DSM Delivers Strong Result Improvement in Q3

• Q3 operating profit from continuing operations EUR 139 million, more than double Q2 2009 (EUR 58 million)
• Strong Life Sciences performance due to robust Nutrition business
• Materials Sciences continued strong recovery
• Cost savings and efficiency improvements on track to achieve EUR 150 - 200 million on yearly basis by 2010
• Cash flow from operating activities again very strong (Q3 EUR 517 million)
• Outlook for the rest of the year remains uncertain; Q4 operating profit currently expected to be lower than Q3, but above Q4 last year

 

Commenting on the results, Feike Sijbesma, chairman of the DSM Managing Board, said: 

 

 

 

 

third quarter			in EUR million	January - September
2009	2008	+/-		2009	2008	+/-
			Continuing operations:
2,020	2,336	-14%	Net sales	5,727	7,045	-19%
257	361	-29%	Operating profit before depreciation and amortization (EBITDA)	562	1,011	-44%
139	237	-41%	Operating profit (EBIT)	229	685	-67%
119	104	14%	- Nutrition	384	292	32%
2	22	-91%	- Pharma	16	59	-73%
45	62	-27%	- Performance Materials	45	212	-79%
21	19	11%	- Polymer Intermediates	-5	85
2	85	-98%	- Base Chemicals and Materials	-60	158
-50	-55		- Other activities	-151	-121
			Discontinued operations
39	56	-30%	Net sales	123	161	-24%
26	34	-24%	Operating profit before depreciation and amortization (EBITDA)	80	105	-24%
26	30	-13%	Operating profit (EBIT)	72	95	-24%
			Total DSM:
2,059	2,392	-14%	Net sales	5,850	7,206	-19%
165	267	-38%	Operating profit (EBIT)	301	780	-61%
100	181	-45%	Net profit before exceptional items	155	535	-71%
274	-		Net result from exceptional items	242	-
374	181	107%	Net profit	397	535	-26%
			Net earnings per ordinary share in EUR:
0.51	0.97	-47%	- before exceptional items, continuing operations	0.62	2.78	-78%
2.29	1.10	108%	- including exceptional items, total DSM	2.40	3.20	-25%

 

          'operating profit' (before depreciation and amortization) is understood to be operating profit (before depreciation and amortization) before exceptional items.

          'net profit' is the net profit attributable to equity holders of Royal DSM N.V.

          'continuing operations' refers to the DSM operations excluding DSM Energie Holding B.V. and Stamicarbon B.V.

 

Most of DSM's businesses experienced a further improvement in demand during Q3, including a strong September. The underlying trend can be described as a mixture of a clear recovery in some end markets (especially China, where sales were 16% higher than Q3 last year) and some downstream re-stocking in other areas which, however, are still lower, such as automotive. The year-on-year percentage drop in sales volumes in the businesses affected by the economic downturn has returned to single digit.

 

DSM's Nutrition cluster continued to show resilience and steady growth, capitalizing on its strong market position in areas which were hardly affected by the downturn. The Pharma results remained low as expected, due to weak sales.

 

In the Materials Sciences clusters, the results of DSM Engineering Plastics, DSM Resins and DSM Fibre Intermediates were close to last year's level. The combined effects of lower sales volumes and the reduction of inventories were compensated for by lower raw material prices and the sustained focus on efficiency. Also DSM Dyneema experienced a weaker demand than in the same period last year. 

 

The operating profit of DSM's core business, Life Sciences and Materials Sciences, in Q3 2009 (EUR 137 million) was only 10% lower than last year's level, during which period DSM was not yet affected by the downturn.

 

All businesses in Base Chemicals and Materials showed a clear recovery compared to the previous quarter, which resulted in a small operating profit for the cluster as a whole, but a much weaker result than in the very good period last year. The main contributors to this improvement versus Q2 were DSM Elastomers and DSM Agro.

 

The broad improvement in trading conditions was no reason to compromise the focus on cash. DSM's net debt of EUR 1,069 million is now EUR 818 million (43%) lower than a year ago at the start of the economic downturn.

 

The disposals of DSM Energy and the urea-licensing activities, as part of DSM's accelerated Vision 2010 strategy, were completed on 30 September and 6 October respectively. The disposal of DSM Energy resulted in a net book profit of EUR 268 million in Q3 and the disposal of the urea-licensing activities will result in a net book profit of around EUR 30 million which will be recognized in Q4.

