Good morning. Welcome to DSM's conference call on the first nine months results of 2020. Throughout today's presentation, our participants will be in listen-only mode. After the presentation, there will be an opportunity to ask questions. To register for questions, you may dial star one at any time. At this moment, I would like to hand the call over to Mr. Huizing. Please go ahead, sir.
Thank you, operator. Good morning, everybody, and welcome to our third quarter conference call for investors. I am joined on this call by our Co-Chief Executive Officers, Geraldine Matchett and Dimitri de Vreeze. Geraldine will give a short introduction, after which we will open the line for questions for about 30 minutes. As always, I need to caution you that today's conference call may contain forward-looking statements. You can find the disclaimers about forward-looking statements published in the press release and on our website. With that, I hand over to Geraldine.
Thank you, Dave. Good morning, everyone. Given the ongoing challenges caused by COVID-19 in our everyday lives, I do hope that this call finds you and your families in good health. As you can imagine, COVID-19 remains a daily topic for us as well at DSM. We continue to prioritize our employees' and our partners' safety. Thanks to our ongoing commitment and dedication, we've actually been able to maintain uninterrupted supply for our customers. Now, before I get started, I have to say that we're very lucky and really looking forward to having your undivided attention for the next two days. We view this morning's call on our nine months results as part one. Part two starts right after this call.
You will be able to access the virtual conference center from 10:00 A.M., and you will find in this venue a lot of background materials on our nutrition growth platforms and related innovations, with lots of videos and infographics and interviews. As for part three, that will be tomorrow with the virtual investor event. Therefore, conscious of your time, we will keep our introduction today a bit shorter than usual, and we will try to keep the Q&A, which should focus really on the year-to-date results, to about 30 minutes, as Dave just said. Strategy and other such topics are probably better covered tomorrow. Finally, with regards to these introduction comments, please note that following the recent announcement of the divestment of Resins & Functional Materials, we now publish our results on a continuing operations basis as from today, unless indicated otherwise.
We've already provided earlier some key restated data, and the full restatement will be published with the integrated annual report 2020 with the full-year results. Let's start with the financial highlights on page three. Year-to-date, we have delivered solid results given the circumstances, with Nutrition performing well, including a slight positive effect from COVID-19, whilst our Materials business faced, of course, more challenging environments. As for Q3 more specifically, our businesses performed in line with our expectations, with good conditions in Nutrition and an improving momentum in Materials, despite the stronger negative foreign exchange effect.
Nutrition delivered a 5% organic sales growth with a 6% increase in EBITDA during the nine months, despite the increasingly negative effects. Q3 saw similar rates in organic growth and EBITDA growth, with continuation of good conditions in Human Nutrition, solid conditions in Animal Nutrition, and a gradual recovery in Personal Care.
Materials saw a 13% decline in volumes in the nine-month period, and a 33% fall in EBITDA. In Q3, volumes were down only 6%, compared to a fall of 25% in Q2, with an improved momentum in September moving into October. Although, given the restocking effects and the recent surge in COVID-19 cases, we believe it is too early to get excited yet. As for the EBITDA, we saw a drop of 31% in Q3 for Materials compared to prior, but this should be compared with the -59% in Q2, reflecting the improving situation. Free cash flow was strong for the nine-month period, up 16%, driven mainly by lower working capital and reduced CapEx. All of this leads me to confirm our unchanged full-year outlook for 2020.
Given the business condition outlined as above for Nutrition, we feel comfortable in our expectation of delivering an at least mid-single-digit increase in adjusted EBITDA. With regards to Materials, while we saw a good recovery in September and into October, the recent surge in COVID-19 has reduced visibility, and therefore, we think it's appropriate to continue to withhold an outlook at this time. Let's look in more details at our Nutrition business, starting on page 10. Overall, Nutrition delivered a good volume-driven organic sales growth for the nine-month period, up 5%. Volumes were initially driven by Animal Nutrition in the first quarter and then by Human Nutrition in the second and third quarters.
