Koninklijke DSM NV

AEX:DSM

Earnings Call Transcript

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to DSM's conference call on the announcement of the preliminary results for the first quarter of 2018. [Operator Instructions] Now I'd like to turn the call over to Mr. Dave Huizing. Please go ahead, sir.

[Dave Huizing, Vice President of Investor Relations]

Thank you, operator. Ladies and gentlemen, good morning, and welcome to this conference call on DSM's preliminary results for the first quarter of 2018, which we published earlier this morning. I'm sitting here with Mr. Feike Sijbesma, CEO and Chairman of the DSM Managing Board; Mrs. Geraldine Matchett, Chief Financial Officer and member of the DSM Managing Board. Geraldine will give a short introduction, whereafter Feike and Geraldine will answer your questions.We will keep this call short given that some of you had to step out of Croda's Capital Markets Day for this call and that we're only addressing today some key preliminary indicators of our first quarter results and provide an updated outlook for the year. As a reminder, our full first quarter results will be published, as previously communicated, on the 8th of May. As always, I need to caution you that today's conference call may contain forward-looking statements. In that regard, I would like to direct you to the disclaimers about forward-looking statements as published in the press release. And with that, I will hand over to Geraldine. Geraldine, please go ahead.

[Geraldine Matchett, CFO & Member of the Managing Board]

Thank you, Dave. Good morning, ladies and gentlemen. Thank you for rearranging your schedule in short notice, and welcome to this conference call. The press release we issued this morning, in addition to our usual reporting rhythm, provides a first indication of our preliminary results for Q1. I'd like to point out that we are, of course, not yet able to provide the full picture for Q1 as we're in the middle of our quarterly close. However, at this early stage, it is already apparent that the exceptional supply disruption in the vitamin industry have had a significant positive effect on our results, higher than initially expected, and that our outlook for the full year 2018, as we expressed on February 14, needs to be updated.Having now an indication of our preliminary Q1 results, we felt it necessary to communicate today these indicative results and update you on our expectations for the full year. I need to caution you, however, that these first quarter results are still very high level and preliminary. Therefore, some changes may still occur. The final Q1 results will be published, as scheduled, on May 8.Now let me briefly highlight what we published in our press release and that we -- and then we will open the line for a Q&A session. As you can see from our press release, in order to provide as much clarity as possible in terms of the performance of our underlying business, we have shown separately the estimated effects of the current high vitamin prices resulting from the exceptional supply disruptions in the industry on our Nutrition business. This effect is expected to be temporary and heavily weighted towards the first half of the year.What we referred to in our press release as the underlying business are the normal business activities excluding these extraordinary volumes and mainly price effects that we refer to as the temporary vitamin effects. This split is, of course, not our usual way of reporting and, thus, require some estimates. However, we hope this will help provide transparency in terms of what is expected to the temporary nature in terms of -- what is temporary in nature versus what relates to the strong performance of our underlying business.Let me, therefore, first address the performance of our underlying business. As indicated, we have had a very strong start to the year with an overall organic sales growth of about 11% against very strong sets of comparative figures. Animal Nutrition, Human Nutrition as well as Materials are all indicating strong organic sales growth, resulting from the continued good momentum in their businesses, growing well above markets.Looking at the businesses separately. On Nutrition, underlying business is expected to report an organic growth for Q1 of about 12%, driven roughly by a 7% volume growth and 5% pricing. And our Materials business is expected to report an organic growth for Q1 of about 11%, driven roughly by 7% volume growth and 4% pricing. The total adjusted EBITDA for our underlying businesses is expected to be up about 7%, supported by a double-digit growth at constant currency but offset partly by the significant foreign exchange headwind estimated for the quarter at around EUR 30 million. This very strong performance in our underlying business at constant currencies is in line with the increases we realized in both 2016 and 2017, which were, of course, well ahead of our target set in our Strategy 2018.Looking by business and despite the foreign exchange headwind, the adjusted EBITDA growth for the underlying business in Nutrition is expected to be about 7%, and the adjusted EBITDA growth for Materials is expected to be about 11%. On top of these strong results in our underlying businesses, we had roughly an additional EUR 165 million adjusted EBITDA contribution from higher vitamin prices due to the exceptional supply disruptions in the vitamin E and vitamin A industry. While it is clear that these market conditions are temporary, we do expect that they will continue into the second quarter, although we have somewhat limited visibility as to the full year potential impact on our results.That brings me to the last part of my introduction, the increased outlook for the full year. As indicated in the press release, we are raising our outlook for the full year based on the continued very good momentum in growth in our underlying businesses and the higher additional EBITDA benefit from the temporary vitamin price effect. Our new 2018 outlook now reads: DSM now expects an adjusted EBITDA growth towards 25% and a related higher ROCE growth. This is based on a low double-digit adjusted EBITDA growth in the underlying business at constant currency, a negative foreign exchange effect on adjusted EBITDA of about EUR 80 million and an additional adjusted EBITDA benefit at EUR 250 million to EUR 300 million from an exceptional vitamin pricing environment that is expected to be temporary and heavily weighted towards the first half of the year.And with this, I open the floor to questions. Operator?

