Ladies and gentlemen, thank you for standing by. Welcome to DSM's conference call on the first quarter results of 2020. Throughout today's presentation, all participants will be in listen-only mode. After the presentation, there'll be an opportunity to ask questions. To register for questions, you may dial star one at any time. Now I would like to hand over the conference to Mr. Huizing. Please go ahead, sir.
Thank you, operator. Good morning and welcome to this conference call, which we do today in a typical COVID-19 setting. That means we're all doing this call from our homes. I'm joined on this call by our two Co-CEOs, Geraldine Matchett and Dimitri de Vreeze. Geraldine will give a short introduction, and after that, we will open the lines for questions. 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, which you can find on our website. With that, I hand over to Geraldine.
Thank you, Dave. Good morning, everyone, and welcome to this call on DSM's first quarter results 2020. Before I start, I just want to say that I hope that you're all healthy and well in these very unusual times, wherever you are dialing in from today, and that I hope the lines will be okay and stable. Back in mid-February, on our full year 2019 results call, you may remember that we included in our outlook statement that with regards to any potential impact of the coronavirus, DSM will monitor the situation closely. Well, much has happened since then, impacting all of our lives and impacting the way business can operate. For our part at DSM, we took very early action thanks to our 5,000 also colleagues in China, who made us alert very early to the seriousness of the threat.
This enabled us to focus on the health and safety of our people and partners, and to ensure the continuity of supply of our products and solutions to our customers, many of which are classed as vital by national governments around the world. I have to say that we are extremely proud of how our people have worked through significant challenges to keep our operations running and at the same time, finding ways of supporting the communities around us. With that said, let me turn back to our Q1 results, and start with the financial highlights on page three of the presentation that we loaded this morning with the press release. Despite this unusual context, we reported a solid first quarter with both stable sales and adjusted EBITDA. Furthermore, our adjusted net profit was up 8% and our adjusted net operating free cash flow was up 152%.
Nutrition delivered a good performance with sales up 4% and the adjusted EBITDA up 3%, driven by a strong performance in Animal Nutrition. Included in these numbers, we estimate an overall 1% increase in sales coming from the COVID-19 effects, and I will come back to this in a minute. Materials also had a solid start to the year, but closed the quarter with volumes down 6% compared to prior, and an adjusted EBITDA down 7%. Demand deteriorated rapidly by the end of the quarter owing to COVID-19, and we estimate the negative impact on the sales to be about 7% as customers' operations were severely impacted by government containment measures, especially in Europe and North America.
In this context, it is important to highlight that we continue to benefit from a strong balance sheet, and combined with our quick and decisive actions, as well as our strong and growing nutrition business, we feel well-positioned to navigate mid-term developments. While we are taking all necessary short-term measures, we also remain focused on our long-term strategy to deliver above-market growth, pursuing our innovation programs and growth initiatives. This brings me to our statement on the full-year outlook 2020 on page six. Overall, we are expecting the conditions we saw at the end of Q1 to continue into Q2. We have seen in April continued good underlying business conditions in nutrition, while at the same time the lockdown impacting all economies around the world, significant uncertainty persists in the near term over end-user demand, and thus limits our ability to estimate business activity for materials.
We are taking all necessary actions to sharpen our focus on operational excellence across the company, and we are limiting capital expenditure and operating costs in materials to protect earnings and cash generation without compromising our mid to long-term potential. This leads us to our statement on the full-year 2020 outlook, which states DSM expects nutrition to deliver at least a mid-single-digit increase in adjusted EBITDA for 2020 compared to prior year. Given current limited visibility in materials, it feels prudent not to express an overall earnings outlook at this time. To give you a bit more color on our trading conditions and performance by business, let's go first to nutrition on page eight.
