Koninklijke DSM N.V.
Annual Report 2008

Plain-text annual report

R o y a l D S M N V . . A n n u a l R e p o r t 2 0 0 8 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 2008 Life Sciences and Materials Sciences Staying the Course 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 contributing to the quality life of millions of people around the globe. We support a healthier, more sustainable and more enjoyable way of life. 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, electrical and electronics, life protection and housing. DSM has annual net sales of almost € 9.3 billion and employs some 23,500 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 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. Annual Report 2008 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 five clusters: Nutrition, Pharma, Performance Materials, Polymer Intermediates and the non-core Base Chemicals and Materials cluster. In addition, DSM reports on a number of other activities, which have been grouped under Other activities. Nutrition Pharma Performance Materials Polymer Intermediates € 2,710 m Net sales € 863 m Net sales € 2,297 m Net sales € 1,201 m Net sales DSM Nutritional Products DSM Nutritional Products is the world’s largest supplier of nutritional ingredients, such as vitamins, carotenoids (antioxidants and pigments), other biochemicals and fine chemicals, and premixes. DSM Pharmaceutical Products DSM Pharmaceutical Products is one of the world’s leading providers of high-quality global primary and secondary custom manufacturing services to the pharmaceutical, biotech and agrochemical industries. DSM Anti-Infectives DSM Anti-Infectives holds global leadership positions in penicillin G and penicillin intermediates (6-APA and 7-ADCA), in active pharmaceutical ingredients such as semi-synthetic penicillins and semi-synthetic cefalosporins (beta-lactams) and in other active ingredients such as nystatin. - Human Nutrition and Health Leading developer and manufacturer of functional food ingredients for the food industry and personal care ingredients for cosmetics and skin care product companies. - Animal Nutrition and Health World market leader in vitamins, carotenoids, enzymes and premixes for the feed industry. Its products contribute to animal performance (for example by enhancing gut flora or 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 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 electrical & electronics, automotive, engineering and packaging industries. DSM Fibre Intermediates DSM Fibre Intermediates produces caprolactam and acrylonitrile, which are raw materials for synthetic fibers and engineering 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 and increasingly also 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 more or less unlimited and can be found in fishing, life protection and shipping. DSM Resins DSM Resins manufactures and sells high-quality resins which are used in a wide variety of applications such as paints, wind mills and automotive. 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. Base Chemicals and Materials € 1,733 m Net sales DSM Agro DSM Agro produces ammonia and nitrogen fertilizers for grasslands and agricultural crops, which it supplies to agricultural wholesalers. DSM Melamine DSM Melamine produces melamine, a product used in impregnating resins and adhesive resins for the wood processing industry. Applications further include laminate flooring, flame retardants, paper money, car paints and durable plastic tableware. 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 Energy DSM Energy participates in the exploration and production of oil and gas on the Dutch Continental Shelf. Annual Report 2008 www.dsm.com Annual Report 2008 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 five clusters: Nutrition, Pharma, Performance Materials, Polymer Intermediates and the non-core Base Chemicals and Materials cluster. In addition, DSM reports on a number of other activities, which have been grouped under Other activities. Nutrition Pharma Performance Materials Polymer Intermediates € 2,710 m Net sales € 863 m Net sales € 2,297 m Net sales € 1,201 m Net sales DSM Nutritional Products DSM Nutritional Products is the world’s largest supplier of nutritional ingredients, such as vitamins, carotenoids (antioxidants and pigments), other biochemicals and fine chemicals, and premixes. DSM Pharmaceutical Products DSM Pharmaceutical Products is one of the world’s leading providers of high-quality global primary and secondary custom manufacturing services to the pharmaceutical, biotech and agrochemical industries. DSM Anti-Infectives DSM Anti-Infectives holds global leadership positions in penicillin G and penicillin intermediates (6-APA and 7-ADCA), in active pharmaceutical ingredients such as semi-synthetic penicillins and semi-synthetic cefalosporins (beta-lactams) and in other active ingredients such as nystatin. - Human Nutrition and Health Leading developer and manufacturer of functional food ingredients for the food industry and personal care ingredients for cosmetics and skin care product companies. - Animal Nutrition and Health World market leader in vitamins, carotenoids, enzymes and premixes for the feed industry. Its products contribute to animal performance (for example by enhancing gut flora or 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 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 electrical & electronics, automotive, engineering and packaging industries. DSM Fibre Intermediates DSM Fibre Intermediates produces caprolactam and acrylonitrile, which are raw materials for synthetic fibers and engineering 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 and increasingly also 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 more or less unlimited and can be found in fishing, life protection and shipping. DSM Resins DSM Resins manufactures and sells high-quality resins which are used in a wide variety of applications such as paints, wind mills and automotive. 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. Base Chemicals and Materials € 1,733 m Net sales DSM Agro DSM Agro produces ammonia and nitrogen fertilizers for grasslands and agricultural crops, which it supplies to agricultural wholesalers. DSM Melamine DSM Melamine produces melamine, a product used in impregnating resins and adhesive resins for the wood processing industry. Applications further include laminate flooring, flame retardants, paper money, car paints and durable plastic tableware. 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 Energy DSM Energy participates in the exploration and production of oil and gas on the Dutch Continental Shelf. Annual Report 2008 www.dsm.com Annual Report 2008 www.dsm.com R o y a l D S M N V . . A n n u a l R e p o r t 2 0 0 8 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 2008 Life Sciences and Materials Sciences Staying the Course 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 contributing to the quality life of millions of people around the globe. We support a healthier, more sustainable and more enjoyable way of life. 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, electrical and electronics, life protection and housing. DSM has annual net sales of almost € 9.3 billion and employs some 23,500 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 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. Annual Report 2008 www.dsm.com Key data for 2008 Net sales (x million) Operating profit, continuing operations (before exceptional items) (x million) Net profit, continuing operations (before exceptional items) (x million) € 9,297 € 903 € 608 Net profit (x million) Capital expenditure and acquisitions (x million) Net earnings before exceptional items per ordinary share € 577 € 739 € 3.64 Dividend per ordinary share Workforce (at year-end) CFROI € 1.20 23,591 8.7% Forward-looking statements This document may contain forward-looking statements with respect to DSM’s future (financial) performance and position. Such statements are based on current expectations, estimates and projections of DSM and information currently available to the company. Examples of forward-looking statements include statements made or implied about the company’s strategy, estimates of sales growth, financial results, cost savings and future developments in its existing business as well as the impact of future acquisitions, and the company’s financial position. These statements can be management estimates based on information provided by specialized agencies or advisors. DSM cautions readers that such statements involve certain risks and uncertainties that are difficult to predict and therefore it should be understood that many factors can cause the company’s actual performance and position to differ materially from these statements. These factors include, but are not limited to, macro-economic, market and business trends and conditions, (low-cost) competition, legal claims, the ability to protect intellectual property, changes in legislation, changes in exchange and interest rates, changes in tax rates, pension costs, raw material and energy prices, employee costs, the implementation of the company’s strategy, the company’s ability to identify and complete acquisitions and to successfully integrate acquired companies, the company’s ability to realize planned disposals, savings, restructuring or benefits, the company’s ability to identify, develop and successfully commercialize new products, markets or technologies, economic and/or political changes and other developments in countries and markets in which DSM operates. As a result, DSM’s actual future performance, position and/or financial results may differ materially from the plans, goals and expectations set forth in such forward-looking statements. DSM has no obligation to update the statements contained in this document, unless required by law. The English language version of this document is leading. Annual Report 2008 www.dsm.com 1 Table of contents 3 Key financial data 87 Financial statements 4 Letter from the Chairman 6 Investing in future profitable growth Summary of significant accounting policies 88 Consolidated financial statements 88 94 Consolidated statements 101 Notes to the consolidated financial statements 18 Staying the Course of Royal DSM N.V. 140 Financial statements of Royal DSM N.V. 141 Notes to the Royal DSM N.V. financial statements 148 Other information 148 Auditor’s report 149 Profit appropriation 149 Special statutory rights 152 DSM figures: five-year summary 156 Explanation of some financial concepts and ratios Innovation and R&D 20 Report by the Managing Board 20 Highlights of 2008 22 Vision 2010 progress 25 32 Sustainability 34 Human resources 36 Corporate services 36 External recognition 38 Risk management 40 Macro-economic environment 41 Financial results 46 Review of business 48 Nutrition 52 Pharma 56 Performance Materials 60 Polymer Intermediates 62 Base Chemicals and Materials 64 Other activities 66 Report by the Supervisory Board 66 Supervisory Board report 68 Remuneration policy regarding the Managing Board and the Supervisory Board 76 Corporate organization 78 Corporate governance, risk management, financial policy and related functions 78 Organization 78 Dutch corporate governance code 79 Governance framework 80 Risk management system 81 Risks 81 Financial policy 84 Information about the DSM share Annual Report 2008 www.dsm.com 2 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 ROCE 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 1 Subject to approval by the Annual General Meeting of Shareholders. Annual Report 2008 www.dsm.com 3 2008 9,297 1,357 903 608 (31) 577 451 1,028 204 587 152 1,781 4,633 9,653 6,558 3.64 3.45 1.201 27.12 9.7 14.6 22.6 8.7 14.4 27.5 48.6 9.8 13.3 2007 8,757 1,247 823 558 (129) 429 574 1,003 214 475 93 1,338 5,310 9,828 5,982 3.07 2.35 1.20 30.42 9.4 14.2 21.4 8.3 13.4 19.9 54.8 9.4 16.6 23,157 23,591 22,433 23,254 Letter from the Chairman Dear reader, The year behind us was in many ways a remarkable and exciting year. Not only did we achieve record sales and a record operating profit; we also made significant progress with our strategy to focus on Life Sciences and Materials Sciences. Towards the end of the year, the turmoil in the financial markets resulted in strong economic headwinds, setting the stage for more challenging conditions, to which we responded swiftly. These more difficult conditions are no reason for us to change the course we have charted for the coming years. Instead, we will tighten the rig to continue our journey against the wind. We are staying the course. Our focus on Life Sciences and Materials Sciences is fueled by a number of long-term societal trends. For example, climate change and the world’s dependency on fossil fuels highlight the need to find new ways to produce energy and materials. The growing and aging world population is driving an increased interest in health and wellness. At the same time society is asking for new functionalities related to an increased need for connectivity and life protection. And the emerging economies continue to grow at a high pace as economic prosperity is spread more evenly across the world. These trends offer numerous opportunities for DSM to help meet needs that are as yet unmet, especially in the areas where Life Sciences and Materials Sciences come together, for instance in the fields of (bio)medical materials, biomaterials and biofuels. Our unique combination of activities offers us an interesting platform for growth, as we increasingly believe – and also prove with our innovations – that the opportunities for cross- fertilization between the two areas are numerous. Our current strategy Vision 2010 builds on choices that we made in the past. The acquisition of Gist-brocades in 1998 for instance gave us our know-how and expertise in biotechnology, and the acquisition of Roche Vitamins and Fine Chemicals in 2003 put us even more at the forefront of Life Sciences and Nutrition. In 2008 we undertook several steps in further shaping our accelerated strategy to focus on Life Sciences and Materials Sciences and in further exploring cross-fertilization between the two. The acquisition of The Polymer Technology Group for instance gave us a leading position in the field of biomedical polymers, one of our future key growth areas and a prime example of how Life Sciences and Materials Sciences come together to improve the quality of life. The latter also applies to some other acquisitions and venturing participations we announced during the year. We announced several new investments aimed at future profitable growth, most notably the largest-ever investment program for DSM Dyneema. The announcement of the first dedicated production line for Dyneema Purity® is proof that the market for this innovative product for the medical industry is growing rapidly. We completed the carve-out of the activities that do not fit in with our strategic thrust and made a start with the disposal process. Although we have slowed down the process in view of the current financial and economic environment we still have the ambition of completing the disposals within the timeframe of Vision 2010. I continue to admire the professionalism of the employees involved in these businesses in dealing with their new futures. Safety, of course, remains a priority for us. We were shocked and sad to learn of the fatal accident at DSM Pharmaceutical Products in Venlo (Netherlands). Our thoughts are with the family of our employee who died as a result of this tragic accident. We are and remain fully committed to innovation and sustainability. Innovation-related sales rose to about € 600 million in 2008, fully on track to reaching our objective of € 1 billion in innovation-related sales by the year 2010. The same applies to our target of achieving USD 1.5 billion in sales in China by 2010. In China our sales rose by about 20% to USD 1,151 million in 2008. In other emerging economies such as Brazil, Russia and India we continued our growth path. Our Materials Sciences activities have throughout this period increasingly focused on high-performance materials, both through innovation – take for instance Stanyl® and Dyneema® – and through selected acquisitions such as NeoResins in 2005. Our ambition to divest the activities in the Base Chemicals and Materials cluster will further reduce our (supply driven) cyclicality and further enhance the specialty profile of our portfolio. We made good progress in the area of sustainability. The large cut in N2O emissions by DSM Agro reduced DSM’s worldwide greenhouse-gas emissions by more than 20%, which is in line with the 2010 target. The reduction is the equivalent of two million tons of CO2, which has the same effect as having one million fewer cars on the road. Through continuous innovations, we help our customers to reduce the carbon footprint of their products. Annual Report 2008 www.dsm.com 4 The DSM Managing Board (from left to right): Rolf-Dieter Schwalb, Nico Gerardu, Feike Sijbesma (chairman), Jan Zuidam (deputy chairman) and Stephan Tanda. As the year progressed, economic headwinds increased, especially in the fourth quarter, affecting in particular the results of most of our Materials Sciences activities. Turmoil in the fi nancial markets severely restricted the availability of credit to some of our customers, while consumers cut their spending. In view of the situation in the global credit markets we postponed the third and fi nal € 250 million tranche of the € 750 million share buy-back program in April and have now decided to cancel the remaining part. DSM is and remains conservatively fi nanced with adequate short-term fi nancing and healthy long-term funding in place. To address the more diffi cult market conditions we announced several measures to improve cash fl ow, reduce costs and strengthen our profi tability and future competitiveness. We made it a top priority to give our customers full attention in order to meet their needs and priorities. We will also stay alert to identify new growth opportunities within the current market conditions. The change into a Life Sciences and Materials Sciences company not only means a portfolio change, but also a change in the way we work, which includes our systems and our culture. DSM is changing into a company which is even more market and customer oriented and even more alert to innovation opportunities. This is supported by a new learning architecture for our executives and managers. The number of non-Dutch executives has grown; around 70% of our total workforce is non-Dutch. Our shareholders appointed a new member of the Supervisory Board, Louise Gunning-Schepers. She replaced Henk Bodt, who stepped down at the Annual General Meeting of Shareholders, having served the maximum term of 12 years on the Supervisory Board. I would like to express my thanks to him for his commitment and valuable contribution to DSM during his membership of the Supervisory Board. To our shareholders we propose an annual dividend for 2008 of € 1.20 per ordinary share. DSM aims to provide a stable and preferably rising dividend. Our progress in 2008 would not have been possible without the efforts of all our 23,500 employees all over the world and the continued support of our customers and shareholders. I have every confi dence that we will reach our goal of creating signifi cant value for all our stakeholders in the years to come as we further focus on Life Sciences and Materials Sciences. Collaboration and creativity are two key elements to focus on. This needs to be done against the background of a commitment to results, driving DSM’s performance in a sustainable manner. As our efforts to further increase DSM’s diversity continue, we stimulate our senior executives to become even more inspirational leaders in order for us to succeed in our strategy. Feike Sijbesma Chairman of the Managing Board feike.sijbesma@dsm.com Annual Report 2008 www.dsm.com 5 Investing in future profitable growth In 2008, DSM invested in several projects in order to secure sustainable profitable growth in the future. Investments form an integral and important part of the Vision 2010 strategy. In light of the current more difficult market conditions, the company is re-evaluating planned projects and postponing some investments without jeopardizing its strategic thrust. Within the current more difficult environment, DSM is also identifying new growth opportunities, such as small-scale technology-based acquisitions that will complement the company’s knowledge and capabilities in Life Sciences, Materials Sciences or both. DSM remains fully committed to continued investments in innovation and will also continue to invest in growth businesses. Venturing remains an important activity to explore new technologies and business areas. In 2008 capital expenditure on intangible assets and property, plant and equipment (excluding acquisitions) amounted to € 587 million compared to € 475 million in 2007. This was above the level of amortization and depreciation. For 2009, DSM expects capital expenditure to decline versus 2008 as a result of the focus on cash. 9 January DSM announces that it will invest nearly € 15 million in the construction of a new plant for the production of wet polyesters and other specialty resins in Meppen (Germany). The new production line will be built at the existing site of DSM NeoResins+ in Meppen. The plant will be completed in the first half of 2009 and will allow for further expansions in the future. 16 January DSM acquires the US-based company Soluol, a developer and producer of high-performance polyurethane 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 East Providence, Rhode Island (United States). 18 January DSM and the French starch and starch-derivatives company Roquette announce that they have joined forces to implement and commercialize the fermentative production of biorenewable succinic acid, which – amongst other applications – opens the possibility to produce bio-based performance materials. By the end of 2009 a demonstration plant in Lestrem (France) will be operational. DSM acquired seven companies in 2008, while five investments were made by DSM Venturing. An amount of € 200 million has been earmarked for venturing activities over the period 2005-2012. DSM expects to spend around € 75 million per year on small new business acquisitions until 2010. 14 February DSM Food Specialties acquires CMT Srl, an Italian company dedicated to the production of the Copan Milk Test, a micro- biological test for the detection of antibiotic residues in milk. Announcements made by DSM in 2008, especially those relating to major investments and acquisitions, are summarized in the following list: 27 February DSM receives a grant from the US Department of Energy for an innovative biotechnological approach to bioproducts and biofuels. The grant will co-fund an extensive enzyme development program which will focus on finding applications in cellulose-based biorefineries for the production of bio- based products, including biofuels. The research will be carried out by a technical consortium in which DSM will be the lead partner. 3 March DSM announces an agreement in principle with Arsenal Capital Partners (United States) on the sale of DSM Special Products B.V. In February 2009, DSM announced that the transaction would not be completed. Annual Report 2008 www.dsm.com 6 5 March DSM Venturing announces its participation in a USD 20 million financing round in Tianjin Green Bio-Science Co. Ltd. (China). The proceeds will be used to build China’s largest manufacturing plant for polyhydroxyalkanoates in the Tianjin Economic Development Area. This is the first venturing investment by DSM in China. 6 March DSM Venturing makes an equity investment in the Dutch company IQ Therapeutics B.V. The company develops antibody-based products for biodefense and for the prevention and treatment of infectious diseases. 18 March The acquisition of the assets of US-based Polymeric Processes, Inc., accelerates the efforts of DSM Desotech’s UVention™ group, which develops innovative custom UV-curable materials for select markets in the United States and Europe. Investing in future profitable growth DSM Engineering Plastics in Sittard-Geleen (Netherlands) 25 April DSM opens the market development plant for Stanyl® ForTii™, the new polymer for use in electronics and other applications. The plant is located in Sittard-Geleen (Netherlands). With the opening of the market development plant, customers’ access to Stanyl® ForTii™ will be extended. 28 April DSM announces an agreement to acquire The Polymer Technology Group, Inc. (PTG) of Berkeley, California (United States). Through this acquisition DSM obtains a leading position in the field of biomedical polymers, one of DSM’s future key growth areas. PTG expects more than 20% annual sales growth in the next 3-5 years, based on existing business and the pipeline of new products. DSM Dyneema in Greenville, North Carolina (United States) 17 April DSM announces plans for a substantial capital expenditure program, expected to involve up to USD 450 million, to increase production capacity in its Dyneema® business. This will enable DSM to capitalize on expected continuous growth in demand in the United States for the world’s strongest fiber™. DSM Desotech in Xinghou (China) Annual Report 2008 www.dsm.com 7 Investing in future profitable growth 12 June DSM opens the newly expanded China ink manufacturing facility, DSM Desotech Specialty Chemicals (Shanghai) Ltd. The operation has been relocated from Gonglu to Xinghou (China), into a new facility that has doubled in size and is positioned for growth. 12 June DSM NeoResins+ finalizes the construction of a new factory for the production of waterborne acrylic resins in Shunde (China). The investment amounted to almost € 20 million. 13 June DSM announces an extensive engineering study that could lead to a large expansion to the DSM Composite Resins manufacturing facilities in Compiègne (France). If the plant expansion gets the go-ahead from the engineering study, capacity will be expanded by up to 20,000 tons per year, particularly for specialty products. 16 June DSM Biologics and Crucell N.V. announce another breakthrough in the production of IgG antibodies using PER.C6® technology. By employing the PER.C6® human cell line and proprietary XD™ technology, a record yield of over 27 grams per liter has been achieved. 11 July DSM announces the acquisition of the business and substan- tially all of the assets of Valley Research, Inc. of South Bend, Indiana (United States). Through this acquisition, DSM has further reinforced its leading global position in food enzymes. 20 August DSM Engineering Plastics acquires the polymerization assets of Diolen Industrial Fibers B.V., including the facilities for polyester polymer production in Emmen (Netherlands). The facilities will be integrated with DSM’s polyester compounding facility. 27 August DSM announces the closure of its citric acid manufacturing plant in Wuxi (China) by Q1 2009. The closure follows a request from the local government to relocate the plant from its current location as this location is needed for future urban developments. DSM has decided not to rebuild the capacity elsewhere but concentrate its production at the site in Tienen (Belgium). DSM Engineering Plastics in Jiangyin (China) 3 September DSM inaugurates its new polymer plant in Jiangyin (China). The plant produces high-viscosity grades of Akulon® polyamide 6 (PA6) aimed at the fast growing high-end food packaging market in Asia. Construction of the plant, which was announced in September 2006, involved several tens of millions of USD. 17 September DSM Biomedical and Caliber Therapeutics, Inc. of Boston, Massachusetts (United States) will partner on the development of a novel drug delivery balloon catheter that can be used to treat vascular diseases such as atherosclerosis. This cooperation is another step for DSM to leverage its competences in Materials Sciences into Life Sciences applications. 27 August DSM Venturing acquires an equity stake of 29.3% in Provexis plc, a UK listed company that develops and licenses ingredients for the functional food, medical food and dietary supplement markets. The investment makes DSM the largest shareholder of Provexis. 17 September DSM announces a major capacity expansion for its innovative picture glass ®claryl. Within a year after its launch, market demand for this innovative product has risen so quickly that DSM has decided to build an additional oven at its manu- facturing facility in Sittard-Geleen (Netherlands), increasing production capacity by 50%. Annual Report 2008 www.dsm.com 8 Investing in future profitable growth 13 October DSM Venturing makes an investment in Accelerated Technologies II L.P. in Hackensack, New Jersey (United States), the new business incubator in the field of medical devices, further strengthening DSM’s position in the biomedical materials market. 19 November DSM Anti-Infectives announces that it has reached an agreement with the management of DSM Deretil on a management buy-out. The sale allows DSM Anti-Infectives to fully focus on its core future activity as a leading player in generic active pharmaceutical ingredients. DSM Nutritional Products in Hengyang (China) 28 November DSM Nutritional Products opens its third premix plant in China. The facility allows DSM to serve a larger geographical area in China, enabling the company to capitalize on opportunities that arise from the rapidly growing animal nutrition and health industry in one of the key countries for DSM. 2 December DSM announces the sale of its Solutech business to Lydall, Inc., the US-based specialty engineering products manufacturer. DSM Solutech is the manufacturer of Solupor® specialty microporous membranes for air and liquid filtration. DSM Engineering Plastics in Sittard-Geleen (Netherlands) 17 September DSM opens the second polymerization plant for Stanyl® polyamide 46 at the Chemelot site in Sittard-Geleen (Netherlands). The new plant doubles DSM’s worldwide production capacity for this high-performance plastic, supporting expected continuous strong growth in the coming years based on Stanyl®’s leading position in electronics and its growing usage in automotive applications due to higher demand for metal replacement. DSM has invested several tens of millions of euros in the new plant. 26 September DSM Venturing makes an equity investment in The Compliers Group International B.V. The Netherlands-based company focuses on the development of smart pharmaceutical packaging solutions that contain microchips which enable the monitoring of a patient’s therapy compliance. 26 September DSM NeoResins+ announces a capacity expansion worth € 10 million for waterborne polyurethane resins in Parets (Spain), building on continuous growth for these products due to new legislation in Europe. 2 October DSM Anti-Infectives announces the closure of the production site in Strängnäs (Sweden). The site mainly produces clavulanic acid and will cease operations towards the end of 2009. Annual Report 2008 www.dsm.com 9 Increasing efficiency Climate and Energy Annual Report 2008 www.dsm.com 10 DSM’s Functional Coatings program is developing an innovative coating for solar panels in order to improve their efficiency. This coating allows for extra light transmission that leads to higher energy output. The coating technology for this application is already commercially applied in ®claryl picture framing glass. Annual Report 2008 www.dsm.com 11 Improving lives Health and Wellness Annual Report 2008 www.dsm.com 12 With Resvida® DSM has introduced a pure resveratrol for use in dietary supplements and as a food ingredient. Resveratrol, a powerful antioxidant found in red grapes, has been closely linked to the ‘French paradox’: due to their regular consumption of red wine, the French suffer from a much lower incidence of cardiovascular disease than other Western populations despite their diet of high-fat foods. Annual Report 2008 www.dsm.com 13 Increasing connections Functionality and Performance Annual Report 2008 www.dsm.com 14 Many of today’s MP3 players, mobile phones, car parts and other advanced products incorporate DSM materials. DSM’s new polymer Stanyl® ForTii™ can be applied in memory card connectors and LEDs and helps to enable tomorrow’s electronic gadgets. Annual Report 2008 www.dsm.com 15 Changing lifestyles Emerging economies Annual Report 2008 www.dsm.com 16 DSM opened its first representative office in Beijing in 1993. Since then, sales have grown from USD 20 million in the first year to USD 1,151 million in 2008. DSM’s history in China goes back even further: in 1963 the company started its first licensing activities and in 1986 its first joint venture in China. DSM today is a leading manufacturer in China and now increasingly serves the Chinese domestic market with many of its products. Annual Report 2008 www.dsm.com 17 Staying the Course Measures to strengthen competitive position do not change strategic direction With the turmoil in the financial markets having spread to the real economy, the global economic downturn has resulted in more difficult market conditions in some of DSM’s businesses, putting pressure on the company’s financial results. So far, DSM’s Life Sciences businesses have seen only a very limited impact of the current difficult economic climate, and the same holds for DSM Dyneema. In the fourth quarter of 2008 the effects of the economic downturn were mainly visible in DSM’s Materials Sciences businesses that supply to the automotive, electrical and electronics and building and construction industries. Against this backdrop DSM has taken a number of actions and measures that are aimed at improving cash flow and reducing costs in the short term. These actions include a reduction in working capital as well as a review of investments and projects. Other actions include several initiatives regarding cost reduction, for instance a stronger focus on purchasing, a reduction in the number of temporary contract workers and temporary plant shutdowns. In addition, all corporate and regional staff activities are being reviewed. At the same time, DSM remains fully focused on customers in order to meet their needs and priorities. While travels are being greatly reduced for cost reasons, there are no such cuts in travels to customers. A number of DSM employees have been assigned to specific tasks to further deepen relationships with existing and new customers. DSM also remains fully focused on innovation and sustainability. The company is identifying new growth opportunities that the current market conditions provide, such as small-scale technology-related acquisitions. DSM continues to fully adhere to its values. In addition, a number of structural cost-saving actions are being taken to strengthen the company’s profitability and future competitiveness. These actions will result in a reduction in DSM’s total workforce by about 5% or 1000 positions and are expected to lead to savings totaling up to € 100 million per year, to be fully achieved in 2010. A corporate team has been installed to coordinate all measures taken. Navigating an unchanged strategy With the actions and measures described above, DSM remains fully committed to the strategic direction and cultural change agenda it has defined and will further navigate its course as set out in Vision 2010. This involves continuing the company’s accelerated transformation into a Life Sciences and Materials Sciences company with a higher level and better quality of earnings. Economic cycles come and go, but the main societal trends DSM has identified in its Vision 2010 strategy have not changed and will continue to be valid in the coming decade. Energy and climate change Climate change and energy for instance continue to offer a variety of business opportunities, despite the significant drop in oil prices in the second half of 2008. Depletion of natural resources is urging companies to develop alternative routes and strategies regarding the use of both materials and energy. New, tighter emission regulations will further increase the need for metal replacement by high-performance plastics in cars, despite the current dire market conditions for many of the world’s car manufacturers. Increasing awareness of and attention for climate change – also in the United States – together with the wish in some countries to reduce dependency on oil imports, is expected to drive demand for windmills and solar cells energy equipment. Annual Report 2008 www.dsm.com 18 Staying the Course Exploiting bio-based opportunities The development of second-generation biofuels, based on biomass instead of edible crops, is an example where DSM’s unique knowledge and technologies in the fields of Life Sciences and Materials Sciences come together. DSM has used biotechnological methods to produce ingredients for the food and pharmaceutical industries for more than 100 years. Biotechnology is a vital enabler in exploiting opportunities to develop not only these second-generation biofuels but also bio-based chemicals and polymers. Some 20% of DSM’s sales are currently related to biotechnology. The combination of technological know-how, decades of experience and a deep understanding of the materials markets gives DSM a strong competitive advantage not only in the development of materials based on renewable sources but also in the further development of biomedical materials. DSM’s unique and complementary expertise in Life Sciences and Materials Sciences results in a host of opportunities in health and wellness as well, for example in biomedical materials. More and more materials are used to replace parts in the human body and to reduce invasive surgery. At the same time, increasing healthcare costs in the western world are driving the development of new medicines. DSM is actively engaged in the development of biopharmaceuticals and significant progress has been made in the clinical development stage of these products. The company’s cooperation with Crucell on PER.C6® plays an important role in this respect. Changing lifestyles A considerable number of diseases in the western world are lifestyle-induced and related to food patterns. DSM develops functional food ingredients that help to combat these diseases. Especially in the western world, various lifestyle developments are stimulating a change-over among consumers to more health- conscious food patterns. At the same time, global consumption of meat is increasing, especially in the emerging economies as a result of higher disposable income. The livestock needed to produce this meat has a considerable environmental impact. Various products developed by DSM help to decrease this impact. The growing middle class with increased spending power in the emerging economies also has an increased appetite for the newest products, for instance in the areas of communications and cars. Increasing connections With more than two thirds of the world’s current mobile handset volume sold outside Western Europe, Japan and North America, manufacturers increasingly need reliable and affordable materials to produce handsets that consumers in emerging economies are able to afford. In Western Europe, Japan and North America, consumers and companies are increasingly using modern communication techniques, such as mobile internet and high-capacity broadband connections. With slowing replacement sales, manufacturers need to offer new functionalities and better performance to persuade consumers to buy a new mobile phone. Thanks to ongoing innovations in the semiconductor industry, an ever increasing number of computer chips can fit on the same surface, enabling new and faster applications and smaller equipment. DSM’s new polymer Stanyl® ForTii™ for instance can be applied in memory card connectors and LEDs and thus helps to enable tomorrow’s electronic gadgets. The deployment of next-generation broadband technology in the United States, Europe and other parts of the world will further increase connectivity and enable more collaboration both in the home and at the workplace. Already millions of miles of glass fiber optic cables have been coated with materials developed and manufactured by DSM. Improving lives Despite continued economic growth in emerging economies there are still an estimated three to four billion people who are poor or ultra-poor. They are at the bottom of the population pyramid and often lack basic vitamins and minerals in their daily food. DSM is engaged in several projects, including projects in partnership with the United Nations’ World Food Programme, to improve the living standards of the ultra-poor, for example by providing vitamin sachets to enrich carbohydrates to address malnutrition. With the world economy experiencing a downturn, DSM remains fully committed to these projects that improve lives by improving nutrition. Coming out stronger Like many companies, DSM too is seeing the impact of the current economic downturn in certain parts of its businesses. The company has taken swift action, is conservatively financed and has a strong portfolio. DSM will weather this period and emerge as a stronger company. It remains focused on its strategic shift towards a Life Sciences and Materials Sciences company addressing the main issues of today: energy, climate, food and health. Annual Report 2008 www.dsm.com 19 Report by the Managing Board Highlights of 2008 General 2008 was a year of stark contrasts, with strong performances across DSM’s businesses in the first nine months of the year being partly offset by the effects of the global economic downturn since the beginning of the fourth quarter. Whilst DSM’s Life Sciences businesses continued to perform well through the fourth quarter, most Materials Sciences businesses have been severely impacted by the sharp drop in demand. DSM has implemented actions to prioritize the generation of cash and has swiftly taken the necessary steps to reduce costs in the affected businesses. Further such measures will be implemented as required, although the company is also conscious of the need to preserve its capabilities for the future, once market conditions improve again. DSM will continue its customer focus as well as its strategic commitment to innovation and sustainability. DSM’s unique combination of activities together with its healthy financial situation puts the company in an excellent position to take advantage of opportunities that will arise from the current economic climate. Although the difficult market conditions in some of DSM’s businesses are currently leaving their mark on the results, the company’s strategic direction, fueled by long-term societal trends, is the right one: DSM is staying the course. In spite of the developments in the last quarter, the full-year 2008 result shows a record operating profit for DSM, due to excellent performance throughout the year from DSM Nutritional Products, DSM Dyneema and DSM Agro. Organic growth for 2008 of 8% was clearly above DSM’s strategic target (5%). The relatively weak volume development was due to the economic weakness, which materialized in the last part of the year. DSM was able to post a record