DSM-Firmenich AG (DSFIR) Earnings Call Transcript & Summary

This is Zafar Aziz speaking, and welcome to the Deutsche Bank Depositary Receipts Virtual Investor Conference, dbVIC. I'm pleased to announce our next presentation will be from Royal DSM from the Netherlands. Before I introduce our speaker, a few points to note. Please submit your questions in the questions box below the slides. Once the Q&A session has ended, don't log out. You'll automatically be transferred to the DSM booth, where you can continue to ask questions via the chat facility and access shareholder materials. On a final note, while today's presentation is recorded, it can be accessed via the Deutsche Bank website, adr.db.com. At this point, I'm very pleased to welcome Marc Silvertand, Investor Relations Manager of Royal DSM, which trades on the Amsterdam Stock Exchange under the symbol DSM, under the OTCQX investor market as RDSMY. Welcome, and over to you, Marc.

Well, thank you very much, Zaf, and thank you, everybody, for listening in to my presentation on DSM. I'm looking forward to your questions. And of course, when you want to read more about DSM, reading the research of Deutsche Bank, Virginie Boucher is the analyst on DSM. She knows our company very well. She's very experienced with DSM. And my first, let's say -- my second slide is, of course, for the lawyers, the safe harbor statement but let's go immediately into what is DSM. What are we doing? Well, at this moment, DSM is 80% active in nutrition; Human Nutrition, 50% of that; and Animal Nutrition, I'll come back to that, and another 20% in what we call sustainable living. We are -- we were founded in 1902 in the Netherlands. We are headquartered in the Netherlands and we have a U.S. headquarter in Parsippany. We are a global company with a very, let's say, good split over the world with 35% of sales to the Americas, 35% in Europe and 30% in Asia and also a very international workforce. 1/4 of our workforce is active in the Americas. Innovation, very important for DSM, 20% of our current sales is from innovations that we introduced over the last 5 years. And last but not least, we are a ESG leader. We are the #1 out of 120 in our sector in Sustainalytics, and we have a AAA rating in MSCI. But let's first -- where do you know DSM from. Well, when I show here, Culturelle is the #1 probiotic brand in the United States. Culturelle is a brand of DSM, and it's, let's say, it's a very fast-growing business. We have been, let's say, showing here double-digit growth per year since 2010, so year-on-year. And we are now expanding this product line with this brand outside the United States and especially now into Asia. DSM is dedicated to keep the world's growing population healthy. I just showed you Culturelle. Culturelle is a B2C product that we have on the market. But in fact, that's the only B2C product at the moment because the rest of the products are predominantly B2B that we supply all the ingredients, the nutritional ingredients and the nutritional solutions to make our products -- the products of our customers more healthy. For instance, in dietary supplements, we are the key supplier to the dietary supplement industry, and you see One A Day from, let's say, one of our customers. We supply the ingredients, which means all the vitamins. We supply the ingredients for dairy or for infant formula. We don't have an own brand in infant formula, but this brand is from Nestlé. There, we supply key ingredients like the vitamins like HMOs like omega-3, omega-6. And at the right hand, you see Ovega-3, that's a vegetarian omega-3. And that is one of the products, one of the B2C products, one of the few that we have. We call that our i-Health line. The next slide that is Animal Nutrition that was over 50%. We supply all the ingredients that make, let's say, that make the animals grow better, grow healthier, stay healthier, and at the same moment, also make sure that we can produce more meat, animal proteins within the planetary boundaries. So make animal protein production, meat production more sustainable. That's why products of DSM are added to animal feed. So at the human side, it's all about health, making the products more healthy, and at the animal side, it's all about making, let's say, animal protein production more sustainable. The global presence, I already discussed that in first slide. And at the left side, you see the whole range of ingredients that DSM is producing. So we have on vitamins, carotenoids, enzymes, lipids, eubiotics, the whole range of products that make nutrition more healthy and more sustainable. And we are quite unique in that position. We have the broadest range of nutritional ingredients in the world. And what we do with these ingredients, we can sell that as an ingredient to our customers. But in many cases, we produce solutions out of it. And a well-known solution is a premix, that you mix a lot of ingredients together to a solution which can be complete end product again for our customers, which can be a mix for that supplements, a mix for instant formula or mix for, let's say, for animal that we mix a lot of ingredients together. Many of these ingredients are produced by DSM but we also source a lot of ingredients. And this is then our unique business model. We have the broadest portfolio of products, of ingredients. But at the same moment, across the world, we have our local solution facilities where