Adjusted EBITDA in the first nine months increased 6%, with a 3% negative foreign exchange effect offsetting the positive contribution from the CSK and Glycom acquisitions. The adjusted EBITDA margin was slightly up at 21.3% versus 20.9% last year. The third quarter was actually quite similar overall to H1, with a 4% organic sales growth and a 7% increase in adjusted EBITDA, highlighting the continued good momentum in the business.
Now let's move to page 11 for Animal Nutrition. In the first nine months, Animal Nutrition delivered a good 8% organic growth, driven equally by volume and by price mix. COVID-19 stocking effects impacted volumes in Q1, as you will remember, as feed producers initially accelerated purchases in anticipation of supply disruptions. These stocks were gradually unwound during the rest of the year, resulting in a 1% volume decline in Q3.
By the end of the third quarter, however, this destocking is largely complete, and we have seen signs of improving customer sentiment. In addition, the negative effects of the African swine fever that impacted our results last year continued to unwind in China, and DSM is well positioned to benefit from the resulting professionalization of pork production. Although this was still a minor contributor in Q3, we expect this effect to become more meaningful going into the next year.
The strong pricing, up 7% in Q2, continued into Q3 with the pricing up 5%, still driven in part by higher prices of externally sourced ingredients and foreign exchange related price increases in Brazil. Moving to Human Nutrition. Let's go to page 12. In the first nine months, Human Nutrition and Health delivered a 4% organic growth with volumes up 8% and prices down 4%.
Total sales were up 5%, supported by the recent Glycom acquisition, contributing 2%. Partly offset by negative foreign exchange effects of -1%. The strong performance in the second quarter continued into the third quarter with an 8% organic sales growth driven by 11% increase in volumes. Total sales in the quarter saw a 3% contribution from Glycom, offset by a -6% foreign exchange impact. Food and Beverage performed well with a strong pantry loading effect from the end of Q1 and throughout Q2, followed by continued good demand in Q3. Demand for immune boosting solutions has meanwhile remained elevated since the start of the COVID-19 pandemic, supporting dietary supplements and pharma sales in particular, whilst Early Life Nutrition sales were down on weak market conditions in China.
Finally, our other nutrition businesses delivered a good financial performance during the nine months. You can find all the details on page 15. This despite lower sales in Personal Care, especially the sun filters, which were affected by COVID-19, although we have seen some signs of recovery during Q3 there too. Pricing for the nine months is a -4%, owing mainly to the lower vitamin C prices and lower contractual prices in Early Life Nutrition. Q3 saw a slight improvement with a -3% on price as the negative price effect from vitamin C is now almost faded out, while Early Life Nutrition had the same negative price effect as in previous quarters. Q3 also saw a negative mix effect. Moving to Materials, let's move to page 15.
Following a solid start to the year, Materials saw an abrupt deterioration in business conditions at the end of Q1 and into Q2 as customer operations were disrupted and end user demand declined as a result of COVID-19. We moved quickly to implement cost control measures and followed in September with additional actions as part of a wider set of restructuring initiatives aimed at improving business performance and deliver annualized recurring cost savings of about EUR 10 million-EUR 15 million. This figure now excludes the amount previously attributable to the Resins & Functional Materials activities. With reference to Q3, momentum began to improve from a Q2 exit rate of about -1 5% to a run rate of about - 10% in July and August, and a sharp recovery in volumes in September.
This has continued into October with a good order book for November, driven by restocking effects and a more positive end user demand. However, the resurgence of COVID-19 across the world in recent weeks has again reduced midterm visibility. As we saw in March, trading can deteriorate rapidly with lockdowns re-emerging. In Q3, volumes declined 6%, reflecting the gradual improvement in Engineering Materials as demand from global automotive improved during the quarter.
In addition, Personal Protection saw a recovery in the quarter as orders under the typical large government contracts, which were postponed from the end of Q1 and into Q2, slowly restarted in Q3. EBITDA for the third quarter fell 31%, compared to an EBITDA drop in Q2 of -59%. This reflects the negative operating leverage caused by lower volumes in high margin specialties, which recorded a very strong performance in the same period last year.
