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

Good morning, and thank you for joining today's call. I'm sitting here with Dimitri de Vreeze, our CEO; and Ralf Schmeitz, our CFO. I hope you will have had time to look through our Q3 trading update and the presentation to investors, which you can find also on the website. As usual, you will also find the disclaimers about forward-looking statements in these documents. [Operator Instructions] And with that, I hand over to Dimitri and Ralf. First, Dimitri, to talk you through the results. Dimitri, go ahead.

Thank you, Dave, and welcome to all of you. It's a great pleasure to be with you again. And I'm delighted to have the first time, Ralf Schmeitz, sitting alongside me today as our Chief Financial Officer. Ralf and I have worked together for many years in Materials and in Pharma, where we worked major portfolio upgrades and divestments. And the last year, Ralf was active as group controller, and we know each other very well, and I'm delighted to have him here as our CFO. Before we jump into the financials. If we go to the next slide, I would like to share some context and clarity on how we execute in a challenging near-term environment. And then Dave, if you can switch to the next slide. I would like to review a little bit where we are today for macro, what you can expect from us on the micro, what we're doing in terms of portfolio review and how we look towards the future. Let me start with saying that it's a tough environment in which we operate and we see no inflection yet. There's weakness in China, although the recovery is there, but it's relatively slow. We see dynamics in vitamins, which basically we see continuing in Q3. And what we do see is that also there's destocking ongoing, although there are a few segments where we perhaps see destocking fading away. And we'll give you a bit of light and transparency later. We do see normalization of input prices, which will go through our stocks before it helps our bottom line. But the story is that the macro is there and will not bank on a strong recovery. We'll take actions as we speak. Macro will recover. This is an unprecedented situation. It will normalize. But in our actions, we basically take the destiny in terms of actions taking ourselves. And let me go through a bit of the micro, and you've seen that. We have accelerated the integration synergies, which will give about EUR 100 million of savings for next year. And you see already a little bit in Q4. We've launched in June, our vitamin program with follow-up in August, where we will see EUR 100 million savings also for next year and some of that already executed in Q4. And Ralf will read you through the cash numbers where we really focused on cash with an improved cash conversion rate and around EUR 229 million of cash generation in Q3. In addition, we've announced that we will do a portfolio review to look at the high segments, high-growth segments, high-margin segments, to prioritize where we put our money in terms of science and research, innovation as well as CapEx, resources and possibly M&A. And we will lead you through that in full transparency. We'll finalize that towards the end of the year, and we will lead you through in the Capital Markets Day on that portfolio review. Well, if you take that into account with a macro that will normalize, and we don't bank on it, we take action ourselves, but it will normalize over time. The question is when. The micro where we will deliver on the actions, which we have agreed with a 2x EUR 100 million for 2024. A portfolio review on the go with high-growth, high-margin segments, where we put our money on, we do feel there's a strong future ahead for DSM-Firmenich. And I know that as a CEO, I may perhaps be slightly biased. And with that, Ralf, maybe we can run through the financial numbers. Over to you.

Good. And thanks, Dimitri, for your kind words and good morning, everyone. Happy to be here first time, taking you through the numbers. I've been in the background in these calls, but very pleased to, to also engage with you and meet many of you in the roadshow ahead and the teach-in sessions on P&B and Taste, Texture & Health that are coming up this month. Now typically, this is a trading update at the third quarter, but we've also been providing you with some insights in the business performance and provided you with the EBITDA of the business units, which I think is helpful in the context where we are. Dimitri painted overall the picture for the quarter. We don't see a change in trading conditions versus our second quarter. And overall, the macro is impacting our numbers, predominantly a vitamin impact, which you see in 2 of our 4 business units being Animal Nutrition & Health and HNC. Overall, EBITDA impacted by vitamins FX. If you, however, adjust for that and compare on a like-for-like basis versus Q3 last year, you will see a growth in our business results. Pleased with the cash performance in a sense that we've seen a turnaround. And I think that was needed. Dimitri alluded to EUR 229 million of cash conversion in the quarter, that's a 56%, which is a good step up, and that is something that we want to take forward going forward. Then let's take a look at a couple of numbers on the next page. Overall, you see organic growth down 7%, impacted by vitamins, pricing of about minus EUR 1 million. However, when you back out the vitamins, we actually see a mid-single-digit price growth. We see good pricing continuing in the majority of our businesses, which is helpful. And also, the volume would be a modest decline when adjusting for the vitamins. Obviously, you see that translate into our EBITDA numbers with an