we produce premixes of complete end solutions, tailored end solutions for our customers. And then we are -- across the globe, we have 60 facilities across the globe. We are supplying to all species so all types of animals, and we are also supplying to key markets in human nutrition, which is food and beverage, which is infant formula, which is medical nutrition and which is dietary supplements. Over the last 4 years, DSM has shown an impressive track record in our Nutrition business. We have been growing the business organically, 6%, and EBITDA has grown 11% on average per year. We've improved our margin, this is very important for investors, in total by 420 basis points over that period. Going back to Animal Nutrition. The key driver here, Animal Nutrition is that at this moment, we have to, let's say, to give food including proteins, including meat to 7 billion people on the world. It's already higher at the moment, which is growing to around 10 billion people by 2050. And then all those people want to eat meat, beef or chicken. And then we have a problem, let's say, with our planet because you can't do that anymore within, let's say, the planetary boundaries. That is why you have to make, let's say, your meat production more sustainable. Think here also about antimicrobial resistance. Farmers nowadays still, and especially in Asia, add antibiotics to the feed simply to make the animals' growth better. You should not do that. That -- it's dangerous, bad for the animals and also dangerous to take for the humans who are consuming the meat. So there, DSM has solutions. DSM has solutions in reducing the emissions. Ruminants emit a lot of methane, which is yes, a very potent greenhouse gas. DSM has solutions to reduce those emissions. In aqua, we all like to eat salmon. Salmon is very healthy and we consume it not only because of the taste but also because of the high omega-3 content. Well, to provide omega-3 to salmons, you have to feed them with a lot of smaller fishes. So we are emptying the oceans at this moment and that's not sustainable. So there, DSM has found a solution to produce omega-3 directly out of algae and give it directly to the salmons. Just some examples how -- let's say, how we continue to innovate, and that also enables us to do good for the planet. Strong purpose for the planet, but also to grow, let's say, mid-single digits, above -- let's say, above the market. And in human, it's comparable. But human there, the focus is all along, let's say, on health. Take, for instance, immunity. Immunity is very important. There, we are providing, let's say, the solutions at this moment. We have the whole range of immunity-boosting products in our portfolio. Think about vitamin D., think about vitamin C. They are very important, let's say, for your immunity. Also the omegas, other products like [indiscernible] and they are very important. And these kind of, let's say, solutions also drive, let's say, all sales in Human Nutrition, mid-single digit organically per year and we have kind of all the innovations that are like an early life nutrition. I already said we are producing the key ingredients. We have our economic asset for brain development, but also, let's say, HMOs, which is, in fact, the Holy Grail. It's only available in breast milk and we found via Glycom a way, let's say, to produce and almost, let's say, to get a quality that is close to the golden standard, which is, of course, breast milk. Innovation is extremely important for us. Innovation should keep our growth, both, let's say, above the market. And as I just said, we have a projection of, let's say, mid-single-digit organic growth, organic sales growth. And that we have a very rich pipeline of all kind of products that we are launching or that will be launched in, let's say, in the near future or a little bit further away. And we have categorized them under what we call precision. Precision is that both at the human side and at the animal side. You fine-tune, let's say, the need for nutritional ingredients or healthy ingredients, for the human side for healthy and more sustainable animal production at the animal side, that you make that more personal and even, let's say, a performing side that based on the request of the certain, let's say, of a certain farm. And what do we mean by that? No human is the same. So somebody who are very sporty can have a different requirement for nutritional ingredients versus somebody who, let's say, is over or better their requirements, let's say, that can be very different. Also between men and women, between ages, children, let's say, 50-plus. So there, we are working on innovations and personalized nutrition. Animal, let's say, precision that, let's say, in the future, you as a consumer, you want to compare, let's say, the meats that you are buying. You want to compare sustainability of the meat. You want to compare, let's say, the quality of the meat. What do I mean by that? That yes, in the future, we will be able, let's say, to monitor the quality of the meat that is being produced on a farm, the quality from a health perspective but also the eco footprint. You can imagine that a farm was using a lot of ingredients to reduce emissions. A farm that is, for instance, in Ireland, where it's raining all day that, that consumes -- the cows consume less, let's say, less water that you have a more sustainable profile. That's all linked to what we