Ladies and gentlemen, thank you for standing by, and welcome to the DSMs 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 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 Q1 2019 results, which we published earlier this morning. I'm sitting here with Mrs. Geraldine Machet, Chief Financial Officer and member of the BSI Managing Board. Geraldine will give a short introduction after which you will answer any questions you may have.
We appreciate that this is a very busy morning for you with so many people 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. And with that out of the way, I will hand over to Jiali.
Thank you, Dave. Good morning, ladies and gentlemen. It's a pleasure to welcome you on this call on DSM's Q1 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, And then we will open the line for the Q and A section. However, before starting, I have to point out that our Q1 2019 results We reported against prior year figures that include a significant additional profit from exceptional supply disruption in Some of the key vitamins, 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 20 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 the treatment, in the remainder of my introduction, I will compare Q1 2019 versus the underlying business as estimated and reported in 2018. So 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. And 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 2. We're pleased to report a good start to the year We've 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 €12,000,000 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 digit in both Nutrition and Materials. In this Q1, for the first time, we report our new metrics on cash generation, The adjusted net operating free cash flow, which amounted to €60,000,000 in Q1. Given the significant impact of the temporary vitamin effect And of course, also reflecting the €165,000,000 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.
But I will come back on that after my comments on the business developments. So let's go to Page 6 for Nutrition. Overall, Nutrition delivered 3% organic growth, driven by 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 Under consolidation under Pectin contributed a further 3% leading to a total 6% sales growth.
Adjusted EBITDA in Nutrition increased 14%, including a €4,000,000 contribution from vintrapectin and €7,000,000 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 percent 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. Now looking more specifically at Animal Nutrition, let's move to Page 7.
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 the pricemix only slightly down. Overall, business conditions remained 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 the extensive integrated and diversified business model across regions and species, combined with our portfolio of market leading nutritional solutions. Now moving to Page 8 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 5% organic growth, driven mainly by volume, whilst currencies added another 6%, mainly related to the U. S. 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 SEA LIFE Nutrition performing FX 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 €12,000,000 in sales and €4,000,000 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. Now for our Materials business, let's move to Page 10. As with Nutrition, Materials is also reporting against the challenging comparable period, one in which it delivered an organic sales growth of 11% in Q1 twenty 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 business We're able to maintain the adjusted EBITDA stable through active margin management, some cost savings, Currencies and positive mix. This resulted in a 50 basis points margin expansion compared to Q1 2018 or a 50 basis points expansion excluding a small €1,000,000 IFRS 16 impact in the quarter. Now moving to Page 12 on the Innovation Center.
The Innovation Center also had a good start to the We made solid 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 biobased fuels. The adjusted EBITDA increased from and around breakeven in Q1 2018 to €6,000,000 in Q1 2019. All in all, we made very good progress in our innovation center as well as with our large innovation projects. Also, allow me to point you to the news of the sustainability performance that you will find on Page 11 and 12 I'm sorry, 12 13 in our press release and on Page 15 of this investor presentation.
Now 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 €201,000,000 In Q1 2019, unsurprisingly down from the 2018 Q1 cash flow of €310,000,000 which included a €165,000,000 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 Hendrypactin 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 Having said that, let's make it clear, I am not satisfied with the working capital development And finally, net debt closed at €414,000,000 up from €113,000,000 At the end of 2018, reflecting the IFRS 16 lease capitalization of about €200,000,000 as well as the acquisition of Andrew Paechten. And 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 GSF now expects to deliver to full year 2019 teen high single digit increase in adjusted EBITDA compared to prior underlying adjusted EBITDA, meaning excluding the temporary vitamin effect of €290,000,000 recorded in 2018. This compares with an initial outlook at the start of the year with 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 and adjusted EBITDA over the course of 2019. And finally, to the sake of clarity, our guidance excludes The positive impact of IFRS 16, which we estimate at around €45,000,000 for the full year. And with this, I will open the floor for questions. Operator?
Yes, thank you. The first question is from Mr. Mudlu Gundogan, 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 it has developed into Q2?
