Ladies and gentlemen, thank you for standing by, welcome to the DSM conference call on the first quarter results of 2018. Throughout today's presentation, all participants will be in listen-only mode. After the presentation, there will be an opportunity to ask questions. If you have a question, you may dial star one at any time. I now would like to turn over the call to Mr. Huizing. Please go ahead.
Thank you, operator. Good morning, ladies and gentlemen, welcome to this conference call on DSM's full first quarter results, which we published earlier this morning after we already published our preliminary key numbers a couple of weeks ago on April 12th. I'm sitting here with Mrs. Geraldine Matchett, Chief Financial Officer and member of the DSM managing board. Geraldine will give a short introduction, whereafter she will answer your questions. Given the fact that we already released preliminary key figures, that the full first quarter results are in line with these previously announced figures, and that we are aware that many of you have a full agenda this morning, we will aim to keep this call short. 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, I will hand over to Geraldine. Geraldine, please go ahead.
Thank you, Dave. Good morning, ladies and gentlemen. Although our full Q1 results are in line with the preliminary figures that we released on April 12th, we decided to schedule this quick call in order to give you a chance to ask any remaining questions you may have looking at the full set of figures for the quarter. I will start with providing a few comments on the key slides of our investor presentation that we published this morning together with the press release, then we'll open the line for the Q&A session. Let me start with the highlights on page two.
As indicated on April 12th, in order to provide as much clarity as possible in terms of the performance of our underlying business, we have shown separately the estimated effect on our business of the current higher vitamin prices resulting from the exceptional supply disruptions in the industry. These effects are expected to be temporary and heavily weighted towards the first half of the year. What we refer to as the underlying business are the normal business activities, excluding these estimated extraordinary volumes and mainly prices that we refer to as the temporary vitamin effects. This split is, of course, not our usual way of reporting and does require some estimates.
With reference to the underlying business, as you can see from these highlights, we have had a very strong start to the year with an organic growth of 11%, an adjusted EBITDA growth of 8%, despite a significant foreign exchange headwind of about EUR 30 million, and a ROCE improvement of 200 basis points. Animal Nutrition, Human Nutrition, as well as Materials, all contributed to this strong performance, resulting in a continued good momentum in their businesses growing well above market. This very strong performance at constant currencies is in line with the increase we realized in both 2016 and 2017, which were of course well ahead of our targets set in our Strategy 2018. With adding together this strong underlying performance and the temporary vitamin effect, the combined figures indicated a higher outlook for the full year 2018, which we announced with our preliminary Q1 results on April 12th.
This outlook can be found on page four of this presentation. Before moving to the underlying business performance of each business, let me just say a couple more words on the temporary vitamin effect, and for that, let's move to page seven. As shown here on page seven in the middle table, the first quarter benefited from an estimated EUR 220 million additional sales and an estimated EUR 165 million additional adjusted EBITDA contribution related to an exceptional vitamin price environment, which is expected to be temporary and heavily weighted towards the first half of the year. This temporary vitamin price effect is mainly related to our Animal Nutrition. While it is clear that these market conditions are temporary, they are currently continuing into the second quarter, but we have limited visibility as to the full year potential impact.
Our best estimate, as indicated in our outlook, is that the benefit in terms of additional adjusted EBITDA will be in the order of EUR 250 million to EUR 300 million. Moving to the performance of the underlying business in Nutrition, let's go to page eight. Organic growth in the Nutrition underlying business is estimated at 12% for the quarter, with 8% volume growth and a 4% price mix effect, with both Animal Nutrition and Human Nutrition delivering strong above-market organic growth. Adjusted EBITDA for the underlying business in Nutrition is estimated to be EUR 277 million, slightly higher than earlier indicated, representing an 8% increase compared to Q1 2017, despite the significant negative foreign exchange effect. The estimated EBITDA margin for the quarter is 19.4%, representing a further step-up versus the 18.4% in Q1 2017. Looking more specifically at Animal & Human Nutrition, let's move to page nine.
