Ladies and gentlemen, thank you for standing by, and welcome to DSM's conference call on the first quarter results of 2019. Throughout today's presentation, all 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. Now, I would like to hand over the call to Mr. Huizing. Please go ahead, sir.
Thank you, operator. Ladies and gentlemen, good morning and welcome to this conference call on DSM's first quarter 2019 results, which we published earlier this morning. I'm sitting here with Mrs. Geraldine Matchett, Chief Financial Officer and member of the DSM Managing Board. Geraldine will give a short introduction, after which she will answer any questions you may have. We appreciate that this is a very busy morning for you with so many people reporting, so we will try to keep this call to 45 minutes. 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. With that out of the way, I will hand over to Geraldine.
Thank you, Dave. Good morning, ladies and gentlemen. It's a pleasure to welcome you on this call on DSM's first quarter 2019 results. As you are used to from us by now, I will provide a few comments on the key slides of our investor presentation that we published this morning together with the press release, then we will open the line for the Q&A section. Before starting, I have to point out that our Q1 2019 results are reported against a set of prior figures that include a significant additional benefit from exceptional supply disruption in some of the key vitamins that we clearly communicated all along last year as the temporary vitamin effect.
In order to continue to provide as much transparency as possible, we continue to show this separately, calculating growth against 2018 total results, including this special event, as well as the comparison excluding this event. Of course, from a perspective of monitoring the progress of our business, the comparison to last year's underlying business is the only meaningful one. For this reason, in the remainder of my introduction, I will compare Q1 2019 versus the underlying business as estimated and reported in 2018. Now, one more comment on comparisons. Please note that we adopted the new IFRS 16 standard on lease accounting as from January 2019, whilst the 2018 figures are unchanged. You can find the full information about this on page 18 of our press release. To make it easier for you, we also provide here our Q1 2019 numbers, both excluding and including IFRS 16.
Having clarified all this, let's start with the financial highlights for the quarter on page two. We are pleased to report a good start to the year with good momentum in nutrition as well as a resilient performance from materials. Group sales were up 3% in total and 1% organically. Overall, Adjusted EBITDA, excluding a EUR 12 million positive effect from the adoption of IFRS 16, increased 10%, whilst including the IFRS 16 increases 14%. We are pleased with this performance, especially given the challenging comparable period, where underlying sales had risen organically double digits in both nutrition and materials. In this first quarter, for the first time, we report our new matrix on cash generation, the Adjusted Net Operating Free Cash Flow, which amounted to EUR 60 million in Q1. Given the significant impact of the temporary vitamin effect last year, it is difficult to provide a meaningful comparison in this quarter.
Towards the end of the year, we will be able to substantiate our progress on a like-for-like basis. Finally, the difference in total net profit versus prior is, of course, also reflecting the EUR 165 million benefit in EBITDA in Q1 2018 that we got from the temporary vitamin effect. Last on this page, with regards to our outlook for the year 2019, we have increased our expected growth in Adjusted EBITDA from mid to high single-digit growth to high single-digit growth. I will come back on that after my comments on the business developments. Let's go to page six for nutrition. Overall, nutrition delivered 3% organic growth, driven by a strong top-line development in human nutrition and health, as well as in personal care and food specialties.
This is a very good performance when considering the tough comparable period, which saw a 12% organic growth in the underlying business in Q1 2018. In addition to the organic growth in the sales, foreign exchange and consolidation of Andre Pectin contributed a further 3%, leading to a total 6% sales growth. Adjusted EBITDA in nutrition increased 14%, including a EUR 4 million contribution from Andre Pectin and a EUR 7 million from the adoption of IFRS 16. Excluding these two effects, the Adjusted EBITDA growth was 10%, reflecting the continued good momentum. The Adjusted EBITDA margin increased 140 basis points to 20.8%. Or 100 basis points to 20.4% when excluding IFRS 16. This increase in margin was supported by the solid organic growth, some cost savings in the quarter, positive foreign exchange, as well as a positive business mix. Looking more specifically at animal nutrition, let's move to page seven.
