DSM's cost cuts pay off

By Gregory Roumeliotis

- Last updated on GMT

Related tags Dsm Chemical industry Material

Chemicals and nutrition group DSM has reported strong profits for
the first quarter in 2006, including in its pharma business, as
higher prices and lower costs have helped it overcome the increase
in raw material costs.

The Dutch company saw its pre-tax profit jump 23 per cent from €167m in Q1 of 2005 to €206m in Q1 of 2006, with its performance materials unit performing strongly.

But DSM was particularly delighted with the results of its pharma business, not least because it has started to see the results of painful reforms it has had to implement.

Reducing costs meant that a 14 per cent rise in sales translated into an almost doubling of operating profit in the Pharma cluster, from €8m to €15m.

Profit margins increased from 3.6 per cent to 6 per cent, as DSM has managed to defy cyclical chemical industry trends by divestments and restructuring.

For example, DSM Anti-Infectives, which makes raw materials, intermediates and bulk actives for anti-infectives such as antibiotics and antifungals, had proved troublesome for the company, eating away earnings for several quarters, mostly as a result of plunging penicillin prices.

In response, in 2004 DSM restructured its antibiotics-making operations, the world's largest, taking a hit of €99m in its profits.

As a result, this quarter DSM Anti-Infectives saw its operating result improve considerably and was close to break-even.

"The prospects for our markets for this year continue to be good, although there are still economic and monetary uncertainties,"​ said Peter Elverding, chairman of the DSM Managing Board.

"I remain confident about the year as a whole and I expect that our second-quarter operating profit will also be clearly above last year's."

The company was very positive about the fact that economic growth is now picking up in Europe as well but highlighted the risks of sustained volatility in raw material prices.

Nevertheless, DSM can still boast that it is one of the few chemical companies that have achieved strong growth despite rising energy and materials costs.

German rival BASF saw earnings before interest and tax (EBIT) cut by half to €10m in its fine chemicals unit, beleaguered by the increased cost of raw materials and energy.

Long term, DSM sees a growing and aging world population, increasing purchasing power, the increasing importance attached to a healthy lifestyle and the growing emphasis placed on personal care as the main drivers of growth in Pharma.

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