Distribution of company announcements to the professional platforms, finance portals and syndication of important corporate news to a wide variety of news aggregators and financial news systems.
DSM N.V. (RDSMY) * Very strong Q2 result based on 17% organic sales growth. * Changing dynamics in vitamin business drive significantly higher profitability in Life Sciences. * Materials Sciences performing well against difficult economic background. * EBIT from continuing operations up 19% to EUR 276 million. * Earnings per share 34% higher. * Guidance raised: 2008 EBIT from continuing operations expected to be around EUR 970 million, with potential upside. * Execution of Vision 2010 strategy fully on track.
Commenting on the results, Feike Sijbesma, chairman of the DSM Managing Board, said: 'This is the strongest quarterly result in DSM's history. DSM benefited during the quarter from favorable market conditions in particular in Nutrition, where changing dynamics in the vitamins business are taking place which are in large part expected to be sustainable over the medium term. As a result of the performance in Nutrition, and with our other businesses performing solidly despite the more difficult macro-economic environment, we have been able to raise our guidance by around EUR 100 million on what was already expected to be a record year for DSM.
'DSM is continuing to see the benefits of our decision to focus on Life Sciences and Materials Sciences. Our work to complete the transformation continues apace and we believe that DSM is well placed to exploit the opportunities arising from the reshaping of our business.'
second quarter in EUR million first half 2008 2007 +/- 2008 2007 +/- Continuing operations: 2,430 2,177 12% Net sales 4,761 4,301 11%
382 334 14% Operating profit before 718 628 14% depreciation and amortization (EBITDA)
Discontinued operations (DSM Special Products): 26 21 Net sales 53 43 1 -3 Operating profit before 3 -2 depreciation and amortization (EBITDA) 1 -4 Operating profit (EBIT) 2 -5
Total DSM: 2,456 2,198 12% Net sales 4,814 4,344 11%
277 227 22% Operating profit (EBIT) 514 419 23%
193 158 22% Net profit before exceptional items 355 286 24%
- -111 Net result from exceptional items - -111
193 47 411% Net profit 355 175 203%
Net earnings per ordinary share in EUR: 1.15 0.86 34% - before exceptional items, 2.10 1.54 36% continuing operations 1.15 0.25 460% - including exceptional items, 2.10 0.94 223% continuing operations 1.15 0.24 479% - including exceptional items, 2.10 0.92 228% total DSM
In this report: * '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 Special Products.
Overview DSM's strongest ever quarterly result in Q2 2008 was driven by an almost 50% uplift in operating profit in the Nutrition cluster and DSM also benefited from continued high fertilizer prices arising from strong agricultural markets. DSM's Performance Materials and Polymer Intermediates clusters are seeing some impact of the generally worsening economic conditions but are well placed to manage through this period, benefiting from the quality of their product portfolios and in particular the strong growth of DSM Dyneema.
The key driver behind the performance in Nutrition has been DSM's vitamin business, which is benefiting from a number of changes that are taking place across its markets and the industry. Customers around the world have heightened awareness of quality and safety issues in food and feed products. DSM is benefiting from its emphasis on quality, reliability and traceability which has become vitally important to these customers. DSM's strategy to focus on innovation and differentiation is gaining traction and DSM is being recognized as a driving force for innovation in the industry. DSM is the most integrated industry player, well placed to serve these customers with higher added value premixes and base vitamins, in both of which it has a strong position. Furthermore, changing dynamics especially in China are driving changes in vitamin markets. Some competitors have been impacted by additional investments and costs for environmental and quality reasons, the increase in energy and raw material prices, inflation, privatizations and local exchange-rate movements. On top of this, market supply currently is tight because of strong market growth in combination with reduced or at best stable capacities. All these various factors have come together in the last 12 months and have resulted in significantly higher pricing across the industry.
It is expected that a large part of these elements are longer lasting structural changes, which gives comfort that the improved profitability in vitamins can be sustained over the medium term, although specific dynamics exist for each individual product and end-market.
Net sales
in EUR million second quarter 2008 2007 differ-ence vol-umes prices exch. other rates
For Q2 2008, sales from continuing operations increased by 12%. Organic sales growth (17%) even accelerated compared to Q1 (14%). All clusters grew much faster than the strategic target of 5%. Exchange rates had on balance a negative effect of 6%, mainly caused by a 14% lower US dollar. The resilience of most of the businesses against the economic headwind was expected, as it is one of the main objectives of the transformation process DSM is going through. However, the fact that most businesses were able to accelerate their growth in the current environment has exceeded expectations.
The Nutrition cluster showed a strong increase in both volumes and prices, which mainly reflects the changes in the structure of the vitamins business. In Polymer Intermediates a substantial volume and price increase was realized. The Pharma and Performance Materials cluster showed steady organic growth. Within Base Chemicals & Materials all businesses showed a negative volume growth, caused by the natural decline in DSM Energy and incidentals such as the ammonia outage. However, selling prices increased at all businesses, especially at DSM Agro in line with the international fertilizer prices.