As you will remember, the Q1 performance last year for animal nutrition, even when excluding a temporary vitamin effect, set extremely challenging comparable figures for the period, with an underlying organic growth of 18%. As a result, we are pleased to report that we have been able to maintain stable volumes with a price mix only slightly down. Overall, business conditions remain good across all regions, except for China, which was affected by the African swine fever, although this was in part mitigated by higher poultry production in the region, as well as increased pork production in other regions. These offsetting effects demonstrate the strength of DSM's integrated and diversified business model across regions and species, combined with our portfolio of market-leading nutritional solutions. Moving to page eight on human nutrition.
Human nutrition and health also faced a strong comparable period, with 8% organic growth in the underlying business in Q1 2018. Yet, even against this high comp, the business delivered an excellent performance with a further 5% organic growth, driven mainly by volumes, while currencies added another 6%, mainly related to the US dollar, bringing total sales growth in Q1 to a double-digit 11%. Good growth was seen across all regions and market segments, with eye health, pharma, and early life nutrition performing especially well, while food and beverage showed strong premix sales to regional and smaller customers. DSM's other nutritional activities performed well, with the consolidation of Andre Pectin contributing EUR 12 million in sales and EUR 4 million in EBITDA for the quarter. Please note that although the transaction was closed in March, we could consolidate the business from the start of the quarter.
For our materials business, let's move to page 10. As with nutrition, materials is also reporting against a challenging comparable period, one in which it delivered an organic sales growth of 11% in Q1 2018, driven by both volume and price. In addition, whilst market conditions in some of our segments were robust, conditions in some of the other end markets remain challenging, especially in Asia. Automotive, building and construction, and electrical and electronics experienced continued softness in Q1. Given this context, volumes were down 6%, partly offset by a positive price mix effect and a positive foreign exchange, leading to overall sales being down 3%. Despite the top-line development reflecting market conditions, our materials businesses were able to maintain the adjusted EBITDA stable through active margin management, some cost savings, currencies, and positive mix.
This resulted in a 60 basis points margin expansion compared to Q1 2018, or a 50 basis points expansion, excluding a small EUR 1 million IFRS 16 impact in the quarter. Moving to page 12 on the Innovation Center. The Innovation Center also had a good start to the year with a solid top and bottom line growth. Bio-based products and services contributing strongly to the results, partly thanks to new and recurring license income for yeast technologies used in the production of bio-based fuels. The adjusted EBITDA increased from around breakeven in Q1 2018 to EUR 6 million in Q1 2019. All in all, we made very good progress in our Innovation Center, as well as with our large innovation projects.
Allow me to point you to the news on our sustainability performance that you will find on page 11 and 12, sorry, 12 and 13 in our press release and on page 15 of this investor presentation. Let's turn to page 13 for a couple of quick comments on cash flow and working capital. Cash flow from operating activities amounted to EUR 201 million in Q1 2019, unsurprisingly down from the 2018 Q1 cash flow of EUR 310 million, which included a EUR 165 million EBITDA benefit from the temporary vitamin effect. As for the working capital, the increase is linked to higher receivables due to comparatively higher business activity at the end of the quarter, combined with lower payables. In addition, currency movements and the consolidation of Andre Pectin had a negative effect.
Importantly, this higher working capital was, when currency effects are excluded, not caused by higher inventory levels despite the underlying business growth. Therefore, the increase in OWC can be seen as more of a timing effect than a structural development. Having said that, let's make it clear I am not satisfied with the working capital developments in the quarter. Finally, net debt closed at EUR 114 million, up from EUR 113 million at the end of 2018, reflecting the IFRS 16 lease capitalization of about EUR 200 million, as well as the acquisition of Andre Pectin. Now to finish, let's return to slide 16 for some final comments on our outlook.
As mentioned at the start of the call, and as you have seen in our press release, we have raised our outlook for the year 2019 to DSM now expects to deliver a full year 2019 high single-digit increase in adjusted EBITDA compared to prior underlying adjusted EBITDA. Meaning excluding the temporary vitamin effect of EUR 290 million recorded in 2018. This compares with an initial outlook at the start of the year of a mid to high single-digit adjusted EBITDA growth. This outlook reflects our confidence in the way the business is performing. We continue to see good business conditions in both animal and human nutrition across species, segments, and regions. In Materials, while we are mindful of the soft business condition in some of the end user markets, we expect to be able to deliver some growth in adjusted EBITDA over the course of 2019.
