A warm welcome to everyone, and thank you for joining us today for a short trading update call on DSM's first quarter performance. I'm Dave Huizing, Head of Investor Relations, and I'm joined today by our co-CEOs, Geraldine Matchett and Dimitri de Vreeze. We published this morning the first quarter press release, which you can find on our website. Here you will also find the disclaimers about forward-looking statements made in today's conference call. We did not publish a separate presentation to investors, so don't look for it. As this is only a trading update, we will aim to keep this call to about 45 minutes, which includes a short introduction with Geraldine. With this, I hand over to Geraldine for that short introduction.
Thank you, Dave. Hello from me as well, and thank you for joining us on this call, especially as it's not our usual rhythm to have a call outside the full year and half year results. However, given that this is our last financial update as DSM N.V. standalone, following the completion of the tender process and given the market volatility, we thought that it would be helpful to provide as much clarity as possible before we go into the reporting of the DSM-Firmenich combined company. Now, this is indeed a trading update, which means that we're providing the business top-line development and the group EBITDA. For that reason, as Dave just said, we haven't prepared a deck. But I'll just give a few introductory comments, and then we will open the line for the Q&A.
As context, of course, when you compare Q1 versus Q1, in the first quarter of last year, our performance was not yet impacted by the war in Ukraine and the extraordinary pace of inflation that followed, that is still very much in effect at present in 2023. For this reason, the year-on-year comparison has been challenging for Health, Nutrition & Bioscience overall, with our sales down 6% and the EBITDA down 23%. It is probably more useful for us to comment for you on a sequential basis, i.e., the developments in the business conditions from Q4 into Q1 2023, and therefore my comments will be more on that basis going forward. Let me start with animal nutrition.
As we indicated during the full year results call in February, the exceptional conditions that it was experienced by Animal Nutrition & Health during the latter part of 2022, and especially in Q4, actually continued throughout Q1. Whilst we see the consumption of animal-based protein remain resilient, the combination of soft demand, especially in China, the continued high input costs, and a decline in vitamin prices has impacted the financial performance of Animal Nutrition & Health. Within that division, Performance Solutions continued to perform well and actually was strong across the globe, with continued strong interest by farmers in optimizing their yields and their efficiency. In terms of our human activity, conditions were also broadly similar to Q4, with continued end market demand, good end market demand overall, and good business conditions in our key segments.
During the quarter, we did experience quite a bit of destocking in the value chain. We also chose to focus and prioritize on profitability over volume. This does translate into a lower top line. A sequential improvement in margins. More specifically for Health, Nutrition & Care, we saw continued good demand for our eye health products, especially gut health, brain health, women health, and the weakness in immunity optimizing dietary supplements in North America. We also saw some destocking through the value chain. As for Food & Beverage business saw resilient end user markets. We also experienced some destocking in the value chain. End user demand in dairy, baking, beverages, savory, and pet food markets was solid. In hydrocolloids, the demand remained strong.
Now, from an Adjusted EBITDA perspective, it is clear that the lower profitability Q1 versus Q1 is driven by the exceptional conditions in our Animal Nutrition & Health business. Overall, the drop in EBITDA is roughly 50% related to lower vitamin prices, mainly vitamin A, and the other 50% related to the lower volumes and the continued price cost gap linked to inflation. Now, as mentioned in our press release, for the second quarter, we do not expect to see much change in these underlying conditions, but we do expect a better H2 with inflationary pressures receding, a volume recovery, especially in China and vitamin pricing beginning to normalize. Finally, in recent weeks, we have of course, also marked a number of milestones leading to the completion of our merger with Firmenich.
Now, the tender process is now complete, and we gained the support of more than 95% of our shareholders, which means that the contribution of Firmenich into DSM-Firmenich can now happen, and that will take place on May eighth, so next Monday. We of course extremely excited by the compelling business combination that this merger will bring, driving significant opportunities for growth and for value creation for our shareholders and all our stakeholders. I want to say here that we are very grateful for the support that we have received throughout this process. Now, these were our introductory comments, now Dmitri and I are happy to take your questions through the Q&A. For that, I need you, Dave, to open the Q&A line, please.
