Good afternoon, and thank you for joining us today for Our Half Year 2022 Results Webcast. I'm tempted to say welcome back. With the merger announcement end of May and the capital markets day in Paris mid-June, we've demanded a lot of your time already. Today, we can keep it light as there is no news on the merger, and that means for legal compliance reasons that we won't talk about it today, nor take questions about it. Once we have published the offering circular together with Firmenich, which is foreseen for the fourth quarter, we have something to talk about again. Today, it's all about the first half results.
Geraldine and Dimitri will give a short introduction by running you through a few slides of the presentation to investors, which we published this morning together with a half year press release, which you both can find on the website as usual. Here, you will also find the disclaimers about forward-looking statements made in this webcast. After these introductions, we will open the line for questions as usual, and we have planned today an hour for this webcast. With that, let me give the floor to Geraldine.
Thank you, Dave, and hello everyone from me as well. I have to say it was really nice to see so many of you in person recently, given all of our transformational announcement. Indeed today, it's all about the half year results. I will start by running through a few slides with the key financials and the performance highlights. Then I'll hand over to Dimitri. He will run through our core ESG performance, and then we'll open for the Q&A. Let's get started. If we go to slide two of the presentation, which is our quote. Now, of course, in this quote, we do make reference to the important moments on our transformation journey that took place during the last six months.
Not only, of course, the announcement of the intended merger with Firmenich, but also the divestment of DSM Engineering Materials and Protective Materials that took place during the first half. Now, I'm mentioning this, because as we've announced these divestments, they are now reported entirely as assets held for sale in the balance sheet. A word of warning, the balance sheet is not easy to read because the year-end comparators include everything, and the June balance sheet actually bundles that into assets held for sale. Also when it comes to the income statement, this is all reported under discontinued operations. Our comments on the call will be predominantly, you know, focusing on Health, Nutrition, & Bioscience, the core of DSM continuing activities.
I would just like to say, nonetheless, right now, that our materials businesses did have a good half of the year with double-digit organic growth and with a step-up in EBITDA versus a high performance last year. All is good on materials as well. Now going to the next slide. Here is the slide that summarizes the performance for the first half and Q2 of our Health, Nutrition, & Bioscience activities. Now, HNB delivered a good half year with, as you can see, a top-line growth, organic growth of 10% and EBITDA up 7%. Now, this was on the back of resilient demand throughout the market, throughout the six months, and as well, strong pricing, showing that we are able to counter inflation, albeit sometimes with a bit of a time delay.
Now looking at Q2, we have seen broadly similar conditions in Q2 versus Q1, and you see there a double-digit organic sales growth, also with strong pricing offsetting inflation. Now, when it comes to volume developments, in the first half, what we are seeing is a good market demand, resilient demand throughout the six months. Although in Q2, animal nutrition volumes did suffer somewhat from the COVID lockdowns in China, and I'll come back to that in a second. We also saw some supply chain constraints resulting in order backlogs for H&C and for F&B. Having said that, the conditions during the quarter actually got better. We saw an acceleration in Q2 with June having stronger volume and pricing momentum, so going into Q3. Now, let me pause for a second as well on the step-up in EBITDA for the second quarter.
You see here an adjusted EBITDA up 5%. That includes 1% from M&A, from acquisitions, and 6% from foreign exchange. Please also note that that 5% does reflect shortfalls related to these items I just mentioned. If you think of the COVID lockdowns in China for animal nutrition, that's about a 3% impact. The order backlog in HNC and F&B, probably about 1%. The time lag between costs rising and our ability to get the full impact of pricing adjustments through probably about 3%-4%, for the quarter. Now, lastly, looking at this slide, the margins. You see that we closed H1 at 19.5% adjusted EBITDA margin and 19.3% in Q2, so quite similar.
Now, in both cases, these margins reflect the dilutive mathematical effect of the inflationary environment with the top line, of course, reflecting a lot of pricing adjustment to offset the rising costs. We've calculated that dilutive effect at about 160 basis points for Q2 and for H1, which means if you back that out, we're actually pretty close to the 21% that you're used to seeing for these businesses. That is the aggregate financial highlights. Now, if we go to slide four, as you know, from the first of January, we've started reporting our businesses in this format with the three business units, Animal Nutrition & Health, Nutrition & Care, and Food & Beverage.
Now, as you can see on this slide, all three business groups actually contributed very nicely to the organic top-line growth, whether it be double-digit or high single-digit in H1 and in Q2. Now, if we go to Animal Nutrition, let me give you a little bit more color on the performance, for the first six months. Maybe first comment here, a good half year, as you can see, with double-digit organic growth. What we have seen in terms of pricing is that the strong pricing that we had in Q1 continued in Q2, showing our ability to counter the rise in costs, and through our pricing actions. Now, when we look at volumes, we saw consumer demand for animal protein remaining good.