Animal Nutrition had an exceptionally strong volume growth of 13% in its underlying business, mainly driven by very strong premix sales in all regions, but particularly in North America and Asia. In the quarter, we also saw an increased focus from customers on security of supply, amongst other driven by the Blue Sky policies in China, which resulted in additional deliveries. Finally, in the quarter, the volume growth benefited from the introduction of reformulated forms due to new European regulations with sales in the order of EUR 15 million-EUR 20 million. In Human Nutrition, as shown on page 10, the quarter saw a 5% volume growth supported by increases in all regions and across all the market segments, with especially strong growth in premix sales as well as the eye health business.
Higher pricing in both Animal and Human Nutrition were a result of pricing initiatives to mitigate higher input costs and the impact of clearly less favorable exchange rates. Prices were increased in premix and advanced formulations. Our pricing actions are supported by the effects of the Blue Sky policies in China, which have created a more inflationary pricing environment in the industry in general. This brings me to our Materials business. Moving to page 11. Our Materials businesses reported an organic growth in Q1 of 11%, with volumes up 7% and a positive price mix effect of 4%. This strong organic growth was partially offset by a 6% negative foreign exchange effect. Engineering plastics, resins, and Dyneema all delivered strong above-market volume growth with good demand in key markets.
In line with previous quarters, this growth momentum continues to be supported by strong demand for innovative, environmentally friendly specialty solutions, while the 4% price increases offset the higher input costs. Moving to page 12. This strong top-line momentum enabled our Materials businesses to deliver an adjusted EBITDA of EUR 126 million, up 12% compared to Q1 2017, and resulting in an adjusted EBITDA margin of 17.1% versus 16.1% in Q1 2017, positively influenced by the strong sales in specialties. With this, for the sake of time, I will open the floor for questions. Operator.
Ladies and gentlemen, we will start the question and answer session now. If you have a question, you can press star one. For questions or remarks, you can press star one. Please go ahead. The first question is from Mr. Neil Tyler, Redburn. Please go ahead.
Good morning, Geraldine. Thank you. Two questions, please. Firstly, on the impact of the Blue Sky policies, I'm trying to sort of get an idea of the longevity of the volume uplift you've seen from this. Can you share with us any visibility that you have over the investment levels at competitors from which your customers are switching their volumes? Are you seeing your competitors sort of reinvest to comply or come out of the market completely? If you've got any comments you can make around that would be helpful. Secondly, turning back to your own figures, the CapEx figure for the first three months feels like it's ahead of the run rate that I would have anticipated if we were expecting CapEx to be evenly spread.
Are you accelerating any investment plans or is there anything in there that should lead us to sort of up our CapEx forecast for this year or next? Thank you.
Sure. Good morning, Neil. Let me maybe start with the CapEx one. Indeed, we saw Q1 at EUR 172 million, which is a bit on the high side, but here it's also to do with the timing of creditors. What we're seeing in as a cash out, we're picking up actually nearly half is to do with timing of spend versus new investment. This is not really a sign of an accelerated spend.
Okay.
In terms of the guidance for the full year, we're probably looking at a bit above EUR 600 million at this stage for the CapEx in 2018. That's on CapEx. The Blue Sky policies in here, what we're seeing is a couple of things. Firstly, clearly you have the interruption elements of what's going on, and that has a temporary effect a little bit in volume, but also a bit in pricing. In terms of the more mid to long-term impact, what we expect is that it will, if anything, increase the cost base of the other players in the industry. Maybe therefore have a supporting effect on overall prices. Beyond that, we don't have anything particularly to flag in terms of capacity shifts within the industry due to Blue Sky at this stage.
Okay. Thank you.
The next question is from Mr. Martin Röhringer, Kepler. Please go ahead.
Thanks for taking my questions. First, on food specialties, can you explain the background of the production interruptions at Savory? Is that linked to the BASF Citral production facility or solely related to your production facility? Secondly, on working capital, which shrank by 4% to EUR 1.4 billion, despite probably higher receivables, and I refer now to the Nutrition segment. Is that because you are basically sold out for some of the vitamins, and thus you have not any more any inventories? If so, should we expect inventories to be replenished in Q2? Thanks.