Finally, for the sake of clarity, our guidance excludes the positive impact of IFRS 16, which we estimate at around EUR 45 million for the full year. With this, I will open the floor to questions. Operator.
Yes. Thank you. Ladies and gentlemen, we will start the question and answer session now. If you have a question, please press star one on your telephone. The first question is from Mr. Mutlu Gündoğan, ABN. Your line is open. Please go ahead, sir.
Yes, good morning, everyone. Thank you for the presentation, Geraldine. Two questions. On Materials, the 6% volume decline. Can you tell us how the progress was throughout the quarter and how that has developed into Q2?
Good morning. Sorry, did you say one question or two questions?
No, two questions. My second question is on the outlook. You guide for high single-digit EBITDA growth this year, while you did 10% in Q1 despite the difficult comps. I mean, if I want to play devil's advocate, that would imply that you expect business trends to worsen in the rest of the year. Is that the correct way to look at it, or are you just being conservative?
Okay. Morning, Mutlu. Maybe let me start with Materials and the developments within the quarter. As mentioned in my introductory comments, we have seen quarter one actually remaining pretty soft throughout the quarter. There's not much uptick actually. If we look at the developments, we may have seen actually still a bit of destocking going on, particularly in automotive. Basically a soft Q1. So far in Q2, we're seeing about the same sort of developments as we did in Q1. Not yet much of an uptick. I think it's important to mention here that an outlook does not require a major step up in the second half of the year in Materials, but rather a continued resilience of our businesses in these conditions. It's also probably good that I highlight that we do have some end markets which are robust.
We do have a positive mix going on. Amongst others, Dyneema is performing very well. As you know, our fiber optic cable products, the connectors, et cetera. It is a mixed picture. That probably leads into your second question about the outlook, which is that we are confident based on the good start of the year that we can move from mid to high to a high single-digit EBITDA growth. That is reflecting, amongst others, the mixed picture between Materials and Nutrition.
All right. Thank you.
The next question is from Mr. Thomas Wriglesworth, Citi. Your line is open. Please go ahead, sir.
Hi, Geraldine. Thanks for your presentation. Two questions. Firstly, just following on from your comments on the outlook. What is it that's changed that's made you feel that this high single-digit rate of performance is now more sustainable through the course of the year? Is there anything you can identify, certainly versus what you were guiding at February? Secondly, on the African swine fever development, maybe two parts. Firstly, is the top-line impact reflective of the profit impact that you show? Secondly, as you see lower swine production in China, should we actually see a positive effect because actually you'll see a better mix into poultry, which I think is higher value for you? Secondly, non-Chinese pork production should increase again, which might have a positive mix effect.
If you could help on those two components on African swine fever, that would be very good. Thank you.
Yeah, sure. Good morning, Thomas. No problem. Firstly, what has changed? Well, as always, when you start the year, you have 12 months to go. After Q1, you have nine months to go. If we look back to our quarter one, we are very happy with the start of the year. Materials top line is indeed a bit down, but the resilience of the earnings is just a testament to the changed portfolio that we have. While the visibility actually remains a bit limited, we will all know more by the end of Q2, we do feel that part of the hesitation that we had at the start of the year is being addressed bit by bit as we go through the year. It is very much reflecting the strong Q1. If I come back to the African swine fever.
You actually answered the question for me, which is very nice, which is that it is, of course, a development that is important in the animal protein space. As DSM, we have a very strong business model. We are seeing a switch to poultry. Just to give you a few numbers, our animal nutrition sales, 45% is poultry, with swine is 20%. If you actually look at the sales of swine in China, we are talking here about 2%-3% of sales for DSM overall. That is a bit of perspective. What we have started to see, and we will continue to see, is no doubt a switch towards poultry, which is indeed traditionally our strong area. Other geographies are clearly producing pork for China, so we are seeing an increase in imports, both from Europe and North America.