Now, having said that, of course, China did have an impact with the COVID-19 lockdowns, and we've quantified that at about 3%. Where you see a 0% volume for Q2, that would have been 3% if we just normalize for effectively the fact that there was very little out-of-home consumption, and that did have quite an impact on the quarter. We also saw some impact from destocking. You may remember that it began in Q1. It was lesser in Q2, and we saw that destocking fade throughout the quarter, towards the end. Now, a couple of comments on species. We saw the demand for poultry, which, as you know, is a stronghold for us, be very strong, actually, across all regions. We also saw good performance in beef and aquaculture during the half year.
Now, when it comes to pork, on the other hand, of course, the demand was a bit lower, also linked to this out-of-home consumption in China. Now, we also saw during the half year that there was actually a very resilient demand for meats, which also meant a good demand for our products, with the inclusion rates of our essential ingredients being very robust because they're actually essential for the life of the animals. We also saw continued good demand for our performance solutions and especially the feed enzymes. Now, at the bottom there, you have a few logos, and I'd like to say a few words about the progress on our innovations. Now, firstly, of course, Bovaer, a lot of positive news. Firstly, the approvals.
As you know, we had the very important approval in the EU for Bovaer, but also in other geographies like Argentina and Switzerland. That is going very well. It has led to the launch of a number of large-scale pilots with many farms, such as in the Netherlands with FrieslandCampina, with about 200 farms, and with other customers such as Arla, et cetera. We also signed during this period an agreement with Elanco, the world's largest animal health company, a licensing agreement that will enable Elanco to develop, manufacture, and commercialize Bovaer in the US market, effectively accelerating the reach of Bovaer to as many animals as possible as quickly as possible, which is pretty critical as well from a climate change point of view.
Now, when it comes to Veramaris, we are seeing a continued demand for sustainably produced salmon and high in omega-3. We also saw a growing interest for the new areas of pet food and human nutrition. When it comes to Sustell, our environmental measuring platform, Sustell has been extended to aquaculture, which is very good. You may have noticed as well that we closed an acquisition in Brazil that will support our precision animal feed business in Brazil, combining a data-driven business model to the animal business in Brazil. These were the few highlights on Animal Nutrition. Now, if we go to H&C on the next slide. As you see here, also a good half year with 9% organic growth. We saw the business conditions in Q1 basically continue into Q2.
Quite similar with good demand across all segments. We have seen the pricing initiatives that began in Q1 accelerate in Q2, as you can see there, and the pricing supporting the 7% organic growth in Q2. Now, volumes were a bit impacted in the second quarter by some reduced availability of some raw materials, which has created some order backlogs, but we have seen that actually easing towards the end of Q2 and into Q3. We have a better momentum into Q3 on that. Now, regarding a few of the subsegments of H&C, when it comes to dietary supplements, we saw a good performance, especially considering the high performance, the high level last year, related to immunity optimizing products on the back of COVID-19. This was, amongst others, supported by very strong performance of eye health.
When it comes to early life nutrition performance, it continues to progress actually in line with improving market conditions, especially in Europe, where we had some additional demand linked to the North America market. We've also seen that with these improving market conditions, we are seeing more interest in the launch of innovative products that include HMO. Importantly, we've made great progress actually on the regulatory journey to get HMOs approved for China, and we have a good hope that we could obtain this actually maybe as quickly as by the end of this year. As for the remaining segments, they all performed well, being pharma and medical nutrition, PCA, and biomedical. Good performances across the board. As for innovation, well, actually it was a rich six months, and we have here a few examples of that.
We, for example, have obtained approval for ampli-D in Brazil. If you remember, that's the metabolite of vitamin D that accelerates the immunity enhancement, and there's a lot of customer interest for ampli-D in Brazil on the back of this approval. We also saw Culturelle launch quite a few products, including actually a line of gummies for children that include some health ingredients like lutein for eye health, which has been a great success. We've also introduced during the half year the world's first-ever fully bio-based vitamin A, which is a very big technical achievement. This fully bio-based vitamin A will go at first for PCA, but will have a broader application over time. Last but not least in our examples, Hologram Sciences is doing well.
