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Excellent second quarter with 7% volume growth

Published on 2006-07-27. Author : SpecialChem

At EUR 234 million, the Operating profit from continuing operations for the second quarter of 2006 was up EUR 24 million (11%) from Q2 2005. Net profit amounted to 157 million, up 18% from Q2 2005 (EUR 133 million). The net profit included a positive balance of exceptional items amounting to EUR 5 million.

The Operating profit from continuing operations for the first half of 2006 was EUR 440 million, up EUR 48 million (12%) from the first half of 2005. The first-half Net profit was EUR 318 million, up 20% from the first half of 2005 (EUR 264 million). The net profit included a positive balance of exceptional items amounting to EUR 26 million.

Peter Elverding, chairman of the DSM Managing Board, gave the following comment on the results: "In the second quarter of 2006 DSM once again posted strong sales growth and a good result; developments in the Performance Materials cluster in particular are really good. I still expect the generally favourable conditions in most of our end markets to continue in the second half of the year. However, given the fact that raw-material prices are increasing strongly from an already very high level, we might experience some delay in passing on these price rises to our customers. As a result of this and some other factors, our Q3 result may turn out to be lower than the high level achieved last year (EUR 215 million). On the other hand, expectations are that the Q4 operating profit will be better again than last year. I expect that DSM's fullyear operating profit will on balance be better than in the record year 2005, despite the increased efforts we are making in the field of innovation as planned."

Interim dividend

It has been decided to pay out an interim dividend of EUR 0.33 per ordinary share for the year 2006 (2005: EUR 0.29). This represents one third of the dividend paid out for 2005. The interim dividend is no indication of the total dividend for 2006. The interim dividend for 2006 will be paid out in cash on 11 August 2006.

Net sales from continuing operations in Q2 2006 were up 7% from Q2 2005 due to organic volume growth. The effects of both selling prices and exchange-rate developments on DSM's net sales were neutral.

Compared to the first quarter, sales volumes organically increased by 5%. The US dollar was on average 4% lower against the euro.

Operating profit

Q2 operating profit from continuing operations amounted to EUR 234 million, up 11% from Q2 2005. Higher sales volumes at stable fixed costs more than compensated for the pressure on margins. This pressure came from strongly increasing energy and raw-material costs (EUR 90 million higher than in Q2 2005), with selling prices remaining stable on balance. The largest increase in operating profit was achieved in the Performance Materials cluster.

Sales in this cluster increased by 3% on balance due to higher sales volumes and lower selling prices. All activities in this cluster saw their results come under pressure from higher costs for energy and raw materials. Compared to Q2 2005, 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 increased, mainly because of lower fixed costs. In spite of the phasing-out of the phytase tolling business, DSM Food Specialties' sales remained virtually stable. Its operating profit increased thanks to good manufacturing output levels and considerable cost savings. A large part of the result improvement in this cluster was offset by the decrease in the result of DSM Special Products (benzoic acid and benzaldehyde derivatives), which was due to higher energy and raw-material costs.

Sales were up 5% due to higher volumes, with a slightly less favourable product mix. DSM Pharmaceutical Products' operating profit was higher than in Q2 2005, which was due to higher sales volumes at lower margins and to lower fixed costs.

DSM Anti-Infectives posted a negative operating result because selling prices were lower on average and energy costs were higher. Penicillin prices showed a slight increase, but the prices of a number of other important products decreased. It will probably be difficult for DSM Anti-Infectives to achieve a positive full-year operating result this year already, although its result will be considerably better than in 2005. The operating profit for the cluster was favourably influenced by non-recurring items.

Sales were up almost 11% due to clearly increased volumes and slightly higher selling prices. The operating profit for the cluster increased substantially due to higher volumes, in particular at DSM Engineering Plastics, DSM Resins and DSM Dyneema. At DSM Engineering Plastics and DSM Dyneema, the increase in sales volumes was accompanied by an improvement of margins. At DSM Resins, margins remained at a good level. DSM Dyneema will open yet another production line in the USA in Q3 2006. In the run-up to this expansion, fixed costs at DSM Dyneema are increasing. DSM Elastomers' operating profit was lower than in Q2 2005 because of a margin squeeze due to strongly increased raw-material prices.

