Dsm Firmenich Ag

Good morning and thank you for joining today's call. I'm sitting here with Dimitri de Vreese, our CEO, and Ralf Smijts, our CFO. We published this morning not only our full year results press release and the presentation to investors, but also a press release with our announcement on the separation of the animal nutrition and health business from the group. You can find these three documents on our website where you can also find our disclaimers for, for instance, our forward looking statements. After the presentation by Dimitri and Rolf, we do a Q&A session. Sell-side analysts who want to ask questions have to register via the questioner's link, which they can find on our website in the financial calendar. If they've not done it yet, you can still switch. And with that, let me hand over to Dimitri.

Thanks, Dave. And indeed, welcome to all 2023 or the next scenario year. Extremely proud that we have created the global leader in nutrition, health and beauty. And I have to say that our teams work really brilliantly together. I think we've made a huge step in integrating at DSM. You've seen that in the early benefits of cost and sales at the synergies. And you've seen in this extraordinary year, 2023, solid financial performance across the businesses. However, this was impacted by unprecedented conditions in the vitamin market, as well as negative ethics effects. We took immediate actions as we have communicated. We took actions on accelerating the integration as well as the vitamin transformation project. And today, as Dave alluded to, we announced the separation of our animal business and we will bring a little bit more color into that later. Reflecting our confidence, we propose a dividend of 250, which is in line with previous year, when our full year 2024 outlook says at least 1.9 billion, which assumes at this early stage, only our two times 100 million EBITDA contribution projects from merger synergies, mainly costs and the vitamin transformation part. building on an underlying effective prior year end rate of 1,700 million. Then go to the next slide. I want to lead you through a little bit what we presented before and to give you a bit of an update on what we see today. So on the macro front, We still operate in a tough environment with weakness in China and unprecedented dynamics in vitamins. Although we have to say that we do feel that that is at its trough. We'll put a bit more color on that later. We see normalization of input prices, although some of the input prices are still going up on the natural ingredients, some normalization is definitely happening. And destocking, the big question out there, and maybe some normalization will follow. We took actions on this microeconomic condition and not relying on the recovery by taking swift actions on the micro for improving our performance. One is the acceleration of the integration synergies. And I have to say, we've done that. You've seen that in quarter four, about 20 million effect, which helps us in 100 million for 2024. We started the vitamin transformation project only in June, July, when we announced it. And you've seen already some effect in Q4 with 100 million effect for 2024. And we promised you that we will focus on cash. And I'm extremely happy that we showed that predominantly in the second half with a very good quarter four, where we came in at a $950. 99 million i'm still trying to convince ralph to make it a billion but he sticks to 999 he's sitting next to me um but hey um in that sense uh also okay what's in the last million we've also said that taking swift actions on on performance improvement will also accelerate the strategic review to strengthen our portfolio due to these macro circumstances. And we have announced this morning that we will start separating out A&H because of the volatility in the vitamin space, as well as the higher capital intensity to keep that network up and running of sites and premix locations. And having said that, with all these actions in place, you see that we definitely have a strong future ahead with animal nutrition and health more focused on the sustainable farming part under a new ownership structure. And these infeminis with the focus on really consumer ingredients with a very synergetic three business units play, which was also part of the announcement during the merger of which the 500 million revenue synergies were coming from these three business units. Let's move on to the next slide to give you a bit of color on the integration part. Where are we? We've operated accordingly with the operating model which we have defined already for six months in a row and we have implemented and operating accordingly very successfully with swift actions and geared towards the route to market towards our customers. We have started synergy delivery with the first 15 million contributors in Q4. We have Top line filling up the revenue. We'll have a separate slide on that. Very happy to see that the pipeline is filling and we see some cross selling going forward. But more importantly, really filling the 500 million revenue synergy as we speak. And last but not least, I think we've seen many mergers stumble over values and behaviors and cultures. I think we've done a fantastic job on that merging two companies. with a clear focus on building something which is a leader in nutrition, health and beauty. And I'm very proud to say that we do an annual employee engagement survey. And we've done that