increased vitamin impact of EUR 170 million in the quarter. I'll explain that a little later when we get to Animal Nutrition & Health, Nutrition & Care. However, when adjusting foreign FX impact of about EUR 30 million in the quarter, coupled with the vitamin impact, you actually see the organic growth in the business that I just earlier alluded to. It's going to be helpful to talk through a couple of the business units and provide you with some further insights, but good to stress that we have an organic performance in our businesses as we are. If we then turn to the next page to Perfumery & Beauty. Here, we see a good quarter, encouraging results. If you look at it from an organic point of view, overall, there is an organic growth of about 2% when you adjust for the Pinova sales. Let me remind you that's the plant that got lost in the fire earlier in the year and will not restart. That has an impact of about 2%. And here, you see that actually, strong performance in the Perfumery business is more than compensating a weaker volume in ingredients, especially in the Industrial segment, where volume and demand was low. Obviously, that translates into a strong mix, and we're very pleased with the EBITDA quality in this business. Fine Fragrance showing a good growth in the quarter. Consumer Fragrance, a very good growth in the quarter. And here, we might actually see the first signs of destocking coming to an end. That translates into an overall 6% step-up in EBITDA on a like-for-like basis compared to Q3 last year when adjusting for a negative impact of FX. Overall, a quality of 23%. So we're very happy with the performance in Perfumery & Beauty in the third quarter. Then looking at a Taste, Texture & Health on the next page. Overall, a decline in volumes also related to predominantly ingredients, which is linked to the vitamin impact in Taste, Texture & Health and weak volumes in predominantly, our yeast extracts, offset by a very strong performance in our Taste business, and also Cultures & Enzymes are growing well in the quarter. Obviously, that translates into a good EBITDA performance. We see 130 basis points step-up in margin to over 18%, which is demonstrating the quality in this business. There is a negative FX impact and a small vitamin impact as you'll appreciate that now you see the full effect coming through and also stepping out of the vitamin C business in this space. But overall, Taste, Texture & Health is very resilient throughout the quarter, and we actually see a continuation on what we saw in the second quarter again in this business. Then turning on the next page to Health Nutrition & Care. Here, we had a weak quarter. And it's a bit of a combination with a few things coming together. We see continued impact from vitamins on the back of low demand in dietary supplements, especially in the U.S. That, coupled with volumes in Early Life Nutrition. We see a continued declining birth rate. I think it's at the record low level today. And that, coupled with some destocking effects in the quarter, has caused a relatively low volumes in the quarter. Obviously, that has a flow-through in the bottom line. And there you see the vitamin impact and that has increased versus prior quarter because we're also adjusting our volumes produced to meet the demand and the destocking environment. And in our quest to optimize cash, we are adjusting that down and that obviously has caused a slightly bigger impact in the quarter. Now overall, we do also see positive developments in Health Nutrition & Care. As you might have noticed, we're very pleased with the approval of 2 of our HMO solutions in China that puts us in a very good leading position in that space. Let me remind you that overall, 40%, 50% of the Early Life Nutrition, the high-value segment, is coming from China. So we're actually pleased that we got the approval as one of the first into that market. Then last, turning to Animal Nutrition & Health. There, we basically don't see any trading conditions change versus the previous quarter in Q2. The micro continues to heavily impact these numbers with the sizable vitamin impact also in Animal Nutrition. We're adjusting our production volumes. We're optimizing and we want to bring our inventories down. We see continued destocking. And with that, we've adjusted production plans. We already announced that, but we're also extending the shutdowns in further places in this business. It's a bit of a shame that this vitamin impact overshadows the strong performance in our Performance Solutions business. It represents about 25% of the Animal Nutrition portfolio. And actually, throughout the year, that's consistently growing at a high single-digit pace, which is supported by a rich innovation pipeline. So we see positive developments on that front as well. At the bottom, you see the fall-through in EBITDA. Sizable vitamin impact of about EUR 120 million in the quarter, that's taking out the profitability of Animal Nutrition. But I do want to stress the organic increase in EBITDA as well, which is solely driven by our Performance Solutions portfolio. And there, we're actually very pleased with that performance. As announced at the half year, we are addressing the vitamin impact. We've launched a series of measures. We are well on the way in with that program. And we should see the first contributions to that in the fourth quarter of this year. Overall, FX had a negative impact in this business as well, but we are addressing the vitamin impact and we'll see an improvement there. Now what does that all translate to? And maybe then if we go to the next page. So for the remainder of the year, we don't anticipate a real change in trading