Actually, probably most geographies will be contributing to that because China is a big market for pork. That enables us to leverage our business strength. Coming back to the outlook, although we do not want to diminish the importance of the African swine fever, we do believe that we are able to mitigate, if not partly benefit from this. I will add in two more long-term elements just to give you an idea of scale. The culling in China is in the order from some estimates, 120 million pigs. If you think about that from a bigger picture, it is likely to lead to a rationalization of the pork production in China, maybe having less of the backyard animals and more professionalized meat production.
That has a benefit for us because, of course, the more the production is professionalized, the more they use feed ingredients to keep the animals healthy and growing well, and that will effectively increase the addressable market over time. While it's a bit of short-term disruption, we see that probably as over time leading to a positive development in pork production in China.
Very clear. Thank you very much, Geraldine.
The next question is from Mr. Gunther Zechmann of Bernstein. Your line is open. Please go ahead, sir.
Hi. Good morning. Thanks for taking my questions. First one was a technical one. The win of that you mentioned on lower cost in nutrition. Can you just highlight what's that regarding and quantify that as well? The second on your ROCE outlook. ROCE quarter was flat if you exclude IFRS 16. Can you just confirm that you stick to the previous ROCE target of an increase around one percentage points annually? If there's time, I'd like to sneak in a third question as well.
Let me start with your first two questions. We are always vigilant on our cost base, that is what we just do as a matter of course. Here, there's nothing that I can single out as a particular granular information to provide. Clearly, we're always managing our costs, and that is what we're referring to here. Nothing more specific to be provided. As for the ROCE, indeed, if you compare underlying to underlying and excluding IFRS 16, we're currently about flat with 13.2 versus 13.3 last year. It is impacted by the fact that we have a somewhat higher balance sheet this quarter. I referred to that in my opening comments. If you actually look at the development of working capital, it's a combination of things. IFRS 16 actually adds nearly EUR 200 million to the balance sheet. We also have foreign exchange effect.
We have Andre Pectin being consolidated, some timing on AP and AR on the quarter. That taken into account, it's why we haven't seen a progression, but we're still confident that we will get a ROCE improvement year-over-year by the time we reach December.
Great. Thanks. That was pretty efficient. If I can just go to one, the follow-up or the third question, I should say. One of your big competitors in the materials business actually reported last week, had volumes up, quite a big knock on their margin. In your materials business, it's the exact opposite. Are you consciously walking away from less profitable business? Or are you just decently positioned? Could you just highlight what's driving margin resilience, but volume reduction that's different from your competitors?
There are a lot of competitors out there, I can't really comment as a comparison. What I can say is that, as you know, over time, we have been moving our portfolio towards increasingly more specialty applications which does provide an ability to do very good margin management along the way. We mustn't forget that the comps last year were very high as well from a top-line point of view, where we had very good volume development. Therefore, what we're seeing is on top line, a little more of a negative development on the quarter. Through good margin management, through some cost actions, through foreign exchange and positive mix, our earnings have remained stable, which shows the quality of the portfolio as we go through.
Thanks, Geraldine.
The next question is from Mr. Neil Tyler, Redburn. Your line is open. Please go ahead, sir.
Good morning. Thank you. Morning, Geraldine. Two from me, please. The strong growth in the other activities within nutrition, sorry, 12% organic. There is a few different and varying activities within that. Can you call out anything that was exceptionally strong in there? Then, in your introductory comments, you mentioned very good progress in the large innovation projects. I wonder if you wanted to elaborate at all on that progress and when we might begin to see some contribution from those projects. Thank you.
Yeah. Good morning, Neil. In the other nutrition, there are indeed a number of activities in there. The ones that perform very well include personal care. They had a very good quarter, both on UV filters, skincare, good developments in that space. We also see food specialties having had a good quarter in both savory and in dairy. They are a good development versus Q1 last year. Thirdly, depending if you are looking organic or not, remember that Andre Pectin comes in there. This is our hydrocolloids business, and we consolidated that this quarter. If you put all of that is where the other nutrition uptick is coming from. Yes, our innovation projects are going well. I remember on our year-end call, we had a lot of discussions around the innovation project, so I will keep it a little shorter on this call.
