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

The main customers are feed, food, beverages, personal care, and flavor/fragrance companies across the world. The activities in this cluster are to a large extent based on DSM’s knowledge of biotechnology (including fermentation, genomics and biocatalysis), organic chemistry and formulation technologies and on the company’s broad application knowledge. DSM holds leading positions in the markets for ingredients for human and animal nutrition and health and personal care.

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

As the world’s leading supplier of vitamins, carotenoids, other biochemicals and fine chemicals and premixes, DSM Nutritional Products is uniquely positioned to capitalize on the positive dynamics in its markets. The company addresses the animal and human nutrition and health industries as well as personal care sectors. With producers and consumers putting more emphasis on health, wellness and safety, there are many opportunities to capture.

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

In 2007 a new profit improvement plan, 'Aspire to Win', was announced. Through a mix of cost savings and increased profits from higher revenues through innovation and differentiation, this plan is expected to deliver an annual minimum of €100 million in improved profitability by 2010. For 2008, the first full year of the program, it is expected that the benefits will at least offset the negative impact of the phasing out of the contracts related to the acquisition of Roche Vitamins.

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

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

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

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

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

The shift towards a segment approach introduced with the Dual Track Strategy is starting to bear fruit. The Dual Track Strategy, introduced in 2006, recognizes the need to sustain the profitability of established products through reinforced market shares and product margins by reducing costs as much as possible and placing special emphasis on product differentiation. It also aims to boost the full growth of new business by developing a vital portfolio of innovative new products and launching them successfully into the markets.

Examples of the innovative new products are carotenoids preventing age-related eye deterioration, vitamin D3 for optimal bone health and antioxidant vitamins used in cardiovascular prevention. Consumer research in the main segments such as beverages or dietary supplements allows DSM Nutritional Products to tap into very specific needs.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The size of the global food ingredients market is around €30 billion, with an average annual growth of 4-5%. This growth exceeds the average growth of 2-3% of the food market due to higher organic growth in emerging economies and a shift towards higher-value ingredients and processed food. Key market drivers are the demand for healthy nutrition, including low-salt and low-fat foods, the need for natural ingredients, convenience, and food safety. The 2006 bio-ingredients market was estimated at €2 billion. This market segment includes specialty products such as yeast extracts, food enzymes and cultures and is regarded as a knowledge-intensive market where enzyme technology and biotechnology are key assets.

DSM Food Specialties comprises four business units and an Ingredients Development Unit. Dairy Ingredients supplies enzymes, starter cultures and preservation systems for cheese and yogurt, and tests for the detection of residues of antibiotics. DSM is one of the biggest suppliers of dairy ingredients in the world.

Savoury Ingredients is a major supplier of ingredients for flavorings and flavor enhancers (such as yeast extracts) used in products such as soups, instant meals, sauces and savory snacks. Enzymes produces a wide range of food enzymes for applications such as baking, fruit processing, brewing and manufacturing of other alcoholic beverages.

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

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

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

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

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

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

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

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

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

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

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

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

In 2007 four new enzymes were introduced on the market. CakeZyme^™ is a new, unique technological breakthrough for the cake and pastry industry. Following this introduction, the Let’s Cake Together^™ concept was presented to the market. This revolutionary ‘toolkit’ combines three ingredients from DSM CakeZyme^™, Etenia^™ and the taste potentiator Maxarite^™ Delite. It allows manufacturers to respond to the key trends currently driving the cake market – indulgence, reduced fat and saturates and improved costs.

PreventASe^® is an enzyme that has been proven to substantially mitigate the formation of acrylamide in certain foods. Claristar^™ is an ingredient extracted from yeast mannoprotein which prevents tartrate crystallization in wine.

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

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

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

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

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

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

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

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

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

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

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

DSM Special Products produces benzoic acid, sodium benzoate, benzaldehyde and benzyl alcohol. Its products such as Purox^® S, Purox^® B and VevoVitall^® are widely recognized for their purity and quality. The business unit supplies a wide range of markets, including the markets for carbonated soft drinks, food, animal feed, plasticizers, resins, cosmetics, personal care products, flavors and fragrances, as well as a diverse range of industrial applications. The production facilities are located in Rotterdam (Netherlands).

DSM Special Products is the global market leader in most of the products it supplies. DSM Special Products will build upon these leadership positions by creating market growth through innovation. It will continue to set the benchmark in the industry through the quality of its products.

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

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

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

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

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