Overall, nutrition delivered a healthy organic sales growth up 2%, driven by higher volumes, predominantly in Animal Nutrition, and supported by an estimated overall slight increase in sales related to COVID-19 of circa 1%. The adjusted EBITDA increased 3%, driven by higher volumes and the contribution from CSK, offset in part by higher logistics costs and a negative foreign exchange effect. The adjusted EBITDA margin remained broadly stable at 20.6% versus 20.8% in the same period last year. Let's move to page nine, to look at the details of Animal Nutrition. Animal Nutrition reported a 12% organic growth, fully driven by volumes, with good business conditions across all species and geographies. China and Southeast Asia saw good growth as the effect of the African swine fever started to recede.
While the rebuilding of the swine population will be slow, the upward potential is significant given the scale of the devastation caused by the disease. Given that this rebuilding is led predominantly by the larger, more professional pork producers, this will increase even further the relevance of our portfolio of high value-added solutions. With regards to COVID-19, the rapid shift from food services to at-home eating led to increased demand for easy-to-prepare proteins such as poultry and eggs. We saw a positive impact during the quarter from the silo loading effect, which we mean by that additional purchases from feed producers who increased stock of nutritional ingredients in anticipation of possible logistics disruptions as a result of the COVID-19 outbreak. We estimate this to account for about 4%-5% of volumes increase in Animal Nutrition during the first quarter. Moving to Human Nutrition.
Let's go to page 10. As expected, human nutrition had a slow start to the year, with the continuation of the softer conditions seen in Q4 in early life nutrition and Food & Beverage. As lockdown measures began to take effect in more markets, strong demand for packaged goods and infant nutrition altered business conditions from mid-March, intensified by household pantry loading. Dietary supplements had a strong start to the year as the good business conditions of Q4 continued into 2020. The increasing demand for immune optimizing products led to further growth over the quarter. These effects continued into April. The overall price mix during the quarter was -6%, owing to the continued lower vitamin C prices versus prior, and expected lower contractual prices in early life nutrition.
Finally, our other nutrition businesses saw overall a slight negative effect from COVID-19, as we are showing the details on page 11. Food Specialties delivered good growth, especially in baking and savory, on the back of increased consumer demand for processed foods. Personal Care had a weak quarter due to the soft demand for sun filters, while aromas was positively impacted by increased end demand for detergents and disinfectants. Moving now to Materials. Let's go to page 12. Materials had a solid start to the year. However, as lockdown measures were enforced around the world, the operations of many customers were impacted and the closure of retail outlets significantly reduced demand. As mentioned earlier, we estimate COVID-19 to have a negative effect on sales of about 7% in the quarter. Engineering Materials saw increasing weakness in the global automotive segment, partly offset by stronger demand in packaging and medical applications.
Resins volumes were slightly down in the quarter, with good coating sales in Europe partly offsetting weaker volumes in Asia, while functional materials remained low as expected, owing to 5G investment delays. Protective Materials, which is the new name for the division that sells Dyneema, saw lower volumes in the quarter as large government-driven personnel protection projects were delayed. The adjusted EBITDA for materials was down 7% compared to prior, fully driven by lower volumes, while margins were slightly up owing to lower raw material prices and lower costs. Regarding developments since quarter end, we have seen in April volumes drop by up to 30%, and we don't expect big improvements in May. Now to close off, let me go through some key financials on page 16. DSM continues to benefit from a strong balance sheet and liquidity.
In the quarter, the adjusted net operating free cash flow increased by 152% to EUR 151 million versus prior, driven by limited cash outs on working capital. The operating working capital as a percentage of sales for Q1 closed ahead of last year at 25.9%, with inventories slightly up being offset by higher payables. Net debt closed at EUR 1.324 billion, up EUR 180 million, mainly resulting from the share buyback. I would like to point out here, however, that we also closed the Glycom acquisition on April 1st, raising our net debt to slightly above EUR 2 billion. We remain committed to our capital allocation policy, and will continue to reinvest our capital to drive organic growth via disciplined CapEx.