operating profit in 2008, in spite of the economic turmoil in the fourth quarter. The main contributor was Nutrition, where DSM’s focus on innovation and differentiation in combination with structural changes in the vitamin industry has resulted in significantly higher profitability. In addition, DSM Dyneema was able to sustain its solid growth and DSM Agro showed substantial pricing strength resulting in higher profits. Nutrition Organic sales were up 21%. Nutrition clearly benefited from its successful innovation and differentiation strategy, which was amplified by the changing dynamics in the industry. DSM Nutritional Products was able to increase sales and profits substantially despite negative exchange rate effects. DSM Food Specialties’ sales and operating profit declined because of the exchange rates. Pharma Organic sales in the Pharma cluster were stable. DSM Pharmaceutical Products saw its sales and profitability levels affected in 2008 as a result of the phasing-out of contracts related to the Roche Vitamins acquisition, insourcing by large pharma houses to address cost pressures and delays in the commercial development of new products. At DSM Anti-Infectives, prices were clearly below the peak seen in the 2007 rally, but remained at a good level. The operating profit stayed at a healthy level. Operating profit plus depreciation and amortization (EBITDA) Net sales x € million Nutrition Pharma Performance Materials Polymer Intermediates Base Chemicals and Materials Other activities 2008 2007 2,710 863 2,297 1,201 1,733 493 2,302 903 2,390 1,232 1,529 x € million Nutrition Pharma 401 Performance Materials Polymer Intermediates Total DSM 9,297 8,757 Base Chemicals and Materials Other activities 2008 2007 585 150 266 43 342 (29) 403 168 371 133 209 (37) Total DSM 1,357 1,247 Annual Report 2008 www.dsm.com 20 Report by the Managing Board Highlights of 2008 Vision 2010 progress Innovation and R&D Sustainability Human resources Corporate services External recognition Risk management Macro-economic environment Financial results Performance Materials Organic sales in the Performance Materials cluster showed a decline of 3% which was mainly caused by lower volumes at DSM Engineering Plastics and DSM Resins since these businesses are exposed to end-markets that are affected by the economic turmoil. DSM Engineering Plastics posted a loss for the year. DSM Dyneema was barely affected by the current economic conditions and continued to show strong growth. Notwithstanding the higher operating profit at DSM Dyneema, overall operating profit of the cluster went down by 40% due to the full impact of the downturn during the last quarter. Financials Net profit before exceptional items increased from € 558 million to € 608 million (+9%). Earnings per share (before exceptional items) increased to € 3.64 per ordinary share (+19%) for the full year due to the higher net profit and the share buy-back. Net finance costs increased from € 75 million to € 102 million. The increase was mainly caused by the higher net debt and some fair-value adjustments in Other financial assets. The effective tax rate was 25%, the same as last year. Polymer Intermediates Organic sales in this cluster were stable. The caprolactam and acrylonitrile businesses started to face difficult market conditions since the beginning of the fourth quarter with falling demand mostly due to downstream destocking. Up until the third quarter the operating profit stayed at a healthy level but during the final months of the year the economic downturn hit with full force and virtually wiped out the operating profit. Cash flow from operating activities amounted to € 910 million for the full year, of which € 392 million was generated in the fourth quarter. Capital expenditure of € 587 million was clearly higher than last year (€ 475 million) and above the level of depreciation and amortization. The amount spent on acquisitions in 2008 was € 152 million, mainly related to the acquisition of The Polymer Technology Group. Compared to year-end 2007 net debt increased by € 443 million to € 1,781 million, representing a gearing level of 28%. This increase was amongst other things caused by the share buy-back program. Base Chemicals and Materials Organic sales in this cluster were up by 14%, mainly as a result of continuously increasing fertilizer prices and a positive market environment until the last quarter. The operating profit of DSM Energy increased due to on average higher gas prices. The operating results of DSM Melamine and DSM Elastomers were negative, with both businesses being heavily impacted by the global economic downturn. Operating profit (EBIT) x € million Nutrition Pharma Performance Materials Polymer Intermediates Base Chemicals and Materials Other activities Total DSM 2008 2007 447 89 175 19 260 (87) 903 276 92 291 105 137 (78) 823 Annual Report 2008 www.dsm.com 21 Report by the Managing Board Vision 2010 progress DSM’s Vision 2010 – Building on Strengths strategy builds on the company’s track record of portfolio transformation and sharpens its focus on Life Sciences and Materials Sciences at an increased pace. This focus is fueled by a number of societal trends. DSM aims to capture the opportunities offered by these trends. Climate change and the adverse effects of dependency on fossil fuels are gaining in dominance, requiring new strategic inroads. Interest in health and wellness is increasing as a result of global population growth and aging. Also, society is asking for increased functionalities related to globalization, connectivity and life protection. Rapid growth in emerging economies continues, leading to a more even spread of economic prosperity over the world. DSM’s focus on Life Sciences and Materials Sciences offers attractive growth potential, not just in the two individual fields but also in their combination. The cross-fertilization potential between Life Sciences and Materials Sciences is high. DSM is convinced that biotechnology, traditionally associated with Life Sciences, will increasingly play a role in developing new biomaterials while at the same time materials will be increasingly used in Life Sciences applications. The company has defined four Emerging Business Areas (EBAs) to create growth platforms that are based on the strengths and synergies of DSM’s positions in Life Sciences and Materials Sciences. These EBAs are Biomedical, Personalized Nutrition, Specialty Packaging and White Biotechnology. In the Innovation and R&D chapter beginning on page 25 more information can be found on the development of these EBAs. Reshaping the portfolio The acceleration of DSM’s portfolio transformation is an important prerequisite for increasing the focus on Life Sciences and Materials Sciences. The activities that do not fit in with this focus have been carved out and will be disposed of or partnered. These activities are grouped in the Base Chemicals and Materials cluster. This cluster comprises DSM Agro, DSM Melamine, DSM Elastomers, Urea Licensing, DSM Energy, Citric Acid, DSM Special Products and Maleic Anhydride and derivatives. The selling process has started for most businesses. DSM has slowed down the process in view of the current financial and economic environment but still has the ambition of completing the disposals within the timeframe of Vision 2010. For the Citric Acid business DSM has opted for a partnership scenario. During the year it was announced that the production site in Wuxi (China) will be closed and that production will be concentrated in Tienen (Belgium), where competitiveness has improved due to restructuring and process optimizations. The closure of the Citric Acid production site in Wuxi follows a request from the local government to relocate the plant from its current location as this location is needed for future urban development. DSM will receive a compensation amount from the Wuxi government and does not expect to incur a book loss. DSM is also continuing the partnering strategy (possibly with partial disposals) for the Anti-Infectives business. DSM Anti-Infectives, carved out into a separate entity, announced the closure of its clavulanic acid production site in Sweden. The business group also announced the management buy- out of DSM Deretil. With a unique combination of market positions and technologies, as illustrated by the company’s leading position in white biotechnology, its long history in advanced chemical synthesis and its strong know-how with regard to Materials Sciences, DSM has ample opportunities for innovative growth. In 2008, DSM acquired seven companies. Most notably, the acquisition of The Polymer Technology Group (PTG) allowed DSM to further expand its biomedical materials business. The acquisition of PTG was an important step for DSM in realizing its ambitions in Biomedical, one of the Emerging Business Areas defined in the Vision 2010 strategy. The main building blocks of DSM’s accelerated Vision 2010 transformation include reshaping the portfolio at an increased pace, the setting of ambitious new targets, measures related to DSM’s shareholders and a reinforcement of DSM’s Triple P policy. At the same time DSM continues to see market-driven growth and innovation, an increased presence in emerging economies and operational excellence as its key strategic drivers. With already an established presence and a broad portfolio of products and services for the healthcare industry, DSM aims to generate over € 100 million in sales in the biomedical materials market by 2012, to which PTG will contribute a significant part. Annual Report 2008 www.dsm.com 22 Report by the Managing Board Highlights of 2008 Vision 2010 progress Innovation and R&D Sustainability Human resources Corporate services External recognition Risk management Macro-economic environment Financial results Another acquisition in 2008 was enzymes producer Valley Research, allowing DSM Food Specialties to strengthen its product portfolio while at the same time offering regional blending and solution providing platforms to customers in the United States. DSM also acquired US-based Soluol, a developer and producer of high-performance polyurethane resins which are used in a wide range of applications, with annual sales of USD 20 million. The acquisition of Soluol has enhanced DSM’s specialty-resins presence in North America and added new technology as well as a state-of-the-art production facility in East Providence, Rhode Island (United States). DSM Food Specialties acquired CMT Srl, a company dedicated to the production of the Copan Milk Test, a microbiological test for the detection of antibiotic residues in milk. The acquisition of the assets of US-based Polymeric Processes, Inc. has accelerated the efforts of DSM Desotech’s UVention™ group, which develops innovative custom UV-curable materials for select markets in the United States and Europe. The EBITDA / net sales margin targets set per cluster Nutrition Pharma Performance Materials Polymer Intermediates 1 On average over the cycle Target Actual > 18% > 19% > 17% > 13%1 22% 17% 12% 4% DSM has also defined targets for growth from innovation, growth in China and sustainability. Progress against these targets can be found further on in this chapter. Other Vision 2010 targets Organic sales growth Sales in China by 2010 Growth from innovation by 2010 CFROI Sustainability Target > 5% USD 1.5 billion € 1 billion WACC (7.5%) + 100 basis points Double energy savings; other targets confirmed DSM is continuing its stepped-up search for acquisition opportunities to further accelerate its evolution towards a Life Sciences and Materials Sciences company. DSM will however maintain its disciplined acquisition policy. Within the current market conditions, the company is identifying new growth opportunities, such as small-scale technology- related acquisitions. Measuring performance Within the Vision 2010 – Building on Strengths strategy DSM has defined a number of ambitious targets, including targets for organic sales growth, EBITDA margins and value creation. In 2008 DSM continued to create value. The CFROI (cash flow return on investment) amounted to 8.7%. This means that DSM achieved a CFROI that exceeded the annual weighted average cost of capital (WACC) by 120 basis points. The target is a difference of at least 100 basis points. The following table shows the EBITDA margin achieved per cluster in 2008, compared to the targets. Total shareholder return Above peer-group average By realizing the Vision 2010 targets, DSM intends to achieve a total shareholder return that exceeds the average of its peer group.1 Shareholder returns An overview of the development of the DSM share in 2008 can be found in the ‘Information about the DSM share’ chapter on page 84. In 2008 DSM executed the second phase of the share buy- back program of € 750 million. During this phase DSM repurchased 6,615,000 shares for a total consideration of € 250 million. In view of the situation in the global credit markets, among other reasons, DSM decided in April 2008 to prudently review the timing of the buy-back of the final € 250 million at the beginning of 2009 to retain financial flexibility. DSM has decided to cancel the remaining € 250 million part of the share buy-back program of € 750 million which was announced in 2007. 1 This peer group consists of AkzoNobel, BASF, Ciba, Clariant, Danisco, EMS Chemie Holding, Lanxess, Lonza Group, Novozymes, Rhodia and Solvay. Annual Report 2008 www.dsm.com 23 Report by the Managing Board The company proposes to the Annual General Meeting of Shareholders to declare a dividend per ordinary share of € 1.20, of which € 0.40 has already been paid as an interim dividend. Market-driven growth and innovation Market-driven growth and innovation is a key driver in DSM’s Vision 2010 strategy and is expected to contribute significantly to growth. DSM aims for sales growth based on existing leadership positions, accelerated by innovation as well as selective acquisitions. This should lead to organic sales growth of more than 5% per year. Organic sales growth in 2008 amounted to 8%. DSM is fully committed to its Vision 2010 target of generating an additional € 1 billion in sales from innovation by 2010. The company is confident that the pipeline of products currently in development will enable this target to be met. In 2008 innovation-driven sales were about € 600 million. The global trends identified by DSM which form the basis of the Vision 2010 strategy are also very visible in China. Climate change and the adverse effects of dependency on fossil fuels are high on the agenda of policymakers. The change in lifestyle of the middle class and the younger generation will increase demand for food and bio-ingredients. The expected substantial rise in the number of Chinese citizens older than 65 years will drive demand for pharmaceutical products. And with increasing prosperity, demand for new, better, high- performing materials that contribute to new functionalities in for example connectivity continues to rise. Against this background, DSM is very well positioned in China. Over the past few years DSM has been experiencing growth rates in China of around 20% per year. Sales in China in 2008 amounted to USD 1,151 million, approximately 20% more than in 2007. Towards the end of the year, demand in some areas declined, as the export-related areas of the Chinese economy were affected by the economic slowdown in the United States and Europe. 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. More information on DSM’s progress in innovation can be found in the Innovation and R&D chapter on page 25. DSM Venturing announced five investments in 2008. More information on DSM Venturing and DSM’s innovation efforts in 2008 can be found in the Innovation and R&D chapter on page 25. Sales in China x USD million 1,200 960 720 480 240 0 1,151 956 779 617 2005 2006 2007 2008 Increased presence in emerging economies DSM continues to experience growth in emerging economies. As a percentage of total revenues, sales in the emerging economies remained at 15% in 2008. In China, DSM has had a significant presence for a number of years. China is transforming from the world’s manufacturing base into one of the world’s leading economies with the highest growth rates. Chinese industrial production has been growing on average some 10% per year over the last 30 years, but as a result of the global economic downturn this growth slowed down in the last few months of 2008. China has become one of the largest markets in the world, accompanied by an increasing demand for Life Sciences and Materials Sciences products to improve people’s lives. Economic prosperity and strong domestic demand, driven by a fast-rising income level, are expected to fuel economic growth in China for the coming decades. As in previous years, DSM invested substantially in China in 2008. Early 2009 the company opened the DSM China Campus, comprising DSM China’s headquarters and R&D Center, in the Zhangjiang Hi-Tech Park in the Pudong New Area of Shanghai. The building achieved ‘Gold’ certification from the LEED® (Leadership in Energy and Environmental Design) program. China offers DSM a large market, a good manufacturing base and increasingly also innovation opportunities. An overview of the inaugurations and investments in China in 2008 can be found in the ‘Investing in future profitable growth’ chapter on page 6. Fengxi Fertilizer Industry (Group) Co. Ltd. and DSM Melamine established the joint venture Shanxi FengHe Melamine Co. Ltd. The joint venture produces melamine, which is broadly used Annual Report 2008 www.dsm.com 24 Report by the Managing Board Highlights of 2008 Vision 2010 progress Innovation and R&D Sustainability Human resources Corporate services External recognition Risk management Macro-economic environment Financial results in melamine-formaldehyde resin for laminates, furniture, flooring, coating resins, textiles, and flame-retardant applications. DSM continues to seek government approval for two joint ventures with North China Pharmaceutical Group Corporation. One joint venture is in the area of nutritional products and the other in anti-infective products. DSM is also continuing its growth path in other emerging economies, such as Brazil, Russia and India. In India DSM Engineering Plastics opened a greenfield compounding site in Ranjangaon industrial zone, which doubled DSM’s production capacity in the country. 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 that represent step changes in performance and add to the bottom line. DSM remains fully committed to the pursuit of operational excellence and intends to continue and further strengthen its Operational Excellence program with new initiatives in advanced manufacturing (yield improvements and energy savings), commercialization (product launch program) and pricing. corporate overhead. The actions are expected to result in total savings of up to € 100 million per year, to be fully achieved by 2010. DSM is confident that its operational excellence in all business processes will be the basis for a strong competitive position in the current market conditions. The company is convinced that with the actions announced and its continued full commitment to innovation it will be in an even stronger position in the future. Innovation and R&D Innovation is a key element of DSM’s Vision 2010 strategy. In order to achieve its target of € 1 billion in additional innovation-related sales in 2010, DSM continues to focus on research & development, product introductions, acquisitions, open innovation and cooperation with the academic world. The fine-tuning of the business group innovation strategies has led to the acceleration of 50 key projects. These are expected to generate the main part of the € 1 billion growth target. Many innovations emerging from these projects have already found their way to the market and they all have projections that show considerably higher margins than DSM’s traditional portfolio. The turmoil in the financial markets in 2008 both substantially restricted the availability and increased the pricing of credit. Some of DSM’s businesses, in particular in Materials Sciences, experienced more difficult market conditions in the last quarter of the year after the turmoil spread to the real economy. Substantial additional funding has been made available to step up DSM’s innovation efforts. In-house activities are complemented by open innovation tools, such as venturing, licensing-in, marketing alliances and R&D collaborations. To address the effects of the economic downturn, DSM swiftly took a number of actions to improve its cash flow and reduce costs. Inventories were reduced by temporary plant shutdowns in some business groups. Tight credit risk management and credit control was put in place for accounts receivable to prevent increasing payment terms and insolvency losses. With these measures, DSM achieved a cash flow from operating activities of € 392 million in Q4 2008. Following a positive evaluation of the venturing activities in 2007, from both a strategic and a financial point of view, DSM has earmarked up to € 200 million for venturing investments until 2012. Furthermore, the New Business Development centers of the clusters together with the DSM Innovation Center scan the market for acquisitions to strengthen DSM’s innovative power. So far, this has resulted in the acquisition of Crina, Pentapharm, Lipid Technologies Provider, Pamako and The Polymer Technology Group. DSM also announced a number of structural cost-saving actions. DSM has prepared plans for most of these actions, which cover three areas: a reduction in workforce, a stronger focus on purchasing and other efficiency improvement measures such as a reduction in the number of temporary contract workers. The actions are expected to result in a reduction in DSM’s workforce by about 5% or 1000 positions, mainly at DSM Engineering Plastics, DSM Resins, DSM Fibre Intermediates, some businesses within Base Chemicals and Materials and in All this resulted in additional innovation sales, compared to 2005, of around € 600 million in 2008 (2007: € 350 million). The number of innovation launches remained at the high level achieved in 2007 (59 vs. 66). DSM is confident it will be able to keep up this accelerated launch rate in the coming years. Annual Report 2008 www.dsm.com 25 Report by the Managing Board Development of innovation-related sales x € million 650 520 390 260 130 0 600 350 170 2006 2007 2008 Since the start of DSM’s innovation boost in 2006, 151 innovations have been launched. DSM uses a self-assessment tool, which the company developed together with McKinsey, to map the innovation practices in all business groups and compare them with the practices in peer companies. Overall results now confirm that DSM performs better than the industry average. Research & Development Research & Development (R&D) plays a key role in the realization of DSM’s innovation strategy. Most of the annual R&D expenditure is directed towards business-focused R&D programs. In addition, DSM has a Corporate Research Program in place to build and strengthen the technological competences the company needs to execute development projects. R&D expenditure x € million (including associated IP expenditure) 2008 2007 Nutrition Pharma Performance Materials Polymer Intermediates Base Chemicals and Materials Other activities Total Total R&D expenditure as % of net sales Staff employed in R&D activities 135 74 127 22 22 14 394 4.2 2,200 135 67 113 13 30 14 372 4.2 2,130 Innovation and R&D in Life Sciences In the Nutrition cluster, innovation relates mainly to product innovation, namely the development of new nutritional ingredients and supplements. In the Life Sciences clusters, 75 new launches took place between 2006 and year-end 2008, of which 31 were launched in 2008. In 2008, ongoing innovation and R&D efforts 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 nutrition and personal care industries. Examples are Alpaflor®, Abi Complex Ao®, a new natural Ecocert certified treatment for irritated and sensitive skins, a new formulation of Omega-3 fish oil powder for maternal and infant nutrition, Panamore™, a breakthrough alternative to chemical emulsifiers, MaxiCurd™, a new granulated protein hydrolysate range to improve curd strength and boost cheese yield and a new form of oily vitamin A. DSM was granted a patent in January 2008 for the use of lutein and zeaxanthin for glare protection. Also, a study was published demonstrating protection against glare discomfort and improved glare recovery in normal healthy individuals after supplementation with FloraGLO® lutein and Optisharp® zeaxanthin. Glare, caused for instance by upcoming headlights, is the cause of many traffic accidents. With Resvida® DSM has introduced a pure resveratrol for use in dietary supplements and as a food ingredient. Resveratrol, a powerful antioxidant found in red grapes, has been closely linked to the ’French paradox’: due to their regular consumption of red wine, the French suffer from a much lower incidence of cardiovascular disease than other Western populations despite their diet of high-fat foods. For the baking industry DSM introduced a breakthrough alternative to chemical emulsifiers in bread production: Panamore™. Also, new PreventASe® solutions were announced. The product is now available in three formulations covering specific food applications under the sub-brands Panna™, Bicra™ and Xtru™. PreventASe®, introduced in 2007, has demonstrated its potential to significantly mitigate the formation of the unwanted by-product acrylamide in baked products whilst leaving the nutritional properties of food products as well as the browning and taste aspects unaffected. DSM introduced four new products for the cheese industry; MaxiCurd™, a new granulated protein hydrolysate range to improve curd strength and boost cheese yield, DELVO-TEC® TS-80 for pasta filata cheeses, Maxiren® Gold to maximize Annual Report 2008 www.dsm.com 26 Report by the Managing Board Highlights of 2008 Vision 2010 progress Innovation and R&D Sustainability Human resources Corporate services External recognition Risk management Macro-economic environment Financial results cheese manufacturers’ production efficiency and DELVO-STAR®, a breakthrough starter culture system. Rapidase® Expression was brought to the market. It is a white grape maceration enzyme, specifically developed to assist the production of popular premium white wines with an intense aromatic profile. In Savoury Ingredients DSM launched two new products in 2008: Gistex® HUM LS and Maxavor® Chicken YE. A natural yeast extract, Gistex® HUM LS provides an intense and complex umami taste perception and powerful bouillon taste to a wide range of savory applications. Maxavor® Chicken YE is an innovative new range of chicken flavors. As a 100% natural ingredient, Maxavor® Chicken YE is the first ingredient of its kind to deliver an authentic chicken taste direction to a diverse range of savory foods. DSM launched Ronozyme® ProAct, the world’s first pure protease specially developed for animal nutrition. The protease significantly improves feed protein digestibility and reduces feed costs. At the same time it increases meat production and reduces nitrogen excretion. For the 2008 Olympic Games in Beijing (China), DSM developed a powdered form of the recovery product PeptoPro®, which is easier to transport and preserve. In total, 20,000 servings of PeptoPro® powder were shipped to China where they helped Dutch athletes to speed up their muscle recovery process, also fitting in DSM’s partnership with the Dutch Olympic Committee (NOC*NSF). A major research project initiated by DSM in which seven international research groups participated successfully analyzed the DNA sequence of the fungus Penicillium chrysogenum. It was a major landmark in the history of penicillin, arguably the most important drug of the 20th century. The insights gained through this research will help DSM Anti- Infectives to improve current production methods for beta- lactam antibiotics. They will also allow greater innovations in the development of production mechanisms. DSM Biologics together with joint-venture partner Crucell N.V. realized another breakthrough in the production of IgG antibodies using PER.C6® technology. By employing the PER.C6® human cell line and DSM’s proprietary XD™ technology, a record yield of over 27 grams per liter was achieved. This record surpasses all other production systems including the results previously achieved by the PER.C6® technology itself. Innovation and R&D in Materials Sciences With 76 launches between 2006 and year-end 2008, the Materials Sciences clusters are well underway to reaching the desired portfolio size of successful applications. In 2008 there were 28 launches. Further steps were taken in the commercial development of Stanyl® ForTii™, previously known as PA4T and the first new polymer to be introduced in the 21st century worldwide, among other things with the opening of a market development plant. Numerous trials at selected customers have been completed and the initial results and customer feedback are very positive. The opening of the market development plant will extend customers’ access to Stanyl® ForTii™. During 2008, the first products containing Stanyl® ForTii™ appeared in selected mobile phones. DSM Resins introduced the Decovery™ range of products that more than meet the environmental and technical requirements of solvent emission legislation while at the same time improving the performance of the paints in which they are processed. More information can be found in the Sustainability chapter on page 32. After the successful introduction of the HiTone™ Uralac® Indoor grades in 2007, Uralac® P 780 was launched, the first product within the HiTone™ Uralac® range for outdoor applications. HiTone™ Uralac® accepts pigment and filler loadings beyond industry standards and provides customers with a broadened formulation and application window as well as superior flow and coating finish. As additional benefits HiTone™ Uralac® P 780 has excellent heat resistance and is easy to process. Technology developed at DSM Composite Resins helped to optimize the performance of the Dutch Olympic sailing team’s 470 class racing dinghy at the 2008 Beijing Olympic Games. The boat ‘s hull became stronger and more stable than ever before at minimum weight. DSM’s technology increased the rigidity of the boat by 120%, making it 200% stronger. It also minimized energy loss for maximum speed and reduced swing. The Dutch female 470 class sailing team won a silver medal during the 2008 Olympic Games. In response to the automotive industry’s strict demands for low emissions of volatile organic components (VOCs), DSM developed Palapreg® Premium for exterior Bulk and Sheet Moulding Compounds with the highest-quality surface technically achievable. This new development resulted in a breakthrough reduction in VOC emissions, setting a new industry standard. Annual Report 2008 www.dsm.com 27 Report by the Managing Board DSM Composite Resins supplied the fiber composite nose and rear panels that are being used in the next generation of Dutch InterCity trains. Using composite resins instead of metal for these parts will remove 1000 kg of weight from the train, which translates directly into cost savings and environmental benefits. Badinotti Group, the global leader in netting for commercial fishing, entered into an expanded collaboration with DSM Dyneema to develop enhanced netting technologies using Dyneema® fiber. One area of focus will be reducing fish escapes in South America’s fish farming industry. DSM Desotech, the world’s largest supplier of UV-curable coatings, inks and ribbon matrix materials for fiber optic cables, developed next-generation optical fiber coating systems which significantly reduce light loss induced by fiber optic cable manufacturing or installation processes. These systems are essential in the drive for Fiber to the Home initiatives, because they facilitate improved signal integrity which is critical for enabling high bandwidth applications such as HDTV, downloading and uploading video, gaming and medical imaging. At DSM Engineering Plastics several innovations were announced, such as new additions to its Arnitel® line of copolyester thermoplastic elastomers (TPC), designed to meet the stringent performance and compliance needs of today’s automotive designers. Also, Akulon® Ultraflow™ with added gloss was announced. The new grades will have improved surface finish, even with glass fiber loadings as high as 60%. For Stanyl®, too, new grades were announced. One grade has very high stiffness and outstanding wear resistance, ideally suited for taking very high loads in sliding and roller bearing applications. Another grade is used in plastic lead chip carriers for high brightness LEDs used in mobile phones, PDAs and other handheld devices. DSM Engineering Plastics is the first producer to include halogen-free grades in all its product lines. More information can be found in the Sustainability chapter on page 32. DSM Dyneema continued its successful innovation path with the release of several new products in 2008. It announced a new tape technology platform that will extend the material choice for vehicle protection of the future. The platform will allow designers and decision makers to balance the requirements for better performing vehicles and increased protection, and will create room for future weight growth. Two new grades for Dyneema Purity® were introduced and cooperation with the University Hospital of Maastricht (Netherlands) was announced to conduct research into new solutions that can improve surgical outcomes for patients with spinal deformities. Capewell Components, LLC, a US manufacturer of aerial delivery and life support systems, developed a new air cargo pallet and net system featuring Dyneema® fiber. The new pallet and cargo net system, the lightest in the world, delivers an unmatched combination of durability, low maintenance, very low weight and mass for easier handling, expanded freight capacity, the ability to fly longer and at higher altitudes, environmentally conscious design, and better fuel economy. More than 350 new patent applications In 2008, DSM filed more than 350 new patent applications, bringing the company’s total number of patents to over 15,000. DSM further strengthened its Intellectual Property position in the emerging economies with an excellent position in China, a very high number of filings in India and good positions in Brazil and Russia. DSM Innovation Center The DSM Innovation Center was set up in 2006 to support the achievement of DSM’s innovation targets as set out in Vision 2010 – Building on Strengths. This includes the targets related to the overall objective of achieving € 1 billion in additional, 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. The DSM Innovation Center comprises an Innovation Program Office, a Corporate Technology department, an Intellectual Property department, Licensing and Venturing units, a Business Incubator and four Emerging Business Areas (Biomedical, Personalized Nutrition, Specialty Packaging and White Biotechnology). In 2008 the DSM Innovation Center continued to further enhance DSM’s innovation capabilities and competences. Much emphasis was placed on firming up the innovation infrastructure by focusing on selected areas in the existing activities (Accelerated Growth Areas) and beyond the current activities (Emerging Business Areas). Also, programs have been expanded to drive medium and long-term innovation growth. Annual Report 2008 www.dsm.com 28 Report by the Managing Board Highlights of 2008 Vision 2010 progress Innovation and R&D Sustainability Human resources Corporate services External recognition Risk management Macro-economic environment Financial results The medium-term innovation programs mainly build on the competences in the different clusters and are focused on securing the greater part of the € 1 billion additional sales growth target. The main innovation pockets which will accelerate DSM’s innovation growth include programs such as Obesity & Diabetes, Improved Animal Performance and Eco-Friendly Materials. Each of these Accelerated Growth Areas represents a number of innovation programs which all focus on bringing solutions to the specific needs identified in the market segments. PTG realized USD 43 million in annual net sales. In the next 3-5 years more than 20% sales growth per year is expected. Another big step for DSM Biomedical was the launch of its drug delivery platform Trancerta™. It covers an extensive portfolio of advanced resorbable materials, synthesis methods, formulation and processing techniques, which provides the foundation for designing tailored drug delivery systems to treat both ophthalmic and vascular diseases. To secure delivery of mid-term innovation targets 50 key projects have been selected. They have in common that they show considerably higher margins than DSM’s traditional portfolio. These projects are constantly being monitored in terms of sales potential and probability of success in 2010. Caliber Therapeutics, Inc. and DSM Biomedical announced a partnership on the development of a novel drug delivery balloon catheter that can be used to treat vascular diseases such as atherosclerosis. This disease can develop into coronary artery diseases, the leading cause of death in the western world. The longer-term innovation programs also create new growth platforms based on DSM’s strengths and synergies in Life Sciences and Materials Sciences. These longer-term programs include the Emerging Business Areas and additional platforms such as Bio Performance Materials. The Emerging Business Area programs – Biomedical, Personalized Nutrition, Specialty Packaging and White Biotechnology – 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 2008. These Emerging Business Areas optimally combine expected social and technological trends with DSM’s current market strongholds and technology positions. DSM Biomedical is one of the partners in the Biomedical Materials Program (BMM), a Dutch public-private partnership in biomedical materials. In total BMM allocated over € 50 million to seven R&D projects, four of which were initiated by DSM Biomedical. This will help DSM Biomedical to expand its technology platform and shorten the development time of new biomedical materials. In the White Biotechnology EBA DSM announced a major cooperation with Roquette. More information can be found in the section on Open Innovation later in this chapter. In the same chapter the grant DSM received from the US Department of Energy for biotechnology research is described in more detail. Most of the Emerging Business Area programs are excellent examples of how DSM captures its cross-cluster opportunities as these – to varying degrees – combine DSM’s competences in Life Sciences and Materials Sciences. In its White Biotechnology EBA DSM strives to create practical solutions for the biorefineries of the future, using feedstocks that are not in competition with food and feed supplies. At present micro-organisms can grow only on the basis of sugar or starch derivatives. DSM Biomedical has shown a very rapid development since its inception in 2006. It is actively building a leading position in this fast-growing market by linking technological developments to patient needs, creating and enabling new and more effective therapies. In 2012 DSM aims to generate over € 100 million in sales in this market. A major milestone in 2008 was the acquisition of US company The Polymer Technology Group (PTG). This market leader in new specialty chemicals and polymer-based solutions is a key player in the development of critical material-intensive applications. The main applications include pacemakers and neural stimulation leads, contact lens materials, spinal applications, catheters and implantable sensors. In 2008, Therefore, in close collaboration with ethanol producer Abengoa and several research institutes, DSM is intensively working on what is called the second generation of biofuels. This means searching for a way to recover carbohydrates from what is currently disposed of as a waste material, such as the non-edible parts of corn plants. There are still major hurdles to take but as DSM is one of the very few companies that are able to independently carry out the complete chain from pre-treatment via enzyme technology to fermentation technology, the company is confident that it will become a major technology supplier in this area, at different stages of the value chain. Annual Report 2008 www.dsm.com 29 Report by the Managing Board DSM Specialty Packaging focuses on developing unique packaging solutions to enhance many aspects of food quality such as freshness, safety and authenticity through active, intelligent and smart packaging systems. DSM’s ambition in this field is to become a recognized solution provider throughout the whole food packaging chain. With an equity investment in The Compliers Group International B.V., DSM Venturing participates in the development of smart pharmaceutical packaging solutions that contain microchips which enable the monitoring of a patient’s therapy compliance. Innovative packaging solutions in development by DSM aim to increase the quality of fresh foods such as fruits, fresh-cut vegetables, meats and fish during their shelf life. This not only means that consumers can enjoy fresher and tastier foods, but also that retailers can reduce their waste and out-of-stock situations. Besides developing intelligent food packaging systems, DSM Specialty Packaging is also exploring opportunities in the rapidly developing smart packaging market for pharma and nutraceuticals. The link between nutrition and health is widely recognized, but it is less well known that this connection is different for each individual. The Personalized Nutrition EBA is dedicated to improving health by helping people understand their unique food-health connection, and to apply this knowledge to enjoy greater health and well-being. The business’ initial product is a corporate wellness solution offered to US employers. Employees in these organizations will gain insight into their health and receive personalized recommendations and support for making changes to increase their wellness. Employers will be able to offer a valuable service to their employees, and will gain advantages from a healthier workforce, including lower health care costs and higher productivity. DSM Venturing To DSM, venturing is an integral part of its open innovation approach, focused on teaming up with innovative players all over the world. In 2008 DSM Venturing announced its first investment in China by participating in a USD 20 million financing round in Tianjin Green Bio-Science Co. Ltd. The proceeds will be used to build China’s largest manufacturing plant for polyhydroxy- alkanoates in the Tianjin Economic Development Area. DSM Venturing also made an equity investment in the Dutch company IQ Therapeutics B.V. This company develops antibody-based products for biodefense and for the prevention and treatment of infectious diseases. DSM Venturing also acquired an equity stake of 29.3% in Provexis plc, a UK listed