conditions. We previously guided for an FX impact of about EUR 100 million. We actually see that slightly more positive on the back of recent developments in the exchange rate. So we're forecasting now around EUR 90 million for the year. The vitamin impact in the year increased from EUR 400 million to EUR 500 million. It's on the back of rightsizing our production volumes. We see an increase in idle costs and under coverage costs. And that is the main driver on why the vitamin impact moved from EUR 400 million to EUR 500 million, coupled with a bit of volume and pricing impact. As in our previous outlook, we anticipated a bit of improvement in the second half, and that is what we currently don't see. Overall, we see an organic performance in our other businesses, and that takes the outlook for the year to around EUR 1,800 million of EBITDA for the full year 2023. Now to guide you further on the next page, we also translated this outlook into an earnings per share outlook. I think it was a question of many of you. And given that we're obviously a new company, we want to provide further guidance on a couple of other line items, down to earnings per share. We expect the earnings per share to be around EUR 1.90 per share in 2023. You'll appreciate that there are plenty of moving pieces as so that could be some small deviations on these line items. But I think you'll find that helpful in sizing that, right? If you compare to the prior year, where we did the pro forma, then the impact is predominantly driven by environment again. Then turning to the next page, talking about our cash performance. We provided you with the net debt bridge at the half year, but I first want to talk a bit about cash flow. We talked about that we see a turnaround in our cash performance. Overall, a 56% cash conversion within the quarter, and we're doing a few things. We're prioritizing our inventory reduction versus the peak. Towards the end of Q1, we see inventories coming down by EUR 200 million. That's not yet where we want to be. We'll continue to be very disciplined around our inventories going forward. But you'll appreciate that in an environment of destocking, it will take a bit of time to work our way through that. But as said, we'll prioritize, and we'll be disciplined in our actions to bring that down. Also at the CapEx side, we're prudent in our spend, and we've done a bit of reprioritization in order to improve our cash generation within the year, and we'll continue to focus on that going forward. Overall, our net debt is estimated to be around EUR 3.1 billion at the end of the year. Let me remind you, there's two things in there. One is the buyout of the minority shareholders. It's a merger-related element that we're committed to. We don't know the exact timing, but that might actually slip into next year. And there's also a small place for some M&A where we go bank to buy out a minority stake. That might also slip into 2024. So actual reported figure at the end of the year will probably come in a little lower around the 2.5 or 2.3, depending on the placeholder for M&A. But when we look at that, we obviously take these elements into account. So happy to report that there is a turnaround in net cash performance. We will continue to focus on that going forward as a priority. Now it's also important to talk a bit about the programs, but Dimitri, maybe you'll take us through that.

Yes, indeed, Ralf, and I hope you all appreciate the clarification and transparency we are giving on something which Ralf and myself find very important. Some background on indeed, the programs on the macro elements. First of all, I think the focus on cash. I think Ralf alluded to that, a step-up will continue doing so in Q4. And depending on how the macro develops in 2024, we will be very prudent in terms of inventory. Then the two programs, which we have indicated, which will deliver, in total, about EUR 200 million for Vitamin Transformation and about EUR 175 million cost synergies in terms of integration. Let me put some clarification on the Vitamin Transformation program. The Vitamin Transformation program has three main blocks. One is creating a separate vitamin unit under the Animal Nutrition & Health part, where we also changed our business model and our OTIF and our response to market. We have installed a Vitamin Transformation Program Director, [ Eros Carletti ], reporting directly to me to show that he is directly helping the overall group. And we have established that. The vitamin unit is being established as we speak towards the end of the year, beginning of next year. Then the capacity-related box, which is the second one. We've announced the Xinghuo and Jiangshan rationalizations. Xinghuo, the Vitamin B6 plant has been stopped, and that plant has been stopped. We've initiated that, and we are executing that as we speak. And the Vitamin C plant in Jiangshan in China has come to a chemical stop. It has a stand still, and we're looking at options to valorize that. But it has been executed. It has been communicated, and we follow through. We've also had, in July and August, extended shutdowns for Vitamin A and E in Sisseln. And we're currently also reviewing whether we should have an extended shutdown in December depending on how things are developing on, yet again, to prepare ourselves for the future and also to keep the cash in mind. The programs with headcount reductions has been communicated. We'll do that in a phased approach and has been executed accordingly. The third part has to do with a simpler, more response go-to market model. Customers are, at the current environment, not willing to pay for secured ship line, we modify ourselves, so we'll have a