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.
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.
External recognition Risk management Macro-economic environment Financial results
Financial results
Income statement x € million 2008 2007 Continuing operations: Net sales 9,297 8,757Other operating income 142 164
Total operating income 9,439 8,921
Total operating costs (8,536) (8,098)
Operating profit before exceptional items 903 823
Net finance costs (102) (75)
Share of the profit of associates (3) (2)
Income tax expense (196) (183)
Profit attributable to minority interests 6 (5)
Net profit before exceptional items 608 558
Net result from discontinued operations - -
Net result from exceptional items (31) (129)
Net profit attributable to equity holders of Royal DSM N.V. 577 429
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%.
Net sales by segment
in % 2008 2007 29 9 25 13 19 5 26 10 27 14 18 5 Nutrition Pharma Performance Materials Polymer Intermediates Base Chemicals and Materials Other activities 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. EBITDA / net sales
in % 0 5 10 15 20 25
Nutrition Pharma Performance Materials Polymer Intermediates Base Chemicals and Materials 2007 2008 21.6 17.5 17.418.6 11.6 3.6 10.8 19.7 13.7 15.5
Report by the Managing Board
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 Nutrition 89 Pharma 175 Peformance Materials 19 Polymer Intermediates 260 Base Chemicals and Materials (87) Other activitities 500 360 220 80 (60) (200) 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 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. 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).
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 2007 46 2 14 11 13 6 4 4 44 2 13 13 13 6 5 4 Netherlands Germany Switzerland Rest of Europe North America China Asia Pacific Rest of the world
Net sales by destination
in % 2008 2007 10 11 6 3 3 19 8 13 18 9 9 11 6 4 2 20 8 13 18 9 Netherlands Germany France United Kingdom Switzerland Rest of Europe China Asia Pacific North America Rest of the world
End-use markets in % 2008 2007 31 9 12 8 8 9 4 4 15 29 11 14 8 9 6 5 4 14
Health and nutrition Pharmaceuticals Metal / building / construction Automotive / transport Textiles Agriculture Electrical / electronics Packaging Other
External recognition Risk management
Macro-economic environment
Financial results
Cash flow
At € 910 million, net cash provided by operating activities was 9.8% of net sales.
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 2.1 Nutrition 1.0 Pharma 1.7 Performance Materials 0.4 Polymer Intermediates 0.9 Base Chemicals and Materials 0.4 Other activities 2.5 2.0 1.5 1.0 0.5 0
Cash flow statement
x € million 2008 2007
Cash and cash equivalents at 1 January 369 552
Operating activities:
- Net profit plus amortization and depreciation 1,028 1,003
- Changes in operating working capital (180) (124)
- Other changes 62 (54)
Cash flow provided by operating activities 910 825
Investing activities: - Capital expenditure (591) (434) - Acquisitions (120) (85) - Sale of subsidiaries 8 - - Divestments 19 51 - Other (110) 74
Net cash used in investing activities (794) (394)
Dividend (220) (193)
Net cash from / used in financing activities 305 (426)
Effects of changes in consolidation and exchange differences 31 5
Report by the Managing Board
Balance sheet profile
As % 2008 2007
Intangible assets 12 10
Property, plant and equipment 38 35
Other non-current assets 8 17
Cash and cash equivalents 6 4
Other current assets 36 34
Total assets 100 100
Equity 49 55
Provisions 3 3
Other non-current liabilities 21 22
Other current liabilities 27 20
Total liabilities 100 100
Equity
As a % of balance sheet total
49 2004 55 2005 58 2006 55 2007 49 2008 60 50 40 30 20 10 0 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
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.
External recognition Risk management
Macro-economic environment