With this, I would like to open the floor for some Q&A.
Thank you. Ladies and gentlemen, we are starting the question and answer session now. If you have a question or remark, please press star one now on your telephone. Star one for your questions or remarks. Go ahead, please. Our first question is from Mr. Mutlu Gundogan of ABN AMRO. Go ahead, your line is open.
Yes. Good morning, and thank you for taking my questions. I'll keep it short. I will have two. The first question is on Human, on the price mix. What were the negative mix effects? Secondly, it's on also Human on the Glycom. The six months sales seem to be 22% lower year- and- year. Can you explain why that is and what your short-term outlook for that business is? To add to that, was this known to you when you bought the business back in February? Thanks.
Okay. Yeah, Mutlu. Let me take that question. On H&H, the price mix effect has to do, obviously, with the portfolio. If you look at H&H, we have four key segments, as you were, Early Life Nutrition, pharma medical, dietary supplements, Food and Beverage, and obviously also throughout the region. What we've seen with the good growth in Q3, with volume plus 11%, you will do see mix effects because of the categories, and one category has a different pricing than the other. That's what we meant with the mix effect. I think it's important to know that we also, like Geraldine noted, that the vitamin C impact has faded out. This is purely mix effects that you see on Human Nutrition. Perhaps on Glycom. I think on Glycom, we reported EUR 14 million sales for Q3 with EUR 8 million EBITDA.
That was prior quarter was EUR 15 million sales and EUR 6 million EBITDA. It's nicely in line. You see some fluctuations throughout the quarter. We strongly feel that we are on track with Glycom. Integration has started, and basically will finish around quarter two 2021. What we see is that we get some positive response from Early Life Nutrition customers, although COVID is sometimes slowing down development a little bit, as it is a high added value ingredient, which obviously needs to be backed in to the formulations. We also see some traction outside the ELN space in pet food and in H&H. I think we are on track with Glycom, and it's running according to expectations. I think the link we gave as a guidance is about EUR 9 million EBITDA third quarter going forward. Let's see how 2021 evolves.
All right. Thank you.
Our next question is from Mr. Matthew Yates of Bank of America. Go ahead, please.
Hi. Good morning, everyone. A couple of questions, please. The first is around materials. I guess once the Resin sale is complete, you will have shrunk the business by about a third in revenue terms. Are you also able to reduce the overheads proportionally, or are there any kind of stranded costs that would stay with you given the smaller size of the overall business? The second question is around nutrition and the 150 basis points of year-on-year margin expansion. I was wondering if you could just disaggregate that a little bit for us in terms of how much is coming from accretive acquisitions, the mix changes you've highlighted. Really just to get an idea if you're thinking 22% is a sustainable sort of run rate to be looking forwards. Thank you.
Thanks, Matthew, and welcome. Maybe let me start with the stranded costs, and I'll hand over to Dimitri for the 22% margin. When it comes to the COVID-19, of course, we are busy doing that. We have been, as you know, the company quite used to changing the portfolio and how to manage that properly. In the first instance, there will of course be a lot of SLA support provided that goes with the business, and that gives us plenty of time to then adjust any sort of scale considerations that we may have. You also have to realize that at the exact same time, we're also integrating and onboarding the nutrition acquisition. If you think of all of the global functions, for example, we need to look at the net of how that is looking.
No major concerns and of course the work is ongoing as we speak.
Yeah. Maybe for me on the nutrition margin, as you have seen, normally we track around the 21%. Year- to- date, it's about 21%. Q3, obviously with good Human Nutrition performance, you will see the balancing. You will see Human Nutrition being strong, that which is helping a little bit the EBITDA quality overall. We also need to take into account that we need to look at what the other bits and pieces do. We normally forget food specialties, hydrocolloids, and Personal Care & Aroma. 22 is on the high side of the range. We've always said that it's between 20 and 22. I think the year to date gives a better picture with the normalization also of the animal nutrition space, where we saw a hike in quarter one with a bit of normalization and destocking in Q2 and Q3.