Good morning, Martin. Sure, no problem. On Savory, actually, this has absolutely nothing to do with the outside world. It's entirely our production. Basically, we use living organisms for this business, and sometimes they just don't do what we expect them to do. It happens from time to time. Nothing linked to a broader industry link or another company. That's the Savory production interruption. A couple of comments on my side from OWC. What we're seeing is actually that we have OWC of EUR 2.1 billion. There is an FX effect on the consolidation. As you know, with the U.S. dollar being weaker and the Swiss franc being weaker right now, when you consolidate up into euros, you see an overall effect on the balance sheets in a consolidated basis. That's part of the movement.
When you actually look at our inventory levels, they actually are a little bit higher versus year-end. There is an element of seasonality there. End of Q1, we tend to be a bit higher. I think the most useful information I can provide is that our inventory days remained at 120 days. Pretty much stable. You're not seeing there any big swings, neither one way nor the other.
Thanks. Very helpful.
The next question is from Mr. Patrick Lambert, Raymond James. Please go ahead.
Good morning, Geraldine. Two questions, please. The first one is very simple on the Andre Pectin issue. Can you comment a bit on what's going to happen after the deconsolidation? Are you going to exit the whole thing? If you can put some colors on what's happening on pectins. The second on the temporary issues, well, pricing on vitamins. Could you also comment on the broadness of it? I think at the beginning you were saying it's not just vitamin E and A. Can you talk about the other vitamins there? Thanks.
Good morning, Patrick. Yeah. Andre Pectin, indeed, in the quarter, in fact, on the 1st of January, we deconsolidated these operations. To give you an idea of size, we're talking here for the quarter of a bit more than EUR 10 million sales and a bit less than EUR 5 million EBITDA. It's not a very sizable business. Because the options were not honored, we are left with our existing 29% shares. Ideally, we would very much like to get more, we are in discussion with our partners on that. In the meantime, we cannot show this as a consolidated business. It's kind of flipped into associates reporting. That is.
You're still in discussion to acquire the 71%?
Yeah. No, indeed. I mean, hydrocolloid remains a very interesting area for us from a development of the business and broadening our nutrition portfolio. We still have good hopes that at some point it will head in the right direction. It's.
It's a valuation issue?
Well, I don't think it's necessary to go into the details.
Yeah, let's say that we're not clear aligned yet.
Okay.
When it comes to the vitamin effect, actually there, I think we were quite specific that this is only to do with vitamin E and vitamin A. What we did is we took vitamin E and A pre-disturbance, and then we estimated the impact of the disturbance on the top line and the earnings. To be clear, this is E and A, and it's primarily Animal Nutrition in its impact.
Okay, great.
Thanks, Geraldine.
You're welcome.
The next question is from Andreas Heine, MainFirst. Please go ahead.
Good morning. Thanks for taking my question. I'd like to start also with these price increases. You had also quite nice price increase in the underlying business. Maybe you refer where that is coming from. Then also on these disruptions you have seen, basically the Citral value chain of BASF includes aroma chemicals and carotenoids as well. Was there no shortage in these two? Was really everything what you're referring to where you had a positive impact only in these two vitamins? Then maybe you can outline a little bit what's going on with this vitamin C plant in China, where you have a longer maintenance, I think it's four months. What you are going to do there, and whether that has any impact on the earnings in the second half.
Lastly, I'd like to get my head around on these very nice volume trends you have seen in Nutrition. My understanding is whatever you might have seen as additional volume from these vitamin interruption is taken out. That's not in your underlying volume line. I would like to understand what this EU regulation means, this EUR 15 million-EUR 20 million. Was that a one-off or is that continuing? Is there any way you can say something how big the impact of this Chinese Blue Sky policy impact and the additional security in supply your customers want to see had on this quite nice volume growth in the first quarter? Thank you.
Okay. That was quite a lot of questions in one big sentence. You'll have to excuse me if I don't get exactly, let me already make some comments. I think your first question was about the price increases within the underlying business.