yet again in January to get a pulse on what's happening in the organization, how they feel about it. And I'm super proud to say that the engagement score for these was 80%. in these difficult macro circumstances with integration ongoing with the vitamin transformation ongoing have an engaged workforce with 80 plus score is quite an achievement and i see that as a huge plus for building the agenda for me into the future we then go to the synergy track so the next slide a bit of background on the synergy delivery Very much well on track. Just as a reminder, 350 million bottom line, half on the cost side, half on the revenue side. Let me just speak a little bit to the revenue part. You see that on the monitoring of the biweekly. This is something where Ralph and myself are very close to. We're tracking building of the pipeline. Remember, 500 million top line revenue, and I'm very happy to say that last week we've passed the 100 million pipeline filling for TTH, which accounts for about 60% of the 500 million, and it's ramping up as we speak. So we're building confidence that this is going to deliver as we promised. I know that some of you have some skepticism around it, but I will show that the pipeline is filling and that we realize. You also know that with the brief machine, it takes a bit longer to have that affected. We'll see some effect in 24, but the full effect will come in 25 and 26. To give you a bit of examples, if you go to the next slide, For example, it's in your pack, just to show you. For me, a very important one, the shampoo with concept hair care. This is for the Asian market. It basically has a healthy ingredient in the hair care shampoo, and it prevents hair loss. You don't see it, but I definitely do need it. The active ingredient in this hair care is something which brings DSM Femini together. And that is really amazing. And then maybe you see it also there, the melody yogurt for some of you who were there at the Geneva teaching session where you tasted this low sugar component on yogurt. We now working on that and really launching this Melody yogurt in the Middle East market, where with the lower sugar content, you still have the taste and the flavor of DSM Feminish. You have the mouthfeel with the hydrocolloids of DSM Feminish, and you will have culture and enzymes with vitamins from DSM Feminish, which also makes it healthy. So quite a unique combination and a nice example of how the synergy is kicking in. We then go to the next slide to give you a bit of background on the vitamin transformation program. So I'm switching now from the integration program to the vitamin transformation program. Also there, swift action. You already see an effect in quarter four with about 10 million, with 100 million for next year. You do see that we have closed vitamin B6 line in Singapore. We have closed vitamin C plant in Yangshan, or at least the part of impacting DSM feminists. That has happened as we speak. We have extended shutdowns and accordingly also a reduction of headcount. We have simplified our route to market and you've seen that, particularly on the cash, we really pushed through also on the stocks and delivered the cash as we have promised. So vitamin transformation is up and running, very confident that we can bring in the 100 million for next year. We then move to the next page to give you a bit of background on the why of the separating out of animal nutrition and health. We originally had planned for the portfolio review in 2024. However, given the market dynamics, we have accelerated this process. And as a direct outcome of that analysis, we think it's best positioned separately on a new ownership structure. It's a fantastic business. It has a global market leading position going forward. It has a complete ingredients position, obviously with vitamin sites and premix, which require more capital intense part of our business. It also has a different dynamic with feed costs, animal protein demand and prices with a bit more volatility. Remember in the past, We always wanted to reduce our exposure to vitamins. We've done that from 45% in the past, in the old days, to 25% before the merger, into 15% exposure of sales after the merger, SDS and Fimnish. And we'll make another step with the separating of animal nutrition and health. So very much in line with the strategic reasoning. It also helps to focus on the three business units into the consumer ingredients. focus for growth, where, as you've seen, the revenue synergies come from perfumery and beauty, taste, texture, and health, and health, nutrition, and care. Initially, they started the merger, and by focusing on that consumer ingredient company, I think we can also accelerate and increase the probability of success at that company. So two fantastic adventures going forward, one more into the consumer ingredient, one more into improving sustainable farming for the world. And go to the next slide. Just wanted to repeat that our purpose and value remains there. We are here for a reason, bringing progress to life with the three business units at DSM Femini geared around the human space, consumer ingredients, curate nutrition, health and beauty, well-being for humans. And on the other hand, the way for animal nutrition and health to grow their business, to create sustainable farming for the world and by different ways bringing progress to life. And with that, I hand over to Ralph for some background on the financial performance. Ralph.