We are also committed to pursuing our existing policy of distributing stable, preferably rising dividends, our dividend proposal for approval at our AGM tomorrow remains EUR 2.40 per share, up 4% versus 2019, as communicated in February. At the same time, having bought back EUR 745 million of shares since Q1 last year, we believe it prudent in the current environment to pause the remainder of our EUR 1 billion share buyback program. Finally, as a reminder, DSM has committed undrawn revolving credit facilities of EUR 1.5 billion, not subject to any financial covenant or a MAC clause, we have no bonds maturing in 2020 or in 2021. With this, I'd like to open the floor for questions.
Our first question is from Mr. Andrew Stott from UBS. Go ahead, please.
Good morning. Thank you for the presentation. Good morning, Geraldine, Dimitri, and Dave. First question is on pricing. It's on both segments of nutrition. First question is on the human nutrition side, the -6 in Q1. Just wondering how much of that is the ELN contract resets, if you want to call it that. How do they work? Is that a one-off every few years? Is it an annual adjustment that's bigger this year? Just to understand a bit more about those contracts. The other pricing comment or question was vitamin E. There's no tailwinds in Q1. It's a zero number. How are you thinking about Q2 on vitamin E on pricing? If I can steal a second question, this is on volumes.
I just wondered if you could somehow scale the improvement you're seeing in March and April in Human Nutrition volumes. Thank you.
Thank you, Andrew. Dimitri, do you want to kick off with the pricing?
Yes. On Human Nutrition, specifically on the price component. What we have seen is that the -6% on pricing, you basically can link to vitamin C for about 3% and the ELN for about 2%, and then you have 1% pricing on product mix left. To your follow-up question on ELN, these are contracts we have with our partners. You know that the ELN space works with big key accounts. We have an agreement with these key accounts, long-term supply agreements, where we share the cost benefits we take. We obviously are always in R&D and innovation to see if we can optimize the stream. If we do so, we have agreements in these long-term supply agreements that we share these savings, and that will basically lower the price, but will certainly not lower our margin impact. That's about 2% out of that 6%.
Thanks, Dimitri . Maybe, Andrew, to your questions on vitamins. I mean, you're homing in on vitamin E, let me first start with our usual cautionary statement, which is that movements in spot prices do not equal movements in contract prices. In fact, you can see it quite clearly in Q1. Within Animal Nutrition, we had a net neutral in Q1. As Dimitri just mentioned, vitamin C was minus 2%-3% in our HNH numbers for H1. Looking at the current market trends around vitamins, we do expect to have a bit of a positive effect overall, maybe in the order of EUR 10 million-EUR 15 million. Please remember that at the same time, vitamin C will remain a headwind in Q2 in two ways. I mean, the comps remain tough in Q2. They will fade in Q3, Q4.
Also, we definitely see a longer time for any price movements to get into the contractual prices, particularly in Human Nutrition, as you know, where it's annual contracts. On top of that, we do need to remember that we will be most likely facing some higher costs going forward, both in terms of our source materials and in terms of logistics, and we expect a negative foreign exchange impact.
Maybe the question on Human Nutrition, what we see for April, May, if I'm not mistaken, was also one of the questions?
Yes.
What we've seen is that towards the end of quarter one. We saw this change in terms of household pantry loading as well as the lockdown measures came into effect, predominantly with a positive effect on the demand for packaged goods and infant nutrition. We've seen that being continued in April sales, and May looks good as well. We see a continuation of that. Maybe as a bit of a reminder, you've seen the household pantry loading is the retail selling out to consumers. The retail is buying from our customers, and obviously they de-stock their chains and therefore we will see the impact predominantly in Q2 because they need to restock their chains. That's why you see the full effect in Q2.
Okay. Thank you very much.
Next question is from Mr. Mutlu Gundogan from ABN AMRO. Go ahead, please.
Yes, good morning. Several of my questions have already been answered. The main question that remains is on the share buyback. You're pausing that. Is that for the full year, or is it just for Q2? What would make you resume that buyback? Perhaps also relating to this, giving your capital allocation priorities, M&A is high on the agenda, is higher on the agenda than the share buyback. How do you see that market at the moment? Have valuations come down?