 

 

in EUR million	third quarter
	2009	2008	differ-ence	vol-umes	prices	exch. rates	other
Nutrition	702	666	5%	4%	-2%	3%	0%
Pharma	152	203	-25%	-3%	-11%	-2%	-9%
Performance Materials	496	580	-15%	-8%	-9%	1%	1%
Polymer Intermediates	246	335	-27%	-4%	-26%	3%	-
Base Chemicals and   Materials	328	444	-26%	3%	-30%	1%	-
Other activities	96	108
Total, continuing operations	2,020	2,336	-14%	-2%	-13%	1%	0%
Discontinued operations	39	56
Total	2,059	2,392

 

 

Net sales dropped by 14% compared to Q3 2008 but improved by 5% compared to Q2 2009 (volumes +5%, prices +2%, exchange rates -2%). Sales volumes were on average still lower compared to last year's level, but the decline was much less than in previous quarters. This is a reflection of improvements in end-markets as well as some re-stocking. Nutrition,

DSM Anti-Infectives, DSM Agro and DSM Melamine are even showing better sales volumes than Q3 last year.

 

Although prices were clearly below last year's level (partly due to lower raw material prices in the Materials Sciences and Base Chemicals and Materials businesses), pricing power was generally strong. Prices were, on average, increasing during the quarter and margins were mostly better than last year's (DSM Agro being the important exception due to much lower prices). 

 

At EUR 139 million, operating profit from continuing operations was substantially better than in the last three quarters, but clearly below last year's Q3. The decline year-on-year was mainly attributable to the Base Chemicals and Materials and Pharma clusters.

 

Nutrition sustained its solid performance and remained hardly affected by the recession. Volumes were growing again and were above last year while prices remained strong. Operating profit was negatively affected by underutilization of assets due to inventory reduction.

 

Pharma was affected by the weak demand at DSM Pharmaceutical Products and the continued weak pricing at DSM Anti-Infectives.

 

In Performance Materials both DSM Engineering Plastics and DSM Resins profited from a recovery in volumes, strong margins and improved efficiency. DSM Dyneema experienced pressure because of a weaker demand than last year. 

 

Polymer Intermediates recovered sharply from the dramatic drop in demand and margins seen at the end of last year and the beginning of this year.

 

In Base Chemicals and Materials, the operating profit of DSM Elastomers showed a substantial improvement in this quarter and was positive again. The improvement in DSM Agro and DSM Melamine was less pronounced. Both business groups still posted a loss.

 

A number of structural cost-saving actions to address the effects of the economic downturn and to strengthen DSM's competitive position helped to improve the operating profit in Q3 compared to Q2. DSM is on track to achieve cost savings as a result of these actions of EUR 150-200 million on a yearly basis, to be fully achieved by 2010.

 

 

 

third quarter			in EUR million	January - September
2009	2008				2009	2008
702	666		Net sales		2,108	2,007
			Operating profit before depreciation and
151	144		amortization		481	396
119	104		Operating profit		384	292

 

Organic sales growth in the cluster was 2% compared to Q3 2008 driven by DSM Nutritional Products. The improvement came from an increase in volume, especially in the animal feed segment where demand slackened in Q3 2008. Demand for food ingredients in Q3 2009 was still impacted by de-stocking effects in the pipeline. However, in the second part of the quarter demand improved. Following the value-over-volume strategy, prices in both food and feed ingredients remained robust although at slightly lower levels which was compensated for by the stronger dollar. Compared to the second quarter of this year, volume improvements continued, but were offset by a weaker dollar. DSM Food Specialties' sales were similar to Q3 last year.

 

Operating profit of DSM Nutritional Products continued to be strong in Q3 2009 and increased compared to last year. This was due to favorable sales developments, production efficiency and good cost management and despite underutilization of assets due to inventory reduction. DSM Food Specialties' operating profit continued to be above last year due to strong performance in enzymes and ARA and favorable exchange rates.

 

 

third quarter			in EUR million	January - September
2009	2008				2009	2008
152	203		Net sales		526	647
			Operating profit before depreciation and
14	37		amortization		57	105
2	22		Operating profit		16	59

 

Organic sales development of the Pharma cluster continued to be under pressure.

DSM Pharmaceutical Products' activity level remained low as a result of low demand from pharmaceutical companies, delay in approvals and the loss of some large contracts. DSM Anti-Infectives was facing low prices. Last year's sales still included the activities of DSM Deretil, which was disposed of at the end of Q3 2008.

 

The operating profit continued to decrease. The lower prices for penicillin derivatives and low demand at DSM Pharmaceutical Products led to a lower result compared to last year.