Good morning. Sorry, did you see one question or two questions?
No, two questions. My second question is on the outlook. And you guide for high single digit EBITDA growth this year, while you did 10% in Q1 despite your difficult comps. So I mean, I want to play devil's advocate, I 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. Good morning, Rudu. So maybe let me start with Materials and the developments within the quarter. So as mentioned in my introductory comments, we have seen Quarter 1 actually remaining pretty soft throughout the quarter. There's not much The uptick actually.
And if we look at the developments, we may have seen actually still a bit of destocking going on, particularly in Automotive. And so basically a soft Q1. Now so far in Q2, we're seeing about the same sort of developments as we did in Q1, so not yet much of an uptick. But I think it's important to mention here that the 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 pretty good that I highlight that we do have some end markets which are robust.
So we do have a positive mix going on. Among others, Dyneema is performing very well, as you know, our 5 optic cable products, the connectors, etcetera. So it is a mixed picture. That probably leads into your second question about the outlook, which is that we are confident based on the mid start of the year that we can move from midhightohigh Single digit EBITDA growth and that is reflecting amongst others the mix picture between Materials and Nutrition.
All right. Thank you.
The next question is from Mr. Thomas Wrigglesworth, Citi. Your line is open. Please go ahead, sir.
Hi, Geraldine. Thanks for your presentation. A few questions. Firstly, just calling from your comments on the outlook.
So what has 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? And then secondly, on the swine flu development, Maybe 2 parts.
Firstly, is the top line impact reflective of
the profit impact that you show? And secondly, as we see lower swine production in China, Should we actually see a positive effect? Because actually, you'll see a bit of mix into poultry, which I think is higher value for you. And secondly, Non Chinese pork production should increase again, which might have a positive mix effect. So If you could help on those 2 components in African swine flu, that would be very good.
Thank you.
Yes, sure. Good morning, Thomas. No problem. So firstly, what has changed? Well, as always, when you start the year, you have 12 months to go.
After Q1, you have 9 months to go. And if we look back to our quarter 1, we're very happy with the start of the year. Material top line is indeed a bit down, but the resilience of the earnings is just a testament to the Changed portfolio that we have. So while the visibility actually remains a bit limited and we will all No more by the end of Q2. We do feel that part of the hesitation that we had at the start of the year It's being addressed bit by bit as we go through the year.
So it's very much reflecting the strong Q1. Now if I come back To the African swine flu, you've 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. But at DSM, we have a very strong business model. So we are seeing a switch to poultry. Just give you a few numbers, our Animal Nutrition sales, OT5 percent is poultry, the swine is 20%.
And if you actually look at the sales of swine in China, We're talking here about 2% to 3% of sales for DSM overall. So that's a bit of perspective. So what we will be 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. And the 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.
And that enables us to leverage our business strength. So coming back to the outlook, we also although We don't 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 2 more long term elements. Just to give you an idea of Scale, the culling in China is in the order from some estimates 120,000,000 pigs.
And if you think about that from a bigger picture, it's likely to lead to rationalization of the pork production in China, maybe having less of the So backyard animals and more professionalized meat production. Now 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. So while it's a bit of short term disruption, we see that probably as over time being leading to a positive development in production in China.
The next question is from Mr. Gunther Zechmann Bernstein, your line is open. Please go ahead, sir.
Hi, good morning. Thanks for taking my questions. First one was a Technical one. The one off that you mentioned on lower costs in Nutrition, could you just highlight what's that regarding and quantify that as well? And second on your roughly outlook, roughly the quarter was that if you exclude IFRS Steen, can you just confirm that you speak to the previous rookie target of an increase around 1 percentage points annually?
My first time would like to sneak in a third question as well.
Okay. So let me start with your first two questions. Now we are always vigilant on our cost base, and that is what we just do as a matter of course. So here there is nothing You know that I can single out is a particular granular information to provide, but clearly, we're always managing our costs And that is what we're referring to here. So 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. So 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 developments of working capital, it's a combination of things. You have IFRS 16 actually adds nearly €200,000,000 to the balance sheet.
