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DSM Reports Record Year Despite Global Economic Downturn in Q4

Published on 2009-02-20. Author : SpecialChem

Commenting on the results, Feike Sijbesma, chairman of the DSM Managing Board, said: "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. We have implemented actions to prioritize the generation of cash and have swiftly taken the necessary steps to reduce costs in the affected businesses. Further such measures will be implemented as required, although we are also conscious of the need to preserve our 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.

"Our unique combination of activities together with our healthy financial situation puts us 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 our businesses are currently leaving their mark on our results, our strategic direction, fueled by long-term societal trends, is the right one: DSM is staying the course."

Overview

In Q4 the crisis in the financial markets spread to the real economy, in particular the automotive, electrical and electronics, and building and construction industries. The businesses in DSM which supply directly or indirectly to these end-markets were seriously affected by the turmoil. DSM Engineering Plastics, DSM Resins, DSM Fibre Intermediates, DSM Elastomers and DSM Melamine all experienced a sharp drop in demand, with lower margins and inventory write-offs. Sales volumes in these business groups dropped on average some 30% compared to Q3, which was the combined effect of reduced end-market demand and downstream destocking. The very rapid fall in oil-related prices led to price and margin reduction and inventory write-offs. Other parts of DSM, the Nutrition and Pharma clusters and DSM Dyneema, have been barely affected by the economic turmoil and have even been able to take advantage of the much stronger US dollar, which was one of the few positive elements in Q4's external conditions.

DSM reacted swiftly when the first signs of the economic downturn became visible. The first action was to prioritize cash over short-term profitability via inventory reduction through plant shutdowns, reduced purchasing spend, focused credit control and the postponement of some projects. In doing so, DSM has been able to maintain its strong balance sheet and limit its dependency on the financial system. This prioritization of cash has been very successful, as evidenced by the fact that cash flow from operating activities in Q4 alone amounted to EUR 392 million. In combination with difficult, but successful, actions to refinance short term debt, DSM's cash position at the end of the year amounted to EUR 601 million.

In addition to the actions to generate cash, DSM has taken a number of more structural measures to strengthen its competitive position. On 15 December DSM announced actions for structural savings of up to EUR 100 million per year, to be fully achieved by 2010.

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.

Operating profit

For the full year, DSM was able to post a record operating profit, in spite of the economic turmoil in Q4. 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.

Operating profit in the fourth quarter was, however, impacted by the sharp drop in global economic activity, which affected most business groups in Materials Sciences and Base Chemicals and Materials. The combined results of these businesses decreased by approximately EUR 240 million between Q3 and Q4, mainly originating from DSM Engineering Plastics, DSM Resins, DSM Fibre Intermediates, DSM Elastomers and DSM Melamine. Approximately EUR 100 million of this total was the result of lower sales volumes and a further EUR 100 million was caused by the combined effect of lower margins and inventory write-offs following the sharp drop in raw material prices.

Compared to Q4 2007, the results of Performance Materials and Polymer Intermediates were also affected by lower sales volumes, lower margins and inventory write-offs. In Base Chemicals and Materials, the higher result from DSM Agro more than compensated for the downturn in performance of most of the other businesses in this cluster.

Net profit

Fourth quarter net profit before exceptional items decreased from EUR 130 million in Q4 2007 to EUR 73 million (-44%). Full year net profit before exceptional items increased from EUR 558 million to EUR 608 million (+9%).

Earnings per share (before exceptional items) increased to EUR 3.64 per ordinary share (+19%) for the full year due to the higher net profit and the share buy-back.

Net finance costs amounted to EUR 39 million in the fourth quarter, EUR 18 million higher than last year. Full-year net finance costs increased from EUR 75 million to EUR 102 million. The full year increase was mainly caused by the higher net debt and the increase in Q4 was also due to some fair-value adjustments in Other financial assets.

The effective tax rate for the fourth quarter as well as for the full year was 25%, the same as last year.

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 EUR 11 million (EUR 6 million after tax). The closure of the clavulanic acid site in Str?gn? (Sweden) resulted in an asset impairment charge and restructuring provision totaling EUR 23 million (EUR 18 million after tax).

Part of the impairment charge recognized in 2007 at DSM Anti-Infectives was reversed for an amount of EUR 15 million before tax (EUR 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 EUR 25 million (EUR 18 million after tax).

Cash flow, capital expenditure and financing

Cash flow from operating activities amounted to EUR 910 million for the full year, of which EUR 392 million was generated in the fourth quarter. Capital expenditure in Q4 amounted to EUR 211 million. Full-year capital expenditure of EUR 587 million was clearly higher than last year (EUR 475 million) and above the level of depreciation and amortization. The amount spent on acquisitions in 2008 was EUR 152 million, mainly related to the acquisition of The Polymer Technology Group. Compared to year-end 2007 net debt increased by EUR 443 million to EUR 1,781 million, representing a gearing level of 28%. This increase was amongst other things caused by the share buy-back program.