It has launched a new brand called Phenology. It is about menopause management, and it includes at-home diagnostics, it includes hormone tracking, and also wellness programs that combine all of that. We're seeing a nice development of that entity that we created to, you know, accelerate personalized nutrition at DSM. Those were the highlights for H&C. If we go now to Food & Beverage on this next slide indeed. Here, actually quite a similar picture to H&C in the sense that we saw continuing good conditions from Q1 into Q2. As you can see, 10% organic growth across the period. Now, we've also seen an acceleration of the pricing actions going from Q1 to Q2, which was good to see.
Now, when it comes to the segments, good demand pretty much across all segments with, of course, a continued strong demand on plant-based alternatives, plant-based proteins, and on pet food. While we've seen so far limited down trading on packaged foods. Now, when it comes to the volumes in Q2, they're a little bit low, and that is also to do with availability of sourced materials that has created, as in H&C, a bit of an order backlog. But we have seen here as well some easing towards the end of the quarter and into Q3. Now, as to the innovations, here we're making very nice progress. We would like to highlight in particular that combining Vestkorn and CanolaPRO has enabled us to develop nice capabilities that is so key to this very growth segments of plant-based alternatives.
We're seeing, you know, progressively increased interest in the fermented stevia, EverSweet that is within the JV Avansya. Those were the key highlights when it comes to the business performance. Now, a couple of quick comments on the financials. Down one slide. I just want to comment on the fact that the working capital is on the high side. There is no doubt about that. Now, this is basically in part by design. As you will have heard everywhere, supply chains are still a challenge, and therefore we are prioritizing being able to deliver to customers rather than inventory levels. But we also see that the balance sheet has become a bit heavier because of foreign exchange, because of inflation built into the balance sheet, and that is reflected in the figures here.
If we drop down to the next slide, this has resulted, in effect, in a very limited cash generation in the first half, which is a reflection of the strong balance sheet. Also actually, a bit higher CapEx in line with our level of pre-pandemic. Nothing, you know, out of whack, but a bit higher than we have seen during 2020 and 2021, when of course some of the projects were a bit delayed and postponed. Also, we're flagging here confirming that an interim dividend is confirmed at EUR 0.93 as the interim amount, which is broadly in line with what we normally do as an interim dividend.
To wrap up on this section before I hand over to Dimitri, I think we can summarize that the first half for HNB has been a good half and that we've been able to deliver a good performance despite what are, of course, challenging macroeconomic environments. We have managed to have effective pricing to counter the rising costs, and we have seen underlying demand remained nicely resilient, and the softness in volumes is really only related to what are effectively temporary factors that have eased by the end of Q2 and into Q3. On that basis, we've retained our outlook as being unchanged, and that is a high single-digit EBITDA growth for the year for HNB, supported by the resilient market demand, supported by the positive pricing momentum and the foreign exchange. With that, over to you, Dimitri.
Yeah. Thank you, Geraldine, and also a warm welcome from my side, and literally a warm welcome if you're at the European continent, in terms of temperature. After a lot of
Profit information. You know that we are a people, planet, profit company, just to complete the dimensions of our company. A little bit around the planet dimensions also there, I think, incredible news to tell. First of all, we have launched several initiative from improving our own sites to introducing greenhouse gas emission reduction, not only from ourself, but also with suppliers, and I come back to that in a minute. We've also have committed ourselves to a new renewable energy target of 100% in 2030. Remember that we started the journey in 2018, and I still remember that, we were at 3%, and we were at preparing a roadmap to improve our renewable energy target.
In the current environment, where energy is somewhere at risk, I think you could imagine that we have started that already in 2018 with 3%. Today, we are at 77%, and we have a roadmap all clarified per site per machine per equipment to move that into renewable energy with the full 100%. I think that is something where we feel really proud about. We've also looked at our Scope 1 and 2 emissions, also something which was a journey going forward, which was based on the Science Based Targets initiative, so these are not just numbers. Those are validated numbers. We have had a roadmap which initially started with 30%.
We found ways in implementation, execution, towards 50%, and we made so much progress that we now feel that we can move it up to 59%, which is nicely in line with the 1.5-degree commitment at the COP21 in Paris. We should see official validation results later this year because this will also be validated by the Science Based Targets initiative. These are not only our numbers and our plan, but we also ask external companies to validate that. Finally, we are working to move from a relatively Scope 3 intense target towards an absolute reduction target that creates more transparency, is easier to follow, and that is what we're currently working on, and more of that to become available in 2023.
That is in terms of planet. Let's move to the slide on people. People, planet, profit. Also here, our employee engagement 76%. We also do pulse surveys throughout the year, and I can tell you that our people are as much engaged as we've ever seen. Although I think the difficult environment would expect people maybe to drop off, but certainly not in DSM. I think we'll see during the pulse survey that we are still having huge engagement within our company, something to be proud of. On safety and also on diversity, I think we're making progress. I think the target on safety is below 0.20. That will be absolutely leading in our industry.