We also have foreign exchange effect. We have Andre Pekka being Consolidated and some timing on AP and AR on the quarter. So that's 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 on year by the time we reach December.
Great. Thanks. That was pretty efficient. So if I can just turn to one follow-up or the third question, I should say. All of your competitors in the materials business actually reported last weekend had volumes up, But I think 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 deeply positioned? Could you just highlight what's driving Margin resilience, but volume reduction was different from your competitors.
Okay. I mean, A, there are a lot of Competitors out there, so 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. Now we mustn't forget that the comps last year were very high as well from a top line point of view where we Very good volume development. And therefore, all we're seeing is on top line a little more of a negative Development in the quarter, but 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.
Thank you, Geraldine.
The next question is from Mr. Neil Tyler, Webberne. Your line is open. Please go ahead, sir.
Good morning. Thank you. Good morning, Geraldine. Two from me, please. The strong growth in the other activities within Nutrition, Sorry, 12% organic.
A few different and varying activities within that. Can you call out anything that was Exceptionally strong in there. And then in your introductory comments, you mentioned a very good progress in the large innovation projects. I wonder if you wanted to elaborate at all on the progress and when we might begin to see some contribution from those projects. Thank you.
Yes. Good morning, Neil. So in the other nutrition, there are indeed a number of activities in there. The ones that Performed very well in Food Personal Care. We had a very good quarter, both on UV filters, skincare, so good developments in that space.
And we also see Food Specialties having had a very good quarter in both Savory and in Dairy. So there, a good development Q1 last year. And thirdly, depending if you're looking organic or not, remember that andropeptan comes in there. This is our hydrocolloids business, and we consolidated that this quarter. So if you put all of that, That's where the Under Nutrition uptick is coming from.
And yes, our innovation projects 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. So Veromaris, we will be opening the plant this summer And the market interest is very strong, so this is very well positioned to start delivering on the potential revenues of €150,000,000 €150,000,000 to €200,000,000 coming from that plant, so all green lights there. The joint venture
on our
On Stevia, Avanciya is also progressing really on track. The joint venture is up and running. Now we're very much focusing on getting the plant ready to increase volumes. We already had some pilot material in the market, and now we want to increase that and on market development. So no flags or flags to mention there.
Anupin Kao, 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. So progress, that's not the assumption I can add to what we've Close prior in terms of when does this start gaining contributing to the reported figures.
Okay. Thank you. That's helpful.
The next question is from Mr. Martin Roediger, Kepler, your line is open. Please go ahead, sir.
Thanks. Good morning, Geraldine. Okay. Most of my questions in answer, so only 2 minor ones. On In the Nutrition, the price mix was up by 2% in Q1.
Any explanation for that? I can envision this is It's actually related to some additional weakness in vitamin D, so excluding the €165,000,000 EBITDA effect And the second question, to continue with innovations. You talked about The recurring license income for yeast technology, am I right that this is the e Boost yeast and the license income comes from Gbo, is that correct? Thanks.
Okay. Good morning, Martin. So yes, on Animal Nutrition, we have a slightly negative pricemix effect. And to be honest, as you know, we have a lot of moving parts behind that. So we can't really pinpoint a particular ingredient, which is leading to that.
Remembering that it was quite a turbulent picture last year. So there's no particular ingredient to highlight here Driving this and overall the pricing environment is relatively stable. So we're okay there. Now on innovation, the license that we are referring to and we don't provide the granular detail, But it's actually linked to our yeast and enzyme platform that we use that's used in biofuels production. And We don't disclose exactly with whom, etcetera.
But it's nice to see that we are in a position to monetize the developments that we've been doing in this sector Quite a while.
Okay. Thanks.
The next question is from Mr. Laurence Alexander, Jefferies.