As I clarified, we very much defined the vitamin effect as E&A. As you can imagine, we have all the other ingredients out there. What we have seen is that during the period, we've got a foreign exchange effect that we need to mitigate. We also, in our premixes, sell ingredients that we also buy, source materials. We've seen a bit of an upward trend on the price of those. When you put that together, you see a positive pricing momentum, which is partly compensating for these costs. That's really the price effect on the underlying business.
To your question of why is this disturbance E&A and maybe not also carotenoids? It is a little bit, it's a lot smaller. We really try to stay clear as to what it is that we are ring-fencing, in order to provide as much clarity as we possibly can in these rather unusual circumstances.
There is an effect, but it's not at all of the same scale, that what we've carved out. Vitamin C, the shutdown. We've announced a shutdown in our Jiangshan plant, which is a four-month shutdown starting in July. This is something that has been planned for more than a year. It combines various objectives. There is obviously the regular shutdown maintenance work, but there is also some upgrading of the sites. There is also addressing some of the greenhouse gas emission, so that we need longer and bigger upgrades. The good news is that because this was very much a scheduled shutdown, we have built up enough inventory to meet all of our committed deliveries to contracted clients. No issues in terms of supplies or sales in the second half of the year.
Summer is a good time because we always do the summer shutdown for this operation. It's a bit of an annual event. I think your last part of your questions was where is the growth coming from, the volume growth? We make reference in our comments for Animal Nutrition, where we saw a 13% volume growth in the quarter. We make reference to an EU regulations on antioxidants. The European Union suspended something called ethoxyquin. I think I pronounced it correct. It's easier to call it EMQ. It's an antioxidant that is used as a feed additive, so it's an Animal Nutrition. I think it actually came up a couple of times in conversations before. In order to respond to this new regulation, we have developed an EMQ-free portfolio of solutions.
What you see is that this changeover in the quarter and maybe also a bit in Q2, is making the volume growth somewhat higher. We didn't want you to take 13% as a new proxy in any way for Animal Nutrition volume growth, we felt it was good to point it out, because it's in there.
Basically a temporary impact specifically in this quarter will not influence the growth in the one or the other direction in the coming quarter.
Indeed. There may be a little longer than just this quarter, it's very much a 2018 effect as we are basically swapping over old products with these new products with a new formulation.
I think I covered your questions, unless I missed it.
Indeed.
Okay. Wow.
No, I think you did. Thank you.
I was scribbling fast. Okay.
Excellent.
The next question is from Reg Watson, ING. Please go ahead.
Morning, Geraldine. Just a quick question. It may be impossible to disentangle it, but you've provided a lot of data on the underlying performance of the business. Looking at the total working capital as a % of sales, we've got the headline figured out, but not the X vitamin effect. Is it possible to provide that X vitamin?
Yes. We indeed thought maybe we'd have a try. We realized that honestly, we're making far too many estimates and a little bit arbitrary assumptions. We gave up, I'm afraid.
Okay. No, that's fair enough. I kind of suspected that might be the case. My final question, just on the dividend proposal. Looking at the payout ratios, a significant decline. What is your thinking in terms of how you arrived at the dividend per share?
Okay. Tomorrow is our AGM, and we will be proposing a dividend of EUR 1.85, which actually is a 47% payout ratio on the results. Adjusted, of course. Now, we wouldn't normally adjust the dividend because we have this stable, preferably rising. We wouldn't normally have a kink in the dividend because of the earnings coming from monetizing Patheon. I don't know whether you did a payout ratio on the full earnings or the adjusted. We tend to work it on the adjusted.
Right. Okay. Yeah, no, it's a huge decline on the full, it's a slight decline on the adjusted, I think.
Exactly. Yeah.
Yeah.
It's very much stable, preferably rising being our policy that even in the financial crisis, we didn't go down. We're maybe a bit cautious on the way up, but that goes with the long-term commitment.
Right. Okay. It's just more as a balance sheet delevers. Obviously, ahead of the strategy day, there are other considerations to take into account, but I was wondering if that influenced your decision on the dividend as well.
Not particularly. This is very much a standard dividend approach at this stage.
Okay. Thank you.
Next question is from Laura Lopez-Pineda, Baader Bank. Please go ahead.