[Operator]

[Operator Instructions] Our first question is from Mr. Mutlu Gundogan from ABN AMRO.

[Mutlu Gundogan, Analyst]

A few questions. First, on vitamins. So that EUR 165 million benefit, that calculation, is that driven solely by higher prices? Or does it also include temporary higher volumes? And then secondly, also on vitamins, you still expect a benefit of EUR 95 million to EUR 135 million predominantly in Q2. Can you tell me why you have such a wide range for a quarter that you are already in? And then thirdly, on the underlying organic growth, I see that you're upgrading your guidance. That looks very positive. Can you tell us what is happening with the underlying growth? Why is that higher than what you initially expected a few months ago?

[Geraldine Matchett, CFO & Member of the Managing Board]

Okay. Maybe I'll start. Mutlu, sorry, Geraldine. I'll start with the first 2 maybe. So in terms of the EUR 165 million, it is predominantly price with some element of volume. So it's not entirely price, but a big part is pricing. And when it comes to the Q2 estimates, as you can imagine, the behaviors and market conditions are a bit difficult to foresee. We have limited visibility. It is also, of course, very much externally driven. Therefore, we are trying to come up with the best possible estimate given what we know at this stage. So that is really what we're able to provide at this stage, remembering that, of course, this is the full year outlook number. Now for the underlying business, Feike?

[Feike Sijbesma, Chairman of the Managing Board & CEO]

Yes, the underlying business, and I think that's part of the good news of today, of course, also that the underlying business -- basically, we don't have the exact Q1 numbers now, the split in Animal, Human and all that stuff. But we are growing well in Animal, in Human and in Materials. In all areas, we continue to grow, clearly, above the markets -- growth of the markets we operate in. And as we look back now to the first quarter, basically, all our businesses are growing very well. I think it is not something special that now happened in the first quarter that created that growth. It's maybe more a result of the strategic decisions we took over the years and already the trajectory we departed from in 2015 when we formulated this 2018 strategy. And it is working out very well. Also, in Human Nutrition, I need to say that we have a little bit less the special vitamin effect because that's mainly vitamin E and even more A. But also, in Human, we grow very well. Also, i-Health is growing very well. But I need to say, if you look to the growth of our Materials business, also this quarter growing very, very well. And indeed, based on that but also how we can deal with margins in the underlying business because that will be the effect at the end of the day on our EBITDA growth, we have increased the EBITDA growth to low double digits for the underlying business at constant currencies. And you see here the EBITDA growth we expect for Nutrition is around 7% for the quarter and 11% for Materials. And if you calculate that, we see FX headwind we have. It would even be higher than that, so very strong. It's not something special which now happened in the first quarter, but apparently, we are able to continue at a pretty high growth rate, Mutlu.

[Mutlu Gundogan, Analyst]

No, it looks very good. Maybe just one question just to clarify, Geraldine, on the vitamins. So the volume and the price effect you mentioned in Nutrition, is that corrected for the vitamin impact of both price and volumes?

[Geraldine Matchett, CFO & Member of the Managing Board]

Yes, that is correct. So we did -- and remember in my introductory comment that, of course, this is best possible estimates. As you can imagine, our systems are not configured to bring out these kinds of splits in a very scientific way, but absolutely, we try to correct on both.

[Operator]

Our following question is from Mr. Sebastian Bray of Berenberg.

[Sebastian Christian August Bray, Analyst]

I would have 3, please. The first is, could you please give any indications on what the implications of this vitamin impact is for your cash flow in the year? The second is, what has changed versus your expectations at the time that you gave full year results? Has your contract pricing negotiations for the year proven more flexible to spot prices? Or have the spot price development exceeded your expectations? And finally, on the outlook for 2019, to what extent is this just a one-off that only falls into the period 2018? And do you expect to be able to grow your EBITDA in that year?