Okay. For sure, Geraldine. Remember that sell-side analysts who want to ask questions in the Q&A session have to register via an audio conference link, which you can find on our website. I think by now we all got that. The other participants can continue to listen in this Q&A session via the Zoom meeting, so they don't have to do anything. As we already have people in that audio conference room, we can start. Operator, please let us have the first question.
Thank you. First of all, I would like to ask the Q&A participants to press star one to register for questions. The first question is from Andrew Stott with UBS. Please go ahead.
Good afternoon, Geraldine and Dimitri and Dave. A couple questions, please. Number one, are you prepared to say what % of the vitamins portfolio today is profitable? I'm just trying to get a sense of potential further downside, particularly from vitamin E. Number two question. I've read a lot about the China problems in livestock production. It feels like it can get slightly worse before it gets better, i.e., the virus can spread to the south of the country. I'm wondering whether you would agree with that, rather gloomy short-term prognosis. Question attached to this is how big is China as a % of animal nutrition? Thank you.
Thank you, Andrew, and thanks for joining the call. We heard you a little bit muffled, but I think we got the questions. Dimitri, do you wanna comment maybe to the vitamin picture? Because that, of course, is a topic for today.
Yeah. Indeed. Andrew, thanks for that question and also my behalf. Welcome to have you on this call. Indeed, percentage of vitamins which are profitable. I would say the majority of the vitamins are profitable. We have indicated that certainly on specific occasions, like vitamin A, where there is an unusual circumstance with China opening up, but very slowly and therefore impacting the demand of animal protein in China. Remember, China is the biggest market for animal proteins, and therefore it has an impact on the demand. Therefore, the 80% of vitamin production, which is produced in China, is obviously selling it outside China, and therefore an overall pressure on vitamin prices. That in the context.
Vitamin A has a special circumstances with obviously a BASF coming back into the market and also selling material which is close to shelf life. That is a temporary situation which will normalize. As we have said in our press release, we expect vitamin prices to normalize in the second half of this year. Vitamin E is a completely different story. Vitamin E has different dynamics. Supply and demand is relatively in balance. Obviously also a bit impacted by the soft demand in China, supply and demand is nicely in balance and is in that sense, a completely different part.
In terms of human nutrition and health, which is the Food & Beverage unit and the Health, Nutrition & Care unit, we made a deliberate choice to put price over volume, and therefore we have walked away for some of our vitamins business and predominantly vitamin C. As you know, our business in animal 2/3 is sold by premix and 1/3 in straights. These lower priced vitamins are predominantly in straights. We made a deliberate choice, and therefore you're seeing our margin improving, but it had an impact on the volume component. That a bit of a color to your broader question.
Yeah. Maybe Andrew, to your question on African swine fever. This is indeed. Well, there's different parts to the China demand. Let me start maybe there. First, if you remember after the hard lockdown of COVID, there was clearly an expectation that the consumption would increase quite rapidly because consumption of meat is particularly out of home. As it all opened up, there was a view that there would be an increase in consumption per se. What we're seeing is that this has been actually quite a slow process as opposed to a bounce back, which is one aspect of what is happening in the market. The other aspect is that indeed there has been another African swine fever scare.
For farmers who have been wiped out in the past, this was very much a trigger to basically accelerate and take the animals to slaughter, but also not to increase their herds. Currently the herd size are pretty small, compared to what we would have been expecting at this point in time. There is a glut of effectively of meat on the market. In terms of your question, do we think that, you know, it's at the trough? Well, difficult to tell, of course, with these outbreaks. The authorities are increasingly quick at responding, but the risk is there.
What we do believe, however, that's why we're saying the second half should be better, is that the consumption will pick up, what we also see is when that happens, you know, it gets better for farmers, and then they start again. Difficult to call out the African swine fever impact, but we really would be expecting to see an improvement when it comes to the dynamics in China for, in particular, swine. Remembering that China represents about 50% of the global swine demand. Yeah, this oversupply and the African swine fever is a bit of a combined exceptional position. Dimi, I see you go, "Whoop, whoop.