I think the 22 is on the high side, but, hey, we don't give any guidance on the quality of the portfolio. We give guidance on the EBITDA growth year- on- year.
Thank you, Dimitri.
Next question is from Mr. Chetan Udeshi of J.P. Morgan. Go ahead, please.
Yeah. Hi. Thanks. Just coming back to your point about the destocking ending at the end of, or almost ending at the end of third quarter. Are we now looking at fourth quarter runway to be more normalized in terms of volumes in Animal Nutrition? Second question, just quickly on the Animal Nutrition price mix, can you maybe help us understand how much is the underlying price change, if it's without the FX element and the pass-through of ingredients? Thank you.
Hi, Chetan. Let me take those. Indeed, maybe actually let me start with the pricing element. What we saw is the +5% in Q3, and it is made up of the similar three elements as we saw at the end of Q2. To give you a bit of a rough idea, we have got about 2% related to pass-through ingredients, that we saw for the premixes. We have got about 1%, which is sort of related to the Brazilian real in particular, where we sort of get this FX that goes into the price because of the reporting currency. That leaves about 2%, which is linked to our own ingredients. This is something, going forward, it is very difficult to anticipate the pass-through and the FX.
Sort of 1%-2% in terms of our own ingredients is something that we find relatively normal in that sense. When it comes to the destocking, you're absolutely right. We saw that huge stocking effect in Q1, then the unwind in Q2 and Q3, which results in this minus one for Q3. If I talk a bit to the business conditions in Animal Nutrition, what we're seeing is a continued good condition in Western Europe, particularly with a lot of food coming out of the retail outlets and a lot of still strong demand for those easy-to-prepare proteins, which are basically chicken and eggs in Europe, and in Western countries generally. That is strong.
What we are seeing a little bit of weakness potentially coming through, is in the less affluent economies, and particularly in APAC, where with the household incomes being impacted by COVID, we are seeing potentially a bit less consumption coming into these. Of course, we need to watch out because with the second wave in Europe, at least second wave, but the continued issues around the world with COVID, we are also seeing that the eating out of home categories are still a bit on the back foot. Here, you should think about beef and aqua being the categories that are not helped currently. Having said that, I did also mention in my opening comments that the African swine fever dynamics are progressing very nicely. Now, if you remember, this started really impacting our results as of H2 last year.
We are seeing a good progress in China in terms of rebuilding of the swine herd. While for now the positive effect year to date is relatively small, we do think that this is a little bit the turning point, and that should continue to be a nice supporting thing for us, particularly as it becomes more professionalized, which helps us address the market even better. We are, I have to say, helped by the fact that Brazil is actually a strong exporter of beef right now because of the devaluation of the real. That's the flip side of the currency, and that is also helping. A bit of a long answer to say that broadly, we should be, given this backdrop, seeing a more normalized development for Animal Nutrition going forward.
Understood. Thank you.
Thanks.
Following question is from Mr. Andrew Stott of UBS. Go ahead, please.
Hey, good morning. Geraldine, Dimitri, and Dave. Just a question on strategy. I'm hoping I'm not going to misquote you, but I'm reading from Bloomberg. DSM says remaining materials units fit sustainability focus and doesn't apply an immediate material exit. I'm more interested in the former because I always thought the resins business was pretty much along the sustainability lines with waterborne and, of course, Niaga has gone in that transaction. Why engineering plastics and Dyneema, why are they more sustainable for you? Why do they fit better than the business you're selling? Thanks.
Yeah. Thank you, Andrew. You need to be careful quoting from Bloomberg.
I did put the disclaimer. I said assuming it's accurate.
Nevertheless, I think the question is a fair one. Let me first of all say that I think our materials businesses overall are looking for sustainable living and sustainable trends. It's not that resin is more sustainable than other business elements we have. That is basically not the guiding principle. The guiding principle was that we've looked at Resins & Functional Materials, we found that with Covestro, they will be able to grow faster. This market is consolidating. Scale is needed. We were not willing to be part of that game. Therefore, I think you also need to be strategically sound and say, "Listen, we need to find a good home where that business could grow faster." That was the reason, not whether it was less sustainable or more sustainable in itself.