company that develops and licenses ingredients for the functional food, medical food and dietary supplement markets. This investment is in line with DSM’s strategy to further expand in ingredients for functional food and dietary supplements focusing on for example cardiovascular and digestive health, two areas also addressed by Provexis. DSM has earmarked up to € 200 million for future venturing investments until 2012 and is also considering investing in more grown-up young companies as well as in companies in the emerging economies, as was illustrated by the company’s participation in Tianjin Green Bio-Science Co. Ltd. DSM Venturing’s mission is to explore emerging markets and technologies in order to support DSM’s innovation and growth strategy. Besides financial support, DSM Venturing supports start-up companies with DSM’s knowledge, resources and networks in order to establish mutual benefits and learning opportunities. DSM Venturing participates in early and expansion-stage companies or venture capital funds as a value-adding partner. Investments typically range between € 250,000 and € 5 million. The target range for participation in these companies is from 5% to 20%. DSM Venturing currently has about € 60 million invested in promising companies and leading venture capital funds. The diversity of the venturing portfolio gives DSM a broad window on the world in a wide range of markets and in some cases it leads to even closer forms of cooperation. Following a venturing investment in 2007, for example, DSM and Upfront Chromatography announced a collaboration program to optimize Upfront’s chromatography system for use with DSM’s proprietary manufacturing technology, offering biopharmaceutical manufacturers significant efficiency and productivity benefits. Annual Report 2008 www.dsm.com 30 Report by the Managing Board Highlights of 2008 Vision 2010 progress Innovation and R&D Sustainability Human resources Corporate services External recognition Risk management Macro-economic environment Financial results At year-end 2008, DSM Venturing had participations in 20 companies and 11 funds. Below is a list of the current company participations of DSM Venturing: CreAgri, Inc. (United States) Discovery and development of antioxidant polyphenols from olive pulp. Ganeden Biotech, Inc. (United States) Probiotics company which markets supplements focused on digestive health. Harland Medical Systems, Inc. (United States) Coating solutions for medical device customers. Inmat, Inc. (United States) Flexible nanocomposite barrier coatings for the tire and packaging industries. IntegraGen S.A. (France) Discovery of genes associated with complex diseases and commercializing molecular diagnostic tests to enable personalized healthcare. IQ Therapeutics B.V. (Netherlands) Development of human antibodies for the prevention and treatment of infectious diseases. Jurilab Ltd. (Finland) Discovery of gene-disease associations and their application to healthcare. Novomer, Inc. (United States) Technology platform to use carbon dioxide and other renewable materials to produce performance polymers, plastics and other chemicals. Oryxe Energy, Inc. (United States) Solutions to meet the world’s dual need for dependable fuel supplies and a cleaner environment. Provexis plc (United Kingdom) Scientifically proven technologies for the global functional food, medical food and dietary supplement sectors. Sciona, Inc. (United States) Genetic tests for personalized health and wellness advice with applications in nutrition, sports performance and skin care. Sol-Gel Technologies Ltd. (Israel) Technology platform for customized encapsulation of active ingredients for skin care and dermatology products. Suprapolix B.V. (Netherlands) Supramolecular chemistry platform based on quadruple hydrogen bonds aiming at applications in consumer and industry markets. Terreco B.V. (Netherlands) Complete remediation of polluted soil. The Compliers Group International B.V. (Netherlands) Develops and supplies intelligent medication packaging for improved patient adherence. Tianjin Green Bio-Science Co. Ltd. (China) Development and production of biodegradable polymers and products. Upfront Chromatography A/S (Denmark) Products and technologies for extraction and recovery of biotherapeutics, functional biomolecules, macromolecular complexes, and even living cells. Van Technologies, Inc. (United States) Innovative performance coating solutions using technologies that are environmentally responsible. Xylos Corporation (United States) Healthcare products based on biosynthesized cellulose. Open Innovation DSM has announced numerous partnerships, venturing investments, acquisitions and other forms of collaboration that show that open innovation is becoming more and more ingrained in the company’s innovation approach. Interaction with industry partners and technology thought leaders enable DSM to be active at the forefront of the most promising developments in the areas the company focuses on: Life Sciences and Materials Sciences. Various acquisitions were concluded during the year. They are described in more detail in the section ‘Investing in future profitable growth’ on page 6. DSM Venturing is described in more detail on the previous page. Various partnerships with customers were announced. DSM Dyneema for example expanded its collaboration with Badinotti (as discussed in the section on Innovation and R&D in Materials Sciences earlier in this chapter) and DSM Nutritional Products together with the Chinese pharmaceutical company Dafeng DESANO has developed a leading chemical Annual Report 2008 www.dsm.com 31 Report by the Managing Board synthesis biotin technology. This has led to the setting up of a joint production facility. DSM and the French starch and starch-derivatives company Roquette announced a partnership to implement and commercialize the fermentative production of biorenewable succinic acid, which – amongst other applications – opens the possibility to produce bio-based performance materials. By the end of 2009 a demonstration plant in Lestrem (France) will be operational. Sustainability is in this respect one of the most important elements of DSM’s Values (Respect for People, Valuable Partnerships, Good Corporate Citizenship); the company is continuously looking to improve the safety and health of its employees. A further reduction of DSM’s eco-footprint (including the value chain) and increased utilization of renewable resources are key elements in the company’s sustainability policy, which forms an integral part of DSM’s overall strategy. DSM also received a grant from the US Department of Energy for an innovative biotechnological approach to bioproducts and biofuels. The grant will fund an extensive enzyme development program which will focus on finding applications in cellulose-based biorefineries for the production of bio- based products, including biofuels. The research will be carried out by a technical consortium in which DSM will be the lead partner. DSM Pharma Chemicals published a joint paper with Corning, Inc., describing a successful commercially viable production of an active pharmaceutical ingredient (API) using Corning’s micro reactor technology under cGMP (current Good Manufacturing Practices) conditions. Working together, teams from the two companies demonstrated the safe, industrial-scale operation of a hazardous nitration reaction under cGMP conditions, processing more than 25 metric tons of material in only four weeks. The French pharmaceutical company NicOx will use this compound for the production of a new anti-inflammatory drug which is currently in clinical phase 3 trials. DSM Engineering Plastics accomplished major breakthroughs in the design and functionality of airbag canisters together with automotive supplier Autoliv. Palapreg® Premium, described in more detail in the section on Innovation and R&D in Materials Sciences earlier in this chapter, has been developed in cooperation with Pergan GmbH and the Fachhochschule Steinfurt (Germany). Sustainability DSM’s activities are aimed at creating value: value for customers and shareholders, as well as for employees and the communities in which the company operates. DSM aims to achieve this goal by combining entrepreneurial drive with an awareness of the need for continuity and a strong sense of responsibility. Many DSM products and innovations help reduce CO2 and other emissions at customers. DSM furthermore takes sustainability explicitly into account in the selection and evaluation of suppliers by applying a Supplier Code of Conduct for suppliers, which is based on the company’s own values. In 2008 DSM was once again ranked among the global leaders in sustainability in the chemical sector of the Dow Jones Sustainability Index and the company has the ambition to remain a global leader. DSM actively participates in a dialogue with stakeholders, such as (trade) associations and networks, the United Nations and non-governmental organizations. The company also engages in several global and local community programs, the partnership with the United Nations’ World Food Programme (WFP) being a notable example. Society’s demands are changing, and through these partnerships DSM recognizes how it can contribute and add value to its stakeholders in a sustainable way. This leads to joined advocacy on for instance hidden hunger and further development of knowledge and products, such as NutriRice® and MixMe™. It also catalyzes actions with organizations such as UNICEF and GAIN (Global Alliance for Improved Nutrition). More on DSM and sustainability can be found in the 2008 Triple P Report. Safety DSM has set itself the target of reducing the total number of recordable injuries among DSM personnel and contractors by 50% between 2005 and 2010. In 2008 the total number of recordable injuries per 100 employees was 0.72, compared to 0.95 in 2005, a reduction of 24% in three years. By continuing to pay attention to safety improvement and by consistently executing the programs in this field, DSM still aims to achieve this ambitious target, although the company is aware of the fact that this will be challenging. Annual Report 2008 www.dsm.com 32 Report by the Managing Board Highlights of 2008 Vision 2010 progress Innovation and R&D Sustainability Human resources Corporate services External recognition Risk management Macro-economic environment Financial results On 28 August a fatal accident occurred at DSM Pharmaceutical Products in Venlo (Netherlands). A DSM employee was blown off an empty nitrogen-pressurized tank container while he was depressurizing the tank via the manhole. The manhole suddenly opened and he was lifted to a height of 15-20 meters. He fell to the concrete floor and died instantly. In response to this tragic occurrence all DSM units have reviewed their loading and unloading procedures. During the Global Manufacturing Conference held in Shanghai in November 2008, a ‘closing the safety loop’ initiative was started by Feike Sijbesma, Chairman of the DSM Managing Board. Health Health and wellness are very important for DSM and its employees. The Global Health Management initiative involves a health promotion program for DSM executives as well as a web-based tool for helping employees to assess their health risks and set themselves healthy lifestyle goals. This program is called DSM Vitality Checkpoint and offers a facility for the self-monitoring of health by employees. Where DSM Vitality Checkpoint has been introduced, it has been combined with comprehensive health checkups and individual follow-up on any health issues identified. Health management is also included in learning programs. For example, ‘Health at Work’ forms an integral part of SHE training programs for managers and engineers. In 2008, 18 cases of work-related illness were reported, compared to 18 in 2007 and 19 in 2005. Environment DSM has set itself environmental targets for 2010 on the basis of the principle that all DSM 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 2007, based on findings in pilots, the target for the reduction of energy use was doubled from 1% to 2% per year. As a result of the fact that several of DSM’s facilities reduced their output in the fourth quarter, energy efficiency declined in 2008. A significant step in 2008 towards the realization of the environmental targets was the large reduction of N2O emissions by DSM Agro. The reduction is the equivalent of two million tons of CO2, which equals more than 20% of DSM’s worldwide greenhouse-gas emissions and is in line with the target. Overall DSM made good progress in 2008 towards achieving the environmental targets for the period 2005-2010. However, it will be challenging to achieve all environmental targets. Community True solutions start with listening to and understanding the needs of various stakeholders. Hunger is the number one cause of death in the world, killing more people than AIDS, malaria and tuberculosis combined. But even if people have enough food to survive, this food often lacks certain key nutrients. This type of malnutrition is referred to as ‘hidden hunger’. In March 2007, DSM announced an official partnership with the United Nations’ World Food Programme (WFP). WFP is the largest provider of food aid to the world’s hungry, feeding and nourishing an average of 90 million people (including 58 million children) in over 80 countries each year. DSM provides WFP with expertise, high-nutrient products as well as financial assistance. In 2008, DSM made several million euros available to WFP and other community initiatives and partnerships. DSM’s Nutrition Improvement Program (NIP) develops sustainable business models to deliver safe and effective solutions for large-scale fortification with vitamins and minerals in developing countries. NIP also provides technical and scientific support to organizations and governments to support the fight against hidden hunger. The company is also active with SIGHT AND LIFE, a humanitarian initiative that was set up in 1986 to help combat vitamin A deficiency in developing countries. SIGHT AND LIFE nowadays also aims to address other essential micronutrient deficiencies including nutritional anemia. It has invested some USD 30 million to support humanitarian projects in the public domain. In 2008 it launched a podcast series on the subject. In cooperation with WFP, DSM developed MixMe™ micronutrient sachets for home-fortification in developing countries. It is a high-quality micronutrient powder packed in individual sachets. A year’s supply of 150 sachets for one person costs € 2.75. In 2008 the MixMe™ sachets reached over 250,000 beneficiaries in Nepal, Kenya and Bangladesh. DSM intends to increase distribution in the coming years. DSM continued its Innovation is our Sport™ program, sponsoring various athletes and supporting them with innovations. Athletes from the Netherlands, the United States, Switzerland and China were sponsored by the company. DSM is also partner of the Dutch Olympic organization NOC*NSF. The DSM Unlimited Sports Team won six gold and two silver medals at the 2008 Beijing Olympics and Paralympics. Annual Report 2008 www.dsm.com 33 Report by the Managing Board DSM has an extensive art collection that currently comprises 750 works. The DSM Art Collection is based on works from the Limburg region (Netherlands) but has been expanded in scope since 2003 to include works from national and international artists. The works of art in the collection represent creativeness, innovativeness and concern for the global and local environment. Sustainable innovations DSM’s innovation efforts, more extensively described in the Innovation chapter starting on page 25, have resulted in the launch of several products that help to reduce CO2 and other emissions, such as volatile organic compounds (VOCs), at DSM’s customers. Besides helping to reduce emissions, DSM’s innovations in both Life Sciences and Materials Sciences contribute to a better quality of life. In 2008 DSM announced the launch of a new mark of excellence in nutrition – the Quality for Life™ seal. Introduced to guarantee ingredient quality, this concept responds to growing demand for reliable and traceable products which meet today’s stringent safety and sustainability requirements. It offers a clear point of differentiation and the assurance that DSM is committed to ensuring product quality, safety, reliability, traceability and sustainability. DSM Powder Coating Resins launched Uralac® Corres – a new technology platform, based on breakthrough innovative polyester resins for corrosion protective coatings. This new technology brings some big advantages to the coating process. Through a reduction in the use of pre-treatment chemicals, less process waste is created, and so Uralac® Corres can contribute to a reduction in the metal-coating process impact on the environment. 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 2008 2007 14,493 7,452 7,041 4,793 3,557 1,236 4,030 275 14,343 7,219 7,124 4,760 3,564 1,196 3,873 278 DSM Engineering Plastics has extended its product offerings to include halogen-free grades in all its product lines, ahead of future legislation. The short life cycles of electronic appliances such as laptops, mobile phones and PDAs make it important to re-use valuable materials such as copper through recycling and extraction. These processes introduce risks of generating hazardous by-products from halogen-containing compounds, such as flame retardants, when recycling processes are not optimal. Total DSM 23,591 23,254 Passion for People On the basis of the Vision 2010 strategy, DSM’s human resources strategy Passion for People has been formulated. A key element of this strategy is to help employees to deal successfully with the challenges of a changing company in a fast-moving global marketplace. Following an urgent demand from an Original Equipment Manufacturer in the electronics industry, DSM Engineering Plastics developed within one year a halogen-free grade of Stanyl® for connectors and other electronic parts. Traditional decorative paints for professional painters contain VOCs. By offering the new Decovery™ product family, DSM NeoResins+ offers a zero to low-VOC waterborne and solvent-based product portfolio that is beyond all environmental and technical requirements the industry demands. Between today and 2013, more than 50% of the € 1 billion-plus European and North American decorative resins market (excluding wall paints) is expected to transfer to these new types of technologies. Similar trends are to be expected in Asia at a later stage. The shift towards a Life Sciences and Materials Sciences company means changes not only in the portfolio of activities but also in the way of working, including behavior and culture. A committed workforce is critical to the company in realizing its Vision 2010 ambitions. The concept of employee engagement is very important in this respect. In 2007 DSM launched its first ever worldwide Employee Engagement Survey, to be repeated on an annual basis. The outcome of this engagement survey has been assessed and has led to a number of focus areas: Inspirational leadership supported by a new learning architecture The acceleration of Vision 2010 requires a change in behavior on the part of the employees. This change calls for leaders Annual Report 2008 www.dsm.com 34 Report by the Managing Board Highlights of 2008 Vision 2010 progress Innovation and R&D Sustainability Human resources Corporate services External recognition Risk management Macro-economic environment Financial results that raise the bar on performance, show accountability, take ownership and demonstrate role-model behavior in the DSM Behaviors, in short, truly inspirational leaders. Therefore, DSM significantly reviewed its approach to learning and development of the executive and management population in 2008. A new DSM Learning Architecture ensures a stronger alignment with the strategy, focuses on the key drivers for success (external orientation/growth/innovation, a high-performance culture with clear accountability and a sustainable diversity drive), creates a common and coherent concept of learning and program design, facilitates the development of a DSM learning culture and provides enhanced learning for top performers and high potentials. With full support from the Managing Board, DSM invested in the leadership development of top management. Clear performance-based remuneration of DSM’s people is key in accomplishing the required changes, and the remuneration systems will be adjusted to reflect the objectives of external orientation, entrepreneurship, creativity and accountability. Further increasing diversity The intensified efforts with regard to diversity are paying off. The number of non-Dutch and female professionals entering DSM continues to grow. DSM continued in 2008 to establish a stronger regional recruitment footprint, which enables the company to attract talents across the globe. DSM is strengthening the diversity of the leadership team, not only in terms of gender and nationality but also in terms of leadership style. DSM focuses on selecting leaders with inspiring leadership styles to support the company’s cultural change agenda. The architecture has been developed in close collaboration with leading international business schools, supported by a diverse internal faculty, primarily consisting of DSM’s top management. The new programs have a modular set-up with a strong focus on innovative learning methods, such as round-table discussions, business simulations, web-casting, (team) assignments and e-learning. The key building blocks are: Executive Leadership Programs, Management Leadership Programs, Executive & Management Toolkits, Executive Coaching and Functional Learning Programs. In addition to the improved training and learning programs for DSM executives and managers, all other DSM Business Academy programs are being redesigned and aligned with the change the company is currently going through. Moving towards a high-performance culture In 2008 a new career management design was developed. The new design stimulates a high-performance culture, introduces simplified tools and processes, links career management and performance management, gives transparency in career opportunities within DSM, increases global talent visibility and employee engagement and increases ownership and accountability for career development with managers and employees. To prepare for the roll-out, workshops were held in all business groups and staff/support groups, with additional regional training sessions being organized in the Netherlands, China and the United States. The new career management process was introduced in January 2009. While recognizing the need to attract external talent, DSM also recognizes the need to stimulate existing talent across the company. A new global recruitment management system was designed in 2008, giving employees access to all worldwide DSM vacancies. This will provide greater transparancy concerning career opportunities and will also further internationalize the employee base. The percentage of non-Dutch members in DSM’s management group increased from 45% in 2007 to 53% in 2008, and the percentage of women in this group increased from 17% to 20% in 2008. DSM attracted in total 486 top talents from across the globe, of whom 77% were non-Dutch and 38% were women. Throughout 2008 DSM also continued to strengthen its presence in the academic arena by further strengthening its strategic collaborations with universities and key business schools in Europe. Collaborations are also now being initiated with academic institutions in both China and the United States with the aim of further strengthening these relationships in 2009. All activities are 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. Annual Report 2008 www.dsm.com 35 Report by the Managing Board Corporate services DSM has a decentralized organizational structure built around business groups. The company also has a number of shared service departments and on a corporate level there are a number of staff departments that support the Managing Board and the business groups. ICT In recent years DSM’s ICT initiatives have led to a high- standard and high-performing ICT landscape supporting the businesses globally. Besides the existing programs the ICT teams are now starting up a number of new initiatives to increase collaboration and communication between internal and external parties. In addition, programs to support Customer Relationship Management and Sales Force Automation and to reduce energy usage have been started. Purchasing The global DSM purchasing organization that was set up in 2006 enabled DSM to realize a better total cost of ownership and a corresponding competitive advantage. In 2008 the purchasing activities were further professionalized and spend and competences were leveraged. The execution of the DSM purchasing strategy is being supported by standard processes and systems. DSM Purchasing realized its targets for the year. Risk management (security of supply), further alignment with business requirements and further development of supplier relations were key topics during the year. Other focus areas were business intelligence and innovation. Code of Conduct DSM Purchasing has further implemented the Supplier Code of Conduct (CoC) for the DSM supplier base. This code helps suppliers to comply with DSM’s high sustainability standards. It prescribes minimum requirements regarding DSM’s corporate Triple P values (People, Planet and Profit). The CoC is part of the comprehensive program that has been developed in order to embed sustainable performance in all of DSM’s supply base processes and procedures. At year-end 2008, more than 760 suppliers had signed the CoC, covering 67% of DSM’s supply base. The other targets of the program, the performance of 44 supplier self-assessment questionnaires and 22 sustainability supplier audits, were exceeded. Apart from showing good compliance, DSM’s suppliers increasingly contribute to the substitution of oil-based raw materials by renewable resources. In the Energy and Indirect spend area DSM has best practices of green energy and more energy efficient transport which also support the company’s sustainability efforts. REACH in the supply chain REACH, the new European regulation for Registration, Evaluation, Authorization and Restriction of Chemicals, requires that all substances manufactured in or imported into the European Union in quantities above one ton per year are registered. Raw materials used by DSM need to be pre- registered by the partners up the supply chain. Therefore, DSM carried out an extensive program in which it achieved pre-registration confirmations of nearly 5,000 substances from the company’s suppliers. Marketing and product branding 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 2008 this resulted in a number of accelerated product launches. External recognition DSM and its business groups have been awarded a variety of awards and other recognitions by its customers, suppliers, the academic world, non-governmental and trade organizations. In this chapter an overview is given of the external recognition awarded by and received by DSM. DSM Engineering Plastics was awarded the European Process Enhanced Engineering Plastics Excellence in Technology Award by Frost & Sullivan for Stanyl® Super Flow. The Minister of Economic Affairs in the German state of Hessen awarded the Innovation Award to Hoffmann ACE and DSM Dyneema for their innovative and environmentally conscious third- generation leight-weight air cargo pallet net design. DSM’s UK-based vitamin manufacturing facility was awarded Carbon Trust Standard Certification, the world’s first accreditation scheme designed to allow companies to measure the carbon footprint of their operations and facilitate an independent, specialist review of energy management practices. The Standard is awarded by The Carbon Trust, an independent organization set up by the UK Government in 2001 to accelerate the move to a low-carbon economy by working with organizations to reduce carbon emissions and develop commercial low-carbon technologies. Annual Report 2008 www.dsm.com 36 Report by the Managing Board Highlights of 2008 Vision 2010 progress Innovation and R&D Sustainability Human resources Corporate services External recognition Risk management Macro-economic environment Financial results DSM Nutritional Products and the United Nations’ World Food Programme (WFP) won the 2008 ICIS Innovation Award for Best Business Innovation for the MixMe™ micronutrient powder. DSM NeoResins+ was nominated for the ICIS Innovation Award for most innovative Corporate Social Responsibility (CSR) project for the Decovery™ family of high solids decorative coatings. DSM’s blood pressure controlling lactotripeptide ingredient, TensGuard™, received the gold award for most innovative new health ingredient at the 2008 Health Ingredients Europe exhibition. DSM Nutritional Products received the Innov’Space prize from Salon des Productions Animales, an international trade fair for livestock, for its iCheck™ Egg product, a kit allowing rapid monitoring of the color of eggs and egg products. DSM Composite Resins won the environment prize at the AVK Innovation Awards for Palapreg® Premium, a new resins system for use in automotive exterior applications. DSM Composite Resins also received an award for best innovation in composite resin materials at the International China Composites Expo in Shanghai (China). DSM Food Specialties received the Ringier Technology Innovation Award, a prestigious award within the food and beverage industry in China. The award was in recognition of DSM Food Specialties’ product Brewers Clarex®. It also won the Food Product Design Scientific Excellence Award at SupplySide West for PreventASe®. In the Dow Jones Sustainability World Index 2008, DSM was once again listed as one of the leaders in the chemical industry sector. In 2003 DSM was included in the Dow Jones STOXX sustainability index for Europe for the first time. Also, DSM was independently assessed according to the FTSE4Good criteria, and has satisfied the requirements to remain a constituent of the FTSE4Good Index Series. Dr. Ad Overbeek, Global Science Manager DSM NeoResins+, has been selected by the Federation of Societies for Coatings Technology to deliver the Joseph J. Mattiello Memorial Lecture. This award, considered by many to be the most prestigious in the international coatings scientific community, recognizes individuals who have made an outstanding contribution to the field of coatings science and technology. Dr. Viviane Verlhac, principal scientist in the research center for Animal Nutrition and Health at DSM Nutritional Products, received a special award for her contribution as invited speaker at the XIII International Symposium on Fish Nutrition and Feeding held in Brazil in June 2008. Four researchers of DSM Nutritional Products were awarded the prestigious Sandmeyer Prize by the Swiss Chemical Society for outstanding work on a new synthesis for biotin (vitamin H). For the second year in a row, DSM Desotech was named among Chicago’s ‘101 Best & Brightest Companies to Work For’ in 2008, as published by the National Association for Business Resources and the Michigan Business & Professional Association. In the Netherlands, DSM won the NIMA Marketing Excellence Award for Innovation. DSM was also awarded the Prix de Mazars 2008 for its 2007 annual report and received a nomination for the FD Henri Sijthoff Prijs 2008 for its annual report as well. The DSM corporate website was awarded as best performing website in the European chemical sector by Halvarson and Halvarson. The VNCI (Association of the Dutch Chemical Industry) awarded DSM Agro the prestigious Responsible Care Award 2008. Responsible Care® is a global chemical industry performance initiative that is implemented in the Netherlands through the VNCI. This year’s award recognized the achievement of DSM Agro in Sittard-Geleen (Netherlands) in being the first company in the world to greatly reduce its emissions of dinitrogen oxide (N2O). Innovation Awards Program As DSM is very committed to promoting pioneering research that leads to products or applications that enhance people’s quality of life, an Innovation Awards Program is in place to recognize and reward exceptional achievements by DSM employees as well as by innovative scientists working outside DSM. In 2008, the DSM Science & Technology Awards were presented for the twenty-third time in the North region (Belgium, the Netherlands and the German state of North Rhine-Westphalia) and for the second time in the South region (Austria, Northeastern France, Southern Germany and Switzerland). These awards, granted annually, aim to encourage young scientists to undertake creative and groundbreaking PhD research. The first prize for the North region was awarded to Belgian researcher Maarten Roeffaers of the Catholic University of Leuven, who has pioneered the use of fluorescence microscopy in catalysis research. The first prize for the South region went to German researcher Andreas Walther of the University of Bayreuth, who has succeeded in developing Annual Report 2008 www.dsm.com 37 Report by the Managing Board new classes of polymeric materials with unusual properties based on so-called Janus particles. In 2008 DSM launched the new DSM Performance Materials Award. This award, which DSM grants in cooperation with the International Union of Pure and Applied Chemistry (IUPAC), will be presented every two years and recognizes established scientists worldwide whose work has made a significant contribution to the advancement of the materials sciences, with special emphasis on polymeric materials. The 2008 award was granted to Craig J. Hawker, Professor of Chemistry, Biochemistry and Materials and director of the Materials Research Laboratory at the University of California, Santa Barbara (United States), in recognition of his outstanding fundamental and applied research and his dedication to innovative science. The award was presented at the IUPAC Macro 2008 Congress in Taipei (Taiwan). Risk management • • Information on financial risks is provided in the financial statements on page 123. On the day of publication of this report, an updated full description of the DSM Risk Management System as well as a more elaborate description of relevant risks will be published on the DSM Internet site. The descriptions are to be found on the Risk Management pages of the Governance section of DSM’s website (www.dsm.com) and should be considered an integral part of DSM’s risk management reporting over the year 2008. Main risks As part of the annual risk management calendar, the Managing Board updated the Corporate Risk Assessment. For this assessment, last year’s list of risks was reviewed and supplemented by information from external and internal risk reports, events and other views and information obtained. These risks were ranked and responses were formulated by the Managing Board. The outcome of the assessment was checked against internal risk reports. The most important risks and responses are reported here: • Responsibility 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. Reporting structure In this annual report, reporting on risk management is organized as follows: • • Below, the Managing Board describes the most important risks and responses in relation to the achievements of the Vision 2010 targets. It is also described how the risk management system is used to arrive at conclusions regarding the functioning of the internal controls over financial reporting (the ‘In Control Statement’). In the risk management section (page 80) of the chapter on corporate governance, risk management, financial policies and related functions, a general description is given of the risk management system, the most important adaptations of the system and the risks that are relevant for the company. The impact of the global financial crisis and economic downturn is seen as one of the most important risks for the remainder of the Vision 2010 period. Especially in the end markets for most of the Materials Sciences businesses an unprecedented decline has occurred, whose depth and duration is still very hard to predict. Although the emerging economies have been less affected, their growth rates have also declined below earlier expectations and prospects have larger uncertainties than before. The financial crisis is making access to cash more difficult and more expensive. The pension reserves have been diminished by the stock price developments; this is expected to have a considerable negative non-cash EBIT effect in 2009 compared to 2008. DSM’s response to the financial and economic downturn covers all of the above aspects and is coordinated by a newly installed dedicated corporate team that works with the full Managing Board and the DSM Leadership Council. The responses include cost-cutting measures, reduction of capital expenditure programs, as well as an extra focus on cash and credit management. Opportunities are, however, also investigated and promising innovation initiatives are preserved as much as possible in order to safeguard future growth opportunities. Annual Report 2008 www.dsm.com 38 Report by the Managing Board Highlights of 2008 Vision 2010 progress Innovation and R&D Sustainability Human resources Corporate services External recognition Risk management Macro-economic environment Financial results the outcome of corporate audits and business risk assessments and the occurrence of material control failures or weaknesses were discussed with the responsible Managing Board member. Information on the functioning of the system was collected on a continuous basis. Business groups tracked compliance with Corporate Requirements and follow-up of actions from risk assessments; they conducted assessments on the effectiveness of their internal controls and reported and investigated incidents. The business group controllers confirmed that the quarterly financial statements were produced according to the internal accounting rules and reporting procedures by signing an affidavit. Independent audits on the effectiveness of the risk management implementation were executed by Corporate Operational Audit according to a program agreed with the Audit Committee of the Supervisory Board. The information thus gathered was used for improvements to the risk management system as described on page 80, while any critical findings were addressed immediately. Together with the annual financial accounts, all business groups, staff and service departments reported on any material operational, reporting and compliance risks or incidents over the past year in their Letter of Representation. The Corporate Risk Management department consolidated the reported risks and incidents and compared them with the outcome of corporate audits. These data were used to spot weaknesses and formulate recommendations for reinforcement of the risk management system. The reported risks were also compared with the outcome of the Corporate Risk Assessment; on that basis the final overview of main risks and responses was produced. The main risks were discussed with the Audit Committee of the Supervisory Board on 16 February 2009. Statements of the Managing Board On the basis of the above and in accordance with best practice II.1.4 of the Dutch corporate governance code of December 2003, taking into account the recommendation of the Corporate Governance Code Monitoring Committee on the application thereof, 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 Other main risks are: • • • • • Disposals and acquisitions. DSM has tested methods to conduct these processes successfully. There is, however, always the risk that suitable candidates do not present themselves against affordable conditions. This risk has increased due to the financial crisis. Price volatility (and secured supply) of raw materials and energy. Hedging policies have been put in place and are now being reviewed and extra focus has been put on single source situations. Extreme volatility can, however, always lead to unavoidable losses and the stability of suppliers may be affected by the crisis. Deteriorating market conditions and/or commoditization for the existing product portfolio. This risk may be aggravated by the global downturn, due to lower global utilization rates. DSM continues to counter this risk by innovation and product differentiation, but also by low-cost country sourcing, cost savings and process improvement measures. The ability to turn innovation efforts into profitable business. Close monitoring of the innovation portfolio is in place and best practice solutions for new product development and launch have been implemented. Nevertheless, uncertainties with respect to the eventual success of new products and applications remain, especially in today’s economic environment, where some of DSM’s customers might re-prioritize their needs. People, organization and culture. The ability to attract and retain the right people and to create an entrepreneurial yet responsible culture is key to the achievement of the Vision 2010 targets. During the reporting year new recruiting, management development and learning practices were implemented. Organizational changes were set in motion and programs to support the entrepreneurial spirit and cultural change were initiated. Nevertheless, the above remains a critical success factor in the implementation of DSM’s strategy. Functioning of the risk management system The implementation of the Corporate Requirements, which represent common controls for the most important commonly occurring risks, was continued in those business groups which were allowed by the Managing Board to delay parts of the implementation until after the general due-date of 1 January 2008. In these units, much attention was given to the implementation of temporary controls where necessary. All business groups and the major operational service units have an Audit Committee, which, under the direction of the director, sets up annual risk management plans, monitors their implementation and reviews risk management issues on a regular basis. Major risk management events, such as Annual Report 2008 www.dsm.com 39 Report by the Managing Board 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. The European economy has entered a severe recession with rising unemployment, government intervention programs and thinning order books. The Eurozone manufacturing sector has undergone a deep retrenchment. Commodity prices reached historic highs in 2008, driving inflation up globally. But it took only five months for the price of oil to plummet from nearly USD 150 to under USD 40 per barrel at the end of the year. Macro-economic outlook for 2009 The US and world economies are about to experience a serious recession. Nearly all economic indicators dropped sharply at the end of 2008 and are likely to continue down that path for at least the first half of 2009. Many European countries followed the US downturn in 2008. At the same time, growth in most emerging markets is faltering. The overall economic consensus is that there are severe downward risks to the global economy even with all the unprecedented, government- led, fiscal stimulation and quantitative easing. No economy will show higher growth than in 2008. Global GDP growth is forecast by economists to be between -0.5% and +0.4%; the US and European economies are expected to contract by more than 1%, with Asia growing by 2 to 3%. All in all 2009 will be a year of great uncertainty and many surprises. In view of all of the above, the Managing Board confirms that, to its knowledge, the financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the annual report includes a fair review of the position at the balance sheet date and the development and performance of the business during the financial year together with a description of the principal risks and uncertainties that the company faces. Macro-economic environment Macro-economic environment in 2008 The financial and economic crisis severely affected economic activity during 2008 and left the developed economies in recession at year-end. During 2008, the global economy managed to expand by 2.4%, down from 3.8% in 2007. The effects on the US economy of the housing and subsequent financial crisis were much deeper than anticipated. US GDP growth slowed to 1.2%, down from 2.0% in 2007. The US government intervened heavily and the Federal Reserve lowered interest rates in order to boost the economy. The effects were offset by rising unemployment, increased savings rates and lower investment levels. The US economy is expected to pick up some pace at the end of 2009, but still contract by more than 1% over the year. Even the Asian economies cannot escape the global downturn. China managed growth of 9.3% in 2008, followed by India with 6.9%. Chinese exports were impacted strongly during the final quarter of 2008, but the government-sponsored investment program is expected to boost the economy from the third quarter of 2009 onwards. Economic activity in China was very weak at year-end; manufacturing activity contracted at a record pace, employment fell for the fifth month and backlogs of work fell at the sharpest pace on record. China may see GDP growth slipping to a range of 5 to 7.5% in 2009. Indian GDP will continue to ease in 2009 to a currently expected range of 5.5 to 6.5%. The Japanese economy is continuing its period of weakness, mainly caused by the strong Yen, lower exports and slack domestic demand. Annual Report 2008 www.dsm.com 40 Report by the Managing Board Highlights of 2008 Vision 2010 progress Innovation and R&D Sustainability Human resources Corporate services External recognition Risk management Macro-economic environment Financial results 2008 9,297 142 9,439 (8,536) 903 (102) (3) (196) 6 608 - (31) 577 2007 8,757 164 8,921 (8,098) 823 (75) (2) (183) (5) 558 - (129) 429 Financial results Income statement 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. Net sales At € 9.3 billion, organic net sales from continuing operations in 2008 were 8% higher than in the previous year. Organic volume development accounted for a 3% decrease in net sales. Selling prices were on average 11% higher than in 2007. Exchange rates, acquisitions and disposals on balance had a negative effect of 2%. In total, net sales increased by 6%. Operating costs Operating costs rose compared to 2007, closing the year at € 8.5 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 € 200 million. Total autonomous fixed costs increased slightly, mainly due to higher innovation expenditure and capacity expansions. Net sales by segment in % 2008 2007 5 5 19 29 18 13 14 9 25 27 26 10 EBITDA / net sales in % 2008 2007 25 20 15 10 5 0 21.6 17.5 17.4 18.6 19.7 13.7 15.5 11.6 10.8 3.6 Nutrition Pharma Performance Materials Polymer Intermediates Base Chemicals and Materials Nutrition Pharma Performance Materials Polymer Intermediates Base Chemicals and Materials Other activities Annual Report 2008 www.dsm.com 41 Report by the Managing Board Part of the impairment charge recognized in 2007 at DSM Anti-Infectives was reversed for an amount of € 15 million before tax (€ 11 million after tax), reflecting the improved cash flow outlook for DSM Anti-Infectives. As a consequence of the announced cost-saving actions, a provision for restructuring was recognized amounting to € 25 million (€ 18 million after tax). Net sales by origin in % 2008 13 11 4 4 6 2007 5 4 6 13 46 13 44 260 14 2 13 2 Operating profit The operating profit from continuing operations before exceptional items increased by € 80 million (10%), from € 823 million in 2007 to € 903 million in 2008. The EBITDA margin (operating profit before depreciation and amortization as a percentage of net sales) rose from 14.2% in 2007 to 14.6% in 2008 as higher organic sales growth compensated for higher feedstock costs and lower average exchange rates. 