Sales in this cluster were up 12% from Q2 2005, due mainly to clearly increased sales volumes and higher selling prices combined with strongly increased raw-material prices. The strong increases in energy and raw-material prices could however not yet be fully passed on to the market. The operating profits recorded by DSM Fibre Intermediates and DSM Agro were at Q2 2005 level. The results of DSM Melamine remained under pressure despite increased sales volumes. The further increase in energy prices led to a higher result for DSM Energy.

The costs associated with share-based payments, in particular payments in the form of stock appreciation rights (SARs), were considerably lower due to the decrease in the DSM share price. On the other hand, the captive insurance company posted a lower result due to higher damage amounts.

Net profit

Net profit increased compared to the second quarter of 2005, from EUR 133 million to EUR 157 million (18%).

Net finance costs in Q2 2006 amounted to EUR 23 million. This represents an increase of EUR 4 million compared to the first quarter, which was due mainly to changes in the value of "other securities" and higher interest charges.

The effective tax rate in Q2 2006 was 27%, which is comparable to Q2 2005. Net profit excluding exceptional items was EUR 152 million, up EUR 5 million (3%) from the second quarter of 2005.

Exceptional items comprised, on the one hand, the sale of the Display Coatings business at a book profit of EUR 13 million after taxation and on the other hand the cost of terminating the melamine production joint venture in the USA, amounting to EUR 8 million after taxation.Net earnings per share increased by 19%.

Cash flow, capital expenditure and financing

The cash flow (net profit plus depreciation) in the second quarter amounted to EUR 265 million, which is the same as in Q2 2005. At EUR 87 million, capital expenditure (excluding acquisitions) was below the level of depreciation (EUR 108 million) and below the Q2 2005 level (EUR 111 million).

Compared to year-end 2005, the operating working capital increased by EUR 316 million in the first half of 2006 (of which EUR 123 million in the second quarter). This was in line with the increase in sales and the usual seasonal pattern.

Net debt increased by EUR 89 million in Q2 2006 and stood at EUR 845 million at the end of the quarter. The increase was due mainly to the payment of the final dividend for 2005.

Workforce

The workforce increased by 168 in Q2 2006. This was the balance of an increase of 270 due to consolidation effects and a decrease of 102 due to restructuring operations and attrition.

EPDM anti-trust investigation

The previously announced investigation, commenced by the US Department of Justice in December 2002, into alleged violations of the US anti-trust laws involving the EPDM sector has been concluded without charges of any kind against DSM or its affiliates. The investigation by the European Commission has not yet been concluded.

Outlook

DSM is maintaining its forecast that the generally favourable conditions in most of DSM's end markets will continue in the second half of the year and that the company will be able to achieve healthy volume growth. However, in a number of end markets an increased resistance to further price rises is noticeable, while the prices of energy and raw materials keep rising, partly as a result of political tensions that have recently increased again. In addition, the phytase tolling activities will be discontinued, a few customers for food ingredients (DSM Food Specialties) are expected to deplete their stocks, and a few plant turnarounds have been planned.

The third-quarter profit might therefore turn out to be lower than the excellent operating profit achieved in the third quarter of 2005 (EUR 215 million). On the other hand, expectations are that the Q4 operating result will be better again than last year. All in all, DSM expects its operating profit from continuing operations for the full year 2006 to be better than that of the record year 2005, despite the clearly increased efforts in the field of innovation, a weaker US dollar and higher raw-material costs.

Forward-looking statements

This press release contains forward-looking statements. These statements are based on current expectations, estimates and projections of DSM management and information currently available to the company. The statements involve certain risks and uncertainties that are difficult to predict and therefore DSM does not guarantee that its expectations will be realized. Furthermore, DSM has no obligation to update the statements contained in this press release.

Source: DSM


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