Yeah. Hi, good morning. Let me take those. Firstly, the pausing of the share buyback. We will have to see how the market develops. As you know, our capital allocation policy is unchanged. It's organic growth first, dividend second, third M&A, fourth, giving cash back to investors. It feels prudent to pause that, which means there's EUR 255 million left of the EUR 1 billion. How long will depend a bit on how the world develops going forward. We do it when we can, and when we feel it's prudent to do so, and right now we think it's best to pause. As for M&A, our strategy is predominantly organic, but we are always keeping a look for potential M&A targets. That is something that we will continue to do, bearing in mind that with current market condition, one has to be extra careful.
Thank you.
Next question is from Mr. Matthew Yates of Bank of America. Go ahead, please.
Hey, good morning, everybody. I just had a question on the Animal Nutrition business, and generally around your order visibility. There seems to be growing evidence, particularly in the U.S. market, that some bottlenecks around meat packing or processing and the closure of restaurants is actually leading to reduced demand for meat. Potentially now we're seeing livestock farmers reduce the size of their herds in various categories. I'm just wondering what sort of leading indicators do you track for the Animal Nutrition business, and whether the issues we're seeing in the U.S. market around meat processing are different to what you've been seeing in Europe and LATAM. Thank you.
Yeah. Good morning, Matthew. Maybe let me take this one on animal. Now, indeed, we have seen these disruptions with some of the slaughterhouses closing. That we, by the way, believe to be very short term. It's more of an operational issue. Now, you also refer here to the shift between the sort of food service industry. In the case of the U.S., there's quite a lot of chicken going to the outlets like the Kentucky Fried Chicken type outlets. It's actually quite a U.S. phenomena. Because what we're seeing internationally is that the demand for poultry and for eggs is actually stronger because it is a very easy to cook and prepare protein. Of course, eggs are also an important part of sort of household diets pretty much worldwide. We're obviously keeping an eye on this development in the U.S.
Just to give you a reminder, the U.S. in our Animal Nutrition is about 12%-ish of our sales. I think the impact there will be moderate. These are the kind of things, if you're asking what kind of KPIs we track, we clearly look at the whole chain.
All right. Thank you very much, guys.
Next question is from Mr. Martin Rudiger, Jefferies. Go ahead, please.
Yes. Thanks. Actually, most of my questions have been asked already. Maybe on materials. You said you saw 30% low volumes in April, and you are negative on May. Can you shed some light on by differentiating this minus 30% volumes by the end markets? You certainly have some order book for May. Maybe you can give us a certain kind of sense how you see May evolving compared to the business you saw already in April. Thanks.
Thanks, Martin. Dimitri , do you want to take that?
Yeah. Let me take that one. Yeah, we have an order book for May because we are already in May. Let me contextualize that a little bit. To your point, indeed, towards the end of quarter one, we saw a huge impact, predominantly with customer operations shutdowns. You've seen it in the news, Ford, GM, BMW, all our value chain partners. We have seen that continued in April, with volumes down up to minus 30%. For May, we don't see any different pattern in our order book, so we don't see any big improvement, especially in the European and North America. Although there are some announcements. BMW smaller production sites have started up, but we don't see that in the order book, so there is still low visibility on going forward. I think it would be a bit weird to exactly pinpoint where we will end up.
We see some activity, April and May, we see the same impact. That is a bit on the order book. Maybe a little on the end market. Automotive is an important end market for us, about 6% of DSM sales, 18% for the material cluster. Although with a relatively strong start, and with China coming up in towards the end of quarter one, we were hopeful. North America and Europe were really hit by the lockdowns, and we saw that impact at the end of quarter one. Market decline in automotive, depending on who you ask, are in the range from 20%-40% going down, and we also see that in our order book. Building and construction, another important end market for us, also around 6% of sales for DSM, 18% for the materials cluster.
