Koninklijke DSM N.V. Annual Report 2008

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FY2008 Annual Report · Koninklijke DSM N.V.

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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

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

- 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.

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 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

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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

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

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

Table of contents

3 Key financial data

87 Financial statements

4 Letter from the Chairman

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

Information about the DSM share

Annual Report 2008

www.dsm.com

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

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

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

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

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

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

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

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

Increasing efficiency
Climate and Energy

Annual Report 2008

www.dsm.com

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

Improving lives
Health and Wellness

Annual Report 2008

www.dsm.com

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

Increasing connections
Functionality and
Performance

Annual Report 2008

www.dsm.com

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

Changing lifestyles
Emerging economies

Annual Report 2008

www.dsm.com

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

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

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

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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

342

(29)

403

168

371

133

209

(37)

Total DSM

1,357

1,247

Annual Report 2008

www.dsm.com

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

175

260

(87)

903

276

291

105

137

(78)

823

Annual Report 2008

www.dsm.com

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

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%

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

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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

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

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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

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Report by the Managing Board

Development of innovation-related sales

x € million

650

520

390

260

130

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

127

394

4.2

2,200

135

113

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

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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

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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

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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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)

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

EBITDA / net sales

in %

2008

2007

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

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

4 4

2007

5 4

260

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

500

360

220

(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

2007

3
3

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).

in %

2008

2007

Annual Report 2008

www.dsm.com

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

4
2

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)

910

(591)

(120)

(110)

(794)

(220)

305

601

2007

552

1,003

(124)

(54)

825

(434)

(85)

(394)

(193)

(426)

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

2.1

1.7

1.0

0.9

0.4

Nutrition

Pharma

Performance
Materials

Polymer
Intermediates

Base
Chemicals
and Materials

Other
activities

Annual Report 2008

www.dsm.com

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

100

Total liabilities

100

Equity

As a % of balance sheet total

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

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

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

175

260

(87)

903

276

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

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

231

188

739

142

196

568

Annual Report 2008

www.dsm.com

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

127

113

Intermediates

Base Chemicals and

Materials

Other activities

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

Review of business
Nutrition

Net sales

€ 2,710 m

Workforce

7,043

Annual Report 2008

www.dsm.com

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

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

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

Review of business
Pharma

Net sales

€ 863 m

Workforce

4,401

Annual Report 2008

www.dsm.com

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

150

1,001

8.7

17.4

445

458

903

168

1,034

8.1

18.6

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

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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

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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

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Review of business
Performance Materials

Net sales

€ 2,297 m

Workforce

4,978

Annual Report 2008

www.dsm.com

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

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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.

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Nutrition
Pharma
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Polymer Intermediates
Base Chemicals and Materials
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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

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Review of business
Polymer Intermediates

Net sales

€ 1,201 m

Workforce

1,427

Annual Report 2008

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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

431

4.5

3.6

105

133

408

26.2

10.8

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

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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

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

945

30.4

19.7

137

209

765

18.6

13.7

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.

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Nutrition
Pharma
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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

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

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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)

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

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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

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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

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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

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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)

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

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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

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

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

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

37,500

30,000

10,000

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

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.

in €

20081

20072

2008

2007

Feike Sijbesma

Jan Zuidam

Nico Gerardu

Rolf-Dieter Schwalb

Stephan Tanda

56,532

35,232

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

Total

Supervisory Board remuneration in 2008

Annual fixed

Committee

766,000

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

Pierre Hochuli

Claudio Sonder

Tom de Swaan

Cees van Woudenberg

488,963

212,767

26,250

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

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

150

133

117

100

On-target pay-out

Maximum pay-out

(% 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

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

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

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

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

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)

(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

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

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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

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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

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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.

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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

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financial policy and related functions

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

Annual Report 2008

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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

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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

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

2,200

Annual Report 2008

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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

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.

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

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

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Financial statements

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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

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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.

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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

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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

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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

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Financial statements

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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'.