 

 

third quarter			in EUR million	January - September
2009	2008				2009	2008
496	580		Net sales		1,347	1,805
			Operating profit before depreciation and
72	84		amortization		122	275
45	62		Operating profit		45	212

 

Organic sales development was -17% compared to last year as market sentiment was lower for all business groups and most regions. The Asia Pacific region was an exception for most businesses as year-on-year growth continued. Compared to Q2 of this year, the organic sales growth was a healthy 10%. Higher volumes, partly due to re-stocking, as well as favorable price developments were observed in all businesses.

 

The operating profit gap narrowed significantly against Q3 of last year especially for DSM Engineering Plastics and DSM Resins, with a result that was more than double Q2 2009. Also DSM Engineering Plastics moved into positive territory for the quarter. These encouraging developments were driven by volume increase, well structured cost control programs, price leadership and higher margins. The quarterly result of DSM Dyneema dropped compared to the same period last year as weaker demand had an impact on this business as well.

 

 

 

 

third quarter			in EUR million	January - September
2009	2008				2009	2008
246	335		Net sales		600	1,003
			Operating profit before depreciation and
29	27		amortization		18	105
21	19		Operating profit		-5	85

 

Organic sales development was -30% compared to the same period of last year driven by lower market prices. With respect to volume, the continuing weak market demand in North America has been, to a large extent, compensated for by sales volume in Europe and Asia (especially China). Compared to the previous quarter, organic sales growth was 18% due to much better pricing.

 

The cluster delivered a slightly higher operating profit compared to the same quarter of last year. Due to the low benzene price in the first two months of the quarter, the margins in caprolactam have improved. Compared to the previous quarter, the operating profit has improved by EUR 17 million.

 

 

third quarter			in EUR million	January - September
2009	2008				2009	2008
328	444		Net sales		854	1,262
			Operating profit before depreciation and
21	104		amortization		-9	211
2	85		Operating profit		-60	158

 

Organic sales development was -27% compared to last year, which was mainly caused by lower fertilizer prices, as volumes were comparable to last year. Q3 showed a healthy growth of 16% compared to the second quarter. In all businesses, sales are recovering, from the first half year's trough.

 

The operating profit of the cluster was much lower than Q3 2008 due to lower prices at DSM Agro. Compared to the previous quarter operating profit recovered and was slightly positive again. Especially DSM Elastomers showed a good recovery to a level which was comparable to last year. The main cause for the overall recovery of the cluster is the fact that the volumes are picking up again. Furthermore the fixed costs saving programs were contributing considerably to the result.

 

 

third quarter			in EUR million	January - September
2009	2008				2009	2008
96	108		Net sales		292	321
			Operating profit before depreciation and
-30	-35		amortization		-107	-81
-50	-55		Operating profit		-151	-121
			of which:
-18	-2		- Defined Benefit Plans		-56	-3
-15	-16		- Innovation Center		-43	-42
-17	-37		- Other		-52	-76

 

 

The main difference in the result of Other activities compared to Q3 2008 was the higher result at the captive insurance company which posted a substantial loss last year as a consequence of the ammonia outage. This broadly offset the (non cash) increase in IFRS pension costs for defined benefit plans.                                                                          

 

In total, exceptional items after tax amounted to a profit of EUR 274 million in Q3 2009.

 

Due to the sale of DSM Energie Holding B.V. to TAQA a net book profit of EUR 268 million was realized.  

 

As a result of a reduction in entitlements under certain defined benefit plans a gain of EUR 11 million (EUR 16 million before tax) was posted.

 

Mainly due to the sale of DSM Energie Holding B.V. the net profit increased by EUR 193 million compared to Q3 2008 to a level of EUR 374 million.

 

Net earnings per share (continuing operations, before exceptional items) decreased by 47% compared to Q3 last year to EUR 0.51, but was substantially above Q2 (EUR 0.09).

 

Net finance costs amounted to EUR 30 million which represents an increase of EUR 5 million compared to the previous year. Higher average long term debt and lower interest income as a result of unfavorable interest rate developments were partly offset by a higher average cash balance.

 

The effective tax rate decreased to 23% for the first three quarters of 2009 versus 25% for the year 2008 due to changes in the geographic distributions of taxable results.

 

As a result of DSM's continued strong focus on cash, Cash flow from operating activities increased to EUR 950 million current year-to-date compared to EUR 518 million in the first three quarters of 2008. Q3 2009 operating cash flow amounted to EUR 517 million versus EUR 237 million in Q3 2008.  

 

Cash used for capital expenditure in the first three quarters of 2009 amounted to EUR 337 million compared to EUR 387 million in the first three quarters of 2008 (Q3 2009 EUR 102 million versus Q3 2008 EUR 129 million).