Large construction companies basically were impacted by lockdowns. We have seen demand dropping also in the building construction area around 20%-30% in April. In line with market dynamics. May and June will depend a little bit on reopening of the countries. This is a segment which could recover more quickly than the value chain of automotive because it's shorter. This is to be seen, but we've seen April 20%, 30% lower. Then we have, obviously, our Dyneema market, personal protection, which is now called DSM Protective Materials. What we've seen in the Protective Materials business is that, and that has indirectly linked to COVID, is that we have seen tenders for personal protection, small tenders for law enforcement officers, which have been delayed because they're busy with some other priorities, and one of the main priority obviously is battling with COVID-19.
This is a delay. It is not a reduction, but it is a delay because of a change of priority. That is a bit of a quick overview of three important end markets. Hope that gives a bit of color.
Thanks a lot.
Next question is from Mr. Thomas Wrigglesworth from Citi. Go ahead, please.
Thanks very much for the presentation, opportunity to ask questions. two, if I may. Following on from the comments on materials. Is there any reason to think that the drop in volumes that we're talking about should have a more or less proportional impact on profitability? Secondly, around the innovation pipeline, Veramaris, could you shed any color as to how that project is coming on stream, utilization rates, and how the COVID impact might affect the kind of, or not, the timelines for the two other key projects, the sweetener and Clean Cow? Thank you.
Thank you very much, Thomas. Back to you, Dimitri, on materials.
Yeah. I think a fair question. Difficult to answer because it's of a mixed bag of activities, but with volume down up to 30%, we do see lower input prices, which we preferably like trying to hold on. Normally we have spread management where we can hold on for a while. That will give us a bit of a positive in Q2. Limited, because we also see that logistic costs are going up. We have an effect. We have cost actions which we have initiated. We already started in quarter one initiating actions on materials to protect earnings, which annualized will be in the order of tens of millions. Obviously the product mix play into game with Dyneema with some delay. It's difficult to put a one-on-one comparison, but give you a bit of color on the components.
I hope you get a bit of a feel.
Thanks, Dimitri. Thank you, by the way, for asking about our big tickets, because we continue to be very active on our innovation projects. Given that these three big tickets are pretty much in ramp-up phase, we haven't seen a big impact from the COVID disruptions on those projects. What we're seeing is, and I'll run through briefly, the three of them. In terms of Veramaris for the aquaculture space, this is very much hitting the milestones in terms of increasing the productivity. As you remember, this is a gradual curve as we get those big fermenters running. We're pretty much on track, so there we will be fine. In terms of Avansya, that is also on the same site, getting its production going, and in terms of course, the relevance of both remains perfectly supported.
There again, we're pretty much on track. For Clean Cow, if you recall, the big milestone is the regulatory clearance with the EU, and we have seen no delay in terms of getting that to progress. That remains the big milestone for 2020. Pretty much in line with what we would've shared with everybody with our full-year results in February.
Great. Thank you both very much.
Next question is from Mr. Watson from ING. Go ahead, please.
Morning, all. Sorry, math is not my strong point, so Geraldine, perhaps I could ask you as the accountant. With the 1% positive COVID impact quoted for the nutrition segment as a whole, I'm just wondering how the animal silo loading effect of 45% translates to one for the overall segment taken together with human. That's the first question.
Okay. What you're saying is the 45% volume on H&H that we're seeing there estimated versus Oh, yeah. Sorry. You mustn't forget in there that we also have personal care. Here, we're looking at total nutrition.
Yeah.
It's a net of a number of things. You've got 4-5% in Animal Nutrition, in our Human Nutrition & Health plus, which is the EUR 2 billion of Human Nutrition & Health.
Yeah
We have in there personal care that took quite a step down. Do you remember in my opening comments, we referred to the sun filters?
Yeah.
Clearly that was negative. We also saw a mixed bag when it comes to hydrocolloids, for example, where our three plants are in China. They were clearly disrupted during the first quarter. We also saw in the Food Specialties, when you put that together, it's a negative net.
Yeah.
Negative effect on, for example, the beer, the brewery, where clearly that's more of a food service space, as opposed to in-home.
Yeah.
That's why you have the mix there.
Okay. Understood.
