DSM reports 2017 results

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Algemeen advies 14/02/2018 07:04
Full year Highlights
•Strong performance in Q4, contributing to an excellent year
•Sales up 9% to €8,632m, with 9% organic growth mainly from volume growth
•Adjusted EBITDA up 15% to €1,445m, driven by both Nutrition and Materials
•ROCE up 190 bps to 12.3%
•Adjusted net profit up 36% to €706m
•Total net profit of €1,781m, including gain on Patheon disposal of €1,250m
•Proposed dividend increase from €1.75 to €1.85 per ordinary share
•Full year outlook 2018 above Strategy 2018 targets

Key figures and indicators.
in € million
FY 2017 FY 2016 % change vol. price /mix FX other
Sales 8,632 7,920 9% 7% 2% -1% 1%
Nutrition 5,579 5,169 8% 7% 1% 0% 0%
Materials 2,825 2,513 12% 7% 6% -2% 1%
Adj. EBITDA1 1,445 1,262 15%
Nutrition 1,053 931 13%
Materials 488 435 12%
EBITDA (cont. ops.) 1,348 1,174
ROCE (%) 12.30% 10.40%

1) Adjusted EBITDA (and Adjusted net profit) are Alternative Performance Measures (APMs) that reflect continuing operations.
See page 17 for definition and reconciliation

CEO statement

“We are delighted to report again an excellent year, as we significantly exceeded our Strategy 2018 targets for EBITDA, ROCE and organic sales growth. Our focus on driving above market growth while relentlessly pursuing efficiency initiatives and maintaining capital discipline continues to produce very good results in both Nutrition and Materials.

Our success comes from the ability to deliver sustainable, innovative solutions to meet our customers’ demand and help them to address end-market needs. Furthermore, we have taken next steps in embedding the organizational agility and culture that we seek within our company. We are firmly on track with our cost-reduction and efficiency improvement programs. In addition, we successfully divested our share in Patheon ahead of schedule, creating significant value. With all of these developments ahead of plan we brought forward our regular strategic review process for the period beyond 2018.

We remain relentlessly focused on improving our operational and financial performance through our growth initiatives and by completing the final stage of our improvement programs. These actions should allow us to continue our above-market growth and further improve our financial returns and capital efficiency. We expect to deliver above our Strategy 2018 targets in 2018.”

Outlook 2018
DSM expects to deliver full-year 2018 results above the targets set in Strategy 2018, with an Adjusted EBITDA growth somewhat up from high single-digit to double-digit and a ROCE growth above 100 basis points. The expected substantial negative foreign exchange effects, based on current rates, will be more than offset by a positive pricing environment in Nutrition, part of which is temporary in nature and expected to be heavily weighted towards the first half of the year.

Q4 Highlights
•DSM reports another strong quarter
•Sales up 8% to €2,176m, with 12% organic growth, driven by volumes and prices
•Adjusted EBITDA up 14% to €359m
•Nutrition: 13% organic sales growth; Adjusted EBITDA up 12%
•Materials: 5% volume growth; Adjusted EBITDA up 13%

Key figures and indicators.
in € million Q4 2017 Q4 2016 % change vol. price/mix FX other

Sales 2,176 2,015 8% 7% 5% -5% 1%
Nutrition 1,428 1,321 8% 9% 4% -6% 1%
Materials 693 639 8% 5% 7% -4% 0%
Adj. EBITDA1 359 315 14%
Nutrition 267 238 12%
Materials 119 105 13%
EBITDA (cont. ops.) 316 270
ROCE (%)2 12.30% 10.40%
.1) Adjusted EBITDA (and Adjusted net profit) are Alternative Performance Measures (APMs) that reflect continuing operations.
See page 17 for definition and reconciliation
2) Full year 2017

Key figures and indicators .
in € million FY 2017 FY 2016 % change vol. price /mix FX other