 

 

Net debt showed a strong decrease during the first three quarters of 2009 to a level of EUR 1,069 million (EUR 1,781 million at year-end 2008) as a result of a strong reduction of operating working capital and the cash proceeds from the sale of DSM Energy.

 

Following the restructuring programs the workforce decreased overall by 1,147 compared to the end of Q3 2008, the beginning of the economic downturn, and stood at 22,905.

 

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 transform 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.

In Q3 2009 sales in China amounted to USD 334 million, which represents an increase of 16% relative to the comparable period of last year. Year-to-date sales amounted to USD 813 million being a decrease of 11% compared to year-to-date previous year.

 

On 30 October 2009 DSM announced that the contracts to establish nutrition and anti-infectives joint ventures in China with North China Pharmaceutical Group Corporation Ltd. (NCPC) are suspended. Both parties are maintaining their ongoing business relationships. At the same time, DSM will look for alternative solutions for the prospective partnerships. DSM will continue to explore other opportunities for further growth in China through strategic cooperation, also in the areas of nutritional products and anti-infectives.

 

In India, DSM Anti-Infectives inaugurated its new plant at Toansa for the production of Ampicillin, one of the most widely used first lines of therapy for combating bacterial infections. In this new facility, DSM Anti-Infectives implements the newly developed enzymatic process for production of Ampicillin.

 

In September 2007 DSM announced that, as a result of the accelerated shift towards Life Sciences and Materials Sciences, a number of businesses which do not fit in with the accelerated strategy would be carved out and disposed of.

 

DSM has made progress with the planned disposals. On 30 September 2009 the sale of DSM Energie Holding B.V. to TAQA Abu Dhabi National Energy Company PJSC was finalized. Included in the scope are the participations which DSM had in oil and gas exploration and the 40% participation in Noordgastransport B.V. DSM reported a book profit of EUR 268 million after tax on the sale as an exceptional item in the income statement in Q3 2009.

 

On 6 October 2009 the sale of the urea-licensing subsidiary Stamicarbon B.V. to Maire Tecnimont was completed. DSM will report a book profit of about EUR 30 million after tax on the sale as an exceptional item in the income statement for Q4 2009.

 

The disposal process for DSM Elastomers, DSM Agro and DSM Melamine is underway. As reported earlier, DSM has slowed down the process in view of the current financial and economic environment but still aims to complete the disposals by the end of 2010.

 

DSM regained its number one position in the chemical industry sector in the Dow Jones Sustainability World Index. This is a recognition of DSM's continuous efforts in sustainability, an important element of the strategy Vision 2010. From 2004 to 2006 DSM was named the worldwide sustainability No. 1 in this sector. In 2007 and 2008 it ranked amongst the top leaders in the sector.

 

During the quarter, DSM announced and introduced many new innovations. More information can be found in the innovation section at www.dsm.com.

 

During Q3 2009 DSM saw a continuation of the trends that were visible at the end of the second quarter with ongoing robust performance in Nutrition and a further improvement in Materials Sciences. Despite the improved performance in Q3 2009 compared to the previous quarter, demand is still fragile and the economic outlook remains uncertain. The movements in inventories in the value chain as well as the development of end-demand are difficult to separate and predict. DSM will continue to focus on cash and cost, whilst maintaining its strategic commitment to customers, innovation and sustainability.

 

It is expected that the current business conditions in Nutrition will remain strong with an ongoing increase in demand and sustained price levels in both the food and feed markets. The Nutrition cluster is expected to achieve full year results somewhat above the 2008 level.

 

Pharma results are expected to be substantially lower than last year although the results of DSM Pharmaceutical Products are expected to be strong in the last quarter of the year due to temporary additional demand related to the H1N1 flu.

 

In Materials Sciences and Base Chemicals and Materials business conditions have clearly improved in Q3 2009 compared to Q2 2009. At this moment there is still limited clarity on demand for the last quarter of the year, which is traditionally a weaker quarter. In addition there are signs that some re-stocking occurred in Q3 2009. Furthermore, feedstock prices remain volatile which might affect margins - positively or negatively. The operating result of Performance Materials is expected to be lower in Q4 2009 compared to Q3 2009. At Polymer Intermediates operating profit is expected to be around break-even in 2009. The Base Chemicals and Materials cluster is expected to be clearly loss-making in 2009.

 

The outlook for the rest of the year remains uncertain. However, the Q4 operating profit from continuing operations is currently expected to be lower than in Q3 2009, but above Q4 last year.