Yeah. I just want to add, and also again, circle back the last question of Andrew on how much China is in ANH. That's about 15%, Andrew, and you can all see that back in the fact book. I would like to add on what Geraldine is saying on the ASF. Be aware that we have a very strong business model in Animal Nutrition & Health. Obviously if there are any ASF in China, the animal protein demand is the main driver. Other countries will pick it up. We have a very global reach as DSM. We are basically in every market where it really matters, also with our premix facilities.
Be also aware that we have, our input to all the species, so, into ruminants, into pork, into poultry, and that is mitigating a little bit the variations. We've also seen that during COVID where people are going more to easier and cheaper proteins, like poultry and eggs, and that's also in our basket, in our portfolio. To a certain extent, I would not say we are immune, but we have a solid business model to cover that.
We'll take our next question from Ranulf Orr with Citigroup. Please go ahead.
Hi there. Thank you for taking two questions from me, both on vitamins, I'm afraid. The first one is, you know, I appreciate we're in exceptional times for vitamin markets. I guess we've kind of been here before. Once the Firmenich transaction completes, is there a strategy to further limit your price exposure, just beyond vitamins being a smaller part of the mix? Secondly, please, can you give us an update on your view of the vitamin A recovery timeline and really actually what gives you confidence there will be a recovery? I guess vitamin A prices, you know, today are at comparable prices to where they were for most of the 2010s. That'd be great. Thank you very much.
Yeah, indeed. Let me take those. You should not say it, I'm afraid, I have a question of vitamins. I think vitamins are an essential ingredient in many of the solutions we offer to animals and farmers and humans. There are a few particular situations here which you refer to. Let me start with a bit our journey on vitamins. Remember that in the past, the majority of our portfolio was vitamins, and we always had a path to reduce that exposure and also reduce volatility. Today, we are about 25% at our own produced vitamins, and remember that we also deliberately decided to start sourcing vitamins, certainly in the animal nutrition area.
If we, if we complete the merger, and as Geraldine has said, that will be next week, pro rata, that will be close to around 15% at own produce. This is part of the storyline. If you look at the acquisitions we've done, those have been in the areas outside vitamins, that have been in probiotics, have been in HMOs, it has been in mycotoxin binders. This has been a continuous effort, including our innovation portfolio. Indeed, that is a pathway. Nevertheless, what we have seen on vitamins is that today on vitamin A, nobody is making any money at these prices.
You can refer to, I think, public announcement of many of these players, and you will see that they all cover vitamin A and all are saying that they're not making any money. That is one. Secondly, BASF is close to selling off all their produced stock when they were coming back, which is running out of shelf life, and that will also roll out and fade out throughout 2023. Thirdly, the moment that China is further opening up, and they are opening up and they come back on track, and it takes a bit longer than maybe we'll expect it, then we're on track, then the demand protein will improve.
If you then add one,two and three together, I think it's very clear, and I'm not saying safe to say, but it's very clear that we expect vitamin prices to normalize throughout the year and into the second half. We don't see that in quarter two yet, but we certainly are expecting that for the second half of the year.
Great. Thank you.
We will go next to Nicola Tang with BNP. Please go ahead.
Hi, everyone. Thanks for the call. The first question I wanted to ask is a little bit about volumes. You know, when you look at that 8% volume decline in Q1, how much do you estimate could be from destocking versus stepping away proactively, so stepping away from volumes to protect your profitability?
How do you kind of, I guess, split and estimate what's what? The second question is on price. I was wondering if you could talk a little bit more about price expectations for Q2 and for the rest of the year. Are there still areas where you're implementing further price increases to catch up with past inflation? Is it more at this point, an annualization of past initiatives? I guess tagged on to that, are there any areas where you would consider giving back price in order to regain lost volume? Thanks.
Thanks, Nicola. Let me give you already some color on the volume movements, and then we'll tag in some price comments here. Maybe on volume, let me try actually start with human nutrition, because here, maybe it is a development that is, you know, maybe not as expected, whereas the volume developments, I think, on animal nutrition are not a big surprise. Now for HNC, what we have seen broadly, you saw a -7% in volumes for the quarter, you can look at it broadly, a third, a third, a third. A third related to destocking in the value chain, and we have seen that in a number of places, I think, in line with the rest of our peers.