[Geraldine Matchett, CFO & Member of the Managing Board]

Okay. The cash flow implications, I would urge that if you could wait a little bit until May 8. We're still running all the numbers. Of course, from a working capital point of view, when you have a big step-up in sales, you also have a commensurate step-up in accounts receivable. So I still need to do all the math and get that footed out. So if you bear with us, we will come back on that by May 8, at least, with a clearer indication. And then as to 2019, you can imagine we will never give guidance in terms of 2019 development. However, what we're saying here is that we estimate, we expect that this current environment is temporary in nature. Now as I said earlier, we do have limited visibility as to the exact duration and exact magnitude as we go forward. But that was our attempt in terms of splitting what is underlying and what is more of temporary nature so as to try and give some guidance on that. But beyond that, of course, we will not comment on 2019 growth. If anything, that's the kind of topic for our Capital Markets Day on June 20. Feike, do you want to take the...

[Feike Sijbesma, Chairman of the Managing Board & CEO]

Yes. What has changed, basically, 2 things have been changed since the full year outlook. One is what Mutlu -- or both Mutlu referred to. One is the growth of our underlying business in this first quarter was even stronger than we expected or have communicated at full year, and therefore, we raised also the EBITDA growth for the underlying business at constant currencies over the year. So underlying, we see very strong start of the year. Indeed, we are in April, and I expect a very strong year. That is one change. The other change is that the -- temporarily, vitamin effect turns out to be bigger, and it's difficult to estimate that because it has to do, of course, with the outages of competition and the start-up of that one, et cetera. So for me, it's very difficult to anticipate, speculate or to give the exact figure at the full year and even right now. And that is the reason why we gave also that range that Mutlu was referring to because it depends on what's happening with competition, and I don't have a crystal ball here. What we tried to do for you is -- and this is a unique press release because I'm now 11 years CEO and 18 years in the management board. I've never given out such a press release. But we did it deliberately because we wanted to flag to you, yes, there is a onetime pricing effect due to outages. And we want to indicate the order of magnitude so that we can detect from our reported EBITDA, that's the only real figure we have, of course, that so-called onetime effect, which we mainly expect in the first half year or expected because, once again, I don't have crystal ball either, and that you then can see what are we doing underlying. And if we then look to the underlying, yes, that is even also very, very strong. So it's 2 effects.

[Operator]

Our following question is from Ms. Laura Lopez Pineda of Baader Bank.

[Laura Lopez Pineda, Analyst]

One for Geraldine and maybe coming back on the cash flow. So I know the details on the implications will be given on May 8, but maybe it will be interesting to know what are you considering. Or is it you again to return part of this better cash flow to investors maybe in a special dividend or a share buyback or in any kind of form? And one for the CEO. So currently, there's several transactions going on in the natural food ingredients space with relatively high multiples. Maybe what is your view on this? And will DSM also consider doing a transaction at those kind of levels?

[Geraldine Matchett, CFO & Member of the Managing Board]

Okay. In terms of cash generation, indeed, first, we need to figure out the number. We're absolutely not at the stage of discussing dividend policy and dividend distribution at this point. So it's really not -- I'm not able to give an answer on that at this stage, so apologies for that.

[Feike Sijbesma, Chairman of the Managing Board & CEO]

Yes. And I will join Geraldine on the transactions, that I'm also not able to give a clear answer, of course, because M&A deals and those kinds of things, yes, they come as they come, and we announce when we announce, and that's it. And it's very difficult and also uncommon to speculate on that or even what kind of multiples will be paid and what kind of targets, et cetera. So I would like to part that when it comes, it comes. Important is that we see for the company's 3 growth trajectories, we are, I think, very well positioned for our underlying business. And already, for 9 quarters in a row and this quarter again, we show underlying growth basically in all the businesses which we have and own above the markets we operate, and that is the good news. And I'm very pleased also with our own people and the way we manage the company, that we don't have to say, yes, this is predominately this or predominately that, but it is across the whole company, Human, Animal, Materials, et cetera. On top of that, we have the innovation things, which we, over time, will update you also on that one. But we have a couple of big projects, especially towards 2020, which would start to be important. And indeed, M&A could be the certain growth lever, but there, I don't want to speculate on any transaction at this moment.

[Operator]

Our next question is from Mr. Martin Roediger of Kepler Cheuvreux.

[Martin Roediger, Equity Research Analyst]

Three questions from my side. First, given the different contract duration between Animal and Human, is it fair to say that nearly all or a very large part of this EUR 165 million EBITDA impact from vitamins occurred in Animal Nutrition and just a small fraction from that extraordinary effect is in the Human Nutrition? The second question is on your, let's say, expectations for the EBITDA effect of EUR 250 million to EUR 300 million effect in 2018, this is extraordinary. I understand it's difficult for you to quantify that effect. But can you elucidate the parameters for the low end and as well as for the high end of that range? Does that depend on the timing when DSM expects it could supply? Does it depend on the downward momentum of spot market prices? Or does it depend on any dynamics in purchasing pattern by your customers? And the third question is on the other activities, Materials in Innovation Center. Can you set some more background information on these items? I.e., for example, I saw that margins, for example, in Materials were sequentially lower quarter-on-quarter, and also, EBITDA in Innovation Center was negative. Any color on that as we wait for the full reporting on 8th of May?