Sales 8,632 7,920 9% 7% 2% -1% 1%
Nutrition 5,579 5,169 8% 7% 1% 0% 0%
Materials 2,825 2,513 12% 7% 6% -2% 1%
Innovation Center 169 167
Corporate Activities 59 71

.in € million
Q4 2017 Q4 2016 % change vol. price/mix FX other

Sales 2,176 2,015 8% 7% 5% -5% 1%
Nutrition 1,428 1,321 8% 9% 4% -6% 1%
Materials 693 639 8% 5% 7% -4% 0%
Innovation Center 43 41
Corporate Activities 12 14

.in € million
FY 2017 FY 2016 % change Q4 2017 Q4 2016 % change

Sales 8,632 7,920 9% 2,176 2,015 8%
Adjusted EDITDA1 1,445 1,262 15% 359 315 14%
Nutrition 1,053 931 13% 267 238 12%
Materials 488 435 12% 119 105 13%
Innovation Center 9 1 4 -1
Corporate Activities -105 -105 -31 -27
Adjusted EBITDA margin1 16.7% 15.9% 16.5% 15.6%
EBITDA1 1,348 1,174 316 270
Adjusted EBIT1 957 791 21% 240 190 26%
EBIT1 846 685 199 139
Capital Employed1 7,766 7,889
Average Capital Employed1 7,776 7,627
ROCE (%) 12.3% 10.4%
Effective tax rate2 16.8% 18.3%
Adjusted net profit1,3 706 520 36% 202 130 55%
Net profit - Total DSM
1,781 629 183% 178 87 105%
Adjusted net EPS1
3.92 2.90 35% 1.11 0.73 52%
Net EPS - Total DSM 10.07 3.52 0.98 0.48
Operating cash flow 996 1,018 -2% 377 374 1%
Capital Expenditures4 546 475 162 170
Net debt 742 2,070

.1) Continuing operations
2) Over Adjusted taxable result
3) Including result attributed to non-controlling interest
4) Cash, net of customer funding

In this report:
Organic sales growth’ is the total impact of volume and price/mix;
'Total Working Capital’ refers to the total of ‘Operating Working Capital’ and ‘non-Operating Working Capital’

Strategy 2018: Driving Profitable Growth

Stepping up DSM’s financial performance

DSM’s Strategy 2018: Driving Profitable Growth is focused on ensuring that the potential of the business portfolio that has been created over recent years is translated into improved financial results. Reflecting its disciplined focus on performance, DSM has implemented a three-year strategic period with two headline financial targets: high single-digit percentage annual Adjusted EBITDA growth and high double-digit basis point annual ROCE growth.

In 2017, we delivered well ahead of our original ambitions for the second year in a row:
Two headline financial targets

High single-digit percentage annual Adjusted EBITDA growth

High double-digit basis point annual ROCE growth

Achievements to date: 2016: 17%
2017: 15% 2016: 280 bps
2017: 190 bps

DSM has defined clear actions to achieve its targets, including outpacing market growth, cost reduction and efficiency improvement programs and making a continuous push for consistent improvements in capital efficiency.
Clear actions identified to achieve targets

Businesses aim to outpace market growth in all segments

€250-300m cost reduction and efficiency improvements

Consistent improvements in capital efficiency

Achievements to date: Nutrition organic growth
2016: 5%
2017: 8%

Materials volume growth
2016: 4%
2017: 7% 2017 achievements:
Cumulative savings on track (about €195m run rate at the end of 2017) 2017 achievements:
Cash from operating activities at €996m.
Capex at €546m, within guidance of €500-550m.
Total Working Capital at 17.2%, aspiration level <20%.