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 2007 level. Operating profit by segment x € million 447 175 89 19 500 360 220 80 (60) (200) Nutrition Pharma Peformance Materials Polymer Intermediates Base Chemicals and Materials Other activitities (87) Net profit The net profit from continuing operations before exceptional items increased by € 50 million to € 608 million. Per ordinary share, net earnings from continuing operations before exceptional items increased from € 3.07 in 2007 to € 3.64 in 2008. Net sales by destination in % 2008 18 13 2007 9 10 9 9 11 18 6 3 3 13 8 19 8 20 Net finance costs, before exceptional items, stood at € 102 million in 2008, compared to € 75 million in 2007. The increase was mainly caused by the higher net debt and some fair-value adjustments in Other financial assets. End-use markets At 25%, the effective tax rate in 2008 remained stable. Net profit increased from € 429 million in 2007 to € 577 million in 2008. Net profit per ordinary share rose from € 2.35 in 2007 to € 3.45 in 2008. Exceptional items In accordance with the strategic review of DSM Anti- Infectives, DSM Deretil was disposed of in Q4, leading to a book loss of € 11 million (€ 6 million after tax). The closure of the clavulanic acid site in Strängnäs (Sweden) resulted in an asset impairment charge and restructuring provision totaling € 23 million (€ 18 million after tax). 15 in % 2008 4 4 9 8 2007 14 31 4 5 6 9 9 8 12 8 14 Annual Report 2008 www.dsm.com 42 Netherlands Germany Switzerland Rest of Europe North America China Asia Pacific Rest of the world Netherlands Germany France United Kingdom Switzerland Rest of Europe China Asia Pacific North America Rest of the world Health and nutrition Pharmaceuticals Metal / building / construction Automotive / transport Textiles Agriculture Electrical / electronics Packaging Other 11 6 4 2 29 11 Report by the Managing Board Highlights of 2008 Vision 2010 progress Innovation and R&D Sustainability Human resources Corporate services External recognition Risk management Macro-economic environment Financial results 2008 369 1,028 (180) 62 910 (591) (120) 8 19 (110) (794) (220) 305 31 601 2007 552 1,003 (124) (54) 825 (434) (85) - 51 74 (394) (193) (426) 5 369 Cash flow At € 910 million, net cash provided by operating activities was 9.8% of net sales. Cash flow statement 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 Net cash used in investing activities Dividend Net cash from / used in financing activities Effects of changes in consolidation and exchange differences Cash and cash equivalents at 31 December The balance sheet total (total assets) decreased by € 175 million in 2008 and amounted to € 9.7 billion at year- end (2007: € 9.8 billion). Equity decreased by € 688 million compared to the position at the end of 2007; this was due mainly to the decrease in the value of pension assets which is recognized in equity and to the repurchase of own shares. Equity as a percentage of total assets decreased from 55% at the end of 2007 to 49% at the end of 2008. The current ratio (current assets divided by current liabilities) decreased from 1.78 in 2007 to 1.51 in 2008. Net debt stood at 28% of equity plus net debt at the end of 2008. Capital expenditure on intangible assets and property, plant and equipment amounted to € 587 million in 2008 and was € 136 million above the level of amortization and depreciation. In 2009 the level of capital expenditure is expected to be lower. The operating working capital was € 227 million higher than in 2007. Cash and cash equivalents increased and amounted to € 601 million. Capital employed by segment at 31 December 2008 x € billion 2.5 2.0 1.5 1.0 0.5 0 2.1 1.7 1.0 0.9 0.4 0.4 Nutrition Pharma Performance Materials Polymer Intermediates Base Chemicals and Materials Other activities Annual Report 2008 www.dsm.com 43 Report by the Managing Board vulnerable consumer end-markets, have been significantly impacted. During the fourth quarter market conditions in the automotive, electrical and electronics, and building and construction industries deteriorated with unprecedented speed. Conditions in these markets have not improved early 2009 compared to the low level of December and are on average worse than in the fourth quarter. It is expected that business conditions in Nutrition will remain favorable during 2009. In the Pharma cluster, on average lower prices are expected at DSM Anti-Infectives and DSM Pharmaceutical Products will face challenges due to the loss of some of the larger custom manufacturing contracts. At the current time, there is a high degree of uncertainty regarding demand in Performance Materials, except for DSM Dyneema, where continued growth is expected. There is a similar lack of clarity at Polymer Intermediates which will most likely be loss-making in 2009. Price pressure is currently being seen at DSM Agro. IFRS pension costs (non cash) will increase in 2009 by approximately € 70 million compared to 2008. It is not expected that additional cash contributions will be required on top of the normal contributions to the defined benefit plans. DSM’s swift response to the changing market conditions and successful focus on cash flow have secured its strong balance sheet and financing position. DSM is committed to generating sufficient cash from operations in 2009 to secure DSM’s future profitable growth. DSM will provide no quantitative outlook for 2009 in view of the uncertain economic conditions. Balance sheet profile As % Intangible assets Property, plant and equipment Other non-current assets Cash and cash equivalents Other current assets Total assets Equity Provisions Other non-current liabilities Other current liabilities 2008 2007 12 38 8 6 36 10 35 17 4 34 100 100 49 3 21 27 55 3 22 20 Total liabilities 100 100 Equity As a % of balance sheet total 60 50 40 30 20 10 0 55 58 55 49 49 2004 2005 2006 2007 2008 Dividend DSM aims to provide a stable and preferably rising dividend. The dividend on ordinary shares proposed for the year 2008 amounts to € 1.20 per share (2007: € 1.20 per share). An interim dividend of € 0.40 per ordinary share having been paid in August 2008, the final dividend would then amount to € 0.80 per ordinary share, subject to approval by the Annual General Meeting of Shareholders. The ex-dividend date is 27 March 2009. Outlook The general economic outlook is poor, financial markets are unstable, consumer confidence is low and feedstock prices, energy prices and exchange rates continue to be highly volatile. Although half of DSM’s businesses (the Nutrition and Pharma clusters and DSM Dyneema) have been relatively unaffected, most of its Materials Sciences and Base Chemicals and Materials activities, particularly those exposed to Annual Report 2008 www.dsm.com 44 Report by the Managing Board Highlights of 2008 Vision 2010 progress Innovation and R&D Sustainability Human resources Corporate services External recognition Risk management Macro-economic environment Financial results Annual Report 2008 www.dsm.com 45 Review of business In 2008 DSM’s activities were grouped into five clusters: Nutrition, Pharma, Performance Materials, Polymer Intermediates and Base Chemicals and Materials. Net sales x € million Nutrition Pharma Performance Materials Polymer Intermediates Base Chemicals and Materials Other activities 2008 2007 x € million 2008 2007 Operating profit (EBIT) 2,710 863 2,297 1,201 1,733 493 2,302 Nutrition 903 Pharma 2,390 1,232 1,529 Performance Materials Polymer Intermediates Base Chemicals and Materials 401 Other activities 447 89 175 19 260 (87) 903 276 92 291 105 137 (78) 823 Total DSM 9,297 8,757 Total DSM Operating profit plus depreciation and amortization (EBITDA) x € million Nutrition Pharma Performance Materials Polymer Intermediates Base Chemicals and Materials Other activities 2008 2007 585 150 266 43 342 (29) 403 168 371 133 209 (37) Total DSM 1,357 1,247 Capital employed at 31 December x € million Nutrition Pharma Performance Materials Polymer Intermediates Base Chemicals and Materials Other activities 2008 2007 2,054 1,001 1,689 431 945 438 1,909 1,034 1,568 408 765 298 Total DSM 6,558 5,982 EBITDA / net sales Capital expenditure and acquisitions in % Nutrition Pharma Performance Materials Polymer Intermediates Base Chemicals and Materials 2008 2007 x € million 2008 2007 21.6 17.4 11.6 3.6 19.7 17.5 18.6 15.5 10.8 13.7 Nutrition Pharma Performance Materials Polymer Intermediates Base Chemicals and Materials Other activities Total DSM 135 49 231 54 82 188 739 142 60 196 51 65 54 568 Annual Report 2008 www.dsm.com 46 Review of business Nutrition Pharma Performance Materials Polymer Intermediates Base Chemicals and Materials Other activities R&D expenditure (including associated IP expenditure) x € million as % of net sales 2008 2007 2008 2007 Nutrition Pharma Performance Materials Polymer 135 74 135 67 127 113 Intermediates Base Chemicals and Materials Other activities 22 22 14 13 30 14 5.0 8.6 5.5 1.8 1.3 2.8 Total DSM 394 372 4.2 5.9 7.4 4.7 1.1 2.0 3.5 4.2 Workforce at 31 December Nutrition Pharma Performance Materials Polymer Intermediates Base Chemicals and Materials Other activities 2008 2007 7,043 4,401 4,978 1,427 2,357 3,385 6,998 4,888 4,592 1,421 2,282 3,073 Total DSM 23,591 23,254 Annual Report 2008 www.dsm.com 47 Review of business Nutrition Net sales € 2,710 m Workforce 7,043 Annual Report 2008 www.dsm.com 48 Review of business Nutrition Pharma Performance Materials Polymer Intermediates Base Chemicals and Materials Other activities The Nutrition cluster comprises DSM Nutritional Products and DSM Food Specialties. The main customers are feed, food, dietary supplements, 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 sales: DSM Nutritional Products: - Animal Nutrition and Health - Human Nutrition and Health DSM Food Specialties 2008 2007 1,409 945 2,354 356 1,192 740 1,932 370 Total 2,710 2,302 DSM Nutritional Products As the world’s leading supplier of vitamins, carotenoids, feed enzymes, premixes, UV filters and nutritional ingredients, DSM Nutritional Products has a strong presence in all major international markets with a unique completeness and positioning of its portfolio. With producers and consumers putting more emphasis on health, wellness and safety, market dynamics have become very positive. DSM Nutritional Products offers state-of-the-art formulations and is forward integrated into premixing – the customized blending of nutritional ingredients. With 44 dedicated premix plants in total, of which 36 for animal and 8 for human applications, as well as 8 large actives production sites, 5 R&D centers and 40 sales and support offices in all main regions of the world, the business group is never far away from its customers. It is also well recognized for its innovative solutions. DSM Nutritional Products is organized around two market- facing entities: Animal Nutrition and Health (ANH) and Human Nutrition and Health (HNH). ANH realized € 1,409 million in sales in 2008 and HNH € 945 million, 18% and 28% higher than in 2007, respectively. Operating profit Operating profit plus amortization and depreciation Capital expenditure and acquisitions Capital employed at 31 December ROCE EBITDA as % of net sales R&D expenditure 447 585 135 2,054 22.6 21.6 135 276 403 142 Within the global food ingredients market, estimated at € 32 billion in 2008, HNH largely addresses the nutritional ingredients part. This is the fastest growing segment of the food ingredients market, representing some € 7 billion in 2008, with market growth rates at around 7%. 1,909 14.3 17.5 135 ANH addresses the nutritional additives segment of the feed additives market in 2008, worth some € 16 billion in 2008. This nutritional additives market segment, estimated at € 6.5 billion in 2008, also shows market growth rates of around 7%. Workforce at 31 December 7,043 6,998 The Dual Track Strategy of DSM Nutritional Products, addressing on the one hand the dynamics in the established business via product and volume management, application leadership and differentiation and on the other hand innovation and new business development, is generating success. In 2007, the ‘Aspire to Win’ profit improvement plan was announced. Part of this program – which is well underway – focuses on cost reduction and operational excellence. Moreover, the program is about further increasing momentum in differentiation and innovation. Its overall aim is to improve EBITDA by € 100 million, a target that will be reached well before the end of 2010. Annual Report 2008 www.dsm.com 49 Review of business In vitamins, the competitive landscape has changed drastically over the last ten years. Where other western players experienced severe erosion of their position or even decided to exit certain products, DSM Nutritional Products managed to continue growth in 2008. in 2008, mostly driven by organic growth. The company’s competitive position has benefited from efficiencies in production and economies of scale. Operating profit rose substantially in 2008. As an example, the world’s vitamin C production is currently taking place in five plants, four of which are located in China. The one remaining plant in the western world is operated by DSM and located in Dalry (United Kingdom). This plant celebrated its 50th anniversary in 2008. As the only fully integrated player, DSM Nutritional Products is uniquely positioned to innovate and differentiate across the entire value chain, with full quality assurance and traceability. In this value chain there are three distinct steps: the production of actives such as vitamins and carotenoids, the production of forms resulting in improved stability and delivery, and the production of premixes. In the production of actives, added value is created through product and process innovation and strict quality controls. The development of forms technology requires an in-depth understanding of in-use requirements and optimum delivery. In premixes added value is created by offering customers customized blends delivered through efficient logistics and distribution channels. By buying premix from DSM Nutritional Products, customers can reduce their need for raw materials as well as complexity, cost and working capital. About 20% of DSM Nutritional Products’ products are delivered as pure actives and around 80% as forms and premix formulations. Changing business dynamics in China have impacted industry dynamics globally. For vitamin A, C and E there has been a more balanced demand-supply situation. Ongoing privatization for some Chinese players has put more emphasis on shareholder value creation and hence on profitability. Currency appreciation has added to increased upward pressure on export pricing. Also, China’s current Five Year Plan dictates a considerable clean-up of the environment, not just for the Olympic Games. Those businesses that cannot comply with tighter restrictions are forced to reduce activities. In China, DSM Nutritional Products has seen triple-digit growth over the last four years. In 2008, its sales in China amounted to approximately USD 230 million. With one HNH and three ANH premix facilities – the third was opened in November 2008 – and one under construction, the company’s strategy is to maintain its market leadership position and support strong growth through localization and local presence. In this country, which today represents approximately 20% of global meat consumption, DSM Nutritional Products has also introduced a new business model for ANH. By establishing a network of franchises of small distributors in rural areas, selling to local farmers, a new and promising segment has been created. The network is growing rapidly, with more than 70 stores at the end of 2008 and the ambition to double this number during 2009. Customers’ heightened awareness of food safety issues further increases their need for quality assurance and traceability. DSM Nutritional Products – adhering to the highest standards in this area – is recognized as an industry leader by customers and regulatory authorities alike. Quality assurance and traceability at DSM Nutritional Products are embedded in operating procedures, facilities, environmental and microbiological control, calibration and validation. Due to the high dilution factor when applied in end products, ingredients can have a profound effect on the quality in the value chain. As an example, one kilogram of vitamin A can translate to the production of 400,000- 1,000,000 cereal bars. As a result of the market shift described above, DSM Nutritional Products enjoyed substantial sales growth DSM Food Specialties DSM Food Specialties is a global supplier of advanced ingredients for the food and beverage industries, primarily manufactured with the aid of fermentation and enzyme technology. Ingredients made by DSM Food Specialties form an essential part of many everyday products and contribute to the success of the world’s favorite dairy, baking, savory, fruit juice, beer, wine and functional food brands. DSM Food Specialties’ technology base covers all required disciplines from genetics and fermentation to application and nutrition. Increasing demand for healthy nutrition, including low-salt and low-fat foods, the need for natural ingredients, convenience, and food safety are the trends that characterize the markets in which DSM Food Specialties operates. Awareness of the fine balance between nutrition, health and beauty has never been so high. Annual Report 2008 www.dsm.com 50 Review of business Nutrition Pharma Performance Materials Polymer Intermediates Base Chemicals and Materials Other activities The size of the global food ingredients market in which DSM Food Specialties operates is estimated to be around € 32 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. In general the growth of the food market is less sensitive to the development of the world economy. significantly, in particular in the area of brewing. Sales of functional food ingredients showed a strong increase. Sales of savory ingredients accelerated in the second half of the year, due to the expansion of the production facility in the Netherlands by 35% in response to the sharp rise in demand for yeast extracts. The weaker US dollar, amended ARA contract conditions and higher raw material and energy costs had a negative impact, resulting in a lower operating profit. DSM Food Specialties realized two acquisitions in 2008. With the acquisition of CMT Srl the business group strengthened its position and know-how in antibiotic residue testing. DSM developed this market with its Delvotest® product, which today is the industry standard. CMT produces the Copan Milk Test, a microbiological test for the detection of antibiotic residues in milk. The Copan Milk Test has been recognized worldwide and validated by key international scientific institutes and is today the primary reference microbiological test for the detection of antibiotic residues in milk in some of the most important milk control stations and dairies worldwide. DSM Food Specialties also acquired the business and substantially all of the assets of Valley Research, Inc., further reinforcing its leading global position in food enzymes. Valley Research, founded in 1984, offers a broad range of enzymes, supported by technical laboratories and production facilities. Its products are used in dietary supplements, dairy, juices and wines. The acquisition of Valley Research enables DSM Food Specialties to strengthen its product portfolio, while at the same time the company can now offer regional blending and solution providing platforms to customers. Both acquisitions contributed to DSM Food Specialties’ sales and operating profit in 2008. Looking ahead to 2009, DSM Food Specialties will further strengthen its position as a leader and innovator in bio- ingredients. It is expected that DSM Food Specialties will show increasing profitability in the coming years due to market demand and success of the well-filled innovation pipeline. The high food and oil prices create additional opportunities for more efficient and renewables based biotechnology. It is estimated that around 10% of the global food ingredients market consists of bio-ingredients, specialty products based on fermentation processes such as yeast extracts, cultures and food enzymes. DSM Food Specialties is the bio- ingredient leader in food. DSM Food Specialties comprises three business units and an Ingredients Development Unit. Enzymes & Dairy Ingredients supplies a wide range of food enzymes for applications such as baking, fruit processing, brewing and manufacturing of other alcoholic beverages, starter cultures and preservation solutions for cheese, yogurt and meat, and tests for the detection of residues of antibiotics in milk. 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. Functional Food Ingredients focuses on arachidonic acid (ARA) and functional food ingredients with clinically proven health benefits for dietary supplements and functional foods. Together with DSM Nutritional Products, DSM Food Specialties offers a broad portfolio of functional food ingredients. For DSM Food Specialties a major focus in functional food ingredients is on metabolic health solutions, helping consumers to take preventative action to cope with future health concerns, such as high blood pressure (TensGuard™), high glucose levels (InsuVital®) and obesity (Fabuless®). Fueled by market demand, Fabuless® continued in 2008 its significant growth of 2007. ARA remains an important product for DSM. In 2008 ARA performed according to expectations. ARA is naturally found in breast milk and is applied in baby food. DSM Food Specialties partners with the US-based Martek Biosciences Corporation in the production and supply of ARA. In 2008, DSM Food Specialties’ sales showed a satisfactory volume growth of 4%. Primarily as a result of a weaker US dollar and amended contract conditions for ARA, DSM Food Specialties’ sales declined by 1%. Food enzymes grew Annual Report 2008 www.dsm.com 51 Review of business Pharma Net sales € 863 m Workforce 4,401 Annual Report 2008 www.dsm.com 52 The Pharma cluster comprises the business groups DSM Pharmaceutical Products and DSM Anti-Infectives. DSM is one of the world’s leading independent suppliers to the pharmaceutical industry. Many of today’s medicines around the world contain ingredients produced by DSM. DSM Anti-Infectives is one of the few penicillin producers outside of China. x € million Net sales: DSM Pharmaceutical Products DSM Anti-Infectives Total Operating profit Operating profit plus amortization and depreciation Capital expenditure and acquisitions Capital employed at 31 December ROCE EBITDA as % of net sales R&D expenditure 2008 2007 419 444 863 89 150 49 1,001 8.7 17.4 74 445 458 903 92 168 60 1,034 8.1 18.6 67 Workforce at 31 December 4,401 4,888 Review of business Nutrition Pharma Performance Materials Polymer Intermediates Base Chemicals and Materials Other activities DSM Pharmaceutical Products 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. Among these customers are 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 consists of four business units. DSM Pharma Chemicals is a provider of custom chemical manufacturing services for complex registered intermediates and active pharmaceutical ingredients (APIs). DSM Biologics provides biopharmaceutical manufacturing technology and services. DSM Pharmaceuticals, Inc. is a provider of high-quality finished-dose-form manufacturing services. DSM Exclusive Synthesis is a global provider of custom manufacturing services for the crop protection industry. DSM Pharma Chemicals saw its project pipeline improve in 2008 in both clinical and launch material, and the business unit has broadened its customer base. The successful development of micro reaction technology for continuous processes was a highlight of the year and will offer good opportunities in the future for the production of small molecule APIs. DSM Biologics continues to make progress with the development of PER.C6® with joint-venture partner Crucell N.V. DSM Biologics and Crucell 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. With the help of DSM’s innovative XD™ technology much higher yields in manufacturing were achieved during the year. DSM Pharmaceuticals, Inc. is a service provider to the pharmaceutical and biotech industries. Services include oral, topical and sterile finished-dose forms and the related formulation and process development. The business unit recently added sterile cytotoxic and sterile clinical trial manufacturing facilities to its capabilities. DSM Exclusive Synthesis is a service provider to the crop protection industry. This market has been growing at a high pace since the end of 2007 and DSM Exclusive Synthesis has been able to capture the growth in the market resulting in increased sales and increased profitability. Annual Report 2008 www.dsm.com 53 Review of business The main focus for the years to come is on filling the pipeline to secure the future growth of the business. Overall, DSM Pharmaceutical Products saw its profitability levels affected in 2008, as a result of the phasing-out of the contracts related to the Roche Vitamins acquisition, insourcing by large pharma houses to address cost pressures and delays in commercial development of products. Operating profit declined. Sales declined by 6%. During 2009 some large-volume products will not be manufactured by DSM Pharmaceutical Products due to customer insourcing, while other product volumes will be diminished until inventory is reduced. This will result in cost pressure for DSM Pharmaceutical Products. The business group has set up a program to take corrective action. Cost restructuring measures, such as reorganization of the Greenville, North Carolina (United States) site announced in October, are designed to deliver results in the short term. Improved account management should lead to stronger customer intimacy and closer involvement with various players across the value chain and an improved innovation pipeline. More efficient processes will be implemented to ensure low cost levels while maintaining the high quality and compliance for which DSM Pharmaceutical Products is known. The business group will also expand its offering by building on value-added technologies, expertise and customer relations within the business units. This should reinforce the business group’s offering and contribute to a stronger market position. However, 2009 will be a difficult year for the business group. DSM Anti-Infectives DSM Anti-Infectives holds global leadership positions in penicillin G, penicillin intermediates (6-APA and 7-ADCA), in active pharmaceutical ingredients (APIs) such as semi- synthetic penicillins and semi-synthetic cefalosporins (beta- lactams) and in other active ingredients such as nystatin. 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 infections in both humans and animals and as such are of vital importance for people’s well-being and healthier economics in farming. 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 China, India and other countries in Asia, Africa and Latin America. Consumption in the Western world with its highly regulated markets is more or less stable. Within the western world, DSM is one of the few remaining independent (merchant) beta-lactam producers, serving the needs of patients suffering from infectious diseases. Growth of the market for penicillin derivatives is estimated to be between 4-7% per year, the greater part of which comes from the emerging economies. In 2008, penicillin prices recovered quickly from a relatively weak start but declined again in the second half of the year. Overall prices were below the peak seen in the third quarter of 2007, but remained on average at a good but lower level. Based on this, and on the continued implementation of the announced restructuring measures, the results of DSM Anti- Infectives in 2008 stayed at a healthy level. Sales declined 3% in 2008. DSM Anti-Infectives – as the leading supplier of bulk active ingredients and important intermediates – defined a strategy in 2007 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 and a strengthened product portfolio in generic active ingredients. This will be achieved by actively seeking partnerships and where necessary rationalizing parts of the portfolio. In 2008 the business group made further progress with its actions to structurally improve profitability. In addition to restructuring measures, mainly related to lower fixed costs, a further strengthening is taking place through the introduction of new products and the implementation of enzymatic technologies for the production of APIs in its global asset base. At the same time the business group stepped up its efforts to broaden the portfolio to include active pharmaceutical ingredients that will become generic in the coming years. In relation to the rationalization of the portfolio, during the year the decision was taken to close the clavulanic acid manufacturing site in Sweden at the end of 2009. Also, DSM Deretil, active in side chains, was sold in a management buy- out with effect from 1 October 2008. In view of these decisions the value of the remaining business was reviewed and it was determined that a partial reversal of the 2007 Annual Report 2008 www.dsm.com 54 Review of business Nutrition Pharma Performance Materials Polymer Intermediates Base Chemicals and Materials Other activities impairment of the assets of the cash generating unit DSM Anti-Infectives was required, resulting in a € 15 million reversal leading to an increase in the carrying amount of assets. The intended partnership with North China Pharmaceutical Group Corporation to create a joint venture for the production and marketing of anti-infectives in China is in the stage of approval by the Chinese authorities. In 2008 DSM Anti-Infectives announced a partnership with Arch Pharmalabs from India to accelerate the introduction of new products. DSM will contribute its innovative fermentative technologies and market access to the partnership, whereas Arch will utilize its asset base and its competences in chemical conversion. In addition, DSM Anti-Infectives is currently investing to upgrade activities in India, Mexico, Europe and China towards enzymatic processes. DSM’s enzymatic technology provides not only substantial environmental advantages – such as a strong reduction in emissions and energy consumption – but also superior quality and is more cost-effective throughout the value chain. Looking ahead, DSM Anti-Infectives expects its profitability to be sustainable in the years to come. Annual Report 2008 www.dsm.com 55 Review of business Performance Materials Net sales € 2,297 m Workforce 4,978 Annual Report 2008 www.dsm.com 56 The Performance Materials cluster comprises the business groups DSM Engineering Plastics, DSM Dyneema and DSM Resins. The business groups 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 electrical & electronics industry, the sports and leisure industries, the paint and coatings industry and the construction industry. x € million Net sales: DSM Engineering Plastics DSM Dyneema DSM Resins 2008 2007 761 305 1,231 807 259 1,324 Total 2,297 2,390 Operating profit Operating profit plus amortization and depreciation Capital expenditure and acquisitions Capital employed at 31 December ROCE EBITDA as % of net sales R&D expenditure 175 266 231 1,689 10.7 11.6 127 291 371 196 1,568 19.3 15.5 113 Workforce at 31 December 4,978 4,592 Review of business Nutrition Pharma Performance Materials Polymer Intermediates Base Chemicals and Materials Other activities DSM Engineering Plastics With a global market share of about 5% DSM Engineering Plastics is one of the world leaders in polyamides (polyamide 6, polyamide 46 and polyamide 66), polyesters (PBT, PET and TPC), polycarbonate (PC and PC blends) and extrudable adhesive resins. DSM Engineering Plastics is the global leader in high-heat polyamide. The materials produced by the business group are used mainly in technical components for the electrical and electronics, automotive, engineering and packaging industries. The engineering plastics market has grown at a rate of about 6% per year in the last few years, higher than average worldwide GDP growth. The largest growth area has been Asia Pacific, most notably China and India, where growth has been in the range of 10% per year, fueled by local demand and a shift of manufacturing to the region. In the second half of 2008, however, the market for engineering plastics was faced with an unprecedented decline in demand following a strong decline in end-markets, in combination with significant destocking due to scarcity of credit and the rapid decrease in the price of raw materials. The strong decline in the end-markets was a result of both the turmoil in the financial markets and an economic recession in the United States and Europe. DSM Engineering Plastics was faced with strong headwinds in the last few months of the year and temporarily stopped production at several plants to align inventories with the lower demand. Heat-resistant resins are the product area that has shown the highest growth within the engineering plastics market in recent years. DSM Engineering Plastics is active in this market with Stanyl® and the newly introduced Stanyl® ForTii™. In automotive DSM Engineering Plastics’ products are used in the engine compartment and in the exterior and interior of the vehicle. Applications include turbo parts and airbag containers. The replacement of metal to reduce weight and fuel consumption continues to be a high growth area as consumers and car manufacturers alike increasingly focus on smaller, lighter and more economical cars with improved fuel efficiency. With interconnect components from Stanyl® DSM Engineering Plastics is a leading supplier to the electronics industry, benefiting from trends that call for increased connectivity in the world. With Akulon® polyamide 6 DSM has a European leadership position in the food packaging industry. To become a leader in the food packaging industry in Asia Pacific as well within two years, DSM Engineering Plastics opened a polymerization plant in China. Annual Report 2008 www.dsm.com 57 Review of business In the coming years DSM Engineering Plastics wants to further strengthen its leadership position with a strong focus on performance materials and specialties, while innovation programs continue unabated despite the more difficult market conditions. As part of its ambitious investment program, four new plants came on stream in 2008. DSM produces Dyneema® fiber and UD (UniDirectional) in Heerlen (Netherlands) and in Greenville, North Carolina (United States) through its proprietary gel-spinning process. In 2008 DSM completed the commercial introduction of a new tape technology, manufactured at a dedicated facility in Flaach (Switzerland). DSM Dyneema is also a partner in a UHMWPE fiber manufacturing joint venture in Japan. Apart from the aforementioned polymerization plant in China for Akulon® polyamide 6, the second Stanyl® polymerization plant was opened in Sittard-Geleen (Netherlands), doubling existing capacity. A green field compounding site in Pune (India) doubled DSM’s capacity in India after it started production in the fourth quarter of the year. In April, DSM opened its market development plant for Stanyl® ForTii™, the world’s first new polymer in the new millennium. As a result of increasing economic headwinds, especially in the last few months of the year, the markets for engineering plastics contracted in 2008. DSM Engineering Plastics was faced with 6% lower sales and a negative operating result in 2008, as a result of a decline in demand from the automotive and electronics industries. Both markets increasingly felt the impact of reduced consumer spending. A temporary production stop at several facilities in the last few months of the year combined with the lower sales level resulted in a strong decline in operating profit in 2008. In the short term, the focus will be on navigating through the current difficult market situation while continuing the innovation programs as DSM Engineering Plastics prepares to seize opportunities once a recovery sets in. For the longer term, DSM Engineering Plastics continues to target a yearly sales growth of 10% via innovation and expansion. DSM Dyneema DSM invented and developed Dyneema®, a high-modulus polyethylene fiber made from Ultra High Molecular Weight Polyethylene (UHMWPE). It is the strongest fiber in the world on a weight-for-weight basis. It floats on water and is extremely durable and resistant to moisture, UV light and chemicals. DSM Dyneema is expanding around the world in selected, high value-in-use applications and markets offering high profitability. The business group will continue to focus on the further development of ultra high-performance polyethylene materials and technologies. The Dyneema® fiber was invented at DSM’s research laboratories in the late 1960s, the proprietary gel-spinning manufacturing process was developed and patented in 1978. Commercial production started in 1990. Between 1998 and 2008 sales volumes for DSM Dyneema rose sixfold and the business clearly outgrew all direct competitors. Demand for light but strong, high value-in-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. DSM Dyneema’s position in the market relies on strong collaboration down the value chains in which it operates. The business group not only gives focus to direct buyers of Dyneema® fiber, but also provides support to the customers’ customers in the form of processing and application know- how. Support is aimed at co-development of innovative new applications and improved products. At the same time, the business group protects its current and future market positions through market-driven innovation, increased customer intimacy and an active branding policy, supported by a strong manufacturing and technological base. This is backed by an active policy to protect DSM’s intellectual property. Dyneema® fiber is an important component in ropes, cables and nets in the fishing, shipping and offshore industries. It is also used in safety gloves for the metalworking industry and in fine yarns for applications in sporting goods. In addition, it is applied in bullet-resistant armor and clothing for law- enforcement personnel and the military. Dyneema Purity® is a special grade for applications in the medical sector. The business group continued its growth path in 2008. All markets for DSM 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 18%. DSM Dyneema’s operating profit was up from 2007 as a result of higher volumes as capacity further increased during the year. Annual Report 2008 www.dsm.com 58 Review of business Nutrition Pharma Performance Materials Polymer Intermediates Base Chemicals and Materials Other activities In April 2008, DSM Dyneema announced plans for a substantial capital expenditure program, expected to involve up to USD 450 million, to increase production capacity to enable the business group to capitalize on expected continuous growth in demand especially in the United States but also in the rest of the world. DSM Dyneema is set to begin the construction of a large- scale manufacturing facility in Greenville for its new proprietary tape technology. This facility, planned to be on stream at the beginning of 2010, is a key component of the investment program of USD 450 million. DSM is also expanding capacity for UD (UniDirectional) and fiber. In addition to the USD 450 million program, DSM Dyneema will build the first dedicated line for manufacturing Dyneema Purity® fiber at the Greenville facility. The line is expected to be operational by mid 2010. In September 2008, DSM Dyneema successfully brought on stream substantial additional raw material capacity to support future growth of the business. 