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DSM reports good second quarter and raises 2007 outlook

Published on 2007-07-27. Author : SpecialChem

Heerlen, NL -- Feike Sijbesma, Chairman of the DSM Managing Board, gave the following comment on the results: 'This has been a good second quarter for DSM, benefiting from higher volumes and increased prices. Looking ahead to the remainder of the year, our expectations are that these trading conditions will continue, enabling us to raise our fullyear guidance for 2007.' Net sales from continuing operations in Q2 2007 were up 3% from Q2 2006 due to organic volume growth and higher selling prices. The effect of exchange-rate developments on DSM's net sales was 2% negative. The US dollar was on average 7% lower against the euro and the Japanese yen 13%. Sales volumes in Performance Materials and Industrial Chemicals were negatively affected by an unplanned outage of the European caprolactam plant.

Operating profit

Q2 operating profit from continuing operations amounted to EUR 227 million, 3% less than in Q2 2006. The change in operating profit was the result of a number of developments, which in total almost offset one another.On the one hand there were the unfavorable general issues mentioned earlier this year: the development of currency exchange rates had an adverse effect of EUR 20 million (after hedging); fixed costs increased, mainly because of the intensified innovation effort; and the phasing-out of contracts related to the Roche Vitamins acquisition had an effect of almost EUR 10 million. In addition to this there was an unplanned outage of the European caprolactam plant, which caused production and sales losses not only at DSM Fibre Intermediates, but also in DSM Engineering Plastics' nylon business. In total this had an effect of some EUR 10 million.

On the other hand these unfavorable developments were almost compensated for by strong underlying trading conditions. Nutrition showed a strong increase in volumes and market share, while price pressure eased somewhat. In Pharma, DSM Anti- Infectives profited from a sudden and strong increase in prices of penicillin and penicillin-related products. Performance Materials was able to increase volumes and prices. In Industrial Chemicals the selling price increase was clearly higher than the increase in feedstock and energy prices.

Business review

Nutrition

Sales in this cluster increased by 3%. This was the balance of higher sales volumes, lower selling prices and negative exchange-rate effects (mainly US dollar). Compared to Q2 2006, DSM Nutritional Products achieved solid volume growth at slightly lower prices, with Animal Nutrition & Health performing slightly better than Human Nutrition & Health. DSM Nutritional Products' operating profit decreased, mainly because of the strongly negative impact of the US dollar and higher innovation costs. The price pressure in the more mature parts of the portfolio eased somewhat. DSM Food Specialties' sales and operating profit decreased due to lower sales volumes (phasing out of phytase tolling) and higher innovation costs. DSM Special Products (benzoic acid and benzaldehyde) showed a small loss, as in Q2 2006.In June DSM announced a comprehensive profit improvement program for DSM Nutritional Products which, through a mix of cost savings and higher revenues, is\ expected to deliver at least EUR 100 million per annum of improved profitability by 2010.

Pharma

Sales were up 7% due to higher selling prices (mainly at DSM Anti-Infectives) and despite the weaker US dollar. DSM Pharmaceutical Products' operating profit was slightly higher than in Q2 2006, owing to higher margins and a good production level, which was partly due to overflow from Q1. The operating result of DSM Anti-Infectives was positive and much higher than in Q2 2006. The main driver for the better performance of DSM Anti-Infectives was the increase in prices for penicillin and related products. This increase was due to shortages on the market caused by temporary curtailments of domestic production in China. In the light of these shortages DSM Anti-Infectives was able to significantly raise its prices for penicillin derivatives as well.

In mid-June DSM published the outcome of the strategic review of its Anti-Infectives business. DSM has studied all options and has concluded that the greatest value will be generated through a partnering strategy (possibly with - partial - divestments) for the business combined with innovation initiatives and further restructuring measures to improve profitability. As a result, DSM Anti-Infectives aims to report a sustainable profit as from 2008.Sales were up almost 6% due to higher sales volumes and selling prices and despite the lower exchange rate for the US dollar and the caprolactam plant outage.

The operating profit for the cluster decreased slightly, mainly due to the production outage of DSM Fibre Intermediates' European caprolactam plant, which had an adverse effect on DSM Engineering Plastics' nylon business. DSM Engineering Plastics' operating profit also suffered from lower margins and from the weaker US dollar and Japanese yen. DSM Dyneema showed the same operating profit as in Q2 2006, with volume growth being offset by a less favorable product mix and increased fixed costs. The operating profit of DSM Resins was slightly lower, as higher margins could not completely compensate for increased costs for innovation and expansion. DSM Elastomers' operating profit was higher than in Q2 2006 because of higher sales volumes.

Industrial Chemicals

Sales in this cluster were up 1% from Q2 2006 due to clearly increased selling prices and despite lower sales volumes (caused in part by the production outage) and a weaker US dollar.All business groups in this cluster except DSM Energy posted a higher operating profit. Selling prices increased more than raw-material costs. The operating profits recorded by DSM Fibre Intermediates and DSM Agro were higher due to higher margins. The results of DSM Melamine improved strongly due to higher sales volumes and margins. DSM Energy showed a slightly lower profit, reflecting the natural decline of the business.

The operating result for Other activities was substantially lower than in Q2 2006. Innovation expenditure and costs relating to share-based payments were considerably higher, the latter being due to the increase in the DSM share price. On the other hand, DSM's captive insurance company posted a higher result due to lower damage amounts.

Net profit

Net profit decreased compared to the second quarter of 2006, from EUR 157 million to EUR 47 million, strongly influenced by the exceptional item for DSM Anti-Infectives.Net finance costs in Q2 2007 amounted to EUR 15 million. This represents a decrease of EUR 8 million compared to Q2 2006, which was due to interest results on derivatives, higher capitalized interest during construction and interest income on a tax refund.

Progress update on DSM strategy Vision 2010

DSM's strategy program Vision 2010 - Building on Strengths focuses on accelerating the profitable and innovative growth of the company's specialties portfolio. The overall objective is strong value creation, to be accomplished via three main levers:

  • Market-driven growth and innovation
  • Increased presence in emerging markets
  • Operational Excellence

Vision 2010 - evaluation

The Managing Board in its new composition is evaluating the strategy program Vision 2010 - Building on Strengths and will present its conclusions at the annual conference for financial analysts on September 27 and 28. The strategic program Vision 2010 - Building on Strengths and its objectives and targets were set out at the time of the program's launch in September 2005. The mid-term evaluation was originally planned for 2008.

Outlook

Trading conditions in the majority of DSM's business portfolio have improved further and are favorable. Based on this, DSM is able to raise its guidance as published in the Q1 report (EUR 760 million with an uncertainty of plus or minus 5%) for the 2007 operating profit (before exceptional items). Barring unforeseeable developments and based on current trading conditions and exchange rates, DSM now expects the operating profit (before exceptional items) for the year 2007 to be EUR 790 million with an uncertainty of plus or minus 3%.

Source: DSM


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