Remember as well, that the positives in our Human Nutrition have a bit of a time delay. Our customers saw the pantry loading effect sooner than we do.
Now as they refill their supply chain, we see the pull coming through.
Okay.
With clearly a good order book into Q2. I hope that closes that mathematical issue.
Yeah. Thank you very much for explaining, sir. It's very clear. Okay, how have your FMCG orders changed? Because obviously this was an area of weakness last year, which led you to reorganize the sales platform with Fit for Growth and has COVID had an impact on what you've seen from that particular segment of your customer base?
Mm-hmm. Dimitri, do you want to take that?
Yeah. Right. Yeah. The human nutrition space has different segments. Let me try to combine that with the trends, because that's basically what you're asking for. Let me first show and share a bit what we see in terms of trending. What we do see for our human nutrition business is that we see a lot of move from food services to eating at home. Right? That has an impact on packaged foods for human nutrition. It has an impact on Animal Nutrition, like Geraldine explained in terms of the species to be used. For human nutrition, there was an increased demand for packaged food, which will impact our Food & Beverage. We saw very solid growth for vitamins and immunity-boosting ingredients. Right?
Of all the COVID and immunity optimizing products where people do take care more of their health than ever before, we saw further growth over the quarter and we also saw these effects continue to net grow. The third trend we've seen is pantry loading, and exactly like Geraldine said, it's a bit for human nutrition, a bit with delay. We've seen towards the end of quarter one that our customers were selling to the retail and therefore need to restock their value chain in quarter two. We will see having that impact in quarter two, and that has an impact on early life nutrition and Food & Beverage. You see a little bit of trends with our businesses. Hope that a bit of color to your question.
Okay. No, that's really clear. Thank you, Dimitri. Dimitri, while I've got you on the line, you answered an earlier question. You gave some color on materials in April and May. One area you didn't touch on was semiconductors, and the electronics value chain. I was just wondering what you're seeing in terms of, A, what happened in April, and then what your visibility is to May.
Well, very interesting that you asked because that's predominantly the segment where we were a bit worried, also in line with automotive, but we have seen electronics and electric not too bad. I mean, it's not brilliant, but it's not as severe hit by COVID as automotive. We've seen and you've seen that mobile phone producers have launched new models at a lower cost. You've seen that electrical components and electronics in health instruments are really needed. It's also one of the reasons why predominantly all our sites are still up and running because we've seen it's vital for the world. We've seen electrics and electronics holding up pretty okay. There's no growth, I mean, don't get me wrong, but it's not in a decrease as severe as we've seen in the automotive and building construction markets.
Okay. Fantastic. Thank you. Final question from me, thank you for your patience, is when I think we spoke at your Q3 results last year. You've taken another leg down in Animal Nutrition due to African swine fever, and at the time, you had expected that that impact would last for a full 12 months. Obviously, in today's release, there appears to be some move away from that. I'm just wondering if you could provide us with more color, please, in terms of what you're seeing at that in terms of guidance now versus what you thought you were seeing at the end of Q3 last year.
Yeah, absolutely. This is an important effect for our Animal Nutrition business. Indeed, for about five quarters, we had a headwind. If you remember last year, in Q1, Q2, we saw the offsetting effects with other geographies and other needs kicking in. In Q3, Q4, it was too much, and we had the negative effect. What we are seeing now is that, particularly in China, the rebuilding of the swine herd is starting. It's going to be a gradual process. It's not a jump up. If you remember the culling, the estimates were between 40%-50% last year, and it takes 18-24 months for a female breeding animal to be ready to breed.
This is gradual, but in terms of the momentum for us, it is as we were expecting, which is that it has led to a professionalization of the production of pork. We're seeing the professional farms getting started earlier. Because we were very good in terms of our hygiene measures at our production facility for the premixes, we were able to supply the market nicely. We will be seeing basically, what we expect to be a continued and probably accelerating recovery quarter-on-quarter. This will be a positive for us throughout 2020 for sure. We would expect, I indicated earlier, we think that out of the 12% volume growth, we had about 1% year-on-year comparison. One could expect that to be bigger going forward.