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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

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

173

(4,984)

(1,762)

(1,465)

(454)

(119)

903

(94)

(8)

(3)

798

(196)

602

(6)

608

(10)

598

(1)

(47)

(45)

(31)

9,297

142

9,439

173

(4,984)

(1,762)

(1,466)

(451)

(166)

858

(94)

(8)

(3)

753

(182)

571

(6)

577

(10)

567

3.64

3.62

(0.19)

3.45

3.43

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9,297

142

9,439

173

(4,984)

(1,762)

(1,466)

(451)

(166)

858

(94)

(8)

(3)

753

(182)

571

(6)

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

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

8,757

164

8,921

(4,793)

(1,522)

(1,389)

(424)

(95)

823

(85)

(2)

746

(183)

(150)

(26)

(176)

8,757

164

8,921

(4,793)

(1,522)

(1,389)

(574)

(121)

647

(85)

(2)

570

(136)

563

(129)

434

558

(10)

548

(129)

429

(10)

419

3.07

3.05

(0.72)

2.35

2.33

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95

8,757

164

8,921

(4,793)

(1,522)

(1,389)

(574)

(121)

647

(85)

(2)

570

(136)

434

429

(10)

419

178,541

1,475

180,016

2.35

2.33

1.00

1.20

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

577

451

(8)

(2)

(84)

1,076

(180)

910

102

(92)

182

(85)

(93)

(188)

(69)

(75)

136

(156)

(71)

(102)

434

(5)

429

574

(10)

(55)

141

(139)

984

(124)

(35)

825

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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)

(85)

(44)

(794)

(394)

753

(466)

(6)

(193)

(758)

(1)

201

369

601

(619)

(188)

552

(6)

369

(50)

(541)

(120)

(11)

(97)

(2)

219

(49)

341

(220)

(250)

(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

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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

1,200

3,641

392

137

176

5,565

1,765

1,525

107

601

4,088

9,653

4,633

4,695

122

314

190

1,559

2,250

734

179

1,188

492

2,708

9,653

1,037

3,440

346

1,169

126

6,138

1,547

1,452

235

369

3,690

9,828

5,310

5,383

344

273

170

1,560

2,382

192

1,124

605

2,063

9,828

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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)

(14)

(135)

(30)

(26)

208

(62)

(38)

108

(1,270)

305

(880)

429

577

578

(133)

208

(62)

(9)

(52)

(27)

429

402

(1,270)

(30)

(26)

347

(848)

577

(271)

(4)

(6)

(137)

208

(62)

(9)

(52)

(31)

434

403

(1,270)

(30)

(26)

347

(842)

571

(271)

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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

(4)

317

5,192

5,784

5,855

(193)

(664)

(21)

(193)

(758)

(2)

(195)

(758)

403

(135)

108

(3)

429

402

Balance at 31 December 2007

339

489

(575)

(123)

422

4,758

5,310

5,383

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)

(8)

(1)

(220)

(5)

(880)

577

(220)

(250)

(271)

(4)

(7)

(224)

(250)

(7)

(271)

Balance at 31 December 2008

339

489

(773)

(85)

(458)

5,121

4,633

4,695

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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

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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

Total liabilities

(0)

Net assets, at fair value

Acquisition price (in cash)

Acquisition price (payable)

Acquisition costs

Consideration

Total assets

Goodwill

107

105

153

Liabilities

Current liabilities

Total liabilities

Net assets, at fair value

Acquisition price (in cash)

Acquisition price (payable)

Acquisition costs

Consideration

Goodwill

(0)

107

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.

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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

104

The acquisitions in 2007 contributed € 23 million to net sales. If all acquisitions had occurred on 1 January 2007, additional net
sales would have been € 41 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.

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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

863

2,297

1,201

390

1,733

244

493

9,297

(772)

Supplies

2,760

890

2,326

1,591

1,977

525

(772)

9,297

447

(3)

444

138

135

(24)

175

(15)

160

127

(1)

(4)

260

(87)

(2)

260

(89)

5.0

8.6

5.5

1.8

1.3

2.8

475

185

277

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

231

188

903

(45)

858

454

(3)

394

4.2

1,431

9,653

4,958

6,558

739

23,157

23,591

9,297

903

(45)

858

454

(3)

394

4.2

1,431

9,653

4,958

6,558

739

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

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.