Could you give a little bit more detail on what you're seeing in construction markets Hi, Regent. And then secondly, how you're thinking about the potential impact for your business from the Sort of interest in alternative meats or alternative proteins, plant based proteins that affects your business mix as an opportunity for
So in terms of building and construction, just To remind everyone, the slide is about a 6% of group sales. And 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. But please remember also we wrapped in there machines and ships and interests. It's not just buildings per se.
It's very much in line with the macro. So we just need to see whether there's a little bit of an uptick at some point. But now we're Yeah, pretty soft, primarily in Europe. Plant based protein, I mean, 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. And if you remember in our Capital Markets Day, this was a space where we want to gain Scale over time, but nothing specific to report I have to say on this quarter other than we continue with our integration program there.
Does that answer your question?
Yes. Thank you.
No problem. And the next question is from Ms. Laura Lopez, Baader Bank, your line is open. Please go ahead.
Good morning. So I have 2 more questions. So on underpectin, you mentioned that it is already fully it was fully consolidated in the Q1 And you reported EUR 12,000,000 sales. When you reported that you were going to buy or increase your shareholding on this company, You reported that
the company had around €65,000,000 of sales.
So the €12,000,000 is also low. Is this maybe like Some cyclicality on this business that the Q1 is always a little weaker or was there a weakness in the market? I know Maybe they are highly exposed to the Asian markets, so maybe they are a little bit, if you confirm, weaker than expected? Or what was the reason for that? And then just a second one more like housekeeping.
How is the phasing of the share buyback going? Do you still foresee to finish this mid Next year?
Again, good morning, Laura. Thanks for your questions. So indeed, Andrew Jackson had a bit of a soft of the first quarter, Not materially so, but I think the easiest is for me to give you a bit of a guidance. And you can So this is about €15,000,000 top line per quarter with an EBITDA of about €5,000,000 So 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, so we got initiated on the 1st April for €1,000,000,000 Actually in April, we've been buying back more in relation to the stock dividends and for which we need to buy some shares. But we are still expecting that the timing will take us into next year, probably Q2. So broadly EUR 600,000,000 this year, probably EUR 400,000,000 this year.
Thank you. That's perfect.
The next question is from Mr. David Simons, JPMorgan. Your line is open. Please go ahead, sir.
Yes. Hi, it's actually Chetan Udeshi. I just had a question on the leverage on the Nutrition business where 3% organic growth resulting in 10 Could you maybe just shed some light on what are these underlying positives which is resulting in And what is your leverage in the nutrition business on EBITDA from top line?
As you know, we run a rather large and complex Our Nutrition business, so there are a lot of different moving parts in there. I think that one of the important elements is As you saw, we got a very good growth in human nutrition with all components of human nutrition And our contributing well and Personal Care as well, which always tends to have a positive mix effect. And we had in the quarter a bit of a positive on foreign exchange as well, which was helpful. But The main thing is we are, of course, very diligent and systematic about managing our costs. And Yes.
With that, we're able to be confident that we can continue to deliver an EBITDA growth in high single digit 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.
Good morning Geraldine. A couple of questions please. Firstly on M and A, I'll put you back to the Q4 comments. You said that The share buyback was not an indication of reduced acquisition ambition and you just said in answer to the previous question that the balance is going to be fairly measured. Is there anything you can say on generically on the availability of assets right now and multiple out there and some way you're at in your own heads On acquisition opportunities, that's the first question.
And then the second question, the smaller thing is, Baima. You're expanding capacity In the second half, given the benefit to materials from what was extra in the performance, is some Perhaps we should think about that are incurred in that ramp up for the second half or should we just dial down the margin for the second half in Materials? Thank you.
Okay. Good morning, Andrew. Firstly, on M and 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. So we are continuing to do our work, And we're very mindful of the fact that valuations are an important element of value creation of any M and A.
So 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. But 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. Now when it comes to Zainima, we indeed are putting Extension 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. So if there are no questions anymore, then also living to our promise of keeping it short and concise. Geraldine, do you want to
make some closing remarks? Yes. Thanks, Dave. Okay. So basically, 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 and as a result, we feel confident in raising our outlook for the full year to the high single digit adjusted EBITDA growth. And 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. And 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.