Okay. Thank you. That's really clear. Would it be fair to say that the professionalization and the recovery-
Greg, Dave here. I think you're only at five questions, so
Thank you for keeping me honest.
Very great.
Okay. That's okay. Okay. Thank you very much, and good luck for the forthcoming quarters.
Thanks.
Thank you.
Next question is from Mr. Sebastian Bray from Berenberg. Go ahead, please.
Good morning. Thank you for taking my questions. I have two, please. The first is on the exposure to end markets within the Food & Beverage part of Human Nutrition & Health. If I'm not mistaken, this is a touch over 25% of sales. Is most of this end category exposure to packaged food? How much of it is packaged food, and what are the other categories within this segment? My second question, I believe, has already been touched on, but I just wanted to check. I missed the first part of the call. Is the base case for meat production at the moment that poultry enjoys above-trend demand growth, pork is sort of in line with 2%-3% forecast at the start of the year, and beef below? Is that a right assumption? Thank you.
Thanks for your question. You want to start with Food & Beverage?
Yep. Indeed, Food & Beverage we have in our Human Nutrition & Health space. That is predominantly related to packed foods and not to food services. The food services part is partly in our DSM Food Specialties part, where Geraldine was referring to personal care and DSM Food Specialties. The HNH part is predominantly packed goods.
Yeah. Indeed, in terms of the species, we referred to it earlier a little bit, but I can cover that. We are seeing worldwide an increase indeed in poultry and in eggs, easy-to-prepare proteins, with pork holding up well. Clearly the meats that tend to be more eaten in restaurants, beef, for instance, being probably more on the down. Those are the main trends. Now, probably worth reminding everyone on the call that for us, we have a very strong position in poultry. It's about 40%, 45% of our Animal Nutrition has been historically. Swine is about 20%, ruminant 20%, and then the rest is aqua and pet. We have a very strong position in poultry.
There is one caveat that came up in the questions earlier, that is in the U.S., there's currently some disruption on the market due to the slaughterhouses having closed with some of the big players also the big proportion of sort of fast food chicken, like the Kentucky Fried Chicken, that are down at present. For us, North America is about 12%. We see this as most likely to be somewhat of a temporary effect.
Thank you for taking my questions.
Next question is from Mr. Sheldon Deshi from JP Morgan. Go ahead, please.
Yeah. Hi. Thanks. Two questions. First, just thinking long term, there is these talks about China possibly getting stricter on consumption of wild meat in China. Is that something which can have any material impact on DSM over the mid to long-term perspective. Second question, just to clarify, within the nutrition guidance, is it fair to say there is no assumption of major benefit from vitamin pricing portfolio? Thank you.
Okay. Well, maybe first, in terms of a brief comment on my side. To be fair, we haven't got a house view on the changes in China when it comes to the meat markets, and the way that they are managed. When it comes to our business, of course, our products and solutions go to grow, particularly pork and poultry. I don't know whether any changes will be around those types of animals in those live markets. We don't have a house view other than we don't believe it's going to impact consumption, particularly, certainly not in the midterm. When it comes to vitamin prices, I think we covered it earlier. In short, looking at the current trends, and I look at all the vitamins put together, we probably expect a bit of a positive, maybe in the order of EUR 10 million, EUR 15 million.
With a cautionary reminder that vitamin C will remain a headwind in Q2 from a comps point of view, and also that in Human Nutrition, the translation of market pricing into contract pricing is obviously a much slower and more gradual process, and that we also have increased costs to bear in mind, in terms of our sourced ingredients. Also, we expect the logistical costs and also the foreign exchange to be negative, given current exchange rates.
Understood. Thank you.
Next question is from the. From Bernstein. Go ahead.
please. Hi. Good morning. Thanks for taking my questions. Two as well. Firstly, on the Nenter side in China, this is something that you had originally planned to start up towards the summer of this year. Can you just give us an update if there's been any delay due to COVID and how the ramp-up is going on that side? Secondly, on your second-generation bioethanol business, given where the oil price and the ethanol price are, do you see any risk there for any impairment? What's the capital that you have employed in that business, please?