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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

903

2,390

1,232

293

1,529

180

401

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)

(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

135

113

(1)

5.9

7.4

4.7

1.1

2.0

3.5

437

194

255

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

196

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

823

(176)

647

424

(2)

372

4.2

1,347

9,828

4,445

5,982

568

22,433

23,254

823

(176)

647

424

(2)

372

4.2

1,347

9,828

4,445

5,982

568

22,433

23,254

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

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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

989

1,313

1,021

1,184

583

365

264

2,624

1,647

783

1,172

375

871

9,297

100

9,297

100

The
Nether-
lands

4,240

947

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

164

584

573

972

396

Workforce at year-end1

7,452

827

2,265

3,949

2,907

3,557

1,308

1,326

3,829

793

207

929

1,135

1,143

536

433

213

2,584

1,566

698

1,162

339

812

9,415

382

2,187

2,968

1,447

587

393

545

(8,096)

9,828

241

1,917

185

425

751

796

308

Workforce at year-end1

7,219

793

2,177

4,154

2,768

3,564

1,268

1,311

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.

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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

Continuing operations before

exceptional items

Additions to provisions

Loss from the disposal /

closure of assets

and activities

Bad debts

Derecognition of assets

under construction

Claims

Exchange differences

Sundry

Total

119

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

Interest charge on discounted

provisions and accruals

Total

1,199

219

1,465

1,389

Other financial income and

2008

2007

Result from other securities

Sundry

Total

389

454

373

424

Net finance costs

102

In 2008 the interest rate applied in the capitalization of interest
during construction was 5% (2007: also 5%).

(7)

(6)

(4)

(7)

(2)

(3)

(10)

6 Depreciation, amortization and impairments

expense

Interest income

Exchange differences

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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)

(45)

(31)

(26)

(150)

(176)

(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.

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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)

- Reclassifications

(54)

Balance at 31 December

(93)

(84)

(22)

(2)

(77)

(98)

Total

(182)

(136)

Of which:

346

(344)

(98)

346

270

392

(122)

496

(383)

113

(54)

(52)

(9)

(16)

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

(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)

2007

25.5

2.4

0.3

(3.7)

Effective tax rate

24.6

24.5

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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

389

291

(288)

392

(45)

(237)

(39)

(22)

(23)

(3)

(1)

(32)

(8)

(410)

288

(122)

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.

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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

(3)

(37)

(12)

(41)

1,224

187

1,037

119

(6)

(49)

(3)

163

1,443

243

1,200

725

(37)

(1)

725

724

822

127

(8)

(9)

(2)

139

(11)

157

(7)

304

205

(3)

(29)

(3)

(2)

360

129

231

(6)

(38)

(3)

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.

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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

358

295

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

EUR

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

210

447

360

(85)

(9)

(8)

(63)

(11)

(176)

(129)

147

271

231

115

146

102

121

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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

(38)

(373)

(152)

(99)

(21)

(1)

(15)

(56)

(1)

(28)

(1)

208

(23)

(307)

(150)

(52)

(12)

(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

(23)

(389)

(24)

(18)

(3)

201

(8)

(64)

(11)

9,068

5,427

1,727

749

334

(13)

(313)

(7)

(1)

(2)

137

6,568

4,464

Carrying amount

3,641

978

2,104

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113

242

204

(10)

(1)

246

203

(12)

245

199

428

404

386

(270)

(1)

(19)

(22)

(1)

481

478

479

(431)

(2)

(6)

(18)

(1)

507

502

(1)

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

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

2008

2007

Changes:

- Share of profit

- Dividend received

- Acquisitions

- Impairments

- Transfers

- Exchange differences

- Other changes

Balance at 31 December

Of which loans granted

(1)

(4)

(1)

(2)

(1)

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

Total

100

(7)

(4)

(2)

(1)

(7)

126

(4)

(20)

(1)

(13)

(30)

176

Other
participations

Other
receivables

Other
deferred
items

(4)

(1)

(7)

(20)

(1)

(30)

118

(2)

(1)

(10)

(0)

(1)

(11)

(7)

(4)

(2)

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.