Outpaced market growth
DSM has outpaced market growth in 2016 and in 2017 delivering strong organic growth in both Nutrition and Materials, growing at rates around double the markets it operates in. DSM continued to leverage its innovation capabilities together with market insights and close customer relationships to accelerate growth for its solutions in its key segments and to develop and open new segments. DSM also took further steps on promising innovation projects for future growth with a wider societal impact, such as Clean Cow, Green Ocean (now called Veramaris), Stevia and Niaga. Sales to High Growth Economies increased in line with the higher sales in 2017. It remained stable at 44% of total sales, in line with our aspirations, providing a well-balanced geographical spread of our sales. Sales to China increased from 12% to 13% of total sales.

Cost-reduction and improvement programs
DSM has instigated extensive cost-reduction and improvement programs which were targeted to deliver €250-300 million versus the 2014 baseline. In 2017, all of these well-identified programs progressed as planned and the programs are on track to deliver the targeted benefits. DSM achieved run-rate cumulative cost savings of about €195 million at the end of 2017. We expect to achieve run-rate cumulative savings of between €270 million and €280 million for the total program at the end of 2018. The 2017 one-time costs related to the improvement programs amount to €60 million with roughly €30 million to go in 2018 to complete the program. In support of our targets, we adjusted our global organizational and operating model to create a more agile, commercially focused and cost-efficient company.

Additional actions underpinning Strategy 2018

Besides stepping up the financial performance of DSM’s businesses, Strategy 2018 comprises additional elements aimed at future-proofing the company, providing a sustainable basis for long-term value creation for all its stakeholders.

For DSM, sustainability is a core value as well as a key business driver. Our growth platforms are addressing important societal trends and have in particular strong alignment with 5 of the 17 United Nations Sustainable Development Goals (SDG’s also referred to as global goals), which together in fact set out the strategy for the world. In doing so, DSM focuses on delivering science-based, sustainable and scalable solutions that not only help address challenges the world faces but also positively impact the value chain. These ‘Brighter Living Solutions’ offer higher growth rates and better margins.

DSM continued to make good progress toward its sustainability aspirations in 2017:
•The ‘Brighter Living Solutions’ amounted to 62% of sales, on track towards our ambitious aspirations.
•DSM’s drive to improve its environmental efficiency is on track, with further improvements in both greenhouse-gas efficiency (26% versus 2008) and energy efficiency (3% versus 2015) in 2017.
•The company now sources about a fifth of its purchased electricity from renewable sources and is on track to reach its goal of 50% by 2025.
•Employee engagement jumped from 71% to 75% according to the Employee Engagement Index, which indicates how our employees feel in terms of commitment, pride, advocacy, and satisfaction.
•The Frequency Index of all DSM Recordable Injuries increased from 0.33 to 0.36, due to a relative increase in the number of incidents in the first months of 2017. This increase and a fatal incident in the latter part of the year stresses the paramount importance of continued safety programs as we aspire to be an incident-free company.

Many of the above-mentioned achievements are being recognized externally as well, resulting in leading positions in, amongst others, CDP, Dow Jones Sustainability Index (DJSI) and Sustainalytics.

DSM has adjusted its global organization and operating model to support the company’s growth and to create a more agile, commercially-focused and cost-efficient business. Actions such as the implementation of new more globally leveraged target operating models in ICT, Finance, HR, Indirect Sourcing, Communication and Legal are all completed. The emphasis at this stage is above all on ensuring that cost savings, as well as the new way of working are anchored in the organization and in supporting mindset and behaviors.

Talent management and development is a further strategic cornerstone. DSM continued to invest in its talent pipeline to ensure it can sustainably address future challenges and demands. It also finalized the roll-out of a new learning and development program called Lead & Grow for all executives.

Inclusion & Diversity is an important enabler for a high-performing organization and DSM continues to strive to achieve a balanced and representative workforce. Today, more nationalities are represented across DSM and there is a better gender balance across different levels of our organization, including more women in executive positions (from 15% in 2016 to 17% in 2017). The composition of our Supervisory Board also reflects our desire to be more gender balanced, international, inclusive and diverse.