We have the first half of 0.27, but we have all the roadmaps there and behavior sessions there to bring it into a really leading 0.20 frequency index. Then on diversity, it's always high. We're basically looking at female executives, one of our targets. Obviously, we'll look at diversity in a far more broader lens, but this is something which we made very transparent with you, and we are making progress on that target as well. Overall, on planet and also on people, being a people, planet, profit company, we are making progress, and we're also willing to make progress and be very transparent on our ambitions and targets on that. With that, maybe let's move to Dave to open the Q&A.
Yeah. Thank you very much, Dimitri. Indeed, time for Q&A. Remember that the sell-side analysts who want to ask questions have to register via an audio conference link, which they could find on the website. As I said at the introduction, we can't take today any questions on the merger. I think when I see a signal, yeah, I think we already can start. Operator, I think we can go for the first question.
Thank you, Mr. Huizing. Our first question will come from the line of Matthew Yates, [from] Bank of America. Please ask your question.
Hey, good afternoon, everyone. A couple of questions, please. You referenced some of the supply chain challenges that constrained your growth and left some untold backlog on the human side. Can you elaborate a little bit what those raw materials were that you were missing and how that's been resolved? Maybe, particularly for Geraldine, just on the guidance. Your guidance is in reported currency rather than constant currency. Just trying to get a sense of how incrementally favorable the move we've had in exchange rates this year has been for you. If you wouldn't mind just reminding me the difference between translation and transaction exposure across the business. Thank you.
Sure. Hi, Matthew, and welcome on the call. Dimitri, do you want to start with the raw materials, and then I'll do the FX?
Yep. Yep, let's do that. Hi, Matthew. Thanks for that question. Indeed, first of all, it was not only raw material elements. It's a continuous battle to get product and customers being delivered and also having our suppliers delivering to us. I think we've been so far pretty successful in doing that. In Q2, what we have seen in COVID in China is that a few of our sites were only allowed to run at half capacity or maybe at reduced capacity. We had people camping on site because of the travel restriction because of COVID. It shows a little bit about the engagement in itself. By the way, we've now seen throughout Q2 and into Q3 that there is a bit of relief there.
I think China is opening up, but hey, I mean, it's very difficult to forecast how that will look like for the second half of the year. That has relieved a little bit. Just to give you an example, I'm not going to go through all of them, but an important example has been our vitamin C production in Dalry in Scotland, where we are depending on raw materials to supply and to produce the vitamin C. We have operated at rates even below 50% for a certain amount of time. That has been resolved because obviously, we're working on supply chains on several fronts, so we are back at 100% capacity production rates at Dalry.
Just as an example, what has hit quarter two for us?
Thank you, Dimitri. Let me come to the foreign exchange. Indeed, we do not report at constant currency. We include it all. When you look at the first half, let me start there maybe from an FX point of view. You remember that, for H1, we had about a EUR 10 million benefit from foreign exchange. In the second quarter, we had about EUR 23 million, and that's about 6%. If I average out, it's about 4% on H1. Now, when we are looking at our outlook, it does include the foreign exchange. Really, if you look at the different moving parts, what we're seeing going into H2 is a somewhat smaller contribution from M&A. It was 1% in the first half.
It'll probably be half a percent, simply because of the timing of First Choice that was already in from for one quarter last year. We also would expect the effects to be a little bit lower going forward. We are seeing this normalization of volumes that we talked about in Q2, you know, the lockdowns, what Dimitri was just referring to. That's the build-up for the outlook. When it comes to translation and transaction, what we give as a rule of thumb for exposure is an exposure in Swiss francs of about CHF 700 million. Now on continuing operations, we have to be a bit careful here. It's about $1 billion on the US dollar. We hedge transactional exposure, not translation.
It doesn't really economically make a lot of sense to hedge translation. There are some currencies that we don't hedge, like the Brazilian real, which is, you know, has had at times some effects as well. What we are seeing is, of course, that overall, the euro is somewhat weak versus probably the basket of currencies for us at present.
Thanks very much, guys.
The next question is from Martin Roediger. Please go ahead with your question.
Thanks. Firstly, on the cash flow, I remember that in Q1, you still had a cash flow guidance of adjusted net operating free cash flow to increase. I guess this is not anymore the case after the first half with 0 net operating free cash flow. Can you talk about your expectation now for the free cash flow and primarily for the continuing operations there? Secondly, on the gas availability in Europe, I know you are not an energy-intensive company, but can you talk about a, the direct risk about not getting sufficient gas for your own production and the indirect risk, i.e., from your suppliers not being supplied in total with raw materials? Thanks.