Operating profit The operating profit from continuing operations amounted to EUR 276 million, an increase of 19% compared to Q2 2007. This increase underlines the strength of DSM's business, as feedstock and energy costs have increased by EUR 150 million and much lower currency exchange rates versus the Euro had a negative effect of some EUR 25 million (after hedging). On top of this there was the negative effect of the phasing-out of some contracts relating to the Roche acquisition and the higher innovation expenditure. All of this was more than compensated for by substantially higher sales volumes and selling prices across the portfolio.
Nutrition benefited from changing dynamics in the vitamin business. Organic sales growth was 29% and EBITDA margin improved to 20.6% (18.2% in Q2 2007).
Prices for vitamin A, E and C increased further in Q2, and prices for some of the B vitamins also trended upwards. This good pricing strength is a result of DSM's successful innovation and differentiation activities to focus on quality, the breadth of its product portfolio, higher costs at competitors and a more even balance between supply and demand in a number of key products. Continued good pricing strength is expected to be maintained.
DSM Nutritional Products' operating profit strongly increased as a result of higher volumes and margins despite the negative impact of the US dollar, higher feedstock and energy costs and the phasing-out of the Roche contracts.
The operating profit of DSM Food Specialties was equal to last year's.
Organic sales growth was 9% due to higher sales volumes, mainly at DSM Pharmaceutical Products, and higher selling prices at DSM Anti-Infectives.
Operating profit was slightly below Q2 2007, being the balance of a lower result at DSM Pharmaceutical Products and a higher result at DSM Anti-Infectives. The lower result at DSM Pharmaceutical Products was caused by the phasing out of Roche contracts and a lower production level. At DSM Anti-Infectives the rebound in prices that had started in Q1 was maintained, although partly offset by a weaker US dollar.
Within DSM Performance Materials is experiencing most of the economic headwind, as a result of a noticeable slowdown in some important end markets (automotive, E&E and paint), higher feedstock and energy costs and a weak US dollar. In this context the cluster is managing well. All three business groups contributed to the organic sales growth of 7%.
Operating profit was only slightly lower than last year. DSM Engineering Plastics' profit was lower because of decreasing margins due to higher raw-material prices and lower currency exchange rates, and DSM Resins' profit was lower because of negative exchange-rate effects. This was almost fully compensated for by the continuous growth at DSM Dyneema.
Organic sales growth was 17%. Higher sales volumes and selling prices were partly offset by weaker currencies.
The higher sales volumes were driven by the expanded production capacity for acrylonitrile and solid demand for both caprolactam (with the exception of the US, because of weakness in the construction and automotive markets) and acrylonitrile. Due to a good supply-demand situation, prices were increased further in all markets, but offset by higher raw-material costs. Fixed costs were higher due to some planned plant turnarounds. On balance the operating profit was clearly higher.
Organic sales growth for Base Chemicals and Materials was 18% due to higher prices and despite lower sales volumes.
DSM Agro and DSM Energy in particular posted higher operating profits. The fertilizer market is extremely tight, which is reflected in much higher prices. The unplanned outage of the ammonia plant, communicated on 7 July, is insured and will not materially affect DSM Agro's operating profit. The operating profit of DSM Energy increased because of the higher prices for oil and natural gas. DSM Melamine's operating profit remained at the level of Q2 2007. DSM Elastomers' operating profit decreased due to lower margins caused by higher feedstock costs and the lower US dollar.
The captive insurance company will be covering part of the costs of the unplanned ammonia plant outage. Only a limited part of the expected total cost of EUR 25-30 million has been recognized in Q2 and the major part will become visible in Q3. Other reasons for the lower operating profit are higher costs for share-based payments (higher share price) and higher innovation expenditure.
Net profit Net profit before exceptional items increased compared to 2007, from EUR 158 million to EUR 193 million (+22%).
Earnings per share increased to EUR 1.15 per ordinary share (+34%) thanks to the higher net profit and the share buy-back.
Net finance costs amounted to EUR 18 million, which represents an increase of EUR 3 million compared to the previous year. The impact of a higher net debt was partly compensated for by favorable exchange-rate and interest-rate effects.
At 25%, the effective tax rate in 2008 was at the level of 2007.
Cash flow, capital expenditure and financing Cash flow from operating activities amounted to EUR 281 million in the first half of 2008. Cash flow was negatively affected by a strong increase in operating working capital. This increase was mainly caused by the strong growth in sales (11%) in the first half of 2008, but also by the seasonal increase in operating working capital in the first half year (operating working capital to sales ratio increasing from 21.4% to 22.5%), which is expected to fade away again in the second half of the year.
Capitalization of capital expenditure amounted to EUR 150 million in Q2, which is clearly above the level of depreciation and amortization (EUR 106 million).
Compared to year-end 2007, net debt increased by EUR 394 million in 2008 and stood at EUR 1,732 million. The increase was mainly due to the share buy-back, the payment of final dividend for 2007 and acquisitions. Gearing (net debt / equity plus net debt) increased to 25%.