Dividend

DSM's dividend policy is to provide a stable and preferably rising dividend. For 2008 an unchanged dividend of EUR 1.20 will be proposed to the Annual General Meeting of Shareholders. An interim dividend of EUR 0.40 per ordinary share having been paid in August 2008, the final dividend would then amount to EUR 0.80 per ordinary share.

Share buy-back

DSM has decided to cancel the remaining part of EUR 250 million of the current share buy-back program of EUR 750 million which was announced in 2007.

Workforce

The workforce increased overall by 337 from year-end 2007 to 23,591 at the end of 2008. This was due to business growth and innovation (+424) and disposals/acquisitions (-87). Compared to Q3 2008 the workforce decreased by 461 during Q4 mainly as a result of the disposal of DSM Deretil (-389) and several reorganization programs.

Progress update on DSM Strategy Vision 2010

DSM's acceleration of the strategic program Vision 2010 - Building on Strengths, announced in September 2007, focuses on delivering faster growth, higher margins and improved earnings quality from the company's portfolio. The strategy will see the transformation of DSM into a Life Sciences and Materials Sciences company capable of sustainable growth fueled by important societal trends.

The key drivers - market driven growth and innovation, increased presence in emerging economies and operational excellence - remain at the heart of DSM's strategy.

Full year sales in China rose by about 20% to USD 1,151 million. In Q4 2008 sales in China amounted to USD 265 million, which represents an increase of 2% relative to the comparable period of last year.

Two venturing investments were made in Q4: in The Compliers Group International B.V. which specializes in the development of smart pharmaceutical packaging solutions and also in Accelerated Technologies II, a business incubator in the field of medical devices.

DSM Food Specialties expanded its production capacity in Delft (Netherlands) by 35%. This development allows DSM Food Specialties to meet the increasing demands of its customers. DSM Nutritional Products opened its third premix plant in China to capitalize on opportunities that arise from the rapidly growing animal nutrition and health industry in a key growth market for DSM.

DSM Dyneema is set to begin the construction of a large-scale manufacturing facility in Greenville, North Carolina (United States) 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 announced in April 2008 for the business group. DSM Dyneema also is 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® at the Greenville facility. This line is expected to be operational by mid 2010. DSM also announced its participation in a multimillion dollar funding program with the US Department of Energy aimed at enabling second generation biofuels from non-food feedstocks. A consortium led by DSM was awarded USD 7.4 million. In Q4 DSM announced the disposal of DSM Deretil, a business unit of DSM Anti-Infectives, to its management. This disposal fits with the strategic review of DSM Anti-Infectives as announced in June 2007. This also applies to the announced closure of the clavulanic acid site of DSM Anti-Infectives in Str?gn? (Sweden).

In addition DSM also sold its Solutech business to Lydall, Inc. (United States). The previously announced sale of DSM Special Products BV to Arsenal Capital Partners (United States) will not be completed. DSM regrets that the transaction cannot proceed and will continue the disposal process for DSM Special Products, as part of its Vision 2010 strategy.

As a result of the accelerated shift towards Life Sciences and Materials Sciences, DSM announced in September 2007 that a number of businesses which do not fit in with the accelerated strategy would be carved out and disposed of. The disposal process for Agro and Melamine, Elastomers and Urea Licensing is underway in the form of a controlled auction process. DSM has slowed down the process in view of the current financial and economic environment but still aims to complete the disposals within the timeframe of Vision 2010.

During the quarter, DSM announced and introduced many new innovations.

Actions addressing the economic downturn

DSM announced a number of structural cost-saving actions to address the effects of the economic downturn in December 2008. DSM has now prepared plans for most of these actions and confirms that they are expected to result in total savings of up to EUR 100 million per year, to be fully achieved by 2010.

These actions cover three areas: a reduction in workforce, a stronger focus on purchasing and other efficiency improvement measures.

The actions are expected to result in a reduction of DSM's workforce by about 5% or 1000 positions, mainly at DSM Engineering Plastics, DSM Resins, DSM Fibre Intermediates, DSM Pharmaceutical Products, some businesses within Base Chemicals and Materials and in corporate overheads. Around 25% of the planned job reductions will be in the Netherlands; about 75% is spread around the world including the United States and China.

In its capital expenditure portfolio DSM will prioritize projects focused on future growth and postpone or delay others.

DSM will closely monitor the economic downturn and its effect on the company's businesses to assess when further actions should be taken.

At the same time, DSM remains fully focused on customers in order to meet their needs and priorities, as well as on its priorities of innovation and sustainability. The company is alert for new growth opportunities that the current market and economic conditions provide.

DSM will pay close attention to limiting salary increases across the company. The Managing Board has decided to request the Supervisory Board not to increase their salaries in 2009. For DSM's almost 400 executives worldwide it has been decided not to implement general salary increases in 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 Q4.

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 EUR 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.

Source: DSM


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