DSM meets negative expectations

DSM's new vitamins business will be key to the group's performance in coming months as it attempts to recover from a 75 per cent drop in operating profit for the third quarter.

Plummeting from €104 million in last year's third quarter to just €26 million for 2003, the operating profit was in line with DSM's warning at the beginning of the month. The company blamed lower sales volumes, higher operational fixed costs due to new plant start-ups, lower margins which have hit all of its units, and a low exchange rate for the US dollar.

The group's profit statement is now showing losses of €78 million, partly due to an explosion at its plant in Linz, Austria, early on in the quarter, which brought charges of €15 million. DSM​ will also take a one-off charge of €102 million for restructuring measures, announced on 1 October, designed to help integrate the new vitamins business.

This includes a provision of €43 million net for severance payments (more than 600 jobs are slated to go), and reorganisation and closure of some of its plants, resulting in impairments of around €59 million net. The reorganisations are expected to contribute at least €75 million to the operating profit for 2005.

Profits should also be boosted by the newly named DSM Nutritional Products (formerly Roche vitamins), expected to make earnings (before interest and tax) of at least €150 million in 2004.

But other DSM units will continue to pose problems. Profit on ordinary activities after taxation in the third quarter was down 77 per cent to €20 million, compared to €87 million the prior year.

Net sales in the quarter dropped 5 per cent to €1.3 billion, with the life sciences division one of the worst performers, down by 11 per cent on the previous year. Selling prices were on average 1 per cent lower and sales volumes were down 2 per cent across the group. Unfavourable exchange rates, in particular for the US dollar, also played a role.

In the Food Specialties division, results were affected by lower sales volumes due to extremely hot summer conditions and by lower margins due to imports from countries outside Europe. The summer appeared to have a worse than usual effect on other units too.

However Peter Elverding, chairman of DSM's board of directors, insisted that improvement would come in the fourth quarter but remained cautious about the long-term. "Fortunately, I see some improvement in our markets. However, the economic recovery is still fragile, and the situation with regard to our pharma and elastomers activities is still unsatisfactory."​

DSM Nutritional Products is expected to contribute at least €25 million to operating profit in the fourth quarter, but a further decline in the US dollar exchange rate against the euro and the Swiss franc is likely to dampen the result. And there is little improvement expected in the chemicals market, offering limited potential for other units.