You will see that the remaining business is still a business which is EUR 1.7 billion in size with a very high quality of the portfolio and EBITDA percentage of about 20%, which nicely fits into the company which we're trying to build, nutrition, health, and sustainable living. We'll tell you more about that tomorrow. That's why we've decided for the divestment of DRF, not because it's less or the other businesses are less sustainable. I hope that gives a bit of context.
Yeah. Thanks. Bottom line, they are core assets or not?
Engineering Materials and Dyneema.
Yeah.
Yeah, absolutely. They're part of our key to our strategy to build a nutrition, health, and sustainable living company. Obviously, we'll look at these businesses as we've always done within DSM, but our strategy is a nutrition, health, and sustainable living company. The remaining businesses are very high quality, normalized EBITDA above 20%. In that sense, good quality businesses comparable with the EBITDA percentages you see at Nutrition.
Thanks, Dimitri. Appreciate it.
Next question is from Mr. Thomas Wrigglesworth of Citi. Go ahead, please.
Hi, Geraldine. Hi, Dimitri. Thanks for the opportunity to ask questions. See if I have any. First one, just kind of following on, obviously M&A activity, both acquiring and selling assets has accelerated. Should we read something in that in the ability to execute M&A? Is this a bit like London buses, three have come along quite rapidly at once? Second question is on the Early Life Nutrition volumes. I think you've called those out as soft in China. China's been a bit choppy this year. Is there something structural in that market, or can you identify the temporary factors that are driving slower volumes for us? Thank you.
Yeah. Hi, Thomas, and thanks.
You want to do the buses, Geraldine?
I will do the buses. Having lived in London for 20 years, I can fully relate to that phenomenon. It's actually a really nice way of putting it. A little bit about our acquisitions as well. As you remember, when we announced our strategy, we said that after three years where we deliberately put M&A on hold while we were getting ourselves stronger, we reopened the door to M&A predominantly in Nutrition & Health, but that we were not in a hurry, the strategy is predominantly an organic strategy. When the opportunities do come along, though, we have to seize them. If I look at the dynamics, of course, over the last nine months, we're very pleased to have been able to make those three acquisitions that fit very well into our nutrition strategy.
I would even say that, in an ideal world, would we have necessarily wanted to do Erber in the middle of a COVID-19 crisis? Maybe not, for integration and other reasons. When the bus comes along, you have to take that opportunity. I would say that's a good way of describing it. Dimitri, do you want to take Early Life?
Yeah. Early Life. Indeed, we are tracking lower and seeing lower birth rates. We're tracking birth rates, which is among to how business is doing now, especially in China indeed. China is about 1/3 of the Early Life Nutrition market. We do see that happening, and that creates some pressure on the market. Also, Chinese producers, helped a little bit by our local stimulant, are taking a bit of share. What we all see is that if markets are a little bit under pressure, we do see that new developments where it's been looked at creating value more than creating volume growth. We do see a very solid demand on the ingredients where we play in with ARA, DHA, HMOs now coming in. We do see that value chain popping up.
I think it's too early to say how this structurally will spell out, but the fundamentals of that business are still very strong. I think if you talk about infant nutrition, we talk about the baby food. I think nobody wants to take any risk. Reliability, credibility is absolutely key. In that sense, we are absolutely well-positioned. It's too early to say how COVID and how the lower birth rates are spelling out. We also had a discussion just this morning where people were saying, "Well, Dimitri, I'm expecting a huge increase in quarter one for the Early Life Nutrition business because it's nine months after COVID lockdown." March, April. We need to see. I think I have a preference on the impact, but I think that's more speculation than anything else. We'll give you more insight on that in quarter one.
Overall, I think the fundamentals are still strong.
Thank you. Okay.
Our next question is from Mr. Reg Watson of ING. Go ahead, please.