Basically, the news is positive pretty much on all of them. Veramaris, we will be opening the plant this summer. The market interest is very strong, so this is very well-positioned to start delivering on the potential revenues of EUR 150 million-EUR 200 million coming from that plant. All green lights there. The joint venture on stevia, Avansya, is also progressing really on track. The joint venture is up and running. We're very much focusing on getting the plant ready to increase volumes. We already had some pilot material in the market. We want to increase that and on market development as well. No red flags to mention there. On Project Clean Cow, in line with what we said a couple of months ago, we are busy with the registration filing, both in New Zealand and in Europe, and so far so good.
Progress. There's not much that I can add to what we've disclosed prior in terms of when does this start contributing to the reported figures.
Okay. Thank you. That's helpful. Thanks.
The next question is from Mr. Martin Ruediger, Kepler. Your line is open. Please go ahead, sir.
Thanks. Good morning, Geraldine. Okay. Most of my questions have been answered, only two minor ones. On animal nutrition, the price mix was down by 2% in Q1. Any explanation for that? I can imagine this is actually related to some additional weakness in vitamin E. Excluding the EUR 165 million EBITDA effect from one-time gains in vitamins. The second question, to continue with innovations. You talk about the recurring license income for yeast technology. Am I right that this is the eBOOST™ yeast and the license income comes from Gevo,Inc. Is that correct? Thanks.
Okay. Good morning, Martin. Yes, on animal nutrition, we have a slightly negative price mix effect. To be honest, as you know, we have a lot of moving parts behind that, we can't really pinpoint a particular ingredient which is leading to that. Remembering that it was quite a turbulent picture last year. There's no particular ingredient to highlight here driving this. Overall, the pricing environment is relatively stable, we're okay there. Now on innovation, the license that we are referring to, we don't provide the granular detail, but it's actually linked to our yeast and enzyme platform that's used in biofuels production. We don't disclose exactly with whom, et cetera. It's nice to see that we are in a position to monetize the developments that we've been doing in this sector for quite a while.
Okay, thanks.
From Mr. Laurence Alexander, Jefferies. Your line is open.
Good morning. Two quick ones. Could you give a little bit more detail on what you're seeing in construction markets by region? Secondly, how you're thinking about the potential net impact for your business from the interest in alternative meats or alternative proteins, plant-based proteins, how that affects your business mix and the opportunity for pea to sell into those products.
Okay. Good morning, Laurence. In terms of building and construction, just to remind everyone, the size, it's about a 6% of group sales. What we're seeing in terms of business development is that it continued to be pretty soft. Here, Europe remains a geography that's important for us. Please remember also we wrap in there machines and ships, et cetera, so it's not just buildings per se. It's very much in line with the macro. We just need to see whether there's a little bit of an uptick at some point. For now, we're seeing pretty soft primarily in Europe. Plant-based protein, this is one of our innovation areas that we've been working on. There's some innovation both in-house relating to canola, protein, and such things.
Now clearly, we see this as an area that over time will gain traction and that we are going to keep growing. If you remember in our capital markets day, this was a space where we want to gain scale over time. Nothing specific to report, I have to say, on this quarter other than we continue with our innovation program there.
Does that answer your question?
Yes. Thank you.
No problem. The next question is from Ms. Laura Lopez, ABN AMRO. Your line is open. Please go ahead.
Good morning. I have two more questions. On Andre Pectin, you mentioned that it was fully consolidated on the first quarter, and you reported EUR 12 million sales. When you reported that you were going to buy or increase your shareholding on this company, you reported that the company had around EUR 65 million of sales. EUR 12 million is a little low. Is this maybe some cyclicality on this business that the first quarter is always a little weaker? Was there a weakness in the market? I know maybe they are highly exposed to the Asian markets, so maybe they're a little bit, if you perform weaker than expected, or what was the reason for that? Then just a second one, more like housekeeping. How is the phasing of the share buyback going? Do you still proceed to finish this mid-next year?