There's about a third related to end user demand. That's really more the dietary supplement space that we've pointed out previously. About a third where we're making a choice of basically price over volume. That's how you can broadly split the -7%. From an F&B point of view, so food and beverage, here what we're seeing is that actually end user demand is pretty resilient overall, and it's actually more of a, of a two-piece, about 50/50, half destocking related to the value chain and about half where we've really prioritized price over volume. That's really the split there. Dimitri, do you wanna comment on pricing?
Yep. A bit on pricing. Remember that we have in our human space, these are normally long-term contract pricing, a year, sometimes one and a half year, and they roll over. They're locked in. You can also see that in the numbers with nice price increases for Q1. On animal, that's more on a quarterly basis with some exceptions here and there. There we basically price on a quarterly basis. What we see is that on the vitamins part, like I said earlier, we think that vitamin prices will bottom out and normalize towards the second half. That creates that momentum also in animal nutrition to bring that up. In terms of inflation, we expect inflation to ease in the second half.
With the pricing momentum we have, we expect that we could hold on to that. We also have to do that because as Geraldine already explained, we still have a lag still in the price and the cost. We expect that to close towards end of 2023. It depends a little bit on how inflation will develop, and it has different elements to it. I think energy, raw materials, transport pricing, we see easing. However, we now see labor costs going up. We need to see how that works. You need to be careful in seeing the immediate effect because we have about five months of stock where it's basically taking five months to roll that into our results over time.
We are more positive about the second half of the year. Overall, we have that pricing momentum. Human is fixed. Animal, we have that on a quarterly basis, and we expect with a normalization in the second half of the year, a pricing momentum for us.
Thanks. I wonder if I could follow up on your last point, Dimitri, on cost inflation. I think before you were talking about 5% overall for the year. Does that still hold? In terms of what you're talking about, you know, there's improvement in the second half. Is this more an annual thing or are you actually seeing more easing than the original 5% expectation?
Maybe-
We basically said indeed about 5%. I mean, I would almost say we're not economists in the world, but I am. The economists think it's about 5%, and I think that's baked in into our assumptions, but more towards the first half than the second half. Like I said, I mean, lots of people didn't expect labor costs to go up as we've seen today. I think I've said it early in the call, I stopped making any forecasts or estimations on the inflation. But certainly, we are working with 5% as a reference number.
We'll go next to Matthew Yates with Bank of America. Please go ahead.
Hi. Thanks very much. Afternoon, everyone. Maybe just then to follow up on Dimitri's comment about the five months of inventory. Is that where the confidence in margin recovery in the second half comes from? Correct me if I'm wrong, but I feel like we've been talking about this EUR 30 million-EUR 40 million price co-cost gap now for several quarters, and you haven't actually managed to close it. Is it just a matter of patience or lag to work down that legacy inventory? The second question I had, just coming back to animal volumes. My understanding of kind of the premix business, or proprietary customer formulas is that they've refined those recipes over many, many years to get the best kind of economic paybacks and mortality outcomes for their livestock.
Have you seen recently a change in the inclusion rates of the vitamins as farmers are trying to save money? I'm just trying to understand whether the volume decline we've seen could be something perhaps more structural rather than cyclical.
Thank you, Matthew. Let me start with the first one, and that is the time lag. Maybe to put numbers on to all of that. We've been a little bit behind the curve when it is our ability to price versus inflation. If you remember last year, we were at about 7% pricing versus about an 11% inflation in our cost base. We had, for example, in Q4, a time lag effect of about EUR 20 million. Now, if I look at where we are in Q1, we're seeing actually a similar time lag, and this really has to do, you're correct, with the inventory. What you have is you get a carryover of your inflation. Your cost of goods sold that are in the P&L are of course, coming across at the higher inflated level.
Now what we're seeing is on top of that you have the energy cost has a delayed arrival time when you look at raw materials. What we're seeing is that we do have this natural hangover of inflation in the cost of goods sold, which is clearly still present in Q1 and Q2. You should not expect that time lag to go in Q2. However, it will start fading in the second half. That's an important element. You know barring, as Dimitri said, we're not economists barring other disruptions. As the way that we're seeing it, that is the time lag effect. That was on your first point. Dimitri, do you want to comment to the animal nutrition?
