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UPDATE 2-DSM Q3 oper profit below fcast, lower margins hurt

Published 11/02/2010, 04:43 AM

* Operating profit 185 million euros vs forecast 204 million

* Says margins hit by rising raw materials prices

* Reiterates 2010 outlook for strong year

* DSM shares down 2.3 percent

(Adds details, shares)

By Aaron Gray-Block

AMSTERDAM, Nov 2 (Reuters) - Dutch chemicals group DSM reported third-quarter operating profit at the low end of estimates, ending a run of positive earnings surprises, as margins came under pressure from rising raw materials prices.

DSM, which supplies products to the cyclical electronics and automotive markets, said its margins came under pressure because of a time lag in passing on higher raw materials costs, particularly at its engineering plastics and resins business.

Chief Financial Officer Rolf-Dieter Schwalb said the company wanted to raise its prices, but added it was not always easy to renegotiate existing contracts.

"No customer likes price increases so it is always a tough discussion, but we are pushing it and we are also successful in doing it. How long it will take ... you cannot say because raw materials prices continue to move," Schwalb told reporters.

The world's largest vitamins maker reported third-quarter earnings before interest and tax (EBIT) of 185 million euros ($257.9 million), missing the average forecast of 204 million in a Reuters poll and just above the lowest estimate of 184 million.

In the year-earlier period, DSM had restated EBIT of 144 million euros.

ABN Amro analyst Mark van der Geest said DSM's results were "disappointing" and cited weaker-than-expected figures at its nutrition unit, which reported EBIT of 137 million euros -- in line with estimates but below Van der Geest's forecast.

Earnings at the nutrition unit, which makes vitamins and food ingredients and operates from Switzerland, were hit by the strengthening of the Swiss franc in the third quarter, but DSM expects this effect to subside in the fourth quarter.

DSM shares fell 2.3 percent to 37.62 euros at 0807 GMT to underperform a flat STOXX Europe 600 Chemicals.

TWO-TRACK GROWTH

European chemicals companies have reported strong increases in earnings over recent quarters, boosted by growth in Asia and cost cuts, but economic worries still persist, particularly in light of a moderate recovery in the U.S. and Europe.

DSM said it expects further end-market growth, especially in high-growth economies, but warned medium-term macroeconomic uncertainties remain. DSM reiterated it expects 2010 to be a "strong year".

"We don't see the economy would really worsen significantly (in 2011), but will continue to grow at different speeds in the western world and high-growth economies -- mostly Asia, but also Latin America," Schwalb said.

Sales rose 19 percent to 2.15 billion euros compared with the average forecast of 2.14 billion.

Germany's Bayer got a boost from the recovering auto industry last week and its underlying earnings beat forecasts, but Belgium's Solvay took an impairment because of ongoing construction industry woes.

France's Rhodia, which makes products that end up in car tyres, sportswear, light bulbs and shampoos, will report its quarterly results on Thursday.

($1=.7172 Euro)

(Reporting by Aaron Gray-Block and Bate Felix; Editing by Sara Webb and David Hulmes)

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