Morning, all. This question's probably best directed at Geraldine. We've seen a number of companies reporting stronger EBITDA margins because they've been able to avoid costs such as travel. With an organization as large as DSM and with your global reach, are you seeing any margin benefits from the COVID crisis and the way you're now operating, particularly with work from home?
Yeah. Hi, and thanks for the question. Of course, in the mix of all of this, we've been watching our costs as well. When you have this kind of drop-off, particularly in our materials businesses, then you need to take all the actions possible. Travel is one of the cost categories where currently we're lower. Going forward, actually, the big discussion is what will be the new normal? At least that's what we call it internally. Are we going to go back to as much travel as we used to do? Is it going to be somewhere in the middle? Currently, we're thinking somewhere in the middle. To be honest, it's all bundled into all sorts of cost measures that we were taking to make sure that we weather this storm in a good way.
It translates into this good cash performance of 16% up versus last year.
Okay. Your expectation going forward as we come out of the crisis is that you'll be able to hang on to some of this, but not necessarily all of it. Is that my sort of?
Yeah, exactly. Exactly. In the meantime, of course, we've also done a few more programs. We've been trying to keep our organization as effective and as efficient as possible. That will also be bearing fruit going forward. For example, in the materials cluster, as I mentioned in my opening comments, we've continued to adjust the organization, and that should bring some annualized savings. If you put that all in the mix, I think we're in a good place.
Okay, that's great. Thanks.
We have a question from Mr., let me see, Mr. Gunther Zechmann of AllianceBernstein. My colleague is going to open his line. Just one moment, please. Mr. Zechmann, can you say something? Is your line open? Hello? In the meantime, if there are any further questions or remarks, you can still press star one on your telephone. Star one for questions or remarks. Still trying to get hold of Mr. Gunther Zechmann. We've been trying to press star-
Otherwise, operator, if this is the end of the queue, give it a second. If that doesn't work, I think we're done with the Q&A session.
Okay.
I think tomorrow, happily. I would say let's Yeah, this is the end of the queue?
I think so.
Yeah? Okay, that brings us then to the end of the Q&A for today. Maybe Dimitri, you can make some closing remarks before we close this call?
Yes. Thank you, Dave, indeed. Let me try to close. DSM delivered a solid nine-month result in a highly dynamic environment. I think we've seen that every day. We're trading in Q3, developing in line with expectations we have communicated at Q2. Nutrition continues to do well, with good condition in Human Nutrition and solid conditions in Animal Nutrition, together with an improving Personal Care. It confirms our long-term growth drivers. In materials, we've seen improving momentum with a good order book in October, but recognize a limited new visibility caused by the recent resurgence of COVID-19. Let me say that I'm ever more convinced now about the quality of our materials business, especially after the recent announcement on the divestment of our Resins & Functional Materials business. Let me turn to our investor event.
Like Geraldine said, we are excited to welcome you all tomorrow to our live virtual event. Given that this is the first time we've undertaken such a format, with a sense of nervous anticipation. We're all ready, and we hope you will forgive us for any lapses, either technically or personally. Rest assured, we try to minimize them as much as we can. From 2:00 Central European Time, Geraldine and I will present our strategic progress, whilst our nutrition and innovation colleagues will present the key growth platforms and related innovation pipeline. Obviously, we will close with a Q&A session. However, you don't have to wait until then. I really encourage you to visit our virtual conference venue. I've been there already. It will be open for you today at 10:00 sharp, which showcases innovation-driven growth platforms in the nutrition businesses.
You will find a variety of videos, interviews with business leaders, animation, and more. I really think it's worthwhile your time. With that, back to you, Dave.
Thank you, Dimitri. We're done with part one, as Geraldine called it, and that means we conclude our today's conference call. We're looking forward to welcoming you all to our virtual investor event. As Dimitri said, it's open as from 10:00 o'clock. Please go there. If you have any issues, questions, or whatever getting in, or you have other questions, please don't hesitate to reach out to us. Thank you. With that, I hand back to the operator.
Thank you, sir. Ladies and gentlemen, this concludes DSM's conference call on the first nine months results of 2020. Thank you for your attention. You may now disconnect your lines.