Share buy-back program After the publication of the Q1 2008 results DSM resumed the execution of the share buy-back program of EUR 750 million that the company had announced in September 2007. The total number of shares repurchased under the second phase of this program up to and including 8 July amounted to 6.6 million shares for a total consideration of EUR 250 million, as announced on 29 April 2008. During the remainder of 2008 no further shares will be bought back under this program.
Interim dividend It has been decided to pay out an interim dividend of EUR 0.40 per ordinary share for the year 2008 (2007: EUR 0.33). This represents one third of the total dividend paid out for 2007. The interim dividend is no indication of the total dividend for 2008. The interim dividend for 2008 will be paid out in cash on 22 August 2008.
Workforce The workforce increased overall by 414, from 23,254 at year-end 2007 to 23,668 at the end of Q2 2008. This was due to acquisitions (+245) and capacity expansions (+169).
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.
The key drivers for growth - market-driven growth and innovation, increased presence in emerging economies and operational excellence - remain at the heart of DSM's strategy.
In the second quarter DSM announced the acquisition of The Polymer Technology Group (PTG) to expand its fast growing biomedical materials business at the crossroads of Life Sciences and Materials Sciences. PTG expects to realize approximately USD 40 million in net sales in 2008 with an above-average operating profit margin. The acquisition was completed on 28 May 2008.
Earlier this month, DSM announced the acquisition of the business and substantially all of the assets of Valley Research, Inc. (USA) to reinforce its leading global position in food enzymes. The acquisition has been completed.
A number of investments aimed at future profitable growth were announced during the quarter, such as plans for the largest investment program ever for DSM Dyneema. DSM Composite Resins embarked on an extensive engineering study that could lead to a large expansion of its manufacturing facilities in Compiègne (France).
In Q2 2008 sales in China amounted to almost USD 330 million (first half 2008: USD 630 million), which represents an increase of 33% (first half 2008: 35%) relative to the comparable period of last year. In China, DSM Powder Coating Resins opened an R&D facility and DSM Desotech opened its newly expanded ink manufacturing facility. DSM NeoResins+ finalized the construction of its new plant for the production of waterborne acrylic resins in China.
As a result of the accelerated shift towards Life Sciences and Materials Sciences, DSM announced that a number of businesses which do not fit in with the accelerated strategy will be carved out and divested. This process started at the end of 2007. The carve-out is on schedule and is expected to be completed by the end of August 2008, with the divestment process commencing thereafter.
The intended sale of DSM Special Products to Arsenal Capital Partners, which was announced in the first quarter, has been delayed as a result of regulatory inquiries.
In the area of sustainability the Dalry (Scotland) based vitamin manufacturing facility has been awarded the Carbon Trust Standard certification, the world's first accreditation scheme designed to allow companies to measure the carbon footprint of their operations. DSM Engineering Plastics launched a "Green Portfolio" of engineering materials for new halogen-free applications.
During the quarter, DSM announced and introduced many new innovations. The highlights can be found in an appendix to this press release.
Outlook The general economic outlook appears to be worsening, the financial markets continue to be volatile, feedstock and energy prices continue to rise, inflation is gaining momentum and the US dollar remains very weak. Despite this backdrop, and the headwinds that it brings with it, DSM remains very positive about the outlook for the remainder of 2008. The changes that have driven improved profitability in vitamins are expected to benefit the Nutrition business for the rest of the year and beyond. Elsewhere businesses such as DSM Agro continue to enjoy strong demand and high prices. Performance Materials and Polymer Intermediates are expected to show resilience against the deteriorating economic conditions.
As a result, based on the currently available information and barring unforeseen circumstances, DSM is raising its guidance on operating profit from continuing operations for the year to around EUR 970 million, with potential upside. The excellent performance of the Nutrition business during Q2 is expected to be sustained. Any upside beyond the indicated EUR 970 million may come from continuing strength at DSM Agro and a more positive development of the business conditions in Performance Materials and Polymer Intermediates than is currently expected.
Heerlen, 29 July 2008
The Managing Board of Directors
Important dates
Ex-dividend date (interim dividend 2008): Wednesday, 30 July 2008 Record date (interim dividend 2008): Friday, 1 August 2008 Interim dividend 2008 made payable: Friday, 22 August 2008 Annual Analysts' Conference: 25-26 September 2008 Publication of third-quarter results: Monday, 27 October 2008 Annual Report 2008: Wednesday, 18 February 2009 Annual General Meeting: Wednesday, 25 March 2009
DSM - the Life Sciences and Materials Sciences Company Royal DSM N.V. creates innovative products and services in Life Sciences and Materials Sciences that contribute to the quality of life. DSM's products and services are used globally in a wide range of markets and applications, supporting a healthier, more sustainable and more enjoyable way of life. End markets include human and animal nutrition and health, personal care, pharmaceuticals, automotive, coatings and paint, electrics and electronics, life protection and housing. DSM has annual sales of almost EUR 8.8 billion and employs some 23,000 people worldwide. The company is headquartered in the Netherlands, with locations on five continents. DSM is listed on Euronext Amsterdam. More information: www.dsm.com.
For more information DSM, Corporate Communications tel.: +31 (45) 5782421 e-mail: media.relations@dsm.com
