Royal DSM N.V. (RDSMY)

Q2 2010 Earnings Call

August 3, 2010 10:00 am ET

Executives

TST Recommends

Herman Betten - IR

Feike Sijbesma - Chairman and CEO

Rolf-Dieter Schwalb - CFO

Analysts

Anna Marij van der Meulen - Dow Jones

Aaron Gray-Block - Reuters

Martijn van der Starre - Bloomberg

Antonio Ligi - Bloomberg

Presentation

Operator

Welcome to the conference call on the second quarter results 2010 of DSM. (Operator Instructions)

Now I would like to turn the call over to Mr. Herman Betten.

Herman Betten

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Good morning, ladies and gentlemen, and welcome to the conference call of the second quarter results of 2010 of DSM that we published earlier this morning. Sitting here with me are Mr. Feike Sijbesma, CEO and Chairman of the Management Board; and Mr. Rolf-Dieter Schwalb, CFO, and member of the Management Board. They will elucidate the results and after that answer your questions.

As a reminder, I am obliged to say that today's presentation can contain forward-looking statements. And in that regard, I would like to point you to our disclaimer regarding forward-looking statements, as published on our website and in our press releases.

And now I'll turn over the call to Feike.

Feike Sijbesma

Thank you, Herman. Ladies and gentlemen, welcome to this conference call on the second quarter results of 2010, which were published indeed for this morning.

As you can see in our press release, we are delighted to report a very strong second quarter. Operating profit increased by more than 25% compared with the first quarter. And for the current business portfolio, it was the best quarter in DMS's history. Our outstanding performance in the quarter reflects very good volumes across our business combined with continued disciplined focus on pricing and cost. Compared to the second quarter of 2009, the operating profit almost tripled.

We see a number of general drivers behind this strong performance. Business conditions in most geographic areas and markets further improved, partly due to restocking. Especially, the China business is growing very fast. Sales in China in the first half year increased to $784 million, which is 13% of total DSM sales. A year ago, this percentage was only 9%.

Also, in several businesses, DSM was able to improve market share by maintaining a strong customer focus during the economic downturn. The cost savings program that DSM started in the last part of 2008 is now generating benefits of €200 million on an annual basis. These cost savings had a positive impact on the operating profit for businesses.

Currency developments were favorable as well in the second quarter. Compared to the first quarter, the euro was on average 8% weaker compared to the U.S. dollar. DSM cost basis is still for a large part in euros, whereas sales in U.S. dollars and dollar-related currencies are increasing. Our second quarter results in detail can be found in the press release which we issued today.

Nutrition was benefiting was extra-ordinarily strong trading conditions in Q2. As expected, Pharma business faced difficult challenges. In Materials Sciences, the recovery continues. In some markets, demand is back to or even better than the pre-downturn level, although some downstream restocking is visible too.

Our cash performance was again strong. Net cash from operating activities was €223 million in the second quarter and €360 million of the first half year, which was more than sufficient to fund our capital expenditures and our final dividend paid. Net debt decreased substantially because of the receipt of the DSM Agro and DSM Melamine divestment proceeds.

Now, regarding the outlook, most of the markets that are relevant to DSM saw a continued recovery in the second quarter. DSM expects further end-market recovery for the remainder of the year, assuming no major change in economic conditions. The risk of a slowdown of the economic recovery remains due to macroeconomic uncertainties and a potential disruption of global financial markets. Emerging economies are expected to remain strong throughout the year. The focus on cash generation and cost savings continues to be important.

The growth in food and feed markets will continue in line with long-term trends. Quarterly Nutrition results for the remainder of the year are expected to be at the good level achieved last year and the full year results are now expected to be somewhat above 2009.

Based on (inaudible) Nutrition, in the second quarter, we had an exceptionally strong result. The businesses benefited from good market conditions, favorable product mix, excellent manufacturing performance, good cost control, favorable currency exchange rates and some downstream restocking.

For Pharma, full year results are expected to be positive, but lower than 2009 due to the ongoing challenges at DSM Pharmaceutical Products and relatively low prices at DSM Anti-Infectives, our penicillin-based business. Results in the third quarter might be negative due to the poor business conditions at DSM Pharmaceutical Products.

In Performance Materials, DSM is experiencing good market recovery in automotive and electronics due to market growth in restocking. Demand in building and construction markets will remain at relatively low levels. Overall sales volumes in Performance Materials for the second half year of 2010 are expected to be lower than in the first half year of 2010 due to seasonality and the diminishing impact of re-stocking.

The cluster results are expected to be substantially better than in 2009, though results in the second half 2010 are expected to be lower than in the first half 2010.

Polymer Intermediates is expected to have an outstanding 2010 result. The maintenance turnaround in the third quarter of 2010 will impact production volumes in China. Margins are expected to be healthy, but below the peak in the second quarter of 2010. Operating profit in the non-core Base Chemicals and Materials cluster is expected to be clearly positive in 2010.

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