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. However, towards the end of the year the business group encountered more difficult market conditions in combination with significant destocking by customers. This resulted in a sales decline of 7% for the year and increased pressure on operating profit in the last few months of the year. DSM Resins ended the year with a lower operating profit. During the year the construction of a new factory for waterborne resins in Meppen (Germany) was completed. In China, a new ink manufacturing facility was opened in Xinghou for DSM Desotech. Construction of a new factory for waterborne emulsion resins in Waalwijk (Netherlands) is on schedule. The factory will be opened in Q1 2009. DSM NeoResins+ announced a capacity expansion for waterborne polyurethane resins in Parets (Spain). Also a feasibility study to expand the composite resins facility in Compiègne (France) was announced. Looking ahead, DSM Dyneema expects its growth path – sales have grown by more than 15% per year in recent years – to continue and accelerate as new capacity comes on stream in the coming years with above-average profit margins. Apart from capacity expansions, DSM Resins is investing heavily in market-driven innovation by developing new technologies and products for existing and new applications. DSM Resins With 2008 sales of € 1,231 million, DSM Resins is the largest business group in the Performance Materials cluster. DSM Resins is a leading global player in the manufacturing and sale of high-quality resins. The group’s products 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. The group consists of four business units: DSM NeoResins+, DSM Powder Coating Resins, DSM Desotech and DSM Composite Resins. In 2008 DSM Resins made further progress in all of its four business units and introduced a broad range of new, innovative products. These will contribute to the ambition of achieving strong sales growth towards 2010. Market trends in the materials market call for eco-efficiency and eco-effectiveness, in part driven by stronger legislation in combination with the customers’ need for improved durability, lower weight, ease of use and lower system costs. The innovation drive at DSM Resins 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. Specific resin systems have been developed for high-quality paints and coatings that can be applied with lower or zero solvent emissions while being competitive with more conventional systems. Through its focus on market-trend-driven innovation, DSM Resins is well on track in changing itself into a specialty company, with improved profitability, in the coming years. Annual Report 2008 www.dsm.com 59 Review of business Polymer Intermediates Net sales € 1,201 m Workforce 1,427 Annual Report 2008 www.dsm.com 60 Review of business Nutrition Pharma Performance Materials Polymer Intermediates Base Chemicals and Materials Other activities The Polymer Intermediates cluster consists of DSM Fibre Intermediates. resistance to wear, crushing, matting and dirt. It also has a more favorable eco-footprint compared to other materials and is recyclable. x € million Net sales 2008 2007 DSM Fibre Intermediates 1,201 1,232 Total 1,201 1,232 Operating profit Operating profit plus amortization and depreciation Capital expenditure and acquisitions Capital employed at 31 December ROCE EBITDA as % of net sales R&D expenditure 19 43 54 431 4.5 3.6 22 105 133 51 408 26.2 10.8 13 Workforce at 31 December 1,427 1,421 DSM Fibre Intermediates DSM Fibre Intermediates produces caprolactam and acrylonitrile, which are raw materials for synthetic fibers and plastics. Other products include ammonium sulfate, a fertilizer, diaminobutane, sodium cyanide and cyclohexanone. DSM Fibre Intermediates, with plants in the Netherlands, the United States and China, is with a market share of 20% the largest merchant caprolactam producer in the world. With a market share of 25%, DSM is a major player in the merchant acrylonitrile market in Europe. Caprolactam is the raw material for polyamide 6, a thermo- plastic polymer. This is a versatile material, which in the form of fibers is used in carpets, sports and leisure clothes and textiles. It also has applications in engineering plastics applications including electronics, automotive industries and specialty packaging materials and in tires as tire cord. DSM’s caprolactam production capacity is more than 600,000 tons per annum (tpa). In addition, the business group produces about 1.2 million tpa of fertilizer (ammonium sulfate) as a co-product. 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 polypropylene. Acrylonitrile is a raw material used in textile fibers (acrylic or modacrylic), ABS plastics used in automotive, toys and computers, latex rubber, paints, coatings and water- purification products. It is also used in baby-food jar closures. 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. It also produces diaminobutane, an intermediate for Stanyl®. 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 the business group aims to strengthen its manufacturing base in Sittard-Geleen (Netherlands). During most of 2008, there was a healthy supply and demand balance in caprolactam and acrylonitrile with a global utilization rate above 90%. At the beginning of the fourth quarter, however, market conditions became significantly more difficult as demand weakened strongly in combination with significant customer destocking in anticipation of lower prices following the drop in oil prices and a recession in North America and Europe. The business group responded by temporarily shutting down a number of plants. Slow demand and lower feedstock costs resulting in a drop in caprolactam prices put pressure on operating profit and margins towards the end of the year. For the full year, sales decreased by 3%; operating profit showed a strong decrease. Polyamide 6 is also used in dentists’ chairs, hooligan-proof stadium seats, food packaging, medical packaging, lingerie, sleeping bags, parachutes and tennis racket strings. It is the most widely used material in carpets, having excellent Looking ahead, the impact of the turmoil in the financial markets and the current difficult economic situation will be significant for DSM Fibre Intermediates and lower global utilization rates are expected. Annual Report 2008 www.dsm.com 61 Review of business Base Chemicals and Materials The Base Chemicals and Materials cluster consists of DSM Agro, DSM Melamine, DSM Elastomers, DSM Energy, and a number of activities that have been carved out from other clusters. DSM Agro produces fertilizers and is active in Northwestern Europe. DSM Melamine is the world’s largest producer of melamine, used in wood-based panels and laminates for furniture and flooring. 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. DSM Energy has small but profitable stakes in various oil and gas fields in the Dutch part of the Continental Shelf. per year. DSM Agro also produces products that serve as raw materials for products of other DSM business groups. In 2008 DSM Agro continued to benefit from the change in market sentiment that had started in 2007. Growing global food and feed demand as a result of positive economic developments in the large new economies in Asia drove high world grain prices, which led to a further increase in demand for fertilizers and a strong worldwide fertilizer market. The growing of energy crops for biofuels strengthened this development. High grain prices had a strong positive effect on international fertilizer prices. As a result, DSM Agro significantly improved its operating profit in comparison with previous years. Sales rose by 42% and DSM Agro had its best year ever. x € million Net sales: DSM Agro DSM Melamine DSM Elastomers DSM Energy Other Total Operating profit Operating profit plus amortization and depreciation Capital expenditure and acquisitions Capital employed at 31 December ROCE EBITDA as % of net sales R&D expenditure 2008 2007 This higher result was achieved despite an interruption in production at one of the ammonia plants in the Netherlands which lasted several months. 578 200 469 104 382 408 181 505 81 354 1,733 1,529 In March 2008 DSM Agro reached agreement with the Dutch government on the termination of ammonia transport by rail between Sittard-Geleen and IJmuiden by 31 December 2009. When these transports are terminated, the site in IJmuiden will lose its reason for being. DSM has therefore decided to close the site in 2010. 260 342 82 945 30.4 19.7 22 137 209 65 765 18.6 13.7 30 DSM Agro became the first company in the world to greatly reduce emissions of dinitrogen oxide (N2O). The nitric acid plants in both Sittard-Geleen and IJmuiden managed to reduce their N2O emissions by 6,500 tons, which has the same effect as reducing CO2 emissions by two million tons. 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. DSM Agro was ranked number one in the recent audit of all EFMA members. Workforce at 31 December 2,357 2,282 DSM Agro DSM Agro supplies products and services for responsible fertilization. The company produces and markets nitrogenous mineral fertilizers and industrial products, mainly for the Northwest European market. In agriculture, nitrogen is the prime determinant of crop growth and yield. The business group operates production sites at Sittard- Geleen and – until 2010 – IJmuiden in the Netherlands. DSM Agro produces and sells about 2.4 million tons of fertilizers 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. 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 internet application services to ensure that fertilizers are used in a responsible manner. Annual Report 2008 www.dsm.com 62 Review of business Nutrition Pharma Performance Materials Polymer Intermediates Base Chemicals and Materials Other activities DSM Melamine With a market share of close to 20%, DSM Melamine is the global market leader. The main application of melamine is in wood-based panels and laminates used for furniture and flooring. It 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 is boosting the use of melamine. Stricter legislation on emission of formaldehyde is expected to have a positive impact as well. The product is also used in paper money, lipstick, glossy magazines, ice hockey sticks and printed textiles. The bridge that links Sweden and Denmark across the Øresund contains MelaminebyDSM™ to improve concrete flow characteristics. In China DSM started a 49/51 joint venture with Shanxi Fengxi Fertilizers, Shanxi FengHe Melamine Co. Ltd. The output – 52,000 tons per annum in 2008 – is sold on both the domestic and international markets under the MelaminebyDSM™ brand. DSM Melamine’s objective is to consolidate its leading position and improve profitability. The business group will continue its efforts together with customers to grow further via innovation. Examples are cost reductions 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 Elastomers With a market share of around 16%, DSM Elastomers is one of the global market leaders in EPDM (Ethylene Propylene Diene Monomer) rubber under the brand name Keltan®. It is also the number two player in the market for EPDM-based – fully vulcanized – thermoplastic elastomers (TPVs). DSM sells these TPVs under the brand name Sarlink®. 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. Production plants for Keltan® are based in Sittard-Geleen (Netherlands) and Triunfo (Brazil). Plants for Sarlink® are found in Genk (Belgium) and Leominster, Massachusetts (United States). DSM Melamine has plants in Sittard-Geleen (Netherlands), Pinglu and Jishan (China), and Bontang (Indonesia). The Chinese melamine is produced by Shanxi FengHe Melamine Co. Ltd. (DSM 49%). The plant in Indonesia is a joint venture with P.T. Pupuk Kalimantan Timur and P.T. Barito Pacific Lumber Company. Sales increased by 10% in 2008; operating result was negative. Excluding China, worldwide demand and production capacity in 2008 were below the 2007 levels. Prices for melamine increased during the year, but at a lower pace than the price of urea, ammonia and natural gas, the main raw materials for melamine. However, with increasing economic headwinds towards the end of the year, price increases for melamine in the last quarter were lower than envisaged. Lower demand together with destocking in the downstream industry put pressure on sales. The planned shutdown of the plant in Indonesia in September was prolonged until the end of the year and in the Netherlands, too, DSM Melamine closed one plant temporarily. Keltan® EPDM is used in cars and other transportation vehicles, white goods, various industrial products and construction materials and as motor-oil additives. It is also used as a waterproof covering for roofs. DSM has maintained the position of Keltan® as the global innovative leader in the EPDM market in 2008. The customer survey executed in June amongst 180 customers confirmed this position and the main brand values (high quality, high security of supply and high service) were clearly recognized. DSM launched several new Ziegler-Natta catalyst based Keltan® products and built a new reactive extrusion line in Triunfo (Brazil). With this new line, the company is able to strengthen its position in the oil additives business but the line also offers possibilities for new functionalized materials. The first commercial products were delivered in February. At the end of the year, the line was fully operational. In the development of the Advanced Catalysis Elastomers (ACE™) technology 2008 was an important year. After a very successful trial run, commercial-scale production of the first innovative range of products commenced at the end of 2008. The ACE™ technology enables DSM to produce products Annual Report 2008 www.dsm.com 63 Review of business with a high VNB (2-vinyl-5-norbornene) content, which is unique in the world of EPDM. Sarlink® TPVs are used in a wide variety of applications including automotive, consumer, electrical, food, building, medical and industrial applications. It is also used as infill material in artificial turf sports surfaces, mainly soccer fields, under the brand name Terra® XPS. DSM’s strategy for Sarlink® is to maximize growth, replacing thermoset rubber and PVC, through the development of new advanced technology solutions. Global demand at DSM Elastomers was strong in the first half of 2008, driven by healthy growth in the emerging economies. Raw-material prices continued to increase in the first half of the year. The further weakening of the US dollar – especially in the first eight months of the year – caused pressure on both prices and margins. By passing on the cost increases to the market the business group was nearly able to safeguard its margins. In the second half of the year, demand in both North America and Europe fell, mainly driven by a continuous restructuring of the automotive industry and its suppliers. Moreover, the downturn in the housing market continued to affect the building and construction industry. The business group’s sales decreased by 7% in 2008; operating result was negative. DSM Energy 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 during the year participated in two gas field developments. All fields are located in 25 production licenses. DSM Energy’s strategic mission is to maximize cash flow by minimizing cost and maximizing production in the existing licenses. per barrel, which was substantially above the average level in 2007. The sales prices for natural gas follow those of oil with some delay and were also above the 2007 level. The business group’s operating profit was once again at a high level. One development project, the A6/B12 field, delivered first gas in 2008. Another project, the M7-A field, suffered from installation delays due to poor weather conditions and start- up is now expected in Q1 2009. The business group’s total production of 1.8 million barrels of oil equivalent in 2008 was slightly less than in 2007. The remaining reserves at the end of the year were about 7.9 million barrels of oil equivalent, of which 7.3 million in the producing fields, compared to 8.1 million and 7.4 million respectievely in 2007. Without new developments the remaining reserves are expected to continue to decrease in the years ahead. In cooperation with RWTH Aachen (Germany) and Delft University of Technology (Netherlands) investigations into the monetizing of coal concessions continued in 2008. Results so far indicate that these concessions at present do not have a positive value, but DSM continues to work on the valuation of these concessions. Further, the business group provided geological support to DSM Agro in a potential CO2 underground storage project. DSM Energy is one of the founding members of the DAP foundation (Delft Aardwarmte Project) in the Netherlands to produce warm water for the energy benefit of the entire Delft University campus and surrounding housing areas. During 2008 the feasibility of the project was established and the next phase of the project was prepared. The necessary sub- surface permits have been applied for with the Dutch Ministry of Economic Affairs. Other The Base Chemicals and Materials cluster also includes several activities that have been carved out from other clusters. These include Stamicarbon, Citric Acid, DSM Special Products and the Maleic Anhydride and derivatives business. These activities together achieved a higher operating profit and higher sales in 2008. Other activities During the first half of the year the oil market saw very large price increases, followed by similar decreases after the onset of the turmoil in the financial markets in the third quarter. Over the entire year the average Brent oil price was USD 97 Other activities comprises various activities and businesses that do not belong to any of the five reporting clusters. It consists of both operating and service activities and also includes a number of costs that cannot be logically allocated to the clusters. Annual Report 2008 www.dsm.com 64 Review of business Nutrition Pharma Performance Materials Polymer Intermediates Base Chemicals and Materials Other activities Other activities includes the DSM Innovation Center, DSM Venturing, Noordgastransport and a number of other activities such as DSM Industrial Services, EdeA, DSM Insurances and part of the costs of corporate activities. Due to their very nature the volume of these units and activities can be subject to change. They normally have a negative operating result. x € million Net sales Operating profit Operating profit plus amortization and depreciation Capital expenditure and acquisitions 2008 493 (87) (29) 188 2007 401 (78) (37) 54 Workforce at 31 December 3,385 3,073 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 Innovation and R&D chapter starting on page 25. 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 in 2008, 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 five new participations were announced in 2008. In addition to direct investments DSM Venturing is also involved in a number of venture capital funds. For more information see the Innovation and R&D section on page 25. DSM Licensing Center DSM Licensing Center (formerly part of Stamicarbon) uses its long-standing experience and licensing best practices to generate added value from DSM’s intellectual property. It had a successful year in broadening its portfolio. Noordgastransport Noordgastransport 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. Without new developments the transport of gas is expected to decrease in the years ahead. For DSM this is a non-core activity. DSM Industrial Services DSM Industrial Services consists of various units. Some services are provided for the Sittard-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 Sittard-Geleen. 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 Sittard-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 lower results in 2008 due to the production interruption at DSM Agro. Associates DSM has a share in a limited number of associates. The contribution to the result was negligible. Heerlen, 16 February 2009 The Managing Board Feike Sijbesma, chairman Jan Zuidam, deputy chairman Rolf-Dieter Schwalb, CFO Nico Gerardu Stephan Tanda Annual Report 2008 www.dsm.com 65 Report by the Supervisory Board Supervisory Board report The composition of the Supervisory Board changed during the year under review. Mr. Henk Bodt stepped down at the Annual General Meeting of Shareholders as he had served the maximum term of 12 years on the Supervisory Board. The Supervisory Board is grateful to Mr. Bodt for his commitment to the company during his membership and his constructive and valuable contribution to the Board’s work. The General Meeting of Shareholders appointed Mrs. Louise Gunning- Schepers as a new member of the Supervisory Board and reappointed Mr. Cor Herkströter and Mr. Ewald Kist. The Supervisory Board appointed Mr. Ewald Kist as its Deputy Chairman, succeeding Mr. Henk Bodt. The Supervisory Board held six meetings in the presence of the Managing Board during the year under review. Each of these meetings was preceded by a Supervisory Board meeting without the Managing Board being present. The 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 and a proposal to the Annual General Meeting of Shareholders in 2009 to adjust the remuneration policy for the members of the Managing Board. These subjects were all prepared by the Remuneration Committee. In addition to remuneration subjects, these Supervisory-Board-only meetings were also used for pre-discussion of for instance corporate governance issues. The Supervisory Board also devoted a separate meeting to its profile, composition and functioning. 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. At the same meeting the Managing Board’s composition and performance and the performance of its individual members were also discussed. The Supervisory Board meetings in 2008 were all attended by at least six of the seven members. None of the Supervisory Board members was regularly absent. results. During the other three regular meetings various subjects were discussed; the external auditor was in attendance at these meetings, and the internal – operational – auditor was present or represented as well. The main topics of discussion during these meetings 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 Audit Committee discussed and endorsed the dividend proposal for the year 2007. The Committee acknowledged the receipt of the independence letter of the external auditor. The Committee 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 as well as the follow-up actions following the Corporate Risks Assessment 2007. The Committee discussed the wish voiced in the 2008 Annual General Meeting of Shareholders to further increase the quantification of the risk disclosures and endorsed the decision of the Managing Board not to do so for competitive reasons. The system and status of the Letters of Representation issued by the managers directly reporting to the Managing Board were evaluated. An assessment of the performance of the external auditors Ernst & Young Accountants was discussed. The Committee discussed at year-end the potential accounting issues for 2008 and observations by the external auditor regarding their assessment of internal control at DSM as well as some recommendations. The status of the whistle-blower system was discussed. The adequacy of the charter of the Audit Committee was reassessed; no recommendations were made for any changes. The Audit Committee had its regular private discussion with the auditors without members of the Managing Board being present. The Chairman of the Audit Committee verbally reported the main issues discussed to the Supervisory Board in their subsequent meeting. The Audit Committee furthermore provided the Supervisory Board with written reports on its deliberations, findings and recommendations. These reports were distributed among all members of the Supervisory Board. The composition of the Audit Committee changed in 2008. Mr. Henk Bodt stepped down, Mr. Tom de Swaan took over the chairmanship and Mr. Ewald Kist was appointed as a member. The Audit Committee, thus consisting of Messrs. Tom de Swaan (chairman), Claudio Sonder and Ewald Kist, held eight meetings in 2008. Five meetings were specifically devoted to discussing and approving the content of press releases on financial results and guidances for the full-year The composition of the Nomination and Remuneration Committee changed in 2008. Mr. Ewald Kist stepped down and was succeeded by Mr. Pierre Hochuli. In 2008 the combined Nomination and Remuneration Committee was formally split into two separate committees, both consisting of Messrs. Cor Herkströter (chairman), Cees van Woudenberg and Pierre Hochuli. Annual Report 2008 www.dsm.com 66 Report by the Supervisory Board Supervisory Board report Remuneration policy regarding the Managing Board and the Supervisory Board The Nomination Committee met once in 2008. The Committee recommended Mrs. Louise Gunning-Schepers as a successor of Mr. Henk Bodt. The Committee also discussed longer-term developments regarding the composition of the Supervisory Board and the succession planning for the Managing Board and the top executives within the company. The Chairman of the Nomination Committee verbally reported the issues discussed to the Supervisory Board in their subsequent regular Supervisory Board meetings outside the presence of the Managing Board. The Remuneration Committee met five times in 2008. On behalf of the Supervisory Board the Committee prepared an overview of the manner in which the remuneration policy was implemented in the year 2008 as well as an overview of the remuneration policy for the Managing Board members in subsequent years. The Committee prepared proposals to the full Supervisory Board on the realization of the 2007 targets, the short-term incentive targets for 2008 and an increase in the base salary of the Managing Board with effect from 1 July 2008. These proposals were adopted by the Supervisory Board. Information on DSM’s remuneration policy is to be found on page 68 of this annual report and is posted on the company’s website. As a consequence of Vision 2010 as well as some comments by institutional investors during the Annual General Meeting of Shareholders on 26 March 2008 the Supervisory Board decided to review in particular the variable compensation elements (bonus and stock incentives) of the remuneration policy for the Managing Board. The Remuneration Committee prepared a proposal to the full Supervisory Board to adjust the bonus scheme to further strengthen the alignment of the bonus-related financial targets with Vision 2010 and to adjust the Total Shareholder Return (TSR) vesting scheme. The Supervisory Board adopted the proposals; the proposal to adjust the TSR vesting scheme is to be submitted for approval to the 2009 Annual General Meeting of Shareholders. Information regarding changes to the remuneration policy expected in 2009 is to be found later in this chapter. The Remuneration Committee provided the Supervisory Board with written reports on its deliberations, findings and recommendations. These reports were distributed among all members of the Supervisory Board. Six regular Supervisory Board meetings were held in 2008. 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 DSM’s executive development and succession planning for the top executives within the company. Also various aspects of the alignment of the organization with the Vision 2010 strategy as well as the progress made in this alignment were discussed. The financial results recorded by the various units and developments at these units were discussed at every meeting. Special attention was paid to the consequences of the financial crisis that became apparent as from October 2008. 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 and the acceleration of the shift to a specialty Life Sciences and Materials Sciences company. The Board discussed the Annual Strategic Review which included an assessment by the Managing Board of the main risks to the company. 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 Nutrition and Performance Materials clusters, and approved the exploration of possible acquisitions fitting into this strategy. The Supervisory Board was regularly updated on the progress of the so-called Batavia project aimed at cooperation with NCPC (North China Pharmaceutical Group Corporation) in vitamin C and in anti-infectives and granted an amended mandate for the set-up of the agreements. The Supervisory Board approved the acquisition of The Polymer Technology Group active in the biomedical sector. The Board approved DSM Dyneema investment proposals. The Board was regularly updated on the progress of the so-called Pearl divestment project regarding the sale of DSM Agro, DSM Melamine, DSM Elastomers and Urea Licensing. The Supervisory Board discussed and approved the proposal to close the IJmuiden (Netherlands) fertilizer plants of DSM Agro. The Board also approved the closure of the Nutritional Products site in Wuxi (China). The Board gave the mandate to dispose of the DSM Special Products business and approved the sale of the Side Chains business unit, part of DSM Anti- Infectives, to the management of DSM Deretil in Spain. The Board discussed and approved a restructuring program for DSM Pharmaceutical Products aimed at improving top line growth and cost reduction. The Supervisory Board discussed and approved the (Revised) Capital Expenditure Plan and the Financing and Guarantee Plan for 2008. Annual Report 2008 www.dsm.com 67 Report by the Supervisory Board The Supervisory Board approved the proposal to re-open the existing € 300 million bond issued in 2005 and increase the outstanding amount from € 300 million to € 500 million. The Board approved a proposal to the Annual General Meeting of Shareholders in March 2008 to adopt a resolution for the annual report for the financial year 2008 and subsequent years to be drawn up in English. The Board also approved the proposal to increase the dividend per ordinary share for 2007 by 20% and the proposal made to the Annual General Meeting of Shareholders regarding the final dividend to be paid out for 2007. The Supervisory Board approved the interim dividend to be paid for 2008. As in previous years, the Supervisory Board invited managers from a number of DSM business groups and corporate staff and services departments to its meetings, to present relevant developments in their units in person. The Supervisory Board visited DSM Pharmaceutical Products’ site in Linz (Austria) and was updated by local management on the business and production activities. Discussions were held with the external auditor, Ernst & Young Accountants, about the financial statements for 2008. The Report by the Managing Board and the financial statements for 2008 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 17 February 2009. The financial statements were audited by Ernst & Young Accountants, who issued an unqualified opinion (see page 148 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 149 of this report. Despite increasing economic headwinds, DSM succeeded in recording good results for 2008. The Supervisory Board wishes to express its sincere appreciation for all the efforts made by the employees and the Managing Board. Remuneration policy regarding the Managing Board and the Supervisory Board This chapter comprises two parts. The first part outlines the remuneration policy as approved in 2005 and adapted in 2008 by the Annual General Meeting of Shareholders. The second part contains details of the remuneration in 2008 and expected changes in 2009. 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 (predominantly Dutch) multinational companies that are similar to DSM in terms of size and complexity. For that purpose, external reference data are used. The remuneration policy for the members of the Managing Board is aligned with the remuneration of other senior executives of DSM. In designing and setting the levels of remuneration for the Managing Board, the Supervisory Board also takes into account the relevant provisions of statutory requirements, corporate governance guidelines and other best practices applicable to DSM. DSM’s policy is to offer the Managing Board a total direct compensation comparable with the median of the (predominantly Dutch) labor-market peer group. Annual Report 2008 www.dsm.com 68 Report by the Supervisory Board Supervisory Board report Remuneration policy regarding the Managing Board and the Supervisory Board Labor-market peer group In order to be able to recruit the right caliber of people for the Managing Board and to secure long-term retention of the current Board members, DSM has taken external reference data into account in determining adequate salary levels. For that purpose, a specific labor-market peer group has been defined which consists of a number of Dutch and some European companies that are more or less comparable to DSM in terms of size, international scope and business portfolio. The labor-market peer group currently consists of the following twelve companies: Aegon AkzoNobel Ciba1 Clariant Heineken KPN Nutreco Océ Rhodia Solvay TNT Wolters Kluwer 1 Will be eliminated from the peer group and replaced due to the expected de-listing of the company. Professional independent remuneration experts (Towers Perrin, Amsterdam) have adapted 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 accounts for 42% of base salary, which can increase to 84% in the case of an exceptionally good financial performance. The part of the bonus that is not related to financial targets accounts for 18% of the base salary and cannot increase beyond that. Targets are defined in the areas of the company’s strategic development and Triple P, among other things. Bonus part linked to financial targets The part of the bonus that is linked to financial targets includes elements related to operational performance, being operating profit (EBIT), net cash and net sales growth (organic), reflecting short-term financial results. The weighting given to the individual financial elements in the bonus is as follows: EBIT 21%, net cash 12% and net sales growth 9% of annual base salary for on-target performance. Targets Financial targets: - Operating profit - Net cash - Net sales growth Non-financial targets: - Shared - Individual Total On-target pay-out Maximum pay-out (% of base salary) (% of base salary) 21 12 9 12 6 60 42 24 18 12 6 102 Operational performance Three financial-target-related bonus elements can be derived from the financial statements: • • • Operating profit: EBIT before exceptional items Net cash, defined as cash provided by operating activities Net sales growth, excluding currency fluctuation 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. Annual Report 2008 www.dsm.com 69 Report by the Supervisory Board The company does not disclose the actual targets, as they qualify as commercially sensitive information. Stock incentives The Managing Board members are eligible to receive performance-related stock options and shares. Both stock options and performance shares operate on the basis of the same performance schedule. The vesting of stock options and performance shares is conditional on the achievement after three years of previously determined target levels of total shareholder return (TSR) compared to the peer group (see also table below). 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 2008 consists of the following companies: AkzoNobel BASF Ciba1 Clariant Danisco EMS Chemie Holding Lanxess Lonza Group Novozymes Rhodia Solvay 1 Will be eliminated from the peer group and replaced due to the expected de-listing of the company. The peer group used for benchmarking TSR 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 Percentage of performance in % points stock incentives that vest ≥ 20 ≥ 10 and < 20 ≥ (10) and < 10 (target) ≥ (20) and < (10) < (20) 100 75 50 25 0 For the 2009 TSR vesting scheme see the discussion of changes expected in 2009 at the end of this chapter. 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 B.V. and DSM Executive Services B.V. employed in the Limburg area. Annual Report 2008 www.dsm.com 70 Report by the Supervisory Board Supervisory Board report Remuneration policy regarding the Managing Board and the Supervisory Board Employment contracts Term of employment The employment contracts of the members of the Managing Board appointed before 1 January 2005 have been entered into for an indefinite period of time. Newly appointed members of the Managing Board are also offered an employment contract for an indefinite period of time. The employment contract ends on the date of retirement or by notice of either party. Term of appointment Members of the Managing Board appointed before 1 January 2005 are appointed for an indefinite period of time. New members of the Managing Board (appointed after 1 January 2005) will be appointed for a period of four years. 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 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. 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). Remuneration policy for the Supervisory Board 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. Following the splitting-up of the Nomination and Remuneration Committee into two separate committees in 2008, the membership and chairmanship fees for each of these committees were halved. In accordance with good corporate governance, the remuneration of the Supervisory Board is not dependent on the results of the company. This implies that neither stock options nor shares are granted to Supervisory Board members by way of remuneration. If any shareholdings in DSM are held by Supervisory Board members, they serve as a long-term investment in the company. At year-end 2008 the members of the Supervisory Board together held no shares in Royal DSM N.V. DSM does not provide any loans to its Supervisory Board members. Remuneration in 2008 and changes expected in 2009 Remuneration of Managing Board in 2008 The remuneration package for the Managing Board is subject to annual review. The market competitiveness of the remuneration package of the Managing Board for 2008 was reviewed, based on the labor-market peer group. The data reflect the July 2008 remuneration levels. All values are denominated in euros. On-target bonus and stock-incentive grants are expressed as a percentage of base salary. The remuneration data of peer group companies 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 labor-market peer group 2008 Managing Board Chairman Base salary On-target bonus Total cash on target DSM (1 July 2008) Peer-group median € 766,000 € 755,000 60% 100% € 1,225,600 € 1,510,000 Annualized stock incentive value 38% 80% Total direct compensation € 1,516,680 € 2,114,000 Other Board members Base salary On-target bonus Total cash on target DSM (1 July 2008) Peer-group median € 509,000 € 500,000 60% 70% € 814,400 € 850,000 Annualized stock incentive value 46% 55% Total direct compensation € 1,048,540 € 1,125,000 Annual Report 2008 www.dsm.com 71 Report by the Supervisory Board Base salary in 2008 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. Stock options and performance shares in 2008 In 2008 performance-related stock options and performance shares were granted to the Managing Board on 28 March 2008 at an exercise price of € 29.79. The table below shows the number of stock incentives granted to the individual Board members: Number of stock incentives granted As stated in the 2007 annual report, it was decided to close the gap with the median of the benchmark in 2008. As a consequence the Supervisory Board decided in 2007 to increase the base salary of the chairman of the Managing Board by an extra 10% with effect from 1 January 2008 to close the gap with the median of the market, as already mentioned in the 2007 annual report. External and internal circumstances justified a general increase in the base salary of the Managing Board of 3.0% as of 1 July 2008 to compensate for inflation and to reflect market developments. Bonus for 2008 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 performance can increase the bonus level to 102% of the annual base salary. The 2008 annual report presents the bonuses that have been earned on the basis of results achieved in 2008. These bonuses will be paid out in 2009. The Supervisory Board has established the extent to which the targets for 2008 were achieved. The realization of the 2008 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 even exceeded. The other, non-financial targets were almost fully achieved. The average realization percentage was 97.3%. See the next page for a tabular overview of the actual bonus pay-out per individual Board member in 2008. Feike Sijbesma Jan Zuidam Nico Gerardu Rolf-Dieter Schwalb Stephan Tanda Stock Performance options shares 37,500 30,000 30,000 30,000 30,000 10,000 8,000 8,000 8,000 8,000 Pensions in 2008 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 € 12,209 (reviewed annually) at a rate of 2%. Employee’s contribution of 2.5% of base salary up to € 53,660 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 cover ratio. Members of the Managing Board born before 1 January 1950 (Mr. 