call precision. Prevention, I already addressed. It has all to do with good health, with immunity, with sugar reduction, with better products, let's say, pharmaceutical nutrition. Proteins, that there's all business in animal, sustainable proteins for animals but also alternatives. And you could think about, let's say, meat alternatives so plant-based proteins. And the fourth direction is pathways that we are looking at different ways to produce these ingredients, think about, let's say, a bio-based production of vitamins, of carotenoids. And also, let's say, a more sustainable way to produce your [ animals ] like we are doing in, let's say, with -- in omega-3. And I have some examples. Immunity, at this moment, more than EUR 1 billion of sales is already coming from products and solutions linked to, let's say, immunity. Balancius, Balancius has a great alternative developed together with Novozymes, great alternative for animal good health. So a good way for farmers to, let's say, to get rid of the use of antibiotics. And customers want that, let's say, big customers in the States, they are really driving their, let's say, their farmers away from the use of antibiotics. Also governments in the, let's say, Europe, and Asia now. So there we have, let's say, a whole range of interesting solutions. Veramaris, already discussed that is, by the way, we have a facility. That's the algae-based omega-3. We have built a facility in the United States together with Evonik that we produce omega-3 directly out of algae. Very sustainable because you save a lot of fish by that. Bovaer, also called clean cow. When you add that to cows, it can reduce the methane emissions of cows by 30%. That's good for the -- let's say, that's good for the planet. It's also good for the farmer. The farmer gets higher return. It's especially good for the dairy and the meat customers who don't like, let's say, developments currently in the market. People are saying, "Hey, not -- meals might be healthy but it's polluting because we're now polluting our cows and they're saying that to the farmers. Farmers don't like that. Also, let's say, there are companies who don't like that. So here, we have, let's say, a very easy solution to add to Bovaer to the feed of cows and to significantly reduce the emissions of cows. So making milk and making beef much more sustainable, and this is one of our solutions. We have many of them in house, but that's not one single bullet -- a single silver bullet, sorry for that. So you need a combination of solutions to make it, yes, as sustainable as possible. Here is an example of the hamburger, the burger. You can produce it out of, let's say, out of meat. But you can also produce it, yes, out of plant-based proteins, so a plant-based burger. But then still, you need a lot of solutions from DSM. And again, here, DSM is not to provide just of the ingredients. DSM comes in and helps you to, let's say, to supply a complete solution. Avansya is smaller -- large project of -- innovation project of DSM. Still had a small only, let's say, a little bit below EUR 10 million sales at this moment. But that's an alternative for sugar. It's stevia. It's a very powerful sweetener, which we can produce out of fermentation. Zero calories, and it has a -- let's say, it has a great taste, no off taste. So it's a very nice, let's say, example of how to make the products of our clients in this case. In terms of soft drinks, how to make them healthier. To finalize, we have, let's say, a portfolio -- a unique portfolio of ingredients, we call them global products that's where DSM is coming from. Over the last 10, 15 years, we have been building on a broad regional network where we are offering solutions. And now even we go one step closer to, let's say, to the customers, what we call personalized nutrition, precision farming, and of course, there you will be helped -- powered by a lot of data and bioscience. And, let's say, to end my introduction and to allow your Q&A. Based on the, let's say, the fact that we are active in very attractive markets, the fact that we have a unique position and a unique, let's say, basis model, we think that towards, let's say, the future, we can continue to grow a mid-single-digit organic sales growth. The margins above 20%, it should result in the company, as we did over the last year, in a high single-digit annual adjusted EBITDA growth. And I said over the last years, when you look at the total company, let's say, this year, we have to be careful because we have, let's say, still this 20% Materials part that is in our portfolio. And it was very impacted by COVID because part of that sales goes to automotive, goes to electronics, where you have, of course, the impact building construction and some like have the impact from COVID. Materials business, this core business is a great business. We have an Engineering Plastic business we have, let's say, our Dyneema business, which is the strongest fiber in the world. It's part of DSM. It doesn't absorb, let's say, the cash that you need to grow your Nutrition business. But on the other side, let's say, the direction of DSM is clear. Let's say, we want to grow and we can grow further in, let's say, in nutrition, health through nutrition, and we are very well positioned. So I now will allow you, let's say, your questions and let me see if I can see some of the questions. And just a second, I have to open this.