Good morning, Laura. Thanks for your question. Indeed, Andre Pectin had a bit of a softer first quarter, not materially so, but I think the easiest is for me to give you a bit of a guidance and you can sort of assume about EUR 15 million top line per quarter, with an EBITDA of about EUR 5 million. I think if we look at that as a starting assumption going forward, there is a bit of seasonality, but no big trend to highlight other than that. As for the share buyback, it was initiated on the 1st of April for the EUR 1 billion. At this stage, actually in April, we've been buying back more in relation to the stock dividends for which we need to buy some shares. We are still expecting that the timing will take us into next year, probably Q2.
Broadly EUR 600 million this year, probably EUR 400 million next year.
Thank you. That's perfect.
The next question is from Mr. David Simons, J.P. Morgan. Your line is open. Please go ahead, sir.
It's actually Deepan Ravesia. I just had a question on the leverage on the nutrition business where 3% organic growth resulting in 10% underlying EBITDA growth, especially at a time when the price mix was also slightly lower year-on-year in animal nutrition. Can you maybe just shed some light on what are these underlying positives which is resulting in this somewhat secular leverage in the nutrition business on EBITDA from top line?
As you know, we run a rather large and complex nutrition business. There are a lot of different moving parts in there. I think that one of the important elements is actually mix. As you saw, we got a very good growth in human nutrition, with all components of human nutrition contributing well, and personal care as well, which always tends to have a positive mix effect. We had in the quarter a bit of a positive on foreign exchange as well, which was helpful. The main thing is we are of course very diligent and systematic about managing our costs. Yeah. With that, we're able to be confident that we can continue to deliver an EBITDA growth in high single digits area, which is what our midterm ambition is for nutrition.
Thank you.
The next question is from Mr. Andrew Stott, UBS. Your line is open. Please go ahead, sir.
Morning, Geraldine. Couple of questions, please. Firstly, on M&A, I go back to the Q4 comments. You said that the share buyback was not an indication of reduced acquisition ambition, and you've just given an answer to the previous question that the buyback is going to be fairly measured. Is there anything you can say generically on the availability of assets right now and multiples out there and sort of where you're at in your own heads on acquisition opportunities? That's the first question. Then the second question, a much smaller thing, is Dyneema. You're expanding capacity in Dyneema in the second half. Given the benefit to materials from what looks like a strong Dyneema performance, is there some cost we should think about that are incurred in that ramp-up to the second half? So should we just dial down the margin for the second half in materials?
Thank you.
Okay. Good morning, Andrew. Firstly, on M&A, I think we are extremely consistent here. We always said we were going to be very disciplined in the way that we look at opportunities, putting value creation as the foremost ambition and not speed. We are continuing to do our work. We're very mindful of the fact that valuations are an important element of value creation of any M&A. We continue, and there's not really that much that I can add, and of course, we will inform the market as soon as there is something to be added on this subject. We do indeed retain enough financial flexibility while doing the share buyback, which is how we wanted to position our capital structure, really on the back of a lot of confidence in the way that our businesses are developing.
When it comes to Dyneema, we indeed are putting some expansion capacity in there. There is no particular cost related to that for which you need to make any specific adjustment.
Okay. Thank you.
There are no further questions at this moment. Please continue.
Okay.
If there are no questions anymore, then also letting it our promise of keeping it short and concise. Geraldine, do you want to make some closing remarks?
Yeah. Thanks, Dave. In summary, Q1 was a good start to the year, demonstrating continued underlying momentum, even given the very tough comparables for the period that we reported against. Business conditions remain broadly positive and support our plans, despite the softness in some of the end markets for our materials businesses. As a result, we feel confident in raising our outlook for the full year to the high single digits adjusted EBITDA growth. With that, I would like to thank you all for joining our call, and I wish you a very good day.
Thank you, Geraldine. This concludes our conference call for today. Thank you very much for your attention and your questions today. If you have any further questions, don't hesitate to reach out to our investor relations team. With that, I hand back the call to the operator.
Thank you. Ladies and gentlemen, this concludes the DSM call. You may now disconnect your line. Thank you for your participation, and have a very nice day.