Well, thank you, Dimitri, and a warm welcome also from my side this morning and happy that you join us in our call this morning. Let me talk through the financials of the group. Let me first overall summarize where we are. So overall satisfied how we landed the year. When we last met, it was at the back end of Q3 and we guided for Q4. We've seen similar business conditions traveling into the quarter and we see continued good performance in perfumery and beauty and taste, texture and health. Also, we've seen the first benefits of the programs coming through as highlighted earlier by Dimitri. which is a satisfactory performance as well. We're very pleased with the cash performance. We've seen working capital come down and I'll comment on that in a little while as well. But overall, happy how we landed the year and that sets us up for 2024. Let me zoom in a bit in the financials and we start on page 11. Here we see the top line overall, and here you see that we're impacted by a challenging macro, impacted by a vitamin impact, and that has translated into an impact on the top line. Overall, we see a decrease of about 5% in top line on a like-for-like basis, which is driven by the vitamins, characterized by low pricing and low volumes, which I'll comment on in a second. um we see a continued good growth in perfumery and beauty and i'd say spectrum health business the vitamin impact is predominantly impacting in animal nutrition and health nutrition and care obviously that had an impact on the bottom line as well you can see that at the bottom of the page we did see a step down in our ebitda performance driven by an impact from exchange rates We got it for about 90 million, and that's where we landed the year. And also the vitamin impact of 500 million came in line with forecast. That vitamin impact is built up on a couple of components. It's driven by unprecedented low pricing in some of our vitamins, coupled with a decrease in volume. And we also right-sized our production capacity as we started prioritizing cash, as we said in Q3, also reflecting in our strong cash performance in the second half. If you put that aside for a minute and you back out the vitamin impact of Avix, you actually see an underlying step-up in EBITDA of about 4% to 5%, driven by, on the one hand, the contributions of the program kicking in. Dimitri alluded to that earlier. About 15 million from the synergies and about 10 million of the vitamin transformation, coupled with an organic growth performance in the other business. So there we see continued growth and step up in EBITDA. Maybe zooming in on the business, if we move to the next page and we start with perfumery and beauty. Overall, a strong performance in perfumery, with fine fragrance showing good growth throughout the year, and that continued into the fourth quarter. Consumer fragrance also showed a very strong growth in 2023, especially in the second half, driven by higher inclusion rates for our ingredients and coupled with price, where we continue to pass on the inflation into our pricing. uh ingredients remain weak on the back of low demand in our industrial applications but you also have to factor in the closure of our pinova plant that we lost earlier in the year on the back of a fire that combined translated into an organic growth of about one percent in perfumery and beauty whereas if you back out the effect of the the fire the growth for the year was three percent again with different dynamics in perfumery and beauty in perfumery coupled with the demand in industrial. That has translated into a good performance from a profitability point of view. If you look at the overall step up in perfumery and beauty, you actually see a step up of 5% in EBITDA, which is net of an FX effect of a negative 6%. So the organic performance is actually very strong in the year we also brought the margin to above 21 in the year a step up of over a percent versus prior and especially the margin in the second half of 2022 is encouraging then if we look at our taste texture and health business um following a double digit growth In 2022, it's encouraging to see that overall top line on a like-for-like basis came in line with prior year. Here also a story of two tails. We see continued good performance in our taste part of the organization with solid growth on that front. coupled with weaker ingredients where we deliberately walked away from some low profitable business and obviously a small impact from the vitamins as well. You see that business part continue to be impacted by the destocking at our customers as we highlighted before. Overall, that translated into an organic growth of minus 1% in TT each. Also here, if you look at the profitability, we focus on profitable growth. Here you see also a double digit organic step up, obviously partially set off by a vitamin impact in taste, texture and health. Combining that, that still shows a 6% step up in the underlying performance on a like for like basis versus prior year. Obviously also here we have a small negative impact from Fx, still netting off in a step up in EBITDA in the year. Also here we see an improvement in the margin. We also improved the margin by over a percent in taste, sector and health to above 18% for the year, which is a good improvement as well. Then a few words on health, nutrition and care on the next page. Here we see volumes down 6% where we see consistent and persistent destocking and basically softer consumer demand. And despite continued good pricing where we continue to pass on inflation to our customers that translated into an overall organic growth of a minus four percent where dietary supplements is very much impacted by a shift in consumer spend where money is allocated to different categories and we see a reduction there predominantly in the us and we're also working through the uh the normalization of the pre the post-covet impact where we saw a boost for our products on the back of the strive for immunity boosting supplements Also in early life nutrition, we highlighted that before on the back of historically low birth rates and continued destocking in that space. We saw some decline in that part of the business, offset by continued