"How has COVID impacted your business on a financial and operating basis?" First, as we have a global position, we're aware of COVID already, let's say, in January in China. We took all measures. We were able to keep all our sites open because, yes, we took the right measures very early, but also we got, let's say, support governments because you are active and very crucial ingredients related to health. And so we managed to do that. And let's say, in addition, financially, the Nutrition business, had a -- let's say, had a positive, let's say, impact from COVID in, for instance, this related to immunity. The Materials business, that had of course, difficulties because I was talking about automotive, I was talking about building and construction. So it's a mix. But -- so in general, in total, it's of course, slightly negative on let's say, financially, but the large part of the businesses performed very well. "How does the growth rate and profitability differ between your Animal and your Human business?" Over the last years, we saw that Animal has been growing a little bit higher, but not that much. So that's why we say both mid-single digits. And the profitability -- in general, the profitability in Human was a little bit higher than in Animal. But of course, you have and especially with the innovative products that in some of the new products also in Animal that you have higher, let's say, higher margins. But the margins, they are quite, let's say, quite equal. More questions. "With regards to early life nutrition volume, if there's something structural in that market, can you identify temporary factors that are driving slower volumes?" Let's say early life nutrition is very much linked to birth rates because they are your customers. So when the birth rates are higher, that's beneficial for that business. Birth rates normally are around 2%. U.S., let's say, as a supplier, you should be able to grow faster by introducing new innovations. And I already mentioned the HMOs, but normally only present in, let's say, in breast milk. What we see at this moment in the market, China is a very important market, but there you see that all customers and our customer as a whole, let's say, the big brands that they have, let's say, that they have competition from the local Chinese players, and that's the Chinese policy of the government. They are really pushing their own Chinese brands. Because in the past, infant formula, the Chinese models and farmers, they wanted to have best on brands and it had all to do with trust, with faith in their own products. And you see now that the Chinese government is very much pushing, let's say, their own brands. But now all in all, for us, it's a very healthy business and we continue to introduce innovations. And yes, we have that lead role. So we are very positive about the future of that business. Then I see a question on dividend policy. It can be very short. It's stable, preferably rising dividend. And we never touched on our dividend negatively over the last 20 years. So stable, preferably rising. That's the dividend policy. "Can you talk briefly about which regions you see with an increased demand for packaged foods or dietary supplements?" Now that's -- dietary supplements that as across the, let's say, the board, in most regions where there is COVID, there is a higher request for, let's say, for dietary supplements. So in general, we have seen the vitamin-related dietary supplements, that the growth rates have gone up from, what was it, around 4% to, let's say, to more in the direction of 6%. But that is, let's say, in general, that is in all regions where, yes, the people also can afford to buy dietary supplements. Then the other one is on packaged foods, yes. That's the same answer. COVID has result in higher demand. And there, it can also be stocking effects that we saw in the second quarter, higher demand for packaged foods from people eating at home and then to, let's say, a more easy food. And that is -- and the that was slightly beneficial. We are not that much in food services. But yes, of course, in packaged food, you also saw again some destocking then when COVID was fading away. More questions. There is the growth rate, that one. I think I answered all the questions that are still in the queue. Any more questions? No? Then I think -- yes, there was 1 more about the development in premixes. How has that changed over the years? You see that DSM in the past was selling ingredients, predominantly ingredients 20 years ago. And then we have been moving, let's say, away from the ingredients because we are still in the ingredients, but moving into the premixes. So for instance, an animal now 70% to 75% of sales is via premixes. And over the years, there have been, let's say, an upgrade of the, let's say, of the premix. The premix, well, 10 years ago, quite, let's say, quite not complex but now we have, let's say, we've seen upgrade with a lot more ingredients mixed together in the solution for, let's say, for the farmers. And there are no more questions. Then I, let's say, like to wrap up. As I've talked to you, when you want to have more information, also check, let's say, the report of Deutsche Bank, Virginie Boucher. And I hope that, let's say, I try to, let's say, give you some flavor on how the company is developing. We are purpose-led, performance-driven, a lot of, let's say, the future sales growth is coming from innovation. And we think by continuing to innovate, being present in very attractive markets, we can grow above the market in which we summarize as mid-single digit in our markets. We grow at attractive margins, which results in, let's say, a high single-digit EBITDA growth. Thank you. Thank you for being, let's say, in the call. When you have questions, you know where to find us. Bye, everybody.