DSM monetized the partnership established for its former pharma activities with the sale of its remaining stake in Patheon to Thermo Fisher Scientific Inc., realizing over recent years total proceeds of approximately €2 billion, of which €1.5 billion in 2017 with a gain on disposal of €1,250 million.

DSM strengthened its portfolio through smaller acquisitions. Key highlights include:
•Twilmij: acquisition of a Dutch feed premix company
•UP4® brand: acquisition in probiotics for consumer health
•Inner Mongolia Rainbow Biotechnology: acquisition of a majority stake in hydrocolloid for human nutrition
•BioCare®: acquisition in probiotics for consumer health
•Amyris: acquisition of Amyris’ production facility in Brazil for bio-based farnesene Furthermore, DSM made an equity investment in Amyris and entered into a development arrangement for bio-based nutritional ingredients
•Sunshine: acquisition of a solar photovoltaic (PV) backsheet technology

DSM is building for further sales and adjusted EBITDA growth beyond 2018 through Innovation. DSM made good progress. Innovation Sales were 21% against our ambitious aspiration of 20% and DSM further focused its innovation program on a smaller number of bigger projects providing interesting opportunities from 2019/2020 and onwards. Examples include:
•The Clean Cow project; feed additives for reduced methane emissions in cattle
•The Green Ocean partnership with Evonik (now called Veramaris) for algae-based omega-3 for sustainable aquaculture
•The fermentative stevia sweetener platform
•Plant-based proteins for human nutrition
•Sustainable biological solutions for crop protection in agriculture
•Niaga® Technology for fully-recyclable carpets
•ForTii® high-performance plastics
•Dyneema® carbon composites

Furthermore, DSM strengthened its innovation infrastructure through the establishment of two state-of-the-art R&D centers, one in Biotechnology and one in Materials Sciences.

Cash flow from operating activities amounted to €996 million for the year 2017, which was slightly below the comparative period in 2016. Cash-wise, the OWC increased by €195 million reflecting strong organic growth. This negatively impacted the cashflow. In absolute terms OWC was stable in 2017 as the increase of OWC related to organic growth (9%) was largely compensated by the weakening of mainly USD and CHF. The OWC percentage improved from 23.9% end of 2016 to 22.3% end of year 2017.

Total Working Capital amounted to €1,499 million at the end of 2017 compared to €1,481 million at the end of 2016. Working capital as a percentage of sales amounted to 17.2%, being an improvement of 1.2% compared to year-end 2016 and well below our aspiration of lower than 20%.

Net debt was €742 million compared to €2,070 million end of 2016. The decrease of €1,328 million was mainly due to the proceeds from the sale of Patheon shares in total of €1,535 million.

The reported effective tax rate was 16.8% over Adjusted taxable result 2017 (2016: 18.3%). This decrease was mainly caused by a one-time benefit from the US tax reform. As from 2018, this tax reform, being a combination of a decreased US federal tax rate from 35% to 21% and a broadening of the tax base, will have a net positive effect of approximately 1%. Overall however, the Group effective tax rate is expected to remain within the 18-20% range.

Proposed dividend

DSM’s dividend policy is to provide a stable and preferably rising dividend. Reflecting its confidence in the financial performance of the company, DSM proposes to increase the dividend from €1.75 to €1.85 per ordinary share for 2017. This will be proposed to the Annual General Meeting of Shareholders to be held on 9 May 2018. An interim dividend of €0.58 per ordinary share having been paid in August 2017, the final dividend payment would then amount to €1.27 per ordinary share.

The dividend will be payable in cash or in the form of ordinary shares at the option of the shareholder, with a maximum of 40% of the dividend amount available for stock dividend. If more than 40% of the dividend is requested by the shareholders to be paid in shares, those shareholders who have chosen to receive their dividend in shares will receive their stock dividend on a pro-rata basis, the remainder being paid out in cash. Dividend in cash will be paid after deduction of 15% Dutch withholding tax. The ex-dividend date is 11 May 2018.

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