[Feike Sijbesma, Chairman of the Managing Board & CEO]

All right.

[Geraldine Matchett, CFO & Member of the Managing Board]

All right. Maybe let me kick off with your first question on contract duration. Your understanding is right, that given the rhythm of contracting, this effect, this temporary vitamin effect is very much predominantly an Animal Nutrition effect. So that is, indeed, correct. And also, it is probably worth highlighting here that the effect is a vitamin E and vitamin A effect and that, actually, the predominant part is vitamin A. So that is in terms of a little bit what's inside this EUR 165 million, so predominantly Animal Nutrition and predominantly, actually, vitamin A, although E is also in there. So that's, I think, addressing your first question. Now on the -- what will influence the range, do you want to take...

[Feike Sijbesma, Chairman of the Managing Board & CEO]

Yes. Indeed, the EUR 165 million in the first quarter is done -- the first quarter is over, and then we estimate the second quarter. And there are a couple of things which plays a role here. Maybe the most important thing which plays a role here is the start-up of factories of competition. And once again, I'd just repeat what competition is saying, that they start up in the second quarter. And why should I speculate on something else that they say? That will be real speculation. So I copy that, and I anticipate on that, and therefore, we say the special effect is predominantly in the first half year. If things change, things change, but this is my best insight at this moment. There are 2 other things. You can imagine that the market is a little bit in shortest at this moment. And then you see all kind of movements, movements on spot price, contractual prices that we have always -- and we always had values the spot prices that you read in [indiscernible] orders stuff and our invoicing prices. But I will say today, that remark I make already for years, I make even stronger today because there are all kind of movements in the market and also movements in ordering. You can imagine that some people are maybe nervous and order even more than they normally would order over a longer term. Maybe some people speculate on competition starting up and order shorter than they would do before. So at this moment, we see, in such an extraordinary situation, all kind of movements, and that gives a little bit this range of EUR 250 million to EUR 300 million, and that has to do with start of competition as we estimate spot, invoicing and timing of ordering, and that gives a little bit the low end and the high end of the range. And then your last question on Materials, Materials did 17.2% EBITDA margin, so let's say 17% in Q4. And in Q1 now, we're both also 17%. So it's not a decline in EBITDA margin, and on top of that, we see the FX impact. So I think our Materials business, I would not say did do worse than last year. I would say we had a very good quarter, both on EBITDA and EBITDA margin and on organic growth. So compliments to our Materials business. Innovation, indeed, innovation showed a breakeven, 0, minus 1. I think it is minus 1. But I will be careful a little bit here because here, there's a lot of R&D, and concurrently, we spend ourselves partly externally, so I would more take that over the year. And as we said, we will be, clearly, in positive and not around 0 for the year. And I don't give an exact figure, but I don't expect us to end up on negative or 0, so a little bit more positive over the year on innovation.

[Dave Huizing, Vice President of Investor Relations]

Now we're running out of time, so we have to move towards the closing. So will you be able to make some closing remarks?

[Geraldine Matchett, CFO & Member of the Managing Board]

Yes, thank you, Dave. Firstly, thank you again for this, for your ability to reschedule in order to participate on this call. In summary, we're very pleased with the strong start of the year, particularly of our underlying business, and that while there is this temporary effect, we will, of course, not become complacent. We're fully focused on our operational performance, our financial performance, on our growth initiatives, on all of the things that we have put in motion for the strategy and that are clearly paying off at the moment.On the 8th of May, we will publish our first quarter report, at which time, we will have a more complete picture for you. And of course, on the 28th of June, we will have our Capital Markets Day in London, where we will be talking more about the updates to our strategy.And with that, I thank you very much and wish you a good day.

[Dave Huizing, Vice President of Investor Relations]

Thank you, Geraldine. Thank you, Feike. This concludes our conference call for today. Thank you very much for your attention and your questions. If you have any further questions, don't hesitate to reach out to our Investor Relations team. And with that, I hand over the call back to the operator.

[Operator]

Thank you very much, sir. Ladies and gentlemen, this concludes this conference. On behalf of DSM, thank you for attending. You can disconnect your line now. Have a nice day.