Yeah. Indeed. What we've seen is premix. Indeed, you jointly develop and formulate. Depending on the circumstances, farmers make different choices. What we see today, where it's relatively soft demand with higher feed costs, they are really trying to optimize their efficiency and yield, and therefore they change a little bit the ingredients in the premix. We've seen that in our Performance Solutions business with enzymes, with mycotoxin binders and the likes. You don't see that as prominent in the figures because the total straight business and the vitamin business in ANH is taking that away.
The Performance Solutions business or the specialty part of the animal nutrition bit is growing because farmers making a different choice by going more for efficiency and yields, and therefore they need more sophisticated ingredients. In terms of business model, yet again, and next to the global approach and the multi-species approach we have, we also have the ingredient approach. We are pretty solid and have a very strong business model where if the vitamin prices are in there and they're gonna reformulate, they always need to do that by improving yield and efficiency. It is end-to-end. It's not a structural move. We've seen that, and we have the business model to cope with that.
Thanks very much.
We'll go next to Artem Chubarov with Redburn. Please go ahead.
Good afternoon, thank you. Thanks for my question. Just a question on your innovation pipeline, given the challenging environment for the animal business. Will you provide any updates on your current sales figures, rough numbers for Bovaer and Veramaris? Has your peak sales estimate changed given the current environment? Thank you.
Okay, thank you for your question, thank you for bringing in innovations, because indeed this is a big part of what we're driving. I can give you a little bit of color, maybe not the full breakdown. What we're seeing, let me start with Veramaris. Here what we're seeing is that fish oil is very expensive, clearly the aquaculture space is very much looking at algal oil now. Pleased to report that we sold out in terms of volume. It's all about then continuing to increase the yield of the plant, that is progressing very well. That's on aquaculture, and the algal oil. When it comes to Bovaer, as you know, we are busy building the plant.
Now, Dimitri opened the site shortly it was near the end of last year. In the meantime, what we're seeing is that there is absolutely continued interest, so there's no problem there. We are, you know, commercializing with the materials that we have, and that is progressing pretty much online with what we were expecting for the year. No big U-turn or change in the market when it comes to Bovaer. Of course, now the big, you know, work is keeping us very much busy is to get the plant built and up and running because that's when we'll be able to truly scale. You remember we have the partnership with Elanco in the US, which is also progressing nicely on that important market.
I would say these are, you know, the two of the, of the sort of newsworthy comments. Unless Dimitri, you wanna jump in with something else?
Nope.
Okay.
We'll take our next question from Sebastian Bray with Berenberg. Please go ahead.
Hello, good afternoon. Thank you for taking my questions, please. I have two, both of one short term, one long term. I'll start with the short term one. Geraldine, you mentioned Bovaer earlier. From memory, the partnership with Elanco was announced around this time last year, and the press release made reference to a high single-digit EUR million upfront payment. Just for modeling quarters, did this take place in Q2 of 2022 and it's a headwind? Do that effect falls away year-on-year, or did the payment take place at another time?
I didn't understand the Elanco headwind. Did you get that, Dimitri? Sorry, Sebastian, I missed the headwind.
I think the question was that we received the payment from Elanco, when is that? If you don't receive it this year, then it's a negative compared to when you received it. I think that is how we described headwind. I'm not sure whether my interpretation is the correct.
Okay. Yeah. The Elanco. Actually, I have to say I have a blank, what the timing of the Elanco payment was. Dave, do you have that at hand?
No, me neither. It was not a big amount, it was a small amount.
No, a small. Little bit small. Yeah.
Exactly. That's why we don't have it at hand. This is not a major shift, basically, which you have to take into account for the second quarter.
That's helpful. Thank you. The second question is just in principle on vitamin demand growth rates. I appreciate when consumers downtrade and shift to poultry, the DSM messaging is usually, "Well, we over-index to poultry, so it's not bad for us." If I just think about the long-term demand growth rate of vitamin A and E, is there any reason to assume that pressure on demand consumption forecasts for beef is going to lead to a lower demand growth rate if that is displaced by poultry? In other words, are poultry on a per unit basis more or less vitamin intense to raise than beef cattle? Thank you.
