.20

1,008

3,655

496

918

100

6,203

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

1,003

3,750

533

478

189

5,996

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

6,303

6,221

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

453

3,811

492

166

5,082

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

5,558

348

613

339

1.34

1.80

0.49

0.07

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

5,554

334

632

337

1.32

1.95

0.54

0.07

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

6,162

433

1,561

516

671

1.21

2.18

0.53

0.12

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 for 2004 do not include the impact of the temporary reclassification of cumulative preference shares A.

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Financial statements 2007

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

2007 1

2006 1

2005 1

2004 1

2004

2003

8,757

8,380

8,195

7,832

7,752

6,050

Operating profit plus depreciation and amortization
(EBITDA)

1,247

1,274

1,311

1,067

1,013

723

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

823

(75)

(183)

(2)

563

(129)

434

(5)

834

(81)

(198)

556

(4)

552

(5)

808

(70)

(180)

(2)

556

(36)

520

562

(56)

(103)

412

(142)

270

489

(51)

(98)

348

(97)

251

294

(31)

(49)

219

(94)

125

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)

429

547

527

293

262

139

(10)

(16)

(22)

419

537

511

271

240

117

Employee-benefits costs (x € million)

1,389

1,332

1,385

1,411

1,487

1,215

Percentage ratios:
- EBIT / net sales
- CFROI
- Net profit / average Royal DSM N.V.

shareholders' equity available to holders of
ordinary shares

9.4

8.3

10.0

8.5

9.9

9.1

7.2

8.1

6.3

7.6

4.9

5.8

7.9

9.9

10.1

5.8

5.3

2.5

EBITDA / net finance costs

16.6

15.7

18.7

19.1

19.9

23.3

Dividend (x € million)

214

197

207

190

188

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.

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Financial statements 2007
DSM figures: five-year summary

Information about ordinary DSM shares 1

Per ordinary share in €

2007 2

2006 2

2005 2

2004 2

2004

2003

Net profit before exceptional items
Net profit
Cash flow
Royal DSM N.V. Shareholders' equity

3.07

2.35

5.56

2.85

2.83

5.21

2.82

2.68

5.65

2.09

1.41

4.52

1.76

1.25

3.99

1.11

0.62

2.88

30.42

30.03

27.59

25.19

23.86

Dividend:
- Interim dividend
- Final dividend

1.20 3

0.33

0.87

1.00

0.33

0.67

1.00

0.29

0.71

0.875

0.290

0.585

0.875

0.290

0.585

0.875

0.290

0.585

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

35%

38%

33%

45%

53%

81%

3.3%

2.9%

3.4%

4.3%

4.5%

39.87

31.63

32.33

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

166,897

178,541

184,850

189,550

190,923

190,783

191,957

191,617

191,957

191,617

191,537

189,430

1,590

11,347

1,301

267

5,268

1,063

238

6,563

1,014

6,494

1,014

6,494

1,126

130

6,540

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

3 Subject to approval by the Annual General Meeting of Shareholders.

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Financial statements 2007
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
(recurring 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.

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Royal DSM N.V.
Annual Report 2007

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7

Life Sciences and Materials Sciences

Embracing
the Future

Royal DSM N.V.

P.O. Box 6500
6401 JH Heerlen
The Netherlands
T + 31 (45) 578 8111

www.dsm.com

With products and services in Life Sciences and
Materials Sciences we are embracing the future
by supporting a healthier, more sustainable and
more enjoyable way of life.

The Unlimited.DSM brand reflects our
continuous drive to improve – in sports for
example, where innovative development and
improvement in nutrition and materials can make
the difference.

Unlimited.DSM

Annual Report 2007