DSM right not to forecast 2003

13 February 2003 17:54  [Source: ICIS news]

DSM is right not to attempt to forecast 2003 earnings in the current uncertain environment.

Expectations from the much changed company have been lowered with the slowdown in fine chemicals and against the backdrop of the increasingly tense geopolitical and uncertain economic climate. But the company knows it still has a job on its hands to persuade some that it has been doing the right thing.

Over the next few months management will have to convince investors that synergies with the former Roche vitamins and fine chemicals business will be realised. That deal was signed only a few days ago and the reduced purchase price reflects largely the impact of slower economic growth and changed currency exchange rates on the perceived value of the vitamins business.

DSM now has to see how the business can be integrated effectively. That is likely to take between 12 and 18 months, the company said on 12 February, when it noted that it will not talk about synergies in any detail until closing. At the time of the acquisition announcement, some financial analysts were sceptical about the move into the leading position in a group of chemicals that were fast becoming commodities.

While not downplaying the importance of the core vitamins, DSM has also made a great deal of what it has called the significant integration and innovation potential elsewhere in the business. It is looking particularly to so-called ‘nutraceuticals’ and other high margin niche products.

DSM will have to complete quickly the Roche restructuring programme and work to restore margins which have slipped from their high point. But the Dutch company knows it can bring its own operational skills and standards to bear and probably complement the technology base with biotechnology. The cross-fertilisation of skills and know-how is where most of the growth potential lies.

DSM faces sector overcapacity driven problems in life science chemicals and will have to work hard to maintain profit levels in the segment this year. The pharmaceutical products business is feeling the impact of delays in the introduction of new products in the pharmaceutical industry. But DSM is pushing back on the technology front and looks as though it will have the capability to perform better in the longer as well as the shorter term in the business.

New technology will apply also across the performance material and industrial chemicals businesses, both of which did particularly well in the fourth quarter and helped lift the full year 2002 results. In performance materials DSM benefited from higher sales volumes from the super strong fibre Dyneema and higher margins from engineering plastics in the fourth quarter. Fourth quarter operating profits in industrial chemicals were much higher due to better prices for fibre intermediates and increased sales in all units.

DSM notes that trading conditions in its major markets are not likely to improve for the time being. The pressure on life science molecules capacity will continue and no real upturn in electronics or telecommunications can be expected in the near future. The company will experience some growth - in materials and in industrial chemicals possibly - but that growth is likely to be balanced by the pressures elsewhere. So far, the company says 2003 has been developing more or less in line with last year which at this stage does not give much cause for optimism.

By: Nigel Davis
+44 20 8652 3214

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