Sure. Dimitri, do you want to kick off with Nenter?
Yeah. Nenter, as you've seen, we have our, in the Hubei province, which was locked down, we had our Nenter facility, which we had basically stopped immediately after having the joint venture just to upgrade it according to DSM standards. Unfortunately, with COVID-19, obviously, nobody was allowed on the site. We obviously continued our work on engineering. You can do that from home with computers, et cetera. What we're trying to do is to try to make up the lost time. It's too early to say how that will look, but, we're confident that we didn't lose too much time on it because we could continue working from home on the engineering part. Obviously, with the Hubei province today with limited restrictions, we still take care of safety and health of our people on the site.
We feel that we could reasonably well make up for the lost time due to the restrictions earlier.
Thanks, Dimitri. On the biofuels, so bioethanol. What we have done there, in the autumn of last year, is that we switched our focus to predominantly the research and development part and the technology testing, more so than the sales. We're not seeing a direct impact of the current prices movements. Having said that, the R&D is all about validating the licensing business model, which was always the original intention. We don't have much in terms of cash outflow on our joint venture on biofuels at present this year. We are watching, of course, the lower oil prices, but also the blending rates. There's legislation around blending that keeps some of the biofuel volumes going. In terms of exposure, we have about EUR 60 million-EUR 70 million, I think, on the balance sheet at present.
Great. That's very helpful. Thank you both.
Okay. That leaves us for one last question if I look at the time. Who has the last questions, operator?
That's Mr. Adam Blups from Jefferies. Go ahead, please.
Good morning. Sorry, Laurence Alexander from Jefferies. Two questions. On protection, how much of that is actually PPE? Secondly, for your overall materials segment, should we expect any significant inventory work down burden in the second quarter?
I'm not sure I heard your second question well. Do you mind repeating?
Sorry. In the second quarter, should we expect in materials a burden from inventory work down or inventory timing FIFO effects?
Okay. Yeah. Dimitri, do you want to take those?
Yeah. If you can take the second, I will take the first.
On the DSM Protective Materials business, about half is personal protection, and the other half has to do with commercial marine sports fabrics. Half is personal protection. That is predominantly personal protection of law enforcement officers. That's really bullet-resistant vests and the like. I don't know if you want to compare that with other markets, but we are in bullet-resistant vests. Personal protection is about half of the composition of the protective material business.
Yeah. On inventory, I think you're referring here to potential inventory revaluation. Of course, we are currently seeing a lower input cost trend. With that, we always along the way, adjust our inventories according to IFRS requirements. Similarly, of course, at the same time, the lower input costs is something that we reflect in our pricing dynamics. It's something that we have shown with the portfolio of our materials business becoming increasingly specialty related, that this is something we've been handling pretty effectively over the last few years. At least at this point, nothing specific to report on that subject.
Thank you. Okay, that brings us now to the end of the Q&A. Dmitri, do you want to make some closing remarks?
Yes. Thank you, Dave. Firstly, I would just like to reiterate what Geraldine said earlier. We are very thankful for the continued effort of our colleagues at DSM, especially in these circumstances, and are proud to serve and continue to serve customers and society with our essential products. We're all together taking necessary actions to address the recent challenges in the markets, and we remain focused on driving growth, costs, and operational excellence throughout the company. We remain well-positioned to manage near-term developments with a growing nutrition business and a strong financial position. We stay focused on our long-term strategy to deliver above-market growth, pushing our innovation programs and supported by the execution of our shelf health actions. As such, we expect nutrition to deliver at least a mid-single-digit increase in adjusted EBITDA. Given the current limited visibility in materials, we suspend the overall earnings outlook.
Having said that, back to you, Dave.
Thank you, Dimitri, and also Geraldine. This concludes today's conference call. If you have any further questions, don't hesitate to reach out to our team. We're all sitting at home waiting for your calls. Hey, thank you.