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 DSM does not provide any loans to members of the Managing Board. Annual Report 2008 www.dsm.com 72 Report by the Supervisory Board Supervisory Board report Remuneration policy regarding the Managing Board and the Supervisory Board Purchasing shares As announced in the press release on the third-quarter results of 2007, all members of the Managing Board have decided to purchase more shares in the company to emphasize their confidence in the strategy. These share purchases are private transactions with private money. At year-end 2008 the members of the Managing Board together held 23,027 shares in Royal DSM N.V. Total remuneration The total remuneration (including pension costs relating to current and former Board members) of the Managing Board amounted to € 4.6 million in 2008 (2007: € 3.8 million). The increase of € 0.8 million was mainly due to higher bonus pay- out and pension expenditures. Overview of remuneration awarded to the Managing Board in 2008 The tables below show the remuneration awarded to the Managing Board in 2008. Pensions Pension costs Accrued pension (employer) as of age 65 31 Dec. 31 Dec. in € 20081 20072 2008 2007 Feike Sijbesma Jan Zuidam Nico Gerardu Rolf-Dieter Schwalb Stephan Tanda 56,532 35,232 38,272 38,272 38,272 - - - - - 331,487 167,562 272,809 256,509 282,294 261,615 21,681 11,755 38,543 28,2083 1 Partial pension discount 2 Discount on employer contribution 3 Including additional accrual (one-off) for compensation of loss of pension from previous employer Overview of remuneration awarded to the Supervisory Board in 2008 In the following table an overview is given of the remuneration awarded to the Supervisory Board in 2008. Fixed annual salary in € Feike Sijbesma Jan Zuidam Nico Gerardu Rolf-Dieter Schwalb Stephan Tanda Bonus in € Feike Sijbesma Jan Zuidam Nico Gerardu Rolf-Dieter Schwalb Stephan Tanda (as from 1 May 2007) 1 July 2008 1 July 2007 in € fee fee Total Supervisory Board remuneration in 2008 Annual fixed Committee 766,000 509,000 509,000 509,000 509,000 676,000 Cor Herkströter, 494,000 chairman 494,000 Henk Bodt, 494,000 deputy chairman 50,000 7,500 57,500 494,000 (until 26 March 2008) 8,750 1,875 10,625 Ewald Kist, deputy chairman (as from 26 March 2008) 35,000 5,000 40,000 20081 20072 Louise Gunning- 735,930 481,440 496,485 483,948 Schepers 395,633 (as from 26 March 2008) 317,200 317,200 317,200 Pierre Hochuli Claudio Sonder Tom de Swaan Cees van Woudenberg 488,963 212,767 26,250 35,000 35,000 35,000 35,000 - 3,750 5,000 6,875 5,000 26,250 38,750 40,000 41,875 40,000 1 Based on results achieved in 2008 and therefore payable in 2009 2 Bonus paid in 2008 based on results achieved in 2007 Total 260,000 35,000 295,000 Changes expected to the remuneration policy in 2009 for the Managing Board As a consequence of Vision 2010 as well as some comments made by institutional investors during the Annual General Meeting of Shareholders on 26 March 2008 the Supervisory Board decided to review the remuneration policy for the Managing Board. Annual Report 2008 www.dsm.com 73 Report by the Supervisory Board This review predominantly addressed the variable compensation elements (bonus and stock incentives). A proposal for 2009 will be submitted to the 2009 Annual General Meeting of Shareholders to adjust the TSR vesting scheme as follows: Bonus To further strengthen the alignment of the bonus-related financial targets with Vision 2010 and in line with requests and remarks made by shareholders during the 2008 Annual General Meeting of Shareholders, the Supervisory Board has decided to include in the bonus scheme for the Managing Board only two financial targets related to Vision 2010, namely EBIT and organic sales growth. Net cash as a target will be discontinued because of the complexity of target setting for this element. Therefore the pay-out scheme will be adjusted as shown below: TSR vesting scheme DSM performance minus peer-group Percentage of stock incentives that vest performance in % points ≥ 30% ≥ 25% and < 30% ≥ 20% and < 25% ≥ 15% and < 20% ≥ 10% and < 15% ≥ 5% and < 10% ≥ 0% and < 5% ≥ (10%) and < 0% ≥ (20%) and < (10%) Current plan Proposal 100 100 100 75 75 50 50 50 25 150 133 117 100 83 67 50 0 0 On-target pay-out Maximum pay-out (% of base salary) (% of base salary) The expected value of the stock incentives in the proposed TSR scheme will not change, whilst vesting for below-median performance will no longer be possible. Financial targets: - EBIT - Net sales growth (organic) Non-financial targets: - Shared - Individual Total 30 12 12 6 60 60 24 12 6 102 Stock incentives During the Annual General Meeting of Shareholders on 26 March 2008 shareholders made comments on the TSR scheme for vesting of stock incentives. The current performance incentive zone (TSR) for stock incentives allows pay-out (‘vesting’) for below-median performance versus the peer group. The Supervisory Board agreed to review the TSR vesting scheme. The remuneration policy for the Managing Board (as approved by the Annual General Meetings in 2005 and 2008) is to offer a total direct compensation (base salary, bonus and stock incentives) at the median of the labor market peer group. The annualized stock incentive value for the Managing Board is below the median of the peer group. In Q3 2008 the Supervisory Board concluded that a first step in closing the gap with the peer group should be implemented. A proposal to increase the number of stock incentives has been prepared. However, in the context of the current economic climate, the Supervisory Board and Managing Board agreed that such a proposal would not be appropriate at this moment. An adjustment of the number of stock incentives will be proposed once it is more appropriate. The Managing Board has decided to request the Supervisory Board not to increase their base salaries in 2009. For DSM’s almost 400 executives worldwide it has been decided not to implement general salary increases in 2009. Recommendations from corporate governance code In response to the recently amended Dutch corporate governance code (December 2008) the Supervisory Board assessed to what extent DSM was compliant in terms of remuneration aspects and which recommendations will require further consideration in the course of 2009. Annual Report 2008 www.dsm.com 74 Report by the Supervisory Board Supervisory Board report Remuneration policy regarding the Managing Board and the Supervisory Board Currently DSM complies with the majority of the recommendations. The position taken by DSM with respect to the key recommendations is as follows: • • • • The Supervisory Board closely supervises the independence of the Remuneration Committee and the external remuneration consultant (Towers Perrin) in relation to the Managing Board as a key feature in the process for determining remuneration. The Supervisory Board applies internal guidelines for the total remuneration package of the members of the Managing Board. In the event of a change of ownership, the Supervisory Board, at its discretion, will take such measures as are reasonably necessary to control the total remuneration potentially to be received by members of the Managing Board. In the course of 2009, the Supervisory Board intends to define more precise remuneration criteria which would apply in a change-of-control situation. The Supervisory Board monitors the accuracy of the (financial) data on the basis of which variable pay is granted. Before unconditionally granting variable pay to a member of the Managing Board, the Supervisory Board evaluates the consequences of doing so, from the point of view of reasonableness and fairness, taking the values of the societies in which the company operates into consideration. It is the intention of the Supervisory Board to continuously improve communication to all stakeholders about the remuneration policy and its results. In the 2009 annual report we will further report in more detail on compliance with the revised governance code. Heerlen, 17 February 2009 The Supervisory Board Cor Herkströter, chairman Ewald Kist, deputy chairman Louise Gunning-Schepers Pierre Hochuli Claudio Sonder Tom de Swaan Cees van Woudenberg Annual Report 2008 www.dsm.com 75 Corporate organization Supervisory Board Cor Herkströter (1937, m), chairman First appointed: 2000. End of current term: 2012. Position: retired; last position held: President of Koninklijke Nederlandsche Petroleum Maatschappij N.V. and chairman of the Committee of Managing Directors of Royal Dutch/ Shell Group. Nationality: Dutch. Supervisory directorships and other positions held: chairman of the Advisory Committee of Royal NIVRA, member of the Capital Market Committee (Netherlands Authority for the Financial Markets), member of the Advisory Council of Robert Bosch, Emeritus Professor of International Management at the University of Amsterdam. Ewald Kist (1944, m), deputy chairman First appointed: 2004. End of current term: 2012. Position: retired; last position held: chairman of the Managing Board of the ING Group. Nationality: Dutch. Supervisory directorships and other positions held: member of the Supervisory Boards of De Nederlandsche Bank N.V., Royal Philips Electronics N.V., Stage Entertainment and Moody’s Investor Services, chairman of the Van Gogh Museum, member of the Board of Governors of the Peace Palace in The Hague (Netherlands) and of the Netherlands America Foundation. Louise Gunning-Schepers (1951, f) First appointed: 2008. End of current term: 2012. Position: Chairman of the Executive Board of the Academic Medical Centre of the University of Amsterdam and Dean of the Medical Faculty of the University of Amsterdam. Nationality: Dutch. Supervisory directorships and other positions held: chairperson of the Supervisory Board of Rijksakademie van beeldende kunsten (Amsterdam), member of the Board of the Amsterdam Concertgebouw Committee Foundation, the Board of Arbo Unie (Netherlands) and the Board of Sanquin. 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 N.V. Nationality: Swiss. Supervisory directorships and other positions held: none. Claudio Sonder (1942, m) First appointed: 2005. End of current term: 2009. Position: retired; last position held: chairman of the Managing Board of Celanese. Nationality: Brazilian and German. Supervisory directorships and other positions held: chairman of the Board of Lojas Renner S.A., member of the Supervisory Boards of Companhia Suzano de Papel e Celulose S.A., RBS S.A. Media Group, Cyrela Brazil Realty S.A., OGX S.A. and Hospital Albert Einstein. 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 and of the Board of Zurich Financial Services, chairman of the Supervisory Board of Van Lanschot Bankiers N.V., member of the Supervisory Board of Royal Ahold N.V., board member of Royal Concertgebouw Orchestra and member of the Board of Trustees of Netherlands Cancer Institute-Antoni van Leeuwenhoek Hospital. 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 C.V., Royal Boskalis Westminster N.V., Mercurius Group Wormerveer B.V., Netherlands Chamber of Commerce and Royal Grolsch N.V. 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), 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 Board of RSM Erasmus University and of ECP.NL. e-mail: feike.sijbesma@dsm.com Annual Report 2008 www.dsm.com 76 Corporate organization Other corporate officers (as of 1 January 2009) Directors of business groups DSM Nutritional Products - Human Nutrition and Health Leendert Staal Mauricio Adade - Animal Nutrition and Health Antonio-Ruy Freire DSM Food Specialties Alexander Wessels DSM Pharmaceutical Products Bob Hartmayer DSM Anti-Infectives DSM Resins Gerard de Reuver Ben van Kooten DSM Engineering Plastics Roelof Westerbeek DSM Dyneema DSM Elastomers DSM Fibre Intermediates DSM Melamine DSM Agro DSM Energy Christophe Dardel Jan Paul de Vries Edward Sheu Anton Robek Renso Zwiers Frank Chouffoer Directors of corporate staff departments and services Corporate Secretariat Control & Accounting Human Resources Strategy & Acquisitions DSM Innovation Center Communications Marketing Legal Affairs Operational Audit Safety, Health, Environment & Manufacturing ICT Sourcing DSM Nederland DSM China Strategic Projects Strategic Projects Paul Fuchs Loek Radix Ben van Dijk Hein Schreuder Rob van Leen Angelique Paulussen Vacancy - Pieter de Haan (1954) Vacancy - John Prooi (1946) Aloys Kregting Ton Trommelen Jos Schneiders Wei-Ming Jiang Jos Goessens Hans van Suijdam (1967) (1950) (1951) (1956) (1951) (1950) (1953) (1963) (1949) (1964) (1952) (1956) (1951) (1963) (1960) (1958) (1953) (1959) (1955) (1951) (1946) (1956) (1951) (1951) (1957) (1959) Jan Zuidam (1948, m), deputy chairman Position: deputy chairman of DSM’s Managing Board since January 2001; member of the Managing Board since January 1998. Nationality: Dutch. Supervisory directorships and other positions held: member of the Supervisory Board of Gamma Holding N.V., 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. e-mail: jan.zuidam@dsm.com Rolf-Dieter Schwalb (1952, m), CFO Position: member of DSM’s Managing Board and CFO since October 2006. Nationality: German. Supervisory directorships and other positions held: none. e-mail: rolf-dieter.schwalb@dsm.com 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 N.V. and chairman of the Supervisory Board of Holland Colours N.V. 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 member of EuropaBio (European Biotechnology Industries Association), SGCI (Swiss Chemical and Pharmaceutical Industry Association) and ACC (American Chemistry Council). e-mail: stephan.tanda@dsm.com In 2009 DSM announced a number of appointments. As of 1 April 2009 Hans van Suijdam, at present Director Strategic Projects in China, will be Director Corporate Operational Audit and Compliance Offer. He succeeds Roelof Mulder, who unexpectedly passed away in November 2008. Luca Rosetto (1963) will be Corporate Vice President Safety, Health, Environment and Manufacturing with effect from 1 March 2009, succeeding John Prooi who will retire with effect from 1 March 2009. Gerard de Reuver, at present Business Group Director DSM Anti-Infectives, will be appointed Director Strategic Projects with effect from 1 March 2009. He will be responsible for coordination and support of the program addressing the current economic circumstances and DSM’s change agenda. He will be succeeded by Stefan Doboczky (1967). Annual Report 2008 www.dsm.com 77 Corporate governance, risk management, financial policy and related functions Organization Dutch corporate governance code Royal DSM N.V. is a company limited by shares listed on the Euronext Amsterdam Stock Exchange, 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. 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. The company is governed by its Articles of Association, which can be consulted at the DSM website (www.dsm.com). The General Meeting of Shareholders decides on an amendment to the Articles of Association by an absolute majority of the votes cast. A decision to amend the Articles of Association may only be taken at the proposal of the Managing Board, subject to approval of the Supervisory Board. 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 dialogue 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 arm’s length basis. DSM supports the current 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. DSM considers remuneration to be an integral part of its nomination and retention policy and hence of its human resource management policy for its senior management. DSM therefore considers it desirable for the Chairman of the Supervisory Board to be directly involved in preparing decisions taken by the full Board, also in view of the role played by the Supervisory Board Chairman vis-á-vis the Managing Board. This exception to the code 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 section on Corporate organization). 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 current members of the Managing Board will remain appointed for an indefinite period. In respect to the Dutch corporate governance code it should be noted that any substantial change in the corporate governance structure of the company and in the company’s compliance with the code shall be submitted to the General Meeting of Shareholders for discussion under a separate agenda item. All documents related to the implementation at DSM of the Dutch corporate governance code can be found in the Governance section of the corporate website (www.dsm.com). DSM has taken note of the amended Dutch corporate governance code as published on 10 December 2008. In its 2009 annual report DSM will include a chapter on the company’s compliance with the amended code and present this chapter to the Annual General Meeting of Shareholders in 2010 for discussion as a separate agenda item. During 2009 DSM will review the code and implement the amended principles and best practices where appropriate. Annual Report 2008 www.dsm.com 78 Annual General Meeting of Shareholders On 26 March 2008 the Annual General Meeting of Shareholders was held. The agenda was to a large extent similar to that of previous years. A special item on the agenda was a resolution for the annual report and financial statements for the financial year 2008 and subsequent years to be drawn up in English. All resolutions that were tabled were passed. Governance framework DSM’s business-steering model remained unchanged in 2008, 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 a 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. The Management Framework for the corporate level provides a description of the relations between the 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. In 2008, the framework was adapted to reflect the transition from four to five clusters (Nutrition, Pharma, Performance Materials, Polymer Intermediates and Base Chemicals and Materials) that was implemented on 1 January 2008 in order to facilitate the planned disposal of activities in the Base Chemicals and Materials cluster. Corporate governance, risk management, financial policy and related functions Organization Dutch corporate governance code Governance framework Risk management system Risks Financial policy The following figure depicts DSM’s overall governance framework and the most important governance elements and regulations at each level. Shareholders Articles of Association Supervisory Board • Regulations of the Supervisory Board • Charter of the Audit Committee • Charter of the Nomination Committee • Charter of the Remuneration Committee Managing Board / Corporate Operational units • Regulations of the Managing Board • Management Framework for the corporate level Management Framework for operational units 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. 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 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 and business-support functions, the China Governance function, the DSM Innovation Center and the charters of several Boards. Together they define the basic organizational structure and the division of responsibilities between the Managing Board, these corporate and central functions and the business groups and clusters. The operational units conduct their business within the parameters of the Management Framework for operational units. 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 Annual Report 2008 www.dsm.com 79 Corporate governance, risk management, financial policy and related functions 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 Corporate Directives (for example a travel ban for security reasons). Risk management system On this page the main risks as well as the functioning of the risk management system are described. This section gives a general description of the system and its developments. A full description of the risk management system can be found on the DSM Internet site (www.dsm.com, governance section). 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 of the Supervisory Board. Furthermore, the director of COA acts as the compliance officer with regard to inside information and is the chairman of the DSM Alert Committee, which implements the whistle-blower policy. 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 provides for risk assessment tools, controls for risks that commonly occur in the company and monitoring and reporting procedures and systems. The internal controls for the goods and money flows have been ‘built into’ standard business processes and tools have been developed to support their implementation and to monitor their effectiveness in operation. In this way, a high level of internal control can be achieved efficiently. Based on developments within and external to the company, as well as findings from the various monitoring efforts as described above, the risk management system is regularly adapted and optimized. The most important developments are listed below. The growth, diversity and acquisition policies of DSM lead to an increased influx of senior managers from outside the company. In order to ensure their familiarity with the DSM Values and the DSM governance and risk management system, a Corporate Directive was instituted which stipulates that they have to acquaint themselves with a number of key documents and discuss them with their superior. To better accommodate a first introduction of management to the risk management system, an intranet-based e-learning module was developed. The risk management training activities were considerably expanded, amongst other things to service specific target groups such as risk management professionals in China and business controllers. The Corporate Requirements were made available in Chinese. During the year under review a number of areas were identified where the risk profile had increased or where the existing risk management and control processes showed weaknesses. These areas include the security of payment processes, hedging of commodities, protection against product liability issues and safeguarding against the loss of intellectual property. In these areas measures were taken to enhance the risk management system. Annual Report 2008 www.dsm.com 80 Corporate governance, risk management, financial policy and related functions Organization Dutch corporate governance code Governance framework Risk management system Risks Financial policy Risks Financial policy The following list gives an overview of risks that have been identified as potentially important. A description of the nature of these risks is given on the DSM website (www.dsm.com, governance section). Furthermore, information on financial risks is provided in the financial statements on page 123. The main risks as mentioned in this section are asterisked. Generic risks • Global financial and economic developments* • General market conditions and commoditization* • Political risks • Currency risks and interest risks • Risks of derivatives used for hedging purposes Strategic risks • Divestments*, acquisitions*, and joint ventures • Innovation (new markets, products and technologies)* • People, organization and culture* 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. For the management of all risks mentioned, strategies, controls and/or mitigating measures have been put in place as part of DSM’s 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. As a basis for and contribution to effective risk management and to ensure that the company will be able to pursue its strategies even during periods of economic downturn, DSM retains a strong balance sheet and limits its financial risks. One of the key targets of Vision 2010 is to achieve a cash flow return on investment (CFROI) which exceeds the weighted average cost of capital (WACC) by at least 100 basis points. DSM further aims for a net debt which is between 30 and 40% of equity plus net debt in normal times (currently the objective is to stay below 30%) and an operating profit before amortization and depreciation (EBITDA) which is at least 8.5 times the balance of financial income and expense. This underlines the company’s aim of maintaining its single-A long-term credit rating. 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 single-A rating. DSM aims to provide a stable and preferably rising dividend. In order to avoid dilution of earnings per share as a result of the exercise of management and employee options, DSM buys back shares insofar as this is desirable and feasible. 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. Annual Report 2008 www.dsm.com 81 Corporate governance, risk management, financial policy and related functions 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 to meet 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. 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 as DSM. 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. 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. The tax function is responsible for the management of the company’s position with regard to taxes. As part of this task, it handles or reviews 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 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 corporate (hazardous) risks or having these risks transferred to external insurers, based on the relative costs involved and DSM’s risk appetite. 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 Annual Report 2008 www.dsm.com 82 Corporate governance, risk management, financial policy and related functions Organization Dutch corporate governance code Governance framework Risk management system Risks Financial policy Annual Report 2008 www.dsm.com 83 Information about the DSM share Information about the DSM share Share buy-back program 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 second phase of the program started on 5 May 2008 and was completed on 8 July 2008. During this phase DSM bought 6,615,000 shares for a total consideration of € 250 million. As announced in 2008, DSM has reviewed the timing of the buy-back of the final € 250 million. The company has decided to cancel the remaining part of € 250 million. On 31 December 2008 the company had 162,227,062 shares outstanding. The average number of ordinary shares outstanding in 2008 was 164,195,834. All shares in issue are fully paid. Dividend Re-Investment Plan for shareholders of Royal DSM N.V. ABN AMRO Bank N.V. 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. Shares and listings Ordinary shares in Royal DSM N.V. are listed on the Euronext stock exchange in Amsterdam, the Netherlands (Stock code 00982, ISIN code NL0000009827). Options on ordinary DSM shares are traded on the European Option Exchange in Amsterdam, the Netherlands (Euronext.liffe). In the United States a sponsored unlisted American Depositary Receipts (ADR) program is offered by Citibank NA (Cusip 780249108), with four ADRs representing the value of one ordinary DSM share. Besides the ordinary shares, 44.04 million cumulative preference shares A are in issue, which are not listed on the stock exchange; these have been placed with institutional investors. 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: Corporate governance, notes to the financial statements (18 Equity, 20 Borrowings, 28 Share-based compensation), and in the section Other information. Annual Report 2008 www.dsm.com 84 Information about the DSM share Development of the number of ordinary DSM shares Balance at 1 January Changes: Reissue of shares in connection with exercise of option rights Repurchase of own shares Issued 181,425,000 2008 Repurchased 14,528,140 Outstanding 166,896,860 2007 Outstanding 184,849,837 - - (1,945,202) 6,615,000 1,945,202 (6,615,000) 2,730,031 (20,683,008) Balance at 31 December 181,425,000 19,197,938 162,227,062 166,896,860 Average number of shares outstanding 164,195,834 DSM share prices on Euronext Amsterdam (€ per ordinary share): Highest closing price Lowest closing price At 31 December 41.27 15.76 18.33 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 2009: • • • Fortis Verzekeringen Nederland N.V. Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. Aviva plc 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 26 March 2008 this power was extended up to and including 26 September 2009, on the understanding that with respect to 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. 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 26 March 2008 the Managing Board was authorized to acquire own shares for a period of 18 months from said date. DSM Managing Board members’ holdings in DSM shares The cumulative holdings of the five DSM Managing Board members increased in 2008 from 12,050 to 23,027 shares. These shareholdings serve as a long-term investment in the company. These share purchases were private transactions with private money. The holdings do not include vested performance shares. Board member Holdings on Holdings on 31 December 2008 1 January 2008 Feike Sijbesma, chairman Jan Zuidam, deputy chairman Rolf-Dieter Schwalb, CFO Nico Gerardu Stephan Tanda 5,500 2,423 5,500 5,056 4,548 2,500 2,350 2,500 2,500 2,200 Annual Report 2008 www.dsm.com 85 Information about the DSM share Geographical spread of DSM shares outstanding (excl. cumprefs A) DSM share price development versus AEX and Dow Jones Euro Stoxx Chemical Index, 2008 in % 2008 2007 in € DSM AEX Index Dow Jones Euro Stoxx Chemical Index Netherlands North America Belgium / Luxemburg France United Kingdom Germany Switzerland Other countries 23 28 4 4 21 8 4 8 39 16 6 4 18 6 4 7 DSM share The year 2008 was another turbulent year for stock markets worldwide and the development of the DSM share was no exception. The share price started the year at € 32.36. In the first few months of the year the DSM share moved in line with the broader market. At the end of March DSM raised expectations for the year, marking the start of a period of significant share price outperformance. When the turmoil in the financial markets started to affect stock markets worldwide in September, DSM’s share price declined in line with the broader market. The stock closed the year at € 18.33. 50 45 40 35 30 25 20 15 10 1/08 2/08 3/08 4/08 5/08 6/08 7/08 8/08 9/08 10/08 11/08 12/08 Trading volumes DSM shares 2008 x million shares December November October September August July June May April March February January 0 10 20 30 40 50 60 On 6 February 2009, DSM celebrated twenty years as a listed company. To celebrate this anniversary Feike Sijbesma, Chairman of the DSM Managing Board, rang the opening bell on Euronext Amsterdam. Annual Report 2008 www.dsm.com 86 Financial statements Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 9387 Financial statements 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 2008. 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 recognized. Segmentation Segment information is presented in respect of the group’s operating segments about which separate financial information is available that is regularly evaluated by the chief operating decision maker. The Managing Board decides how to allocate resources and assesses the performance of the clusters. Cluster performance is reported and reviewed down to the level of operating profit. DSM has determined that the Nutrition, Pharma, Performance Materials, Polymer Intermediates and Base Chemicals and Materials clusters represent reportable segments in addition to Other activities. The clusters are organized based on the type of products produced and the nature of the markets served. The same accounting policies that are applied for these consolidated financial statements are also applied by the operating segments. 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 and consistently be allocated. Selected information on a country and regional basis is provided in addition to the information about operating segments. 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. Non-monetary assets denominated in a currency other than the functional currency continue to be translated against the rate at initial recognition and will not result in exchange differences. 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 Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 9488 Financial statements Consolidated financial statements Financial statements of Royal DSM N.V. Other information DSM figures: five-year summary Explanation of some financial concepts and ratios 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. 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. Intangible assets acquired in a business combination are recognized at fair value on the date of acquisition and subsequently amortized over their expected useful lives, which vary from 5-15 years. Acquired licenses, patents and application software are carried at historic cost less straight-line amortization and less any impairment losses. The expected useful lives vary from 4-10 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. An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use or the sale of the asset. Any gain or loss arising on derecognition of the asset is recorded in the income statement. Leases Finance leases, which transfer to the group substantially all the risks and benefits incidental to ownership of the leased item, are capitalized at inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. All other leases are operating leases. Lease payments for finance leases are apportioned to finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are included in Net finance costs. Capitalized leased assets are depreciated over the shorter of the estimated useful life of the asset or the lease term. Operating lease payments are recognized as an expense on a straight-line basis over the lease term. Associates An associate is an entity over which DSM has significant influence but no control, usually evidenced by a shareholding that entitles DSM to between 20% and 50% of the voting rights. Investments in associates are accounted for by the equity method, which involves recognition in the income statement of DSM’s share of the associate’s profit or loss for the year. DSM’s interest in an associate is carried in the balance sheet at its share in the net assets of the associate together with goodwill paid on acquisition, less any impairment loss. 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. Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 9589 Financial statements Consolidated financial statements 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. Loans and long-term receivables are measured at amortized cost, if necessary after deduction of a value adjustment for bad debts. The proceeds from these assets and the gain or loss upon their disposal are recognized in the income statement. Impairment of assets When there are indications that the carrying amount of a non- current asset (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 between 3 and 12 months are classified as current investments. They are measured at amortized cost. Proceeds from these deposits are recognized in the income statement. Cash and cash equivalents Cash and cash equivalents comprise cash at bank and in hand and deposits held at call with banks with a remaining maturity of less than three 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 Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 9690 Financial statements Consolidated financial statements Financial statements of Royal DSM N.V. Other information DSM figures: five-year summary Explanation of some financial concepts and ratios paid for repurchased DSM shares (treasury shares) is deducted from Royal DSM N.V. Shareholders’ equity until the shares are cancelled 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 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. 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 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. Performance shares are granted free of charge and vest after three years on the achievement of previously determined targets. The cost of performance shares is measured by reference to the fair value of the DSM shares on the date on which the performance shares were granted and is recognized in the income statement (Employee benefits costs) during the vesting period, together with a corresponding increase in equity (Reserve for share-based compensation). Revenue recognition Revenue from the sale of goods is recognized when the significant risks and rewards of ownership are transferred to the Emission rights DSM is subject to legislation encouraging reductions in greenhouse-gas emissions and has been awarded emission Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 97 91 Financial statements Consolidated financial statements 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. 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. 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. 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 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 recognized 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 Effect of new accounting standards The IASB and IFRIC have issued new standards, amendments to existing standards and interpretations, some of which are not Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 98 92 Financial statements Consolidated financial statements Financial statements of Royal DSM N.V. Other information DSM figures: five-year summary Explanation of some financial concepts and ratios yet effective or have not yet been endorsed by the European Union. DSM has introduced standards and interpretations that became effective in 2008. The adoption of these standards and interpretations did not have any effect on the group's financial performance or position. IFRS 8, 'Operating Segments', issued in November 2006, 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. DSM is an early adopter of this standard and has applied it in these financial statements. DSM was already using the same performance measures and reporting structures for external financial reporting as were used for regular review of segment performance by the chief operating decision maker and therefore this new standard does not have a significant effect on the consolidated financial statements. In view of the changed grouping of clusters (the DSM term for business segments) as of 1 January 2008, the five clusters (Nutrition, Pharma, Performance Materials, Polymer Intermediates and Base Chemicals and Materials) are presented as business segments in addition to Other activities. The comparative information for the previous year has been represented accordingly. The adoption of other 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 and accounting changes will be required and will be introduced as of the effective date of the standards and interpretations. The following new standards and amendments to existing standards are not yet being applied by DSM. The revised IFRS 3, 'Business Combinations', will become effective as of 2010. It introduces a number of changes that will be relevant to the group's operations: - The requirement that contingent consideration must be measured at fair value with subsequent changes in this value being recognized in the income statement. - The requirement to expense transaction costs for business combinations when incurred. - Additional guidance for step-acquisitions and for the measurement of non-controlling interests. The amendment to IAS 23, 'Borrowing Costs', which removes the option of immediately recognizing as an expense borrowing costs that are directly attributable to the acquisition, construction or production of qualifying assets, will become effective as of 2009. It will not have any effect on the consolidated financial statements because the option is not applied by DSM. The amendment to IAS 1, 'Presentation of Financial Statements', which introduces the requirement to report total comprehensive income in either a single statement of total comprehensive income o r in a separate statement of comprehensive income will become effective as of 2009. It is already standard practice at DSM to provide a separate statement of comprehensive income (currently called 'consolidated statement of recognized income and expense') and the company will align this with the new requirements. The amendment to IAS 27, 'Consolidated and Separate Financial Statements', providing further clarification on accounting for non-controlling interests in subsidiaries in the consolidated financial statements will become effective as of 2010. The changes are not expected to have a significant impact on the consolidated financial statements. The amendment to IFRS 2, 'Share-based Payment: Vesting Conditions and Cancellations', clarifies the definition of vesting conditions, introduces the concept of non-vesting conditions that are to be reflected in grant-date fair value and provides the accounting treatment for non-vesting conditions and cancellations. The amendment will become applicable for the 2009 financial statements and the possible impact is under investigation. The amendments to IAS 32 and IAS 1 with respect to puttable financial instruments and obligations arising on liquidation, the amendments to IFRS 1 and IAS 27 in relation to the cost of an investment in a subsidiary, jointly controlled entity or associate and the amendments to IAS 39 with respect to eligible hedged items are not expected to have any effect on the consolidated financial statements. The October 2008 amendment to IAS 39 and IFRS 7 that permits the reclassification of certain non- derivative financial assets will not be applied by DSM. New IFRIC interpretations are not expected to have a material 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 the application does not have a material effect on the consolidated financial statements. The same holds for IFRIC 12, 'Service Concession Arrangements', IFRIC 13, 'Customer Loyalty Programs', IFRIC 15, 'Agreements for the Construction of Real Estate' and IFRIC 16, 'Hedges of a Net Investment in a Foreign Operation'. Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 99 93 Financial statements Consolidated financial statements Consolidated statements Consolidated income statement for the year ended 31 December 2008 x € million Notes Continuing operations Before exceptional items Exceptional items (note 9) Discontinued operations Total Total 4 5 6 7 8 8 10 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, amortization and impairments 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 9,297 142 9,439 75 173 (4,984) (1,762) (1,465) (454) (119) 903 (94) (8) (3) 798 (196) 602 (6) 608 608 (10) 598 - - - - - - - (1) 3 (47) (45) - - - (45) 14 (31) - (31) (31) - (31) 9,297 142 9,439 75 173 (4,984) (1,762) (1,466) (451) (166) 858 (94) (8) (3) 753 (182) 571 (6) 577 577 (10) 567 3.64 3.62 (0.19) (0.19) 3.45 3.43 Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 10294 - - - - - - - - - - - - - - - - - - - - - - - - 9,297 142 9,439 75 173 (4,984) (1,762) (1,466) (451) (166) 858 (94) (8) (3) 753 (182) 571 (6) 577 577 (10) 567 164,196 874 165,070 3.45 3.43 1.27 1.20 Financial statements 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 2007 x € million Notes Continuing operations Before exceptional items Exceptional items (note 9) Discontinued operations Total Total Net sales Other operating income Own work capitalized Change in inventories of intermediates and finished goods Raw materials and consumables used Work subcontracted and other external costs Employee benefits costs Depreciation, amortization and impairments 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 4 5 6 7 8 8 10 8,757 164 8,921 52 73 (4,793) (1,522) (1,389) (424) (95) 823 (85) 10 (2) 746 (183) - - - - - - - - (150) (26) (176) - - - (176) 47 8,757 164 8,921 52 73 (4,793) (1,522) (1,389) (574) (121) 647 (85) 10 (2) 570 (136) 563 (129) 434 5 558 558 (10) 548 - (129) (129) - (129) 5 429 429 (10) 419 3.07 3.05 (0.72) (0.72) 2.35 2.33 Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 103 95 - - - - - - - - - - - - - - - - - - - - - - - - 8,757 164 8,921 52 73 (4,793) (1,522) (1,389) (574) (121) 647 (85) 10 (2) 570 (136) 434 5 429 429 (10) 419 178,541 1,475 180,016 2.35 2.33 1.00 1.20 Financial statements Consolidated financial statements Consolidated cash flow statement (note 27) 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 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 2008 2007 571 6 577 451 (8) (2) 20 97 (84) 25 1,076 (180) 14 910 102 10 (92) 182 (85) 9 (93) (188) (69) 77 75 36 (75) 136 5 17 (156) (71) (102) 49 434 (5) 429 574 (10) (55) 36 141 (139) 8 984 (124) (35) 825 Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 104 96 Financial statements Consolidated financial statements Financial statements of Royal DSM N.V. Other information DSM figures: five-year summary Explanation of some financial concepts and ratios 2008 910 2007 825 (48) (386) 45 (85) 26 - (44) 92 6 (794) (394) 753 (466) (6) (193) (758) 53 (1) (1) 85 201 369 31 - 601 (619) (188) 552 (6) 11 369 (50) (541) 18 (120) (11) 8 (97) (2) 1 219 (49) 341 (220) (250) 47 (3) - Consolidated cash flow statement (note 27) continued x € million 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 / commercial paper Dividend paid Repurchase of own shares Proceeds from reissued shares Change in minority interests Capital duty Cash from / 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 2008 Annual Report 2008 www.dsm.com www.dsm.com 105 97 Financial statements Consolidated financial statements Consolidated balance sheet as at 31 December x € million Notes 2008 2007 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 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 Total 11 12 10 25 13 14 15 16 16 24 17 18 10 25 19 20 21 25 19 20 24 22 22 1,200 3,641 392 137 19 176 5,565 1,765 1,525 107 86 4 601 4,088 9,653 4,633 62 4,695 122 314 190 1,559 65 2,250 33 82 734 179 1,188 492 2,708 9,653 1,037 3,440 346 1,169 20 126 6,138 1,547 1,452 235 83 4 369 3,690 9,828 5,310 73 5,383 344 273 170 1,560 35 2,382 9 91 192 42 1,124 605 2,063 9,828 Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 10698 Financial statements 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 reserves Retained earnings Total Actuarial gains and losses Other Minority interests Total 2007 Exchange differences on translation of foreign operations (133) Change in actuarial gains and losses Change in 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 2008 Exchange differences on translation of foreign operations Change in actuarial gains and losses Change in 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 - - (9) 21 (14) (135) - (135) 45 - - (30) (26) 42 31 - 31 - 208 (62) - - (38) 108 - 108 - (1,270) 85 - - 305 (880) - (880) - - - - - - - 429 429 - - - - - - 1 577 578 (133) 208 (62) (9) 21 (52) (27) 429 402 45 (1,270) 85 (30) (26) 347 (848) 577 (271) (4) - - - - - (4) 5 1 6 - - - - - 6 (6) 0 (137) 208 (62) (9) 21 (52) (31) 434 403 51 (1,270) 85 (30) (26) 347 (842) 571 (271) Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 107 99 Financial statements Consolidated financial statements Consolidated statement of changes in equity (note 18) x € million Share capital Share premium Treasury shares Other reserves Retained earnings Total Other Actuarial gains and losses Minority interests Total Equity Balance at 1 January 2007 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 74 - - - 2 - 11 (4) - - - - 317 5,192 5,784 71 5,855 - - - - - - - (193) - 13 - (664) (21) - (193) 11 9 (758) - 53 - (2) - - - - - 3 1 - (195) 11 9 (758) - 53 3 403 2 (135) 3 108 (3) 429 2 402 2 Balance at 31 December 2007 339 489 (575) (123) 422 4,758 5,310 73 5,383 Dividend paid Options granted Options / performance shares exercised / cancelled Repurchase of shares Proceeds from reissued shares Change in DSM's share in subsidiaries Recognized income and expense for the period Reclassifications - - - - - - - - - - - - - - - - - - - (250) 52 - - - - 15 (8) - - - 32 (1) - - - - - - (220) - 10 - (5) - (880) - 577 1 (220) 15 2 (250) 47 - (271) - (4) - - - - (7) 0 - (224) 15 2 (250) 47 (7) (271) - Balance at 31 December 2008 339 489 (773) (85) (458) 5,121 4,633 62 4,695 Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 108100 Financial statements Consolidated financial statements Financial statements of Royal DSM N.V. Other information DSM figures: five-year summary Explanation of some financial concepts and ratios Notes to the consolidated financial statements of Royal DSM N.V. 1 General information Unless stated otherwise, all amounts are in € million. In conformity with article 402, Book 2 of the Dutch Civil Code, a condensed income statement is included in the separate financial statements of Royal DSM N.V. A list of DSM participations has been filed with the Chamber of Commerce for 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. As was already announced in last year's report the strategic clustering of activities has been changed in accordance with the decisions in relation to the acceleration of DSM's strategy program Vision 2010. To better align with the evolution towards a Life Sciences and Materials Sciences company it was decided to move from four clusters to five (Nutrition, Pharma, Performance Materials, Polymer Intermediates and Base Chemicals and Materials) as of 1 January 2008. The information in these financial statements is presented in accordance with the new structure and comparative information has been represented accordingly. 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 25), income taxes (note 10) and the determination of fair values for share-based compensation (note 28). 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. 1 euro = Exchange rate at balance sheet date Average exchange rate US dollar Swiss franc Pound sterling 100 Japanese yen 2008 2007 2008 2007 1.41 1.50 0.97 1.27 1.47 1.66 0.73 1.66 1.47 1.59 0.80 1.52 1.37 1.64 0.68 1.61 Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 109 101 Financial statements Consolidated financial statements 2 Change in the scope of the consolidation DSM’s consolidated balance sheet, at the date of acquisition, is summarized in the following table: Acquisitions 2008 PTG Other acquisitions Opening balance sheet DSM In May, DSM acquired 100% of the shares of The Polymer Technology Group, Inc. (PTG), a market leader in the field of biomedical polymers, for a total consideration of € 107 million. The goodwill of € 61 million primarily results from the know-how of the employees, the ability to retain these employees and DSM- specific synergies, notably the ability to cross-sell PTG's technology through the DSM network. PTG has annual sales of approximately USD 43 million and employs about 100 people in Berkeley, California (United States). The impact of the acquisition of PTG on DSM’s consolidated balance sheet, at the date of acquisition, is shown in the following table: Assets Intangible assets Property, plant and equipment Other non-current assets Inventories Receivables Cash and cash equivalents Total assets Liabilities Carrying amount Adjustments to fair value Opening balance sheet DSM Other non-current liabilities Current liabilities Assets Intangible assets Property, plant and equipment Other non-current assets Inventories Receivables Cash and cash equivalents - 2 0 3 4 1 Total liabilities 41 41 0 - (0) - - Net assets, at fair value Acquisition price (in cash) Acquisition price (payable) Acquisition costs Consideration 2 0 3 4 1 Total assets 10 41 51 Goodwill 41 2 0 3 4 1 51 - 5 5 46 61 46 0 107 61 3 24 1 3 3 0 34 0 2 2 32 44 1 1 46 14 44 26 1 6 7 1 85 0 7 7 78 105 47 1 153 75 Liabilities Current liabilities Total liabilities Net assets, at fair value Acquisition price (in cash) Acquisition price (payable) Acquisition costs Consideration Goodwill 5 5 5 (0) (0) 41 5 5 46 61 46 0 107 61 The impact of all acquisitions (CMT, Soluol, Valley Research, Shanxi FengHe Melamine, The Polymer Technology Group, Polymeric Processes, Diolen Industrial Fibers) made in 2008 on The acquisitions in 2008 contributed € 26 million to net sales. If all acquisitions had occurred on 1 January 2008, additional net sales would have been € 46 million. The acquisitions in 2008 contributed € 3 million to the profit for the year; this would have been € 5 million if they had all occurred on 1 January 2008. 2007 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. Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 110 102 Financial statements 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 impact of all acquisitions made in 2007 on DSM's consolidated balance sheet, at the date of acquisitions, is summarized in the next table. Pentapharm Other acquisitions Opening balance sheet DSM Assets Intangible assets Property, plant and equipment Prepaid pension costs Inventories Receivables Cash and cash equivalents 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 Goodwill 12 18 2 16 10 9 67 - 10 5 12 27 40 62 8 1 71 31 5 19 - 2 8 3 37 2 - - 18 20 17 22 0 0 22 5 17 37 2 18 18 12 104 2 10 5 30 47 57 84 8 1 93 36 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 million. The acquisitions in 2007 only made a marginal contribution to the profit for the year; this would have been the case even if they had all occurred on 1 January 2007. Disposals 2008 In 2008 DSM disposed of various small participations. 2007 In 2007 DSM disposed of various small participations. Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 111 103 Financial statements Consolidated financial statements 3 Segment information Business segments 1 2008 Financial performance Net sales Supplies to other clusters Operating profit before exceptional items Exceptional items Operating profit Depreciation and amortization Additions to provisions Share of the profit of associates R&D expenditure R&D expenditure / 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 Nutrition Pharma Continuing operations Perform- ance Materials Polymer Interme- diates Base Chemicals and Materials Other activities 2 Elimina- tions Total Discon- tinued operations Total 2,710 50 863 27 2,297 29 1,201 390 1,733 244 493 32 - 9,297 (772) - Supplies 2,760 890 2,326 1,591 1,977 525 (772) 9,297 447 (3) 444 138 10 0 135 89 (24) 65 61 27 0 74 175 (15) 160 91 19 0 127 19 (1) 18 24 - (4) 22 260 - (87) (2) 260 (89) 82 26 - 22 58 8 1 14 5.0 8.6 5.5 1.8 1.3 2.8 475 185 277 55 140 299 - - - - - - - - - 3,835 1,501 1,445 1,393 2,706 1,274 710 426 1,333 676 8,730 4,415 (9,106) (4,727) 2,054 1,001 1,689 431 945 438 135 2 49 1 231 0 54 10 82 - 188 5 903 (45) 858 454 90 (3) 394 4.2 1,431 9,653 4,958 6,558 739 18 23,157 23,591 - - - - - - - - - - - - - - - - - - - - - - - - 9,297 - 9,297 903 (45) 858 454 90 (3) 394 4.2 1,431 9,653 4,958 6,558 739 18 23,157 23,591 EBITDA / net sales (in %) 21.6 17.4 11.6 3.6 19.7 Workforce3 Average Year-end 6,789 7,043 4,677 4,401 4,819 4,978 1,414 1,427 2,338 2,357 3,120 3,385 1 2 3 For a description of the types of products and services of each segment please refer to the Review of business in the Report by the Managing Board. 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. 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. Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 112 104 Business segments 1 2007 Financial performance Net sales Supplies to other clusters Financial statements Consolidated financial statements Financial statements of Royal DSM N.V. Other information DSM figures: five-year summary Explanation of some financial concepts and ratios Nutrition Pharma Continuing operations Perform- ance Materials Polymer Interme- diates Base Chemicals and Materials Other activities2 Elimina- tions Total Discon- tinued operations Total 2,302 41 903 29 2,390 33 1,232 293 1,529 180 401 54 - 8,757 (630) - Supplies 2,343 932 2,423 1,525 1,709 455 (630) 8,757 Operating profit before exceptional items Exceptional items 276 (22) 92 (154) 291 - 105 - 137 - (78) - Operating profit 254 (62) 291 105 137 (78) Depreciation and amortization Additions to provisions Share of the profit of associates R&D expenditure R&D expenditure / 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 127 32 - 135 76 13 - 67 80 1 - 113 28 0 (1) 13 72 13 - 30 41 23 (1) 14 5.9 7.4 4.7 1.1 2.0 3.5 437 194 255 52 131 278 3,338 1,364 1,597 1,452 2,538 1,095 851 526 1,429 1,155 9,749 4,012 (9,674) (5,159) 1,909 1,034 1,568 408 765 298 142 1 60 1 196 0 51 12 65 - 54 6 EBITDA / net sales (in %) 17.5 18.6 15.5 10.8 13.7 Workforce3 Average Year-end 6,726 6,998 4,828 4,888 4,292 4,592 1,431 1,421 2,257 2,282 2,899 3,073 - - - - - - - - - - - - - - - - - - - 8,757 - 8,757 823 (176) 647 424 82 (2) 372 4.2 1,347 9,828 4,445 5,982 568 20 22,433 23,254 - - - - - - - - - - - - - - 823 (176) 647 424 82 (2) 372 4.2 1,347 9,828 4,445 5,982 568 20 22,433 23,254 1 2 3 For a description of the types of products and services of each segment please refer to the Review of business in the Report by the Managing Board. 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. 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. Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 113 105 Financial statements Consolidated financial statements Geographical information 2008 Net sales by origin In € million In % Net sales by destination In € million In % Total assets Intangible assets and Property, plant and equipment Capital expenditure Carrying amount 2007 Net sales by origin In € million In % Net sales by destination In € million In % Total assets Intangible assets and Property, plant and equipment Capital expenditure Carrying amount Germany Switzer- land Rest of Europe North America China Continuing operations Rest of Asia- Pacific Rest of the world Elimina- tions Total 216 2 989 11 1,313 1,021 1,184 14 11 13 583 6 365 4 264 3 2,624 1,647 28 18 783 8 1,172 13 375 4 871 9 - - - - 9,297 100 9,297 100 The Nether- lands 4,240 46 947 10 9,397 246 2,595 2,946 1,643 711 461 509 (8,855) 9,653 - - - - - - - 587 4,841 23,591 8,757 100 8,757 100 - - - 475 4,477 23,254 291 2,032 20 164 49 584 67 573 64 972 69 396 19 70 8 50 Workforce at year-end1 7,452 827 2,265 3,949 2,907 3,557 1,308 1,326 3,829 44 793 9 207 2 929 11 1,135 1,135 1,143 13 13 13 536 6 433 5 213 2 2,584 1,566 30 18 698 8 1,162 13 339 4 812 9 9,415 382 2,187 2,968 1,447 587 393 545 (8,096) 9,828 241 1,917 17 185 26 425 54 751 84 796 36 308 6 57 11 38 Workforce at year-end1 7,219 793 2,177 4,154 2,768 3,564 1,268 1,311 1 The workforce of joint ventures has been included on a proportionate basis. DSM has no single external customer that represents 10 percent or more of revenues and therefore information about major customers is not provided. Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 114 106 Financial statements Consolidated financial statements Financial statements of Royal DSM N.V. Other information DSM figures: five-year summary Explanation of some financial concepts and ratios 4 Other operating income 7 Other operating costs 2008 2007 2008 2007 Continuing operations before exceptional items Release of provisions Gain on assets, activities, emission rigths, royalties and licences sold Price settlements Government grants Compensation for closure of Gonglu Site (China) Proceeds from the sale of scrap, waste materials, etc. Insurance benefits Sundry Total 5 Employee benefits costs Continuing operations before exceptional items Wages and salaries Social security costs Pension costs (see also note 25) Share-based compensation (see also note 28) Total Continuing operations before exceptional items Amortization of intangible assets Depreciation of property, plant and equipment Impairment losses Total 41 23 3 24 12 7 5 27 Continuing operations before exceptional items 17 Additions to provisions Loss from the disposal / 28 8 21 - 3 3 84 closure of assets and activities Bad debts Derecognition of assets under construction Claims Exchange differences Sundry Total 19 12 7 19 7 19 36 119 40 24 2 - - 16 13 95 142 164 8 Net finance costs 2008 2007 2008 2007 Continuing operations before exceptional items Interest costs 1,128 Interest expense 210 Capitalized interest during construction 42 Interest charge on discounted provisions and accruals 9 Total 1,199 219 34 13 1,465 1,389 Other financial income and 2008 2007 Result from other securities Sundry Total 49 389 16 454 37 373 14 424 Net finance costs 102 In 2008 the interest rate applied in the capitalization of interest during construction was 5% (2007: also 5%). 93 (7) 8 94 (7) (6) 13 8 8 84 (4) 5 85 (7) (2) (3) 2 (10) 75 6 Depreciation, amortization and impairments expense Interest income Exchange differences Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 115 107 Financial statements Consolidated financial statements 9 Exceptional items 2007 2008 2007 The exceptional items in 2007 are listed below: Exceptional expense: - Loss from the disposal of activities - Additions to provisions - Impairment of intangible assets and Property, plant and equipment - Reversal of impairments 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 2008 (11) (37) (12) 15 (45) (45) - - (45) 14 (31) - - (26) (150) - (176) (176) - - (176) 47 (129) - (31) (129) - 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 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 cluster. 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. The exceptional items in 2008 are listed below: - The book loss from the management buy-out of Deretil, part of DSM Anti-Infectives, amounts to € 11 million before taxation. - The following restructuring charges have been recognized: € 25 million before taxation in connection with the actions to strengthen DSM's competitive position announced on 15 December 2008 and € 12 million in connection with the closure of the Clavulanic Acid site of DSM Anti-Infectives in Sweden. - The impairment of € 12 million relates to the closure of the Clavulanic Acid site of DSM Anti-Infectives in Sweden and principally consists of the write-down of Property, plant and equipment to the remaining value in use. - The reversal of impairments relates to DSM Anti-Infectives and is due to improved business conditions. Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 116108 Financial statements Consolidated financial statements Financial statements of Royal DSM N.V. Other information DSM figures: five-year summary Explanation of some financial concepts and ratios 10 Income tax The income tax expense on the total result was € 182 million (2007: € 136 million) and can be broken down as follows: The balance of deferred tax assets and deferred tax liabilities increased by € 268 million owing to the changes presented in the table below: 2008 2007 2008 2007 Current tax expense: - Current year - Prior-year adjustments Deferred tax expense: - Originating from temporary differences and their reversal - Prior-year adjustments - Change in tax rate - Benefit of tax losses and tax credits recognized 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 (65) (17) (82) (83) (7) (10) 46 - Reclassifications (54) Balance at 31 December (93) 9 (84) (22) (2) 3 (77) (98) Total (182) (136) Of which: 346 (344) 2 (98) 346 1 19 - 270 392 (122) 496 (383) 113 (54) (52) (9) (16) 20 2 346 (344) - Deferred tax assets - Deferred tax liabilities 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. Of which related to: - The result from discontinuing operations - The result from exceptional items - The result from continuing operations - 14 - 47 (196) (183) The effective income tax rate on the result from continuing operations before exceptional items was 24.6% in 2008 (2007: the Netherlands and the effective tax rate on the result from continuing operations is as follows: 24.5%). The relationship between the income tax rate in As a % Domestic income tax rate Tax effects of: - Deviating rates - Tax-exempt income and non- deductible expense - Other effects 2008 25.5 1.3 (1.1) (1.1) 2007 25.5 2.4 0.3 (3.7) Effective tax rate 24.6 24.5 Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 117 109 Financial statements Consolidated financial statements 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 assets 2008 Deferred tax liabilities Deferred tax assets 2007 Deferred tax liabilities 84 65 23 53 5 - 5 94 1 59 389 291 (288) 392 (45) (237) (39) (22) (23) (3) (1) (32) - (8) (410) - 288 (122) 71 71 23 34 4 - 8 73 1 55 340 368 (362) 346 (49) (261) (313) (31) (8) (4) (2) (13) (22) (3) (706) - 362 (344) No deferred tax assets were recognized for losses carried forward amounting to € 51 million (2007: € 48 million). The valuation of deferred tax assets depends on the probability of the reversal of valuation differences and the utilization of tax loss carryforwards. Deferred tax assets are recognized for future tax benefits arising from temporary differences and for tax loss carryforwards to the extent that the tax benefits are likely to be realized. Dutch tax losses may be carried forward for 9 years and start to expire in 2013. Foreign tax loss carryforwards primarily exist in the United States and Austria. US tax losses start to expire in 2023. Austrian tax losses can be carried forward for an indefinite period of time. 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. Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 118110 Financial statements Consolidated financial statements Financial statements of Royal DSM N.V. Other information DSM figures: five-year summary Explanation of some financial concepts and ratios Total Goodwill Licenses and patents Under construction Other 1,156 148 1,008 48 53 (3) (37) (12) (41) 21 29 1,224 187 1,037 50 - 119 (6) (49) (3) 35 17 163 1,443 243 1,200 725 - 725 - 36 - - - (37) - (1) 725 1 724 - - 75 - - - 23 - 98 822 - 822 127 49 78 5 16 - (8) (9) (2) 2 4 139 57 82 5 - - - (11) - 4 10 8 157 67 90 - - - - - - - - - - - - - - 14 (7) - - - - - 10 17 17 - 17 304 99 205 43 1 (3) (29) (3) (2) 19 26 360 129 231 31 7 44 (6) (38) (3) 8 (3) 40 447 176 271 11 Intangible assets Balance at 1 January 2007 Cost Amortization Carrying amount Changes in carrying amount: - Capital expenditure - Acquisitions - Disposals - Amortization - Impairments - Exchange differences - Reclassifications Balance at 31 December 2007 Cost Amortization Carrying amount Changes in carrying amount: - Capital expenditure - Put into operation - Acquisitions - Disposals - Amortization - Impairments - Exchange differences - Reclassifications Balance at 31 December 2008 Cost Amortization Carrying amount 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 their estimated useful lives, which could affect the amount or timing of charges to the income statement, such as amortization of intangible assets. Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 119 111 Financial statements Consolidated financial statements The breakdown of the carrying amount of goodwill at year-end 2008 is as follows: Acquisition NeoResins Catalytica The Polymer Technology Group Pentapharm Lipid Technologies Provider Syntech Far East Valley Research DSM Japan Engineering Plastics Crina CMT Pamako Engineering Soluol Fontanals Composite Resins Other acquisitions 2008 2007 Cash generating unit Functional Year of currency acquisition 358 308 68 34 12 10 7 6 6 4 4 3 1 1 358 295 - 31 14 9 - 6 6 - 3 - 1 1 DSM Resins DSM Pharmaceuticals, Inc. DSM PTG DSM Nutritional Products DSM Food Specialties DSM Resins DSM Food Specialties DSM Engineering Plastics DSM Nutritional Products DSM Food Specialties DSM Dyneema DSM Resins DSM Resins EUR USD USD CHF SEK HKD USD EUR CHF EUR CHF USD EUR 2005 2001 2008 2007 2006 2005 2008 2003 2006 2008 2007 2008 2007 Total 822 724 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 taking into account the growth rates that have been determined to apply for the specific cash generating unit in the Annual Strategic Review. The terminal value for the period after ten years is determined with the assumption of no growth. The key assumptions in the cash flow projections relate to the market growth for the cash generating units and the related revenue projections. 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 2007 Cost Amortization Carrying amount 2008 Of which acquisition- related 2007 Acquisition- related 144 20 23 210 50 447 360 (85) (9) (8) (63) (11) (176) (129) 59 11 15 147 39 271 231 11 7 13 115 - 146 13 6 - 102 - 121 121 Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 120112 Financial statements Consolidated financial statements Financial statements of Royal DSM N.V. Other information DSM figures: five-year summary Explanation of some financial concepts and ratios 12 Property, plant and equipment Total Land and buildings Plant and machinery Other equip- ment Under construc- tion Not used for operating activities Balance at 1 January 2007 Cost Depreciation and impairment losses 8,578 4,923 1,603 645 6,286 4,043 Carrying amount 3,655 958 2,243 Changes in carrying amount: - Capital expenditure - Put into operation - Acquisitions - Disposals - Depreciation - Impairment losses - Change in estimate of decommissioning costs - Exchange differences - Reclassifications - Other changes Balance at 31 December 2007 Cost Depreciation and impairment losses 427 - 37 (38) (373) (152) 5 (99) (21) (1) 4 49 17 (15) (56) (1) - (28) 14 (1) 34 208 19 (23) (307) (150) 5 (52) (12) 2 (215) (17) (276) 8,688 5,248 1,634 693 6,309 4,342 Carrying amount 3,440 941 1,967 Changes in carrying amount: - Capital expenditure - Put into operation - Acquisitions - Disposals - Depreciation - Impairment losses - Reversal of impairments - Change in estimate of decommissioning costs - Exchange differences - Reclassifications - Other changes Balance at 31 December 2008 Cost Depreciation and impairment losses 537 - 26 (23) (389) (24) 15 10 70 (18) (3) 201 3 84 10 (8) (64) (11) - - 22 1 - 37 9,068 5,427 1,727 749 53 334 16 (13) (313) (7) 15 10 45 (1) (2) 137 6,568 4,464 Carrying amount 3,641 978 2,104 Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 121 113 242 204 38 3 13 - - (10) - - - (1) - 5 246 203 43 2 13 - - (12) - - - - - - 3 245 199 46 428 24 404 386 (270) 1 - - (1) - (19) (22) (1) 74 481 3 478 479 (431) - (2) - (6) - - 3 (18) (1) 24 507 5 502 19 7 12 - - - - - - - - - (1) (1) 18 7 11 - - - - - - - - - - - - 21 10 11 Financial statements Consolidated financial statements Property, plant and equipment includes assets acquired under finance lease agreements with a carrying amount of € 6 million (31 December 2007: € 17 million). The related commitments are included under Borrowings and amount to € 6 million (31 December 2007: € 8 million). The total of the minimum lease payments at the balance sheet date amounts to € 6 million (31 December 2007: € 10 million) and their present values to € 5 million (31 December 2007: € 9 million). Overview of minimum lease payments in time: 2009 2010-2013 After 2013 Total 1 4 1 6 In 2008, on balance € 9 million in impairment losses was recognized. In 2008 the asset impairment losses mainly related to the closure of the Clavulanic Acid site of DSM Anti-Infectives in Sweden (€ 12 million) and to various assets which are no longer used at DSM Nutritional Products (€ 6 million), at DSM Dyneema (€ 2 million), at DSM Business Support (€ 2 million) and at DSM Resins (€ 1 million); at DSM Anti-Infectives the impairments made in 2007 were partly (€ 15 million) reversed due to improved business conditions. The impairment losses on Property, plant and equipment in 2007 amounted to € 152 million and mainly related to DSM Anti- Infectives (€ 146 million). 13 Associates Balance at 1 January 20 26 2008 2007 Changes: - Share of profit - Dividend received - Acquisitions - Impairments - Transfers - Exchange differences - Other changes Balance at 31 December Of which loans granted 1 (1) 1 (4) - 2 0 19 1 (1) (1) - - (2) (1) (1) 20 - Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 122 114 Financial statements Consolidated financial statements Financial statements of Royal DSM N.V. Other information DSM figures: five-year summary Explanation of some financial concepts and ratios Total 100 (7) 3 42 (4) 1 (2) (2) (1) (7) 3 126 (4) 96 (20) (1) 23 (1) (13) (30) 176 Other participations Other receivables Other deferred items 40 - 3 42 (4) - - (1) - (7) - 73 - 96 (20) (1) - - 0 (30) 118 40 - - - - 1 (2) (1) (10) - 3 31 - - (0) - 23 (1) (11) - 42 20 (7) - - - - - - 9 - - 22 (4) - - - - - (2) - 16 14 Other financial assets Balance at 1 January 2007 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 Changes: - Charged to the income statement - Capital payments - Impairments - Disposals - Loans granted - Repayments - Transfers - Changes in fair value Balance at 31 December 2008 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 € 32 million is included that relates to equity instruments whose fair value cannot be measured reliably (2007: € 35 million). These instruments are therefore measured at cost. Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 123 115 Financial statements Consolidated financial statements 15 Inventories 2008 2007 Deferred items comprise € 2 million (31 December 2007: € 34 million) in prepaid expenses that will impact profit or loss in future periods but have already been paid. Raw materials and consumables Intermediates and finished goods 510 1,299 461 1,128 Adjustments to lower net realizable value Total 1,809 1,589 (44) (42) 1,765 1,547 The carrying amount of inventories adjusted to net realizable value was € 155 million (2007: € 165 million); the value adjustment of inventories recognized in the income statement was € 83 million expense (2007: € 17 million expense). 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. An aging overview of trade receivables related to commercial transactions amounting to € 1,318 million is provided below. The remaining balance reported as trade receivables amounting to € 207 million is excluded from this analysis because it principally concerns reclaimable VAT and is not related to the payment behavior of customers. In % 2008 2007 Neither past due nor impaired 1-29 days overdue 30-89 days overdue 90 days or more overdue 81 14 3 2 85 11 1 3 16 Receivables Trade receivables Trade accounts receivable Receivables from associates Adjustment for bad debts Total Other receivables Income taxes receivable Other taxes and social security contributions Government grants Loans Other receivables Deferred items Total 2008 2007 17 Cash and cash equivalents 1,545 4 1,549 (24) 1,525 17 16 1 19 35 19 107 1,458 11 1,469 Deposits (17) Cash at bank and in hand Payments in transit 1,452 Bills of exchange Total 2008 2007 192 377 1 31 601 70 242 18 39 369 9 128 7 10 35 46 235 Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 124 116 Financial statements Consolidated financial statements Financial statements of Royal DSM N.V. Other information DSM figures: five-year summary Explanation of some financial concepts and ratios 2008 5,383 571 77 (944) 64 (224) (250) 47 (29) 2007 5,855 434 (144) 154 (46) (195) (758) 53 30 18 Equity Balance at 1 January Net profit Exchange differences, net of income tax Net actuarial gains/(losses) on defined benefit obligations Net asset ceiling related to defined benefit obligations Dividend Repurchase of ordinary shares Proceeds from reissue of ordinary shares Other changes Balance at 31 December 4,695 5,383 After the balance sheet date the following dividends were declared by the Managing Board: Per cumulative preference share A: € 0.23 (2007: € 0.23) Per ordinary share: € 1.20 (2007: € 1.20) Total 2008 10 194 204 2007 10 204 214 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 2008 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 € 0.03 carries one vote. The changes in the number of shares in 2008 are shown in the table below. Issued shares Treasury shares Ordinary Cumprefs A Cumprefs C Ordinary Cumprefs C Balance at 1 January 2008 181,425,000 44,040,000 37,500,000 14,528,140 37,500,000 Reissue of shares in connection with exercise of option rights Repurchase of own shares - - - - - - (1,945,202) 6,615,000 - - Balance at 31 December 2008 181,425,000 44,040,000 37,500,000 19,197,938 37,500,000 Number of treasury shares at 31 December 2008 19,197,938 - 37,500,000 Number of shares outstanding at 31 December 2008 162,227,062 44,040,000 - The average number of ordinary shares outstanding in 2008 was 164,195,834 (2007: 178,540,706). All shares issued are fully paid. Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 125 117 Financial statements Consolidated financial statements 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 2007 DSM possessed 14,528,140 ordinary shares (nominal value € 22 million, 6.4% of the share capital). In 2008, DSM used 1,945,202 ordinary shares for servicing option rights and performance shares. On 31 December 2008 DSM possessed 19,197,938 ordinary shares (nominal value € 29 million, 8.5% of the share capital). The average purchase price of the ordinary treasury shares was € 34.34. In 2008, 6.6 million ordinary treasury shares were repurchased as part of the first and the second phase of the second share buy-back program of Vision 2010. The number of treasury shares at 31 December 2008 included 13.5 million shares related to the share buy-back program of Vision 2010. The remaining 5.7 million ordinary treasury shares will be used for servicing management and personnel share-option rights. Other reserves in Shareholder's equity Total Translation reserve Hedging reserve Reserve for share-based compensation Fair value reserve Balance at 1 January 2007 2 (53) 34 21 Changes: Fair-value changes of derivatives Release to income statement Fair-value changes of other financial assets Exchange differences Options and performance shares granted Options and performance shares exercised/cancelled Reclassifications Income tax Total changes 49 (28) (8) (134) 11 (4) 3 (14) (125) - - - (133) - - - (7) (140) Balance at 31 December 2007 (123) (193) Changes: Fair-value changes of derivatives Release to income statement Fair-value changes of other financial assets Exchange differences Options and performance shares granted Options and performance shares exercised/cancelled Reclassifications Income tax Total changes 8 (33) (30) 45 15 (8) (1) 42 38 - - - 45 - - - 26 71 Balance at 31 December 2008 (85) (122) 49 (28) - - - - - (7) 14 48 8 (33) - - - - (1) 8 (18) 30 - - - - 11 (4) 3 - 10 31 - - - - 15 (8) - - 7 38 0 - - (8) (1) - - - - (9) (9) - - (30) - - - - 8 (22) (31) Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 126118 Financial statements Consolidated financial statements Financial statements of Royal DSM N.V. Other information DSM figures: five-year summary Explanation of some financial concepts and ratios 19 Provisions Restructuring costs and termination benefits Environmental costs Other long-term employee benefits Other provisions Total Total 83 42 35 112 272 2008 Of which current 44 19 2 17 82 Total 75 38 36 112 261 2007 Of which current 50 13 1 27 91 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 € 4 million in 2008 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 and costs of termination of contracts. These provisions have an average life of 1-3 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 and expenses relating to claims. These provisions have an average life of 5-10 years. The total of non-current and current provisions increased by € 11 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 1 January 2008 75 38 36 112 261 Additions Releases Uses Exchange differences Other changes Balance at 31 December 2008 59 14 1 16 90 (18) (7) (2) (14) (34) (7) 0 (10) (41) (51) 1 1 - - 2 - 3 - 8 11 83 42 35 112 272 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 expenditures for restructuring the Citric Acid activities, expenditures for the closure of the DSM Agro production site in IJmuiden (Netherlands) and to the structural cost-saving actions to strengthen profitability and future competitiveness at DSM Pharmaceutical Products, DSM Anti Infectives, DSM Engineering Plastics, DSM Resins and DSM Industrial Services. The withdrawal from this provision concerns expenditure related to restructuring activitities at DSM Nutritional Products, DSM Food Specialties, DSM Pharmaceutical Products, DSM Resins and DSM Industrial Services (Copernicus project). The addition to the environmental provision mainly relates to expenditures for soil cleaning at DSM Pharmaceutical Products. Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 127 119 Financial statements Consolidated financial statements The additions to the Other provisions mainly relate to a provision for future drilling-platform decommissioning and site restoration. The withdrawal from this provision relates to expenditures regarding claims at DSM Nutritional Products and DSM Elastomers. 20 Borrowings Debenture loans Private loans Finance lease liabilities Credit institutions / commercial paper Total Total 1,398 391 6 498 2,293 2008 Of which current 177 58 1 498 734 Total 1,210 385 8 149 1,752 2007 Of which current 0 41 2 149 192 In agreements governing loans with a residual amount at year-end 2008 of € 1,614 million, of which € 177 million were of a short- term nature (31 December 2007: € 1,417 million, none of which were of a short-term nature), clauses have been included which restrict the provision of security. The documentation of the € 300 million bond issued in November 2005 which was increased by € 200 million in September 2008 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 2008, borrowings to a total of € 1,398 million had a remaining term of more than 5 years. The schedule of repayment of borrowings (excluding debt to credit institutions and commercial paper) is as follows: 2008 2009 2010 2011 2012 and 2013 2014 through 2018 2008 2007 - 236 7 3 151 1,398 43 225 7 8 107 1,213 Total 1,795 1,603 Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 128120 Financial statements 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 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 original amount of € 300 million of the 4% EUR loan 2005-2015 was swapped into CHF to hedge the currency risk of net investments in CHF-denominated subsidiaries. This original amount of the loan was pre-hedged (cash flow hedge) in 2005 by means of a forward starting swap, which led to a lower effective fixed interest rate of 3.66%. The increase of the loan by € 180 million (after discount of € 20 million) was neither pre- hedged nor swapped; the effective fixed interest rate for this part of the loan is 5.21%. The 5.25% EUR loan 2007-2017 was swapped into CHF in 2007 for an amount of € 650 million and in 2008 for an amount of € 100 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: A breakdown of the borrowings by currency (excluding debt to credit institutions and commercial paper) is given in the following table: EUR USD CNY Other Total 2008 2007 1,324 391 69 11 1,150 384 60 9 1,795 1,603 On balance, total borrowings increased by € 541 million owing to the following changes: 2008 2007 Balance at 1 January 1,752 1,514 Loans taken up Repayments Changes in fair value Acquisitions Changes in debt to credit institutions / commercial paper Exchange differences Other changes 219 (49) 1 0 349 22 (1) 753 (466) 0 6 (10) (47) 2 Balance at 31 December 2,293 1,752 NLG loan NLG loan 4.34% floating (6 months) 1998-2008 2000-2014 The average effective interest rate on the portfolio of borrowings outstanding in 2008, including financial instruments related to these borrowings, amounted to 3.9% (2007: 4.5%). CNY loan floating 2002-2009 (12 months) CNY loan floating 2008-2011 A breakdown of debenture loans is given below: USD loan USD loan (12 months) 5.51% 5.61% 2003-2013 2003-2015 2008 2007 Other loans 2008 2007 - 65 38 31 107 106 44 4 65 60 - 103 102 51 6.75% 4.00% 5.25% USD loan EUR loan EUR loan Total 1999-2009 2005-2015 2007-2017 177 480 741 169 300 741 1,398 1,210 All debenture loans have a fixed interest rate. Total 391 385 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. Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 129 121 Financial statements Consolidated financial statements 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). 23 Contingent liabilities and other financial obligations DSM’s policy regarding financial-risk management is described in note 24. associates and third parties Outstanding orders for projects 21 Other non-current liabilities under construction Other Operating leases and rents Guarantee obligations on behalf of 2008 2007 70 65 16 25 34 58 15 9 Investment grants Other non-current liabilities Total 22 Current liabilities Trade payables Received in advance Trade accounts payable Notes and cheques due Owing to associates 2008 2007 Total 176 116 15 50 65 23 12 35 Most of the outstanding orders for projects under construction will be completed in 2009. Property, plant and equipment under operating leases primarily concern catalysts, buildings and various equipment items. The commitments for operating leases and rents are spread as follows: 2008 2007 18 1,165 1 4 2009 2010 2011 9 1,103 2012 and 2013 After 2013 6 6 Total 6 13 11 12 28 70 Total 1,188 1,124 Other current liabilities Income taxes payable Other taxes and social security contributions Pensions Other liabilities Deferred items Total 70 76 4 207 135 492 65 68 2 216 254 605 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. Claims have been received on account of the delivery by DSM Food Specialties of an allegedly defective intermediate product. No health risks are involved. Discussions are being held with most claimants aimed at an amicable solution whilst in one case litigation has been initiated. Possible liability is covered by insurance. DSM has a process in place to monitor legal claims periodically and systematically. Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 130122 Financial statements Consolidated financial statements Financial statements of Royal DSM N.V. Other information DSM figures: five-year summary Explanation of some financial concepts and ratios 24 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 € 400 million and € 500 million amounting to a total of € 900 million (2007: two confirmed credit facilities amounting to a total of € 900 million) and a commercial-paper program amounting to € 1,500 million (2007: € 1,500 million). The company will use the commercial-paper program to a total of not more than € 900 million (2007: € 900 million). The agreements for the committed credit facilities neither have financial covenants nor material adverse changes clauses. 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. 2008 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 2007 Within 1 year Within 1 to 2 years Within 2 to 3 years Within 3 to 4 years Within 4 to 5 years After 5 years Total Fixed-rate borrowings Floating-rate borrowings Subtotal Interest payments Cash at redemption1 Total cash out 13 6 2 4 108 1,329 223 1 1 39 - 69 236 7 3 43 108 1,398 1,462 333 1,795 6 14 6 2 1 1,247 37 211 1 7 2 69 43 225 7 9 3 1,316 1,276 327 1,603 86 78 78 77 74 199 592 87 76 67 66 66 248 610 - - - - - 29 29 - - - - - 9 9 322 85 81 120 182 1,626 2,416 130 301 74 75 69 1,573 2,222 1 Difference between nominal redemption and amortized costs 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. Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 131 123 Financial statements Consolidated financial statements On 31 December 2008, the notional amount of one interest rate swap in relation to long-term borrowings was € 177 million (2007: € 170 million). For this swap fair value hedge accounting was applied until 1 October 2008; from that moment on the hedge became ineffective. In 2008 an immaterial amount was recognized in the income statement in connection with this ineffectiveness (in Other financial income and expense). 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 2008, with all other variables held constant. As in 2007, 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 2008 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 2008 to changes in interest rates is set out in the following table. Carrying amount Fair value 2008 Sensitivity of fair value to change in interest of: (1%) +1% Carrying amount Fair value 2007 Sensitivity of fair value to change in interest of: (1%) +1% Current investments Cash and cash equivalents Short-term borrowings Long-term borrowings Interest rate swaps (fixed to floating) Pre-hedges 4 601 (734) 4 601 (737) (1,559) (1,621) 1 - 1 - - - 1 97 - - - - (1) 4 369 (192) 4 369 (192) (105) (1,560) (1,509) - - (1) - (1) - - - - 89 (2) - - - - (97) 2 - 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 2008 no pre-hedges were outstanding (same as in 2007). 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 USD, CHF and JPY. 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. At year-end, these instruments had remaining 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 2008, the notional amount of the currency forward contracts was € 1,977 million (2007: € 1,556 million). In 2008 DSM hedged USD 869 million (2007: USD 718 million) of its projected net cash flow in USD in 2009 (partly against CHF) by means of average-rate currency forward contracts at an average exchange rate of USD 1.42 per euro for the four quarters of 2009. In 2008 DSM also hedged JPY 5,475 million (2007: JPY 5,375 million) of its projected net cash flow in JPY in 2009 (mostly against CHF) by means of average-rate currency forward contracts at an average exchange rate of JPY 155.20 per euro for the four quarters of 2009. These hedges have fixed the exchange rate for part of the USD and JPY receipts in 2009. Cash flow hedge accounting is applied for these hedges. As a result of these hedges, in 2008 € 29 million (2007: € 27 million) was recognized in the Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 132124 Financial statements Consolidated financial statements Financial statements of Royal DSM N.V. Other information DSM figures: five-year summary Explanation of some financial concepts and ratios 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 1,901 million). 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 2008, 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. Carrying amount Fair value 2008 Sensitivity of fair value to change in all exchange rates of: (10%) +10% Carrying amount Fair Value 2007 Sensitivity of fair value to change in all exchange rates of: (10%) +10% 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 entities1 Average-rate forwards used for economic hedging2 Average-rate currency options used for economic hedging2 11 2 Fair value change reported in Translation Reserve. Fair value change reported in Hedging Reserve. 4 601 (734) 4 601 (737) (1,559) (1,621) (19) 20 - 17 (37) (31) 14 (7) - (14) 30 25 (12) 6 (87) (145) 119 (7) - (40) - 32 - (19) 20 (87) (7) - 4 369 (192) 4 369 (192) (1,560) (1,509) (28) 23 25 20 2 (28) 23 25 20 2 - 13 (7) (48) 12 (67) (119) (27) - - (11) 6 39 (10) 55 97 22 6 The following sensitivity analysis of net borrowings and derivative financial instruments to currency movements against the euro assumes a 10% change in the USD exchange rate against all foreign currencies and the euro from the level on 31 December 2008, 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. Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 133 125 Financial statements Consolidated financial statements Carrying amount Fair value 2008 Sensitivity of fair value to change in USD (10%) +10% Carrying amount Fair Value 2007 Sensitivity of fair value to change in USD (10%) +10% 4 601 (734) 4 601 (737) (1,559) (1,621) (19) 20 (87) (7) - (19) 20 (87) (7) - - 1 (20) (27) 14 (76) - (68) - - - 17 22 (12) 62 - 56 - 4 369 (192) 4 369 (192) (1,560) (1,509) (28) 23 25 20 2 (28) 23 25 20 2 - 2 (1) (43) 12 (107) - (42) - (2) 1 35 (10) 87 - 34 10 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 entities1 Average-rate forwards used for economic hedging2 Average-rate currency options used for economic hedging2 1 2 Fair value change reported in Translation Reserve. Fair value change reported in Hedging Reserve. 1 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. Price risk Financial instruments that are subject to changes in stock exchange prices or indexes are subject to a price risk. At year-end 2008 DSM had a limited exposure to 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. In view of the current economic circumstances a weekly review by group management of the aging of outstanding trade receivables has been introduced. In addition, weekly reporting of the outstanding balances with important customers has also been started. 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. No significant agreements or financial instruments were available at the reporting date that would reduce the maximum exposure to credit risk. Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 134 126 Financial statements Consolidated financial statements Financial statements of Royal DSM N.V. Other information DSM figures: five-year summary Explanation of some financial concepts and ratios 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 2008 31 December 2007 Carrying amount Fair value Carrying amount Fair value 118 42 1,632 86 4 601 1,559 65 734 179 1,680 118 42 1,632 86 4 601 1,621 65 737 179 1,680 73 31 1,687 83 4 369 1,560 35 192 42 1,729 73 31 1,687 83 4 369 1,509 35 192 42 1,729 The following methods and assumptions were used to determine the fair value of financial instruments: cash, current investments, current and non-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. The following table shows the carrying amounts of the financial derivatives recognized, broken down by type and purpose: Assets Liabilities Total Interest rate swaps Currency swaps Total financial derivatives related to borrowings Currency forward contracts Currency options Balance at 31 December 2007 Interest rate swaps Currency swaps Total financial derivatives related to borrowings Currency forward contracts Currency options Balance at 31 December 2008 0 27 27 54 2 83 1 - 1 85 - 86 (1) (30) (31) (11) - (42) - (106) (106) (73) - (179) (1) (3) (4) 43 2 41 1 (106) (105) 12 - (93) Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 135 127 Financial statements Consolidated financial statements 25 Post-employment benefits 2008 2007 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: Prepaid pension costs Employee benefits liabilities Balance at 1 January Changes: - Balance of actuarial gains/ (losses) - Balance of asset ceiling - Employee benefits costs - Acquisitions and disposals 2008 2007 - Contributions by employer - Exchange differences 11 - Other changes 3 3 25 42 Total changes Balance at 31 December Of which: - Prepaid pension costs - Employee benefits liabilities Pension plans Healthcare plans Other post-employment benefits Defined contribution plans Total 0 3 5 26 34 For 2009 costs related to pensions and healthcare, excluding gains and losses on curtailments and settlements, will be approximately € 70 million higher than the costs for 2008 (€ 3 million). Changes in Prepaid pension costs and Employee benefits liabilities recognized in the balance sheet are disclosed in the following overview: 1,169 (282) 887 (1,270) 85 (9) - 93 (1) 5 (1,097) (210) 137 (347) 918 (325) 593 208 (62) (17) 2 156 7 0 294 887 1,169 (282) In the Netherlands a prepaid pension asset of € 135 million remained at 31 December 2008. € 282 million) consist of € 291 m illion (2007: € 229 million) The Employee benefits liabilities of € 347 million (2007: related to pension plans, € 36 million (2007: € 33 million) related to healthcare and other costs and € 20 million (2007: € 20 million) related to post-employment benefits. 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. Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 136 128 Financial statements Consolidated financial statements Financial statements of Royal DSM N.V. Other information DSM figures: five-year summary Explanation of some financial concepts and ratios 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 2008 2007 5,400 5,466 330 (1,402) (1,072) - - 92 21 11 (239) - 321 (331) (10) - 34 146 20 (32) (224) - Balance at 31 December 4,213 5,400 The amounts recognized in the balance sheet are as follows: The German and the Austrian plan are wholly unfunded. Together they represent 4% of the total defined benefit obligation. 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 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 2008 2007 (4,252) 4,213 (4,276) 5,400 (39) 1,124 (202) (241) 87 - (154) (291) 137 (202) 922 99 (81) 940 (229) 1,169 Balance at 1 January 4,478 4,906 2008 2007 Present value of funded obligations Fair value of plan assets 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 80 236 21 (132) - - 2 - 7 (239) 1 Present value of unfunded obligations 92 224 20 (541) Funded status Unrecognized past service costs Effect of asset ceiling - - 8 28 Net liabilities / net assets (35) Of which: (224) - Liabilities (Employee benefits - liabilities) - Assets (Prepaid pension costs) Balance at 31 December 4,454 4,478 Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 137 129 Financial statements Consolidated financial statements The changes in the net assets recognized in the balance sheet are as follows: Balance at 1 January Net expense recognized in the income statement Actuarial gains/(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 2008 940 0 (1,270) 85 92 - 0 (1) (154) In 2009 DSM is expected to contribute € 111 million (actual 2008: € 92 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 2008 63% 29% 4% 4% 2008 80 236 (330) 14 - (0) 2007 651 (11) 210 (62) 146 2 4 - 940 2007 51% 44% 5% 0% 2007 92 224 (321) 16 - 11 Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 138130 Financial statements 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: Discount rate Price inflation Salary increase Pension increase Expected return on plan assets The Netherlands Foreign The Netherlands 2008 5.75% 1.75% 1.75% 1.75% 6.45% 4.70% 2.19% 3.10% 1.48% 4.8%-8.75% 5.50% 1.75% 1.75% 1.75% 6.25% 2007 Foreign 5.00% 2.19% 3.14% 1.69% 4.5%-8.5% 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 2008 2007 2006 2005 (4,454) 4,213 (241) (1,402) 26 106 (4,478) 5,400 922 (331) 21 519 (4,906) 5,466 560 25 (94) 459 (5,064) 5,231 167 430 (149) (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 obligations Fair value of plan assets (including reimbursement rights) Present value of unfunded obligations Unrecognized past service costs Net liability (provision for post-employment benefits) 2008 2007 (37) 8 (29) (6) (1) (36) (35) 8 (27) (5) (1) (33) Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 139 131 Financial statements 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 2008 2007 2 2 (1) (0) - 3 2 2 (1) (0) - 3 The changes in the net 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 2008 (33) (3) 0 2 - (2) (36) In 2009 DSM is expected to contribute € 1 million to its post-employment healthcare and other plans. 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) 2008 6.25% 3.5% 4.5% 9.0% 4.75% 2007 (33) (3) (2) 1 - 4 (33) 2007 6.0% 3.0% 4.0% 8.0% 4.75% A one-percentage-point change in assumed healthcare cost trend rates would have the following impact: Effect on the aggregate of the service costs and interest costs (increase) Effect on defined obligation (increase) One-percentage- point increase One-percentage- point decrease (0) (5) 0 4 Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 140132 Financial statements 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) 26 Net debt 2008 2007 2006 2005 (43) 8 (35) 1 (40) 8 (32) 1 (40) 8 (32) 0 (69) 13 (56) (4) 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 81. Borrowings: - Non-current borrowings - Current borrowings Total borrowings Current investments Cash and cash equivalents Financial derivatives, assets (see also note 24) Financial derivatives, liabilities (see also note 24) Net debt 2008 2007 1,559 734 2,293 (4) (601) (86) 179 1,781 1,560 192 1,752 (4) (369) (83) 42 1,338 Cash at year-end 2008 was not being used as collateral and was therefore not restricted (2007: also zero). Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 141 133 Financial statements Consolidated financial statements 27 Notes to the cash flow statement The cash flow statement provides an explanation of the changes in cash and cash equivalents. It is prepared on the basis of a comparison of the balance sheets as at 1 January and 31 December. Changes that do not involve cash flows, such as changes in exchange rates, amortization, depreciation, impairment losses and transfers to other balance sheet items, are eliminated. Changes in working capital due to the acquisition or disposal of consolidated companies are included under Investing activities. Most of the changes in the cash flow statement can be traced back to the detailed statements of changes for the balance sheet items concerned. For those balance sheet items for which no detailed statement of changes is included, the table below shows the link between the change according to the balance sheet and the change according to the cash flow statement: 2007 In % of net sales (from continuing operations) 21.4 2008 In % of net sales (from continuing operations) 22.6 Operating working capital 1,875 2,102 227 (59) 7 5 180 (180) Operating working capital 1,801 1,875 74 69 (19) - 124 (124) Balance at 1 January Balance at 31 December Balance sheet change Adjustments: - Exchange differences - Changes in consolidation - Transfers Total Change in cash flow 28 Share-based compensation Under the DSM Stock Incentive Plan, performance and non-performance 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 three-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. 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). All stock options and performance shares are settled by physical delivery of DSM shares, while SARs are settled in cash. Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 142134 Financial statements Consolidated financial statements Financial statements of Royal DSM N.V. Other information DSM figures: five-year summary Explanation of some financial concepts and ratios Fair value on grant date (€ ) Exercise price (€ ) Expiry date Overview of stock options and Stock Appreciation Rights for management Year of issue In 2008 Granted Exercised Forfeited/ expired Out- standing on 31 Dec. 2008 Out- standing on 31 Dec. 2007 2000 2001 2002 2003 2003 1 2004 20052,3,4 20062 20072 20082 15,000 229,625 510,300 632,000 92,200 1,278,321 2,441,028 2,817,725 3,176,800 - - - - - - - - - - 3,377,350 (15,000) (187,175) (111,250) (250,800) (11,000) (478,320) - - - - - - (360,900) (1,130,786) - 42,450 399,050 381,200 81,200 800,001 949,342 (44,000) (158,500) 2,615,225 (2,500) (2,500) (132,850) 3,041,450 (67,850) 3,307,000 3.52 3.88 5.22 3.09 3.64 2.97 6.15 8.95 7.69 5.73 18.240 31 Mar. 2008 19.990 30 Mar. 2009 23.505 4 Apr. 2010 18.195 4 Apr. 2011 19.770 3 Nov. 2011 17.895 2 Apr. 2012 29.050 8 Apr. 2013 38.300 31 Mar. 2014 33.600 30 Mar. 2015 29.790 28 Mar. 2016 2008 Total 11,192,999 3,377,350 (1,463,445) (1,489,986) 11,616,918 Of which vested 3,330,396 at 31 Dec. 2006 3,287,143 at 31 Dec. 2007 2007 Total 10,833,702 3,271,300 (2,479,053) (432,950) 11,192,999 Of which vested 2,831,473 3,330,396 1 2 3 4 On 3 November 2003 a select group of DSM Nutritional Products employees received stock options and SARs on a one-off basis. Stock options will partly vest, and may therefore immediately be exercised, upon termination of employment in connection with retirement or early retirement. The remaining term to exercise stock options or 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). Based on TSR performance, the stock incentives tied to performance granted in 2005 did only partially vest; the remaining part has been forfeited. Certain employees in the Netherlands are entitled to employee stock options that are granted on the first day on which the DSM stock is quoted ex-dividend following the Annual General Meeting of Shareholders. The opening price of the DSM stock on that day is the exercise price of the stock options. Employee stock options can immediately be exercised and have a term of 5 years. Overview of stock options for employees Year of issue In 2008 Outstanding on 31 Dec. 2007 Granted Exercised Forfeited/expired Outstanding on 31 Dec. 2008 Fair value on grant date (€ ) Exercise price (€ ) Exercise period 2003 2005 2006 2007 2008 Total 50,214 184,412 584,533 599,488 - - - - - 657,428 (47,428) (46,950) (41,704) (133,713) (210,462) (2,786) (400) (3,030) (2,090) (998) - 137,062 539,799 463,685 445,968 2.33 4.29 6.03 4.27 3.27 18.19 until Apr. 2008 29.05 until Apr. 2010 38.30 until Mar. 2011 33.60 until Mar. 2012 29.79 until Mar. 2013 1,418,647 657,428 (480,257) (9,304) 1,586,514 Changes in 2007 648,828 (198,203) (33,948) Based on the 2007 result, 657,428 employee option rights were granted in 2008. Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 143 135 Financial statements Consolidated financial statements 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 to determine the fair value at grant date: 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 2008 2007 3.75% 6 years 8 years 2.5 years 5 years 26% 20% 4.00% 6 years 8 years 2.5 years 5 years 26% 20% In the costs for wages and salaries an amount of € 13 million is included for share-based compensation (2007: € 9 million). In the following table the share-based compensation is specified: Stock options Stock appreciation rights Performance shares Total expense 2008 2007 14 (2) 1 13 10 (1) - 9 Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 144136 Financial statements Consolidated financial statements Financial statements of Royal DSM N.V. Other information DSM figures: five-year summary Explanation of some financial concepts and ratios 29 Interests in joint ventures DSM’s share in its most important joint ventures is disclosed below: Company Location Country DSM interest DEX-Plastomers VoF Noordgastransport B.V. EdeA VoF 2008 2007 Heerlen Zoetermeer Sittard-Geleen NL NL NL 50% 40% 50% 50% 40% 50% The financial data of joint ventures are included in the consolidated financial statements according to the method of proportionate consolidation. DSM’s interests in the assets and liabilities, income and expense of these joint ventures are: Non-current assets Current assets Non-current liabilities Current liabilities Net assets Net sales Expenses Net profit 2008 2007 159 68 (100) (44) 83 134 (95) 39 151 75 (100) (38) 88 121 (82) 39 30 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 US CN 2008 25% 25% 2007 25% 25% Investments in associates are accounted for by the equity method. The following table provides summarized financial information on associates on a 100% basis. Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 145 137 Financial statements Consolidated financial statements Non-current assets Current assets Non-current liabilities Current liabilities Net assets Net sales Net result 31 Related parties 2008 2007 61 45 (15) (35) 56 256 (16) 60 66 (5) (54) 67 217 (1) 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 € 4.6 million (2007: € 3.8 million). This includes fixed annual salary including other items to the amount of € 2.8 million (2007: € 2.8 million), bonuses to the amount of € 1.6 million (2007: € 1.0 million), and pension expenditure amounting to € 0.2 million (2007: zero) including a discount of € 0.2 million. For further information about the remuneration of the members of the Managing Board see note 10 to the financial statements of Royal DSM N.V. Members of the Supervisory Board received a fixed remuneration (included in Other operating costs) totaling € 0.3 million (2007: € 0.3 million). Further information about the remuneration of Managing Board members and Supervisory Board members and their share option rights is given on page 68 of the Report by the Supervisory Board. 32 Service fees paid to external auditors The service fees recognized in the financial statements 2008 for the Ernst & Young network amounted to € 4.7 million for the audit of the financial statements (2007: € 4.6 million), € 1.1 million for other assurance services (2007: € 0.3 million), € 2.2 million for tax services (2007: € 2.1 million) and € 3.6 million for sundry services (2007: € 0.8 million). In 2008 the other assurance services and sundry services included additional services related to the carve-out process of DSM businesses now included in the Base Chemicals and Materials cluster. Included in the service fees recognized in the financial statements 2008 are the following amounts for Ernst & Young Accountants LLP: € 1.6 million for the audit of the financial statements (2007: € 1.6 million), € 0.7 million for other assurance services (2007: € 0.2 million), and nil for tax services and sundry services (2007: nil). Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 146138 Financial statements Consolidated financial statements Financial statements of Royal DSM N.V. Other information DSM figures: five-year summary Explanation of some financial concepts and ratios Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 147 139 Financial statements 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 Deferred tax 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 2008 Annual Report 2008 www.dsm.com www.dsm.com 148 140 Notes 2008 2007 2 3 4 5 6 7 8 7 8 9 409 36 9,816 45 409 26 9,738 - 10,306 10,173 155 1 0 156 473 27 3 503 10,462 10,676 4,633 5,310 - 2 1,437 1,439 2 536 106 3,746 4,390 217 2 1,417 1,636 4 3 32 3,691 3,730 10,462 10,676 2008 765 (188) 577 2007 529 (100) 429 Financial statements 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. financial statements 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 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 carrying amount of intangible assets mainly comprises goodwill for the acquisition of NeoResins in 2005 (€ 358 million), Crina in 2006 (€ 6 million) and Pentapharm in 2007 (€ 34 million). 3 Property, plant and equipment This item mainly relates to land and buildings and corporate IT projects. Capital expenditure in 2008 was € 20 million, while the depreciation charge in 2008 was € 3 million. The historic cost of property, plant and equipment as at 31 December 2008 was € 75 million; accumulated depreciation amounted to € 39 million. Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 149 141 Financial statements Financial statements of Royal DSM N.V. 4 Financial assets Total Subsidiaries Other participations Share in equity Loans Balance at 1 January 2007 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) 43 529 (103) 455 (31) 154 (46) 234 (10) (164) 39 - - - - - - - - - 4 Balance at 31 December 2007 9,738 9,299 408 Changes: - Share in profit - Dividend received - Capital payments - Net actuarial gains/(losses) - Net asset ceiling - Intra-group transactions - Change of fair value reserve - Change of hedging reserve - Exchange differences - Other changes 765 (85) 176 (944) 64 (2) (30) (20) 165 (11) 765 (85) 95 (944) 64 (2) - (20) 165 17 Balance at 31 December 2008 9,816 9,354 5 Receivables Receivable from subsidiaries Other receivables Total - - - - - - - - - (15) 393 2008 93 62 155 1 - - 30 - - - - - - - 31 - - 81 - - - (30) - - (13) 69 2007 418 55 473 Annual Report 2008 Annual Report 2008 Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 150 142 Financial statements Consolidated financial statements Financial statements of Royal DSM N.V. Other information DSM figures: five-year summary Explanation of some financial concepts and ratios 2008 5,310 577 71 (944) 64 (220) (250) 47 (22) 2007 5,784 429 (140) 154 (46) (193) (758) 53 27 6 Royal DSM N.V. Shareholders' equity Balance at 1 January Net profit Exchange differences, net of income tax Net actuarial gains/(losses) on defined benefit obligations Net asset ceiling related to defined benefit plans Dividend Repurchase of ordinary shares Proceeds from reissue of ordinary shares Other changes Balance at 31 December 4,633 5,310 For details see the consolidated statement of changes in equity (note 18). 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 € (122) million (2007: € (193) million) is included for Translation reserve, € 30 million (2007: € 48 million) for Hedging reserve and € (31) million (2007: € (9) million) for Fair value reserve. 7 Provisions Environmental costs Other provisions Total 2008 2007 Total Of which current Total Of which current 3 1 4 1 1 2 3 3 6 1 3 4 The total of non-current and current provisions decreased by € 2 million. This is the net effect of the following changes: Environmental costs Other provisions Total 2008 Changes 2007 Balance at 1 January 2008 3 3 6 Additions Releases Uses 1 0 1 1 0 (2) (2) - (1) 0 (1) (2) Balance at 31 December 2008 3 1 4 Annual Report 2008 Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 151 143 Financial statements Financial statements of Royal DSM N.V. 8 Borrowings Debenture loans Private loans Credit institutions / commercial paper Total 2008 2007 Total Of which current Total Of which current 1,398 216 359 1,973 177 - 359 536 1,210 207 3 1,420 - - 3 3 Of the total amount of borrowings outstanding at 31 December 2008, € 1,329 million had a remaining term of more than five years. number of consolidated companies. These debts are included in the consolidated balance sheet. 10 Remuneration of the members of the Managing Board The repayment schedule for borrowings is as follows: 2009 2010 2011 2012 and 2013 2014 through 2018 2008 2007 177 - - 108 1,329 170 - - 104 1,143 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 2008 and subsequent years as approved by the Annual General Meeting of Shareholders on 26 March 2008. More details about the remuneration policy are included in the Report by the Supervisory Board starting on page 68. Total 1,614 1,417 In agreements governing loans with a residual amount at year- end 2008 of € 1,614 million, of which € 177 million were of a current nature (31 December 2007: € 1,417 million, none of which were of a current nature), clauses have been included which restrict the provision of security. 9 Other current liabilities Owing to subsidiaries Other liabilities Deferred items 2008 2007 3,649 94 3 3,612 73 6 Total 3,746 3,691 Contingent liabilities Guarantee obligations on behalf of affiliated companies and third parties amounted to € 200 million (31 December 2007: € 247 million). Royal DSM N.V. has declared in writing that it accepts several liability for debts arising from acts-in-law of a The total remuneration (including pension expenditure and other commitments) of the members of the Managing Board amounted to € 4.6 million (2007: € 3.8 million). The remuneration of the individual members of the Managing Board was as follows: Feike Sijbesma: salary including other items € 796,000 (2007: € 643,000), bonus € 396,000 ( 2007: € 233,000), pension expenditure € 57,000 (2007: zero); Jan Zuidam: salary including other items € 529,000 (2007: € 515,000), bonus € 317,000 (2007: € 233,000), pension expenditure € 35,000 (2007: zero); Nico Gerardu: salary including other items € 506,000 (2007: € 492,000), bonus € 317,000 (2007: € 176,000), pension expenditure € 38,000 (2007: zero); Rolf-Dieter Schwalb: salary including other items € 506,000 (2007: € 493,000), bonus € 317,000 (2007: € 59,000), pension expenditure € 38,000 (2007: zero); Stephan Tanda: salary including other items € 508,000 (2007: € 332,000), bonus € 213,000 (2007: zero), pension expenditure € 38,000 (2007: zero). Outstanding and exercised stock incentives The following table shows the stock incentives of the individual members of the Managing Board and the rights exercised. Annual Report 2008 Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 152 144 Financial statements 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 31 Dec. 2007 In 2008 Granted Exercised Outstanding on 31 Dec. 2008 Average share price at exercise (€ ) Forfeited/ expired Exercise price (€ ) Expiry date - 35.490 19.990 30 Mar. 2009 Feike Sijbesma Stock options Of which vested Performance shares Of which vested1 Jan Zuidam Stock options Of which vested Performance shares Of which vested1 2001 2002 2003 2004 2005 2006 2007 2008 Total 2005 2006 2007 2008 2001 2002 2003 2004 2005 2006 2007 2008 Total 2005 2006 2007 2008 Total 60,000 60,000 60,000 60,000 30,000 30,000 30,000 - 330,000 240,000 8,000 8,000 8,000 - - - - - - - 37,500 37,500 - - - - 10,000 24,000 10,000 - 60,000 60,000 60,000 60,000 30,000 30,000 30,000 - 330,000 240,000 8,000 8,000 8,000 - 24,000 - - - - - - - - 30,000 30,000 - - - 8,000 8,000 (60,000) (22,500) 285,000 (60,000) - - - - - - - - - - - (22,500) - - - - - - - - (60,000) - - - - - - - (6,000) - - - (6,000) - - - - (22,500) - - - 60,000 60,000 60,000 7,500 30,000 30,000 37,500 187,500 2,000 8,000 8,000 10,000 28,000 2,000 60,000 60,000 60,000 7,500 30,000 30,000 30,000 (60,000) (22,500) 227,500 - - - - - (6,000) - - - (6,000) 187,500 2,000 8,000 8,000 8,000 26,000 2,000 23.505 4 Apr. 2010 18.195 4 Apr. 2011 17.895 2 Apr. 2012 29.050 8 Apr. 2013 38.300 31 Mar. 2014 33.600 30 Mar. 2015 29.790 28 Mar. 2016 29.050 38.300 33.600 29.790 23.505 4 Apr. 2010 18.195 4 Apr. 2011 17.895 2 Apr. 2012 29.050 8 Apr. 2013 38.300 31 Mar. 2014 33.600 30 Mar. 2015 29.790 28 Mar. 2016 29.050 38.300 33.600 29.790 - 36.922 19.990 30 Mar. 2009 1 In line with the Dutch corporate governance code, participants will retain any vested performance shares for a period of five consecutive years or to such moment employment is terminated. Annual Report 2008 Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 153 145 Financial statements Financial statements of Royal DSM N.V. Year of issue Outstanding on 31 Dec. 2007 In 2008 Granted Exercised 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 2008 Total 2006 2007 2008 Total 2007 2008 Total 2007 2008 Total 2007 2008 Total 2007 2008 Total 36,000 36,000 36,000 36,000 30,000 30,000 - 204,000 108,000 8,000 8,000 - 16,000 - 30,000 - 30,000 - 8,000 - 8,000 - 30,000 - 30,000 - 8,000 - 8,000 - - - - - - - 30,000 30,000 - - 8,000 8,000 - 30,000 30,000 - 8,000 8,000 - 30,000 30,000 - 8,000 8,000 - - - - - - - - - - - - - - - - - - - - - - - - Forfeited/ expired - - - (18,000) - - - (18,000) - - - - - - - - - - - - - - - Outstanding on 31 Dec. 2008 Exercise price (€ ) Expiry date 23.505 4 Apr. 2010 18.195 4 Apr. 2011 17.895 2 Apr. 2012 29.050 8 Apr. 2013 38.300 31 Mar. 2014 33.600 30 Mar. 2015 29.790 28 Mar. 2016 38.300 33.600 29.790 33.600 30 Mar. 2015 29.790 28 Mar. 2016 33.600 29.790 33.600 30 Mar. 2015 29.790 28 Mar. 2016 33.600 29.790 36,000 36,000 36,000 18,000 30,000 30,000 30,000 216,000 126,000 8,000 8,000 8,000 24,000 - 30,000 30,000 60,000 - 8,000 8,000 16,000 - 30,000 30,000 60,000 - 8,000 8,000 16,000 - Annual Report 2008 Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 154 146 Financial statements Consolidated financial statements Financial statements of Royal DSM N.V. Other information DSM figures: five-year summary Explanation of some financial concepts and ratios Shares In addition to the performance shares granted under the DSM Stock Incentive Plan, the members of the Managing Board have themselves invested in DSM shares. At year-end 2008 the members of the Managing Board together held 23,027 shares (year-end 2007: 12,050) 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 (2007: € 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 till 26 March 2008 Ewald Kist, deputy chairman as from 26 March 2008 Louise Gunning-Schepers as from 26 March 2008 Pierre Hochuli Okko Müller Claudio Sonder Tom de Swaan Cees van Woudenberg Total Total 2007 50,000 8,750 35,000 26,250 35,000 - 35,000 35,000 35,000 7,500 1,875 5,000 - 3,750 - 5,000 6,875 5,000 2008 2007 3,499 312 3,499 2,624 1,250 - 1,250 3,499 3,499 60,999 10,937 43,499 28,874 40,000 - 41,250 45,374 43,499 61,991 45,741 43,241 - 36,250 10,313 40,000 43,241 41,748 260,000 35,000 19,432 314,432 268,750 36,250 17,525 - 322,525 At year-end 2008 the members of the Supervisory Board held no shares (2007: 6,084 shares) in Royal DSM N.V. Heerlen, 16 February 2009 Heerlen, 17 February 2009 MANAGING BOARD, Feike Sijbesma Jan Zuidam Nico Gerardu Rolf-Dieter Schwalb Stephan Tanda SUPERVISORY BOARD, Cor Herkströter Ewald Kist Louise Gunning-Schepers Pierre Hochuli Claudio Sonder Tom de Swaan Cees van Woudenberg Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 155 147 Financial statements Other information Auditor's report Royal DSM N.V. Attn. Managing Board of Directors 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, 2008, the income statement, the statement of recognized income and expense, the 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, 2008, 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, 2008, 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, 2008, 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 f 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, 17 February 2009 Ernst & Young Accountants LLP was signed by P.J.A.M. Jongstra Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 156148 Financial statements Consolidated financial statements Financial statements of Royal DSM N.V. Other information DSM figures: five-year summary Explanation of some financial concepts and ratios Profit appropriation Special statutory rights According to Article 32 of the Royal DSM N.V. Articles of Association and with the approval of the Supervisory Board, every year the Managing Board determines the portion of the net profit to be appropriated to the reserves. For the year 2008 the net profit is € 577 million and the amount to be appropriated to the reserves has been established at € 373 million. From the subsequent balance of the net profit (€ 204 million), dividend is first distributed on the cumulative preference shares B. At the end of 2008 no cumprefs B were in issue. Subsequently, a 4.348% dividend is distributed on the cumulative preference shares A, based on a share price of € 5.29 per cumulative preference share A. For 2008 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 2008, the final dividend will then amount to € 0.15 per cumulative preference share A. The profits remaining after distribution of these dividends (€ 194 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 2008 would amount to € 1.20 per share. An interim dividend of € 0.40 per ordinary share having been paid in August 2008, the final dividend would then amount to € 0.80 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 shares - Final dividend payable on ordinary shares 2008 577 373 10 65 129 2007 429 215 10 59 145 DSM Preference Shares Foundation The DSM Preference Shares Foundation was established in 1989. By virtue of DSM's Articles of Association, 375,000,000 cumulative 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. Under an agreement entered into between the DSM Preference Shares Foundation and DSM, the Foundation has the right to acquire such preference shares (call option) to a maximum corresponding to 100% of the capital issued in any form other than preference shares B, less one. The purpose of such agreement is, amongst other things, for the Foundation to allow DSM the opportunity to determine its position, for example with regard to a possible bidder for DSM shares, to examine his plans in detail and, to the extent applicable, to look for (better) alternatives. Preference shares B will not be outstanding longer than necessary. As soon as there are no longer any reasons for the preference shares B to remain outstanding, the Managing Board will convene a General Meeting of Shareholders and recommend the cancellation of the preference shares B that are outstanding. The Foundation acquired no preference shares B in 2008. On 31 December 2008 the Foundation Committee was composed as follows: Floris Maljers, chairman Maarten van Veen, vice-chairman Mick den Boogert The Foundation Committee Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 157149 Financial statements Other information 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 ( financieel toezicht Wet op het ). The Managing Board of Royal DSM N.V. The Foundation Committee Annual General Meeting of Shareholders The Annual General Meeting of Shareholders is to be held at the DSM head office in Heerlen (Netherlands) on Wednesday, 25 March 2009 at 14.00 hours. Important dates Ex-dividend quotation Publication of first-quarter results Publication of second-quarter results Publication of third-quarter Friday, 27 March 2009 Tuesday, 28 April 2009 Tuesday, 4 August 2009 results Tuesday, 3 November 2009 Annual report 2009 Wednesday, 24 February 2010 Annual General Meeting of Shareholders Wednesday, 31 March 2010 Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 158 150 Financial statements Consolidated financial statements Financial statements of Royal DSM N.V. Other information DSM figures: five-year summary Explanation of some financial concepts and ratios Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 159 151 Financial statements 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 2008 2007 2006 2005 2004 1,200 3,641 392 137 19 176 5,565 1,765 1,632 86 4 601 4,088 - 4,088 9,653 4,633 62 4,695 122 314 190 1,559 65 2,250 33 82 734 179 1,680 2,708 - 2,708 9,653 1,037 3,440 346 1,169 20 126 6,138 1,547 1,687 83 4 369 3,690 - 3,690 9,828 5,310 73 5,383 344 273 170 1,560 35 2,382 9 91 192 42 1,729 2,063 - 2,063 9,828 1,008 3,655 496 918 26 100 6,203 1,515 1,739 79 3 552 3,888 - 3,888 1,003 3,750 533 478 43 189 5,996 1,535 1,597 36 5 902 4,075 43 4,118 10,091 10,114 5,784 71 5,855 383 304 188 907 44 1,826 21 127 607 41 1,614 2,410 - 2,410 5,501 67 5,568 219 383 166 1,381 53 2,202 23 220 329 65 1,699 2,336 8 2,344 10,091 10,114 453 3,811 492 166 78 82 5,082 1,348 1,556 244 6 1,261 4,415 - 4,415 9,497 4,668 22 4,690 134 378 284 1,497 60 2,353 39 219 527 59 1,610 2,454 - 2,454 9,497 Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 160152 Financial statements 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 2008 2007 2006 2005 2004 9,297 8,757 8,380 8,195 7,832 Operating profit plus depreciation and amortization (EBITDA) 1,357 1,247 1,274 1,311 1,067 Operating profit (EBIT) Net finance costs Income tax expense Share of the profit of associates Net profit before exceptional items Net profit from exceptional items Profit for the year Profit attributable to minority interests Net profit attributable to equity holders of Royal DSM N.V. Net profit attributable to holders of cumulative preference shares Net profit used for calculating earnings per share Capital employed Capital expenditure: - Intangible assets and Property, plant and equipment - Acquisitions Disposals Depreciation and amortization Net debt1 Dividend Workforce at 31 December (x 1000) Employee benefits costs (x € million) Ratios1 - Net sales / average capital employed - Current assets / current liabilities - Equity / total assets - Gearing (net debt / equity plus net debt) - EBIT / net sales in % - CFROI in % - Net profit / average Royal DSM N.V. Shareholders' equity available to holders of ordinary shares in % - EBITDA / net finance costs 903 (102) (196) (3) 602 (31) 571 6 577 (10) 567 823 (75) (183) (2) 563 (129) 434 (5) 429 (10) 419 834 (81) (198) 1 556 (4) 552 (5) 547 (10) 537 808 (70) (180) (2) 556 (36) 520 7 527 (16) 511 562 (56) (103) 9 412 (142) 270 23 293 (22) 271 6,558 5,982 6,303 6,221 5,558 587 152 27 454 1,781 204 24 1,465 1.48 1.51 0.49 0.28 9.7 8.7 11.9 13.3 475 93 52 424 1,338 214 23 1,389 1.43 1.78 0.55 0.20 9.4 8.3 7.9 16.6 457 44 165 451 921 197 22 1,332 1.34 1.61 0.58 0.14 10.0 8.5 9.9 15.7 401 573 222 567 832 207 22 1,385 1.34 1.76 0.55 0.13 9.9 9.1 10.1 18.7 348 0 28 613 339 190 24 1,411 1.34 1.80 0.49 0.07 7.2 8.1 5.8 19.1 1 To enhance comparability the net debt and ratios for 2004 do not include the impact of the temporary reclassification of cumulative preference shares A. Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 161 153 Financial statements DSM figures: five-year summary Information about ordinary DSM shares 1 Per ordinary share in € 2008 2007 2006 2005 2004 Net profit before exceptional items Net profit Cash flow Royal DSM N.V. Shareholders' equity Dividend: - Interim dividend - Final dividend Pay-out including dividend on cumulative preference shares as % of net profit before exceptional items Dividend yield (dividend as % of 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 3.64 3.45 6.20 27.12 1.202 0.40 0.80 36 3.9 41.27 15.76 18.33 3.07 2.35 5.56 30.42 1.20 0.33 0.87 35 3.3 39.87 31.63 32.33 2.85 2.83 5.21 30.03 1.00 0.33 0.67 38 2.9 39.70 28.58 37.43 2.82 2.68 5.65 27.59 1.00 0.29 0.71 33 3.4 35.22 23.07 34.50 2.09 1.41 4.52 25.19 0.875 0.290 0.585 45 4.3 23.85 17.88 23.81 162,227 164,196 166,897 178,541 184,850 189,550 190,923 190,783 191,957 191,617 1,783 152 5,894 1,590 94 11,347 1,301 267 5,268 1,063 238 6,563 1,014 26 6,494 1 2 On 5 September 2005 DSM effected a share split on a two-for-one basis (two new 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 spliting of the ordinary DSM shares had taken place prior to all periods presented. Subject to approval by the Annual General Meeting of Shareholders. Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 162 154 Explanation of some financial concepts and ratios Financial statements Consolidated financial statements Financial statements of Royal DSM N.V. Other information DSM figures: five-year summary 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 and associates. Cash flow Cash flow is net profit plus depreciation and amortization. Cash flow return on investment (CFROI) 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. Return on capital employed (ROCE) Operating profit as a percentage of average capital employed. Total shareholder return (TSR) Total shareholder return is capital gain plus dividend paid. Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 163 155  Annual Report 2008 Annual Report 2008 www.dsm.com www.dsm.com 164156 R o y a l D S M N V . . A n n u a l R e p o r t 2 0 0 8 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 2008 Life Sciences and Materials Sciences Staying the Course 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 contributing to the quality life of millions of people around the globe. We support a healthier, more sustainable and more enjoyable way of life. 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, electrical and electronics, life protection and housing. DSM has annual net sales of almost € 9.3 billion and employs some 23,500 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 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. Annual Report 2008 www.dsm.com 

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