strong growth in eye health and biomedical. Eye health was particularly strong in Q4 and biomedical continued to perform very well throughout the year. Here you also see an impact from vitamins, predominantly impacting dietary supplements, and that is also having a reflection in the bottom line performance of our health, nutrition and care business. Overall, the decline in EBITDA is very much linked to the exchange rates and the vitamin impact in this business. Then lastly, turning to animal nutrition and health on the next page, despite continued good demand for animal protein on a global basis, the market is still very much impacted by weak economics for our farmers. And that has basically led to a continued destocking of our essential ingredients business. This has led to unprecedented market dynamics in the vitamin space. We highlighted that before, and that is obviously shown in the overall negative organic growth of 13%, which is driven by volume and prices. The weak demand has dropped down pricing to an unprecedented and unhealthy level for the industry. We're addressing that. We launched a vitamin improvement program. that is giving us a contribution in the fourth quarter to also address that part. At the same time, we see a continued good performance in our performance solutions business. I think they were offering great solutions to our customers, and that has actually seen a very strong growth consistently throughout the year, and we're very pleased with that development in this space. Now, given the size of the vitamin impact, we sized it around 500 million for the group. About two thirds of that is actually landing in animal nutrition, and that you can see also at the bottom of the page. predominantly impacting the drop in EBITDA in animal nutrition, both in an absolute EBITDA and into a margin effect for the year. Looking at the dynamics of the last quarter Q4, let me also share a couple of words there. There we saw essentially unchanged conditions versus Q3, where we see a continued destocking. We also continue to focus on cash performance. Overall, we delivered a quarter of 440 million and encouraging step up versus Q3 on the back of also the benefits from the programs contributing to the performance. Overall, we need to turn the page, sorry, on the next page. I apologize for that. yeah you can see it so overall we see continued good growth in perfumery and beauty that is continued to perform well an a h agency has a similar impact as we've seen before although we see the benefits of programs kicking in now and that coupled with strong cost control has delivered a quarter in line with with guidance Then turning to the next page, how does that all translate into the rest of the P&L? We guided earlier for an earnings per share of around 190 a share. We came in at a little over two euro. Pleased with that. If you look at the various lines making up the earnings per share, I think largely in line with the guidance that we provided, a positive surprise here is the lower financial income and expense, where we were anticipating some unwind of energy derivatives and that materialized, so we're coming in a bit stronger there. Also, we saw some of the impact actually being recorded as an APM item, giving us a bit of an upside on the earnings per share as well. We were a bit conservative in our guidance, but pleased to see that that came in a little stronger as well. Then turning to cash, I highlighted that at the beginning of the insights around financials. pleased with a very strong performance in the second half. We did a rebound on the back of H1. Our cash conversion in the second half was over 80%, which is a very good performance, and that actually brought the full year to just under 60%, which is a presentable performance as well, and we want to continue that going forward. Key driver for that is the improvement in working capital. At the half, we commented that we were at an elevated level of 34%, and we committed to bring that down. And at the end of the year, we're down to a level of 31%. And that is something that we will continue to improve, where we continue to make trade-offs and prioritize cash in some parts of our business, given the dynamics that we're in. Overall, we saw a strong reduction in inventories. So we landed the year just below 3.4 billion. I said that my target was 3.3. When adjusting for some last effects in the fourth quarter and some consolidation effects, I think we came very close to that target. And that makes us confident that in the objective that we set also for 24, that we will be disciplined in taking the actions to drive for further improvement on that front as well. That all led to a proposal for a stable dividend of €2.50. Now, with that payout, we're above the policy that we set of distributing 40% to 60%. Now, 2023 has been a year with many moving pieces. And here we also want to underpin our confidence in our earnings. We are committed to restoring profitability over time. We continue to focus on cash. And with that, we're happy to confirm a stable dividend over the year 2023. That obviously has an effect on the next page on our net debt. Overall, we landed the year reported net debt of 2.2 billion. But a few words of caution read out around that. Obviously, you need to factor in our commitment to buy out the minority shareholders. That is a cash out of around 0.7 billion. You need to factor that in when looking at our net debt. I'm happy to confirm that we did an additional tender round at the start of the year, and we issued a press release earlier this year where we're actually repurchasing 4.2 million shares actually this week. That leaves about 1.5% outstanding, which we will conclude with the squeeze-out procedures that are currently running, but you need to add that in your debt calculations. At the same time, we also have the hybrid outstanding. We're happy with that instrument and we'll assess that over time. If I were to factor that in, then the net debt is actually a little over two times EBITDA from that perspective. And with that, I think that concludes the highlights of the financials. Let's also look at the other angle, sustainability and with that back to you.