Hi, Martin. Thanks for your question. Let me start with the cash, and then I'll hand to Dimitri for the CapEx. Cash flow, yeah, indeed. We had a guidance that was for total company. We did not segregate materials with nutrition, et cetera. We were anyway not gonna. It was difficult to have a comparable start of the year. We decided to focus on EBITDA growth for the guidance on HNB. Now, as you have seen, of course, the first half of the year has been challenging when it comes to the cash flow. I think we are not alone in that situation. Now, when it comes to the second half of the year, we will strive to have some positive cash generation.
Whether it's enough to offset this difficult start of the year, we will have to see. It has, of course, a lot to do with also the supply chain and the stability that we can see there. When we're looking at the level of inventory, and in fact, maybe that's worth giving you a little more color here. When you look at operating working capital, when receivables are fine, we're not seeing any increase in bad debts, et cetera. We're seeing a level of about 70 days receivables, so nothing unusual versus prior. Payables are actually a little bit higher, but nothing very unusual either.
We are seeing clearly that we have been higher levels of inventory, both in terms of raw materials, some inventory in transit, and also some because of in transit, some end products, as well. That one is a little harder to call because we will always make the choice of prioritizing customers over working capital. The intention is, of course, to try and reverse this trend in the second half, as we go there. Difficult to give you a clear guidance on that. Dimitri, gas?
Yeah, gas indeed. A hot topic, indeed. I liked how you introduced it. We're not maybe between brackets no longer an energy intensive company. I think, we're about 3%-3.5% of total sales, which is linked to energy. Just to clarify also for everybody, we don't use gas as a feedstock. We only use it for generation of electricity and steam at our larger manufacturing locations. I think that prepares a little bit from a risk perspective. We have mitigation plans in place for these sites who are using gas to make energy and steam. Remember that in Sisseln in Switzerland, we moved to biomass a couple of years ago. I think that was even before we had these issues, which we've seen today. We've also...
I just explained a little bit our journey onto renewable energy, where we're moving our renewable energy percentage up, so that's helping us. We have sites where we have mitigation plan where we could switch to oil if needed to generate steam or electricity. For some of the sites, we have prepared safety stocks, so in case we'll be ready to act. Overall, our total spend on energy is about EUR 300 million, of which EUR 200 million is gas and EUR 100 million is others. From the EUR 200 million we have hedged 60%-70%, and we have mitigations in place. From a direct perspective to the first part of your question, I think we're well prepared and I have less of a concern.
The indirect question I think is more important. What we have done is we have screened our suppliers from a gas risk perspective. I think it's always good for companies and certainly also ours to have multiple sources of suppliers for key products. We have reviewed that, and I think we're in a good space. Like everybody's doing that, I think we need to see how resilient the industry will be. We are well prepared from a direct perspective as well from an indirect perspective. The last point, be aware that we have a very global infrastructure with sites across the globe with more than 200 sites including premix sites.
If it's needed, we could switch production from one continent to another if it's needed to supply our customers. I think we are well prepared, although, you never can say that you are fully prepared because, yeah, the unknown is unknown. I hope that gives a bit of color.
Thanks, Dimitri. Actually you reminded me of a point that I should have mentioned on the working capital, and that is the shutdowns. In the second half of the year, because you talked about safety stock, we also built up some inventory to handle a number of shutdowns. They're all scheduled, so there's nothing unusual except there's a couple of somewhat lengthier ones that will take place in the second half. That will also obviously help reduce somewhat the inventory that we have built up in anticipation of them.
Thank you.
Thanks, Martin.
As a reminder, if you do have questions for the panel, please dial star one. Our next question comes from Chetan Udeshi with JPMorgan.
Yeah. Hi, good afternoon. A few questions. First, I was just referring to your comment about improved exit rate into third quarter. I was wondering if you can give us any more color on how much improvement have you seen in Q3? I'm more interested on organic EBITDA because if my calculations are correct, you know, in second quarter it was the EBITDA was down about 2% year-on-year organic basis. Are you expecting an improvement on organic growth on EBITDA in Q3 based on the exit rate that you see at this point? The second question was more on animal nutrition.