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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

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

1,549

(24)

1,525

107

1,458

1,469

Deposits

(17)

Cash at bank and in hand

Payments in transit

1,452

Bills of exchange

Total

2008

2007

192

377

601

242

369

128

235

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Financial statements

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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

(944)

(224)

(250)

(29)

2007

5,855

434

(144)

154

(46)

(195)

(758)

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

194

204

2007

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.

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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

(53)

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

(28)

(8)

(134)

(4)

(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

(33)

(30)

(8)

(1)

Balance at 31 December 2008

(85)

(122)

(28)

(7)

(33)

(1)

(18)

(4)

(8)

(1)

(9)

(30)

(22)

(31)

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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

112

272

2008

Of which
current

Total

112

261

2007

Of which
current

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

112

261

Additions

Releases

Uses

Exchange
differences

Other
changes

Balance at
31 December
2008

(18)

(7)

(2)

(14)

(34)

(7)

(10)

(41)

(51)

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.

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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

1,398

391

498

2,293

2008

Of which
current

177

498

734

Total

1,210

385

149

1,752

2007

Of which
current

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

151

1,398

225

107

1,213

Total

1,795

1,603

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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

1,150

384

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)

349

(1)

753

(466)

(10)

(47)

Balance at 31 December

2,293

1,752

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

(12 months)

5.51%

5.61%

2003-2013

2003-2015

2008

2007

Other loans

2008

2007

107

106

103

102

6.75%

4.00%

5.25%

USD 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.

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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

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

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

1,165

2009

2010

2011

1,103

2012 and 2013

After 2013

Total

1,188

1,124

Other current liabilities

Income taxes payable

Other taxes and social security

contributions

Pensions

Other liabilities

Deferred items

Total

207

135

492

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.

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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

108

1,329

223

236

108

1,398

1,462

333

1,795

1,247

211

225

1,316

1,276

327

1,603

199

592

248

610

322

120

182

1,626

2,416

130

301

1,573

2,222

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.

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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

601

(734)

601

(737)

(1,559)

(1,621)

(1)

369

(192)

369

(192)

(105)

(1,560)

(1,509)

(1)

(2)

(97)

Interest rate swaps are from time to time used to hedge the fixed interest rate of a new external loan as from the future issue date
(pre-hedges). In this way DSM achieves up-front certainty about the interest costs for a major part of its long-term euro debt. The
5.25% EUR loan 2007-2017 was pre-hedged for an amount of € 625 million in 2006 and 2007 by means of forward-starting swaps
for a locked interest rate of 4.1% (excluding credit spread). Including the unhedged € 125 million and credit spread, the effective
interest rate of this loan amounts to 4.89%. On 31 December 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

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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

Fair value change reported in Translation Reserve.
Fair value change reported in Hedging Reserve.

601

(734)

601

(737)

(1,559)

(1,621)

(19)

(37)

(31)

(7)

(14)

(12)

(87)

(145)

119

(7)

(40)

(19)

(87)

(7)

369

(192)

369

(192)

(1,560)

(1,509)

(28)

(7)

(48)

(67)

(119)

(27)

(11)

(10)

The following sensitivity analysis of net borrowings and derivative financial instruments to currency movements against the euro
assumes a 10% change in the USD 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.

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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%

601

(734)

601

(737)

(1,559)

(1,621)

(19)

(87)

(7)

(19)

(87)

(7)

(20)

(27)

(76)

(68)

(12)

369

(192)

369

(192)

(1,560)

(1,509)

(28)

(1)

(43)

(107)

(42)

(2)

(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

Fair value change reported in Translation Reserve.
Fair value change reported in Hedging Reserve.

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.

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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

1,632

601

1,559

734

179

1,680

118

1,632

601

1,621

737

179

1,680

1,687

369

1,560

192

1,729

1,687

369

1,509

192

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

(1)

(30)

(31)

(11)

(42)

(106)

(73)

(179)

(1)

(3)

(4)

(106)

(105)

(93)

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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

- Other changes

Total changes

Balance at 31 December

Of which:

- Prepaid pension costs

- Employee benefits liabilities

Pension plans

Healthcare plans