Absolutely. Do you wanna take it or I will?
Yeah. Good, good question. On average, the total driver is animal proteins. For us, it doesn't really make sense which type of protein. Obviously, you will have alternations of the ingredients, but it's not a threat. I would even say it's an opportunity. It depends a little bit on where the innovation goes. Obviously Bovaer is more linked to cows. The innovations in terms of poultry, where we are very strong and have capabilities, overly helps us. There is no disadvantage nor an advantage from a vitamin perspective.
Mm-hmm. Maybe one top up, I always found that to be a useful reference. The smaller the animal, the more micronutrient it needs. It may sound strange, but actually, A, it's got a shorter timeline, life, but actually per kilogram of meat, there's actually more micronutrients in raising a chicken than there is in cattle, particularly, of course, because cattle amongst other grazers. What we have seen is we are indeed over-indexed in poultry. This is our species, our biggest species, and, you know, referencing broadly, I probably don't have the latest stats here, but it's more than 40% of our Animal Nutrition business.
What we're seeing is that even with, you know, the shifts due to the economic environment, but also people preferences, we're seeing you should think of the chicken not only as meat, but also as eggs. A very important dietary protein content. For them, it's actually structurally, there's more micronutrients for chickens than there is for a kilo of meat. There you go. Simple reference. The smaller the animal, more micronutrients.
Helpful. Thank you for taking my questions.
Mm-hmm.
Again, that is star one for your questions. All right, we will take our last question from Chetan Udeshi with JP Morgan. Please go ahead.
Hi. Thanks for taking my questions. I have two, please. Firstly, can you give a bit more color on how gross margin and the underlying OpEx developed in first quarter year-on-year? Were there any material cuts to OpEx?
Mm-hmm. Okay. You said two questions, I think.
Yeah. The second one is on, if you can give us any color on the current utilization of DSM's vitamins production versus normalized levels. Based on your comments of value over volume, preference, it appears that some production curtailment may have continued.
Okay. Let me give a shot at the margin. As you saw, basically our margin actually sequentially is higher than in Q4. Here we have a combination, of course, to get there, it's not because inflation has actually eased on the country, but there's an element of pricing, and we are being very careful on the OpEx. We don't provide a gross profit or GP% figure, but what you have here is that we've been doing everything we can to make sure that we restrict our OpEx during this period, where, as I was saying earlier, we're seeing through the cost of goods sold, if you want the peak of the inflation coming through the P&L. That's the dynamic, but we don't break it down to gross margin. Dimitri?
Yep. In terms of capacity and production, indeed, we have announced that we had a shutdown for a couple of months for vitamin A and E in Sisseln. We're now preparing a further shutdown during the summer period, where we will prioritize our production to supply our human business, which obviously is a far higher added value business in that sense, and also premix and formulation. We'll prioritize where the margins are okay versus the straights. On vitamin C, I think we also announced, you know, that we have also vitamin C in Dalry. That's a premium quality product. There we're running flat out. Vitamin C in Jiangshan in China. There we have minimized our production to reduce inventories, but also to protect our margins.
In 23, that will have, and it already had an impact on sales, but it has no significant impact on EBITDA because of the margin issue in itself. We'll continue to monitor that situation and we expect for the rest of the year that we don't beef up a lot of production in that area. A little bit depending on how the vitamin prices normalize.
Okay. With that, I think Dimitri, that was the last question. You want to round off? Yeah. I will keep it brief. 45 minutes. Many thanks for all the questions and as always, also your ongoing interest in our company.
This will be the last time that I say in our company DSM, because I see you next week on the other side at DSM-Firmenich, where I'm no longer the Co-CEO working 32 years for DSM, but I will be the Co-CEO, will be at our first day of the DSM-Firmenich journey. With that, back to you, Dave. Okay, thank you, Dimitri. Thank you, Geraldine, and thank you all for attending today's call. With that, we conclude today's webcast. As usual, if you have any further questions, please do not hesitate to reach out to me or my team. Thank you. I now hand the call back to the operator.
Thank you. This does conclude today's program. Thank you for your participation. You may disconnect at any time.