We've seen a lot of data points from across the supply chain talking about a more challenging situation in the livestock industry, especially Europe, because of high crop prices, you know, downgrading, farmers going out of business. There's no mention clearly, you know, you've not seen any of that in your numbers, but there is also no recognition of that in your commentary. Maybe can you address that point? Why is it that we've not seen that impact on DSM's numbers so far? Is there a mix issue? Is there a geographical issue, or is there a risk that you might see it with a lag? Last question, just on P&L. I noticed there was a big restructuring charge or at least sizable in Q...
Sorry, in first half of EUR 50 million or so on EBITDA line. Can you maybe give us more color on what is driving that? Thank you.
Yeah, sure. Welcome on the call. Thank you for your questions. Let me start with the first and the third, and then I'll hand over to Dimitri on the animal nutrition dynamics. Maybe when it comes to the underlying EBITDA, indeed, if you take Q2, you end up with -2%. Remember that also factors in this impact of the China lockdowns of about 3%, the backlogs of about 1%. Then we do see that in this environment of continued inflation, we still have a bit of a time lag when it comes to pricing versus the inflation of the cost base. When we're looking forward, we believe, you know, but broadly this order backlog will unwind over H2. That should be fine.
We do not expect the COVID lockdowns in China to continue or to be as severe. Of course that is to be seen, but we hope that that is the case. What we do expect is that we will be in positive territory when it comes to EBITDA growth underlying in the second half of the year. That should hopefully help you on that bridge. Then when it comes to the APMs, if you remember last year, we had launched quite a lot of restructuring to get our Health, Nutrition & Biosciences organization ready, and tilted to how we are now running the company. This was
I know we shouldn't talk about the merger, but this was actually, you know, very important for our future, particularly when it comes to Food & Beverage, and knowing that we wanted to build on that, and that will be the pillar for Food & Beverage slash Taste and beyond. Now, this did come with some programs, and what you're seeing is basically the unfolding of those programs. We had given the guidance at the time that in 2022 we would probably have still about EUR 40 million-EUR 50 million related to that. That's one part. The other part that you're seeing coming through in the first half, of course, the costs relating to the portfolio changes. Some to do with the preparation regarding the deal, but also the carve-outs, et cetera.
That's the buildup of the 52. Now, Dimitri, Animal Nutrition.
Yeah. On Animal Nutrition, to your point, if you look at the USDA protein demand reports, that show still good demand for proteins, although Europe in that whole range is on the lower scale of it. You hinted on that. If you look at the reports, that's definitely the case. Be aware that DSM is in the ingredient space where we help farmers to improve on sustainable farming to reduce emissions, so really in that innovative area, as well as creating yield and productivity. That is something which we still see with a very resilient demand. Input prices are high for the farmers. However, if you look at meat prices, they are also high. If you look at milk prices, they are high.
As of today, as a farmer, the margins are still okay. It looks a bit weird because the input prices are high. The moment that the meat prices are coping and keeping up the pace, I think we're all okay. In terms of risk of downtrading, that's the beauty of our Animal Nutrition & Health business model, because we are relatively independent and relatively immune to these all these changes. If we would look at downtrading, and that is something which has happened in the past, and it's also happening at the moment that you do see that there are COVID lockdowns, where people are going to easy-to-prepare proteins, which in this case, in most of the cases, are poultry and eggs.
For DSM, the poultry and eggs PC is one of our biggest and strongest PC in terms of competence and in terms of sales. It's about 45% of sales in Animal Nutrition & Health, and we have huge competence there. Secondly, if you go into, let's say, from red meat to white meat in the quote downtrading, the inclusion rates of our ingredients in poultry is higher than in others, so it could even work for us. That's the reason why you don't see us saying anything on that, because the business model which we've created, which is a global business model, at every continent, every country where it matters, we are there. If there are changes in the regional setup, we pick it up somewhere else. In terms of species, you'd see the same.
If beef and aqua is going down, other species will go up. That is the beauty of the business model we've built with Animal Nutrition & Health. I hope that gives a bit of background.
Thank you.
The next question is from Andrew Stott with UBS. Please go ahead.
Yes. Good afternoon, Dimitri. Good afternoon, Geraldine. A couple of questions from me. First of all, on HMO, you said when you bought Glycom, you thought the market could quadruple by mid-decade. How important is China approval to that? And can you give me a sense of how quickly you could start selling in China from the actual rubber stamping of that technology? And then could you also remind me of which other countries you still need approval from? All those questions are for HMO. I've got a second question as well, sorry, sticking with the pipeline. On Bovaer, as you look into 2023, in my shoes, would you put much in for revenue for Bovaer, or are you still gonna be in the pilot plant, Elanco ramp-up stage? Thanks.
Okay. Dimitri, do you want to take HMO?