Yeah. Good morning. It's actually Markus Mayer on behalf of my colleague, Laura. I have two questions remaining. Firstly is on the tightness and also the strong pricing power at your resins. I think this also partly comes from epoxy resins. Do you see this current price levels as sustainable? That's my first question. The second question is also more or less related in this kind of segment. Most of your competitors, which have a bigger exposure to the construction industry, had quite a harsh winter effect, in particular, in the northern hemisphere. You reported continued healthy demand in the building and construction industry. Is this mainly driven by the price effect or is this also volume related? Thank you so much.
Okay. When it comes to our resins business, we have actually seen good momentum despite the harsh winter. What we're seeing is it's not only pricing, volumes are doing well. Now, of course, we have a very broad geographical footprint with this business. What we're seeing as one of the big drivers of the volume development is very much that switch from solvent-based to non-solvent. That's where I have to say that our portfolio positioning is proving to be very strong, enabling us to grow above markets as we have stated. Now, in terms of the pricing, there's been a lot of force majeurs, et cetera, in the sector, as you know. I think the team has done an extraordinary work at managing to continue to supply, that has supported prices.
At this point, we are not flagging a strong correction in that space, at this stage, at least based on our portfolio. I'm not sure which reference you're looking at. Maybe one other comment on our resins business. We had a site for powder coatings called Augusta in the U.S., which was closed. Now this has reopened, that's the good news, end of April. We were, during the period of the close, able to meet all our customer needs through the network of production capacity that we have. That was also well handled by our business team.
Very helpful. Thank you so much, Geraldine.
Who has the last question?
The last question is from Mr. Andrew Stott, UBS.
Morning, Geraldine. Morning, Dave. Thanks for the last question. A couple, actually. Materials volume growth is 7%. It looks, from your commentary, quite well-balanced across the three subdivisions, but I wanted to check in on that assumption. Are you seeing similar type of growth across plastics, resins, and Dyneema? That's the first question. The second question was just on the math, and sorry if I've missed this, Geraldine, but on the math of the exceptional profit. Why is there a discount on the revenue benefit to get to EBITDA? The 165 is clearly 75% of your 220. What are you leaking on 25%? Thanks.
Okay. Sure. Materials, we have a 7% volume growth, as you said, and it is indeed well-balanced. All three are on volume growth. Engineering plastic has the highest growth on the quarter. There, I have to say the automotive space is strong with [EU near] as well. In fact, no, all sectors are good. Maybe engineering plastic a bit stronger than the two others, and within engineering plastics, a good quarter on automotive. That's on that. When it comes to the EUR 220 and the EUR 165, what we see is, of course, within the quarter, we said it's primarily price, but there's some volume growth. That's playing into that delta. We also have some FX differences on top line and bottom line.
Thirdly, during this rather exceptional quarter, we also picked up some exceptional costs that went with this environment, and we put it with the exceptional. That's the gap between the EUR 220 and the EUR 165.
Just to come back on that. The FX effect. They're both in EUR, right? The EUR 220 is in EUR and the EBITDA is in EUR. Is that export transaction issues, or? I'm just trying to understand that.
Yeah. The FX effect is not the biggest. What you see is that you indeed have a bit of a different cost base on production and on sales. There you will have always some FX difference there. It's not one of the major elements within the gap that is set.
Okay. Great. Thanks a lot.
That means we're done with that Q&A. Geraldine, do you want to make some closing remarks?
Thanks, Dave. In summary, of course, we're very pleased with the strong start to the year, and particularly pleased with the strong underlying performance that continues with all businesses. We'll remain fully focused on improving our operational and financial performance through our growth initiatives and completing the improvement programs within nutrition. Finally, let me just remind you that on the 20th of June, we will have our capital markets day in London, where we will be sharing the outcome of our strategy review and the highlights of our strategy update. I hope to welcome you all there. With that, thanks very much.
Thank you, Geraldine. This concludes our conference call for today. Thank you very much for your attention and your questions. If you have any further questions, don't hesitate to reach out to our investor relations team, and then it's back to you, operator.
Ladies and gentlemen, this concludes the conference call. You may now disconnect your line. Thank you for your participation and have a nice day.