Yeah, let me take HMO. Thanks for that question indeed. What we have seen is HMO have grown quite a bit outside ELN, Early Life Nutrition. Initially it was prepared in terms of sales in Early Life Nutrition. We do see recovery in the Early Life Nutrition rate, so we also see pick-up of innovation of our customers who preparing product launches with ingredients and approvals. That I think is really good news. It's not only now outside ELN, but also at ELN itself. China is an important bit. As you've seen, we've made far quicker progress than we thought. I think in initial discussion we always said somewhere in 2023.
We have made so much progress on the regulatory approval in China that we're now willing to consider the approval, and we got separate approvals in the meantime that we most probably will get it before the end of the year, and then we can start selling with inroads also with our key customers into China, but also customers in China themselves. It's definitely China is a key market for early life nutrition, and therefore this approval is an important bit. By the way, this has something which was when we acquired Glycom. We've seen as an additional spin-off. We saw it as an opportunity on top of the business case what we have seen, and the acceleration of that is really helpful. That is one.
In terms of innovation, we have approvals. We have certain products which are already approved, but we also innovate the new versions of HMO, and that need to go through approval process as well. The same, another big region for us will be U.S., and there we will follow on that same process. That is a bit of background on the HMOs. Maybe you, Bovaer, Geraldine.
Yeah. When it comes to Bovaer, as you know, we're working on Dalry, which is our site in Scotland, and that will bring the material capacity. It should come on stream in 2025, and that's where you will be able to see a nice ramp up. Now, from here till then, we expect to reach about EUR 100 million of sales by 2025. Now, exactly how much to put into 2023, maybe give us a little bit more time. What we are seeing is a lot of traction. Clearly the Global Methane Pledge signed by a lot of countries to reduce 30% of methane by 2030 does require effectively a solution from methane coming from agriculture and livestock.
Also what we're seeing is, of course, that the Scope 3 targets of a lot of our customers also means that they have to think about how to address methane. Remembering that methane is more than 84 times more potent than CO2 on a 20-year lifespan. It is, when it comes to climate emergency, the biggest driver that can be used. We are seeing a lot of traction. Now, of course, these pilots are required to make sure that it will work fine, et cetera. Give us a few more months and maybe, you know, by the time we give you an outlook for 2023, we can be a little more specific.
Thanks, Geraldine. Thanks, Dimitri.
The next question comes from Nicola Tang with BNP Paribas.
Hi, everyone. Thanks for taking the question. If I could start and ask about the cost inflation side. I think the last time you guided was back in February for 5% cost inflation. I was wondering if you could just talk about what you're seeing today and perhaps a breakdown of what might have moved since then, and whether you're still confident in offsetting that in absolute terms with pricing this year. The second question is related, it's on pricing, and I wanted to ask about spot vitamin prices. I know that the sensitivity to spot prices has, you know, significantly declined over time, but I think we've seen prices starting to fall a little bit.
I was wondering how easy is it for you to push pricing across the whole of your business against a backdrop of deflating vitamin prices? Thank you.
Thanks, Nicola. Nice to hear you, and thanks for being on the call. Let me start with inflation, then I'll pass to Dimitri on vitamins. Indeed, if you think back to inflation, in fact, we saw inflation really start ramping up in Q4 last year. With the full year outlook, we had done our homework, and we estimated that the inflation would be about 5%, and that's what we had in the outlook at the start of the year. Now, if you actually look at Q1, we had given an indication that actually it would probably be a bit higher, adding 2%-3%, so taking us to sort of a 7%-8% inflation.
If I look at where we are now, partly because of the energy issue that is across the supply chain, we're probably now looking at about 9%-10%. It has been an environment of, you know, increasing inflationary pressure going through. Maybe that's a good segue into looking at the time gap between pricing and inflation. If you look at our pricing element on the top line for the first half, you see there that we have 8% pricing with animal nutrition at 11%. It's one has to remember that in animal nutrition we have quite a lot of pass-through costs. Ingredients that we source to then include in our premix, roughly say about half.
If you adjust that element, we probably are sitting on around 5.5% of effective pricing versus the inflation in our cost base. That's why we're still seeing this time lag, because we've been a little bit, you know, continuing to be very proactive, but we still have a bit of a gap between our ability to fully price through on this inflationary element. Now, what will happen in the second half is we will, of course, continue to be extremely diligent on all the pricing actions that we need to do. We will see some of them actually take effect across the whole of the second half. The big question mark is, of course, what is the world going to do in the second half of this year?
What we would expect is that maybe there is still, you know, the inflationary environment will continue into 2023, but our ability to close that gap will be really determined by whether inflation continues to go up a scale or whether we will see a bit of a flattening of the curve when it comes to the inflationary trend. Hopefully that helps you a little bit with the bridge on inflation and pricing. Dimitri, vitamin pricing.
Yep. Starting with a good demand for our vitamins and our ingredients. That's the starting point. Secondly, we said it many times before, there is no vitamin who exactly looks the same. In that sense, all these vitamins have their own supply and demand, but also technology competencies to it. They're all independent from each other. What's happening on vitamin A has nothing to do with vitamin C. Vitamin E has nothing to do with some of the minerals. You need to see it in a basket perspective, and I think we've shown throughout the years also with our production and sourcing.
A keen decision on where we make ourselves and where we source that we manage that very well, and I think at the end of the day, it's all about the basket where you make a difference. I've mentioned the vitamin C example. Obviously that had a supply capacity issue to it. Also the COVID-19 China has all types of impact to it. We're very confident that the basket in itself we've managed in a good order, and we're not looking at a downward or an upward trend itself because at the end of the day, the majority of the ingredients we sell is via premix formulations or formulas in itself.
Direct sales of what we call straight sales has been reduced over time, and I think we've managed that well. That's a bit of a background to your question.
All right. Thank you.
The last question is from Cathal Kenny with Davy. Please go ahead.
Good afternoon, and thanks, team. My question's firstly on the Food & Beverage division. I think the two largest subsegments within that are beverages and dairy. I think about 55% of total sales. Can you provide some commentary on performance in Q2 and the outlook for those subsegments into the second half of the year? Second question is a follow-up on animal nutrition. Are you budgeting for volume growth in H2? And my final question then is on fermented stevia, just how that is performing versus internal expectations. Those are my 3 questions. Thank you.
Thank you very much for your questions. Let me start maybe with animal nutrition, and then I'll pass it to Dimitri. On animal nutrition, as you saw, the first half of the year was very much pricing driven. Partly we had this de-stocking going on in the first quarter on the back of last year, very high levels. We had a 6% de-stocking in Q1. We saw that very much fade in the second quarter, and therefore we do expect that in the second half we will have a more balanced volume and price effect underlying the growth in animal nutrition. That's to your question of volume on ANH. And then Dimitri, beverage and dairy?
Yeah. I think you're right in terms of beverage. That's about 25% of the Food and Beverage unit, and dairy is about 30%. Let me not go into outlooks per segment and per category, so I hope you excuse me for that. I think overall, I think the Food and Beverage businesses have shown a very good pricing momentum. If you look at the pricing momentum from 3% in quarter one into 7% into quarter two, I think we have that pricing momentum ongoing. Food and Beverage also in terms of volumes, I think are really bringing into a very good momentum into Q2.
What we have seen in terms of vitamin C goes also in the food and beverage, so we're now back on track in our Dalry plant in Scotland with a good momentum of the order book into Q3. I think across all segments within the food and beverage industry, so also for brewery, also for the enzymes, also for pet food, and the likes. Then to stevia, to your question, we always have done this with a collaboration and partnership with Cargill because they have the route to market to the sweetener part.
Remember, if we had to do it ourselves, that will really take time to build that route to market ourselves, so we've chosen that jointly with Cargill to go for a joint approach into the sweetener market with the stevia, the EverSweet product which we have developed. What we have seen is that we have great progress into customers where we have new product launches. Boston Beer was one of them with the hard seltzers. We have lined up several of them now also with COVID almost gone in the western part of the world, innovation and product launches are really the name of the game.
What we do see is that the EUR 100 million of sales, which we've always looked at in 2025, I think is within reach, and that is something where we currently are aiming to. What we do see is that there are opportunities for stevia, which is sugar replacement, but obviously sugar replacement is kicking sugar out in the existing formulas, and that takes a bit longer because then you've got to redefine your existing formula with a new ingredient. Obviously that's a fantastic opportunity as well. First of all, we go for the new product launches to make stevia work.
Okay.
Thanks for the detail.
I think the operator said it was the last question, so that means we're done with the Q&A. Dimitri, you want to make some closing remarks?
Some closing remarks from my side. Yes. Really fantastic to have you all listening in and we thank you very much for listening to the Q&A session. We thank you for having a fantastic full year outlook, which was unchanged with good organic growth for the company moving forward, and I think we're very confident that we continue our journey on people, planet, and profit. Thank you.
Okay. Thank you, Dimitri. Yeah, that means we are at the end of today's webcast. As usual, any further questions, please reach out to us before you go to the beach. Anyway, thank you, and have a nice summer.