more efficient and agile organization with a headcount reduction, and we've also started communicating about that and executing on that. This will result in a better cash, and you see that in Q3. That will also continue in Q4, but also included idle costs because we are ramping down capacity as well as stocks, and that has been part of the Q3 and the Q4 numbers. Cash conversion went up. We expect the first savings from the Vitamin Transformation, although we only launched it towards the end of Q2 already in Q4. And the integrated -- integration part on the cost synergies plus the vitamin will already deliver about EUR 20 million to EUR 30 million in Q4 and about EUR 100 million on Vitamin Transformation in 2024. Then move to the next slide in terms of a bit of background on the synergies. Remember, we have the synergies part split in two. EUR 350 million, of which EUR 175 million EBITDA, around EUR 500 million top line in terms of revenue synergy with a brief machine where it takes a bit longer before that is materializing. I'm very happy to say that I've been to many of our top customers, top-to-top meetings, where all our customers really are interested in what we have to offer. We are filling the pipeline of our brief machine. And you know that building a brief sometimes takes a year, 1.5 year, but I'm very optimistic on what I see, how the pipeline is filling with the key account discussions we have. We also see some cross-selling, some quick wins. We had a fantastic win at the energy drinks with Tiger as a company where we combine Taste and Health ingredients and we have a few more to go. But those are the cross-selling ingredients. Obviously, we are in the game to build new concepts together with our customers. Then the cost part EUR 175 million. Very happy to say that we are tracking according to plan. Remember, the cost synergies had three components. One was the SG&A, so the global support. And we're executing on that. We have launched and announced and communicated a new organization with the effects in terms of headcount reduction. We're executing on that part. The second part is indirect costs, has to do with mobile provider costs, facilities, real estate and the like. Also here, we have just recently announced that in the U.S., we will close our Parsippany office, and we'll use the [ Plainsboro ] office as our hub in New York, New Jersey area, which create indirect savings as an example. And on the direct raw material sourcing, I'm very happy to say that we had our key supplier meeting in June, our 150 suppliers, and we are following through on all the programs and commitments we have seen. This will deliver in 2024, around EUR 100 million for the integration cost, integration synergies, and you will also see some effect already in Q4. Integration plus the vitamin transformation will deliver around EUR 20 million to EUR 30 million in Q4. Now let's move to the next slide. Just to give you a bit of a feel on what these cross-selling and new joint concepts are. Not going through it, I think it's in the pack. But a fantastic new joint concept is the Granola recovery, a snack. I've tasted it myself. It's fantastic. It is bringing a sustainable component via the plant-based ingredients together with an essential component, the fibers, the proteins, the vitamins and the minerals, coupled with a desirability, because the taste is really fantastic. Normally, you have a bit of a muffi-taste but with the combination, it is really, really tasteful. And I can tell you, I've tasted it myself. So these are concepts which we do discuss with our customers, and they are a huge, huge interest in working together. Then a bit of background on the business units. Maybe if we go to the next slide. Ralf alluded a little bit on Q3 and year-to-date Q3. Let me help you a little bit on where we are preparing ourselves for the future. So Perfumery & Beauty performed very well, and we continue to focus on bringing a very healthy innovation pipeline and using these fantastic palettes of ingredients, coupled with an enormous capability in creating. So adding ingredients to the fragrance palette makes ourselves and the brief machine stronger to help our customers to win. Taste, Texture & Health. Here, we focus on the revenue synergies. The big chunk of the revenue synergies has to come from Taste, Texture & Health, and I just alluded to with some examples there. And we'll also bring and combine the ingredients to the flavor palette. Also here, a very unique business model where we strongly believe in Taste, Texture & Health. Then on Health, Nutrition & Care as well as Animal, Nutrition & Health, we've launched the Vitamin Transformation program in those two units. That Vitamin Transformation programs will bring savings. And in addition, on Health, Nutrition & Care, we are really accelerating the HMOs developments, certainly after the approvals in China. And for Animal, Nutrition & Health, Ralf has alluded to it, don't forget, there is about 25% of the business, which is a high margin and also high growth, which is doing in the current environment, a fantastic job. And this all banked and backed up by a very strong science, research and innovation commitment. In this current environment will continue to invest on science, research and innovation to prepare ourselves for the future. We spent more than EUR 700 million year-over-year in science, research and innovation. We'll continue to do so to bring the company into a better place for the future. Having said that, wrapping up, if you go to the next slide, coming back to what I said when I started, the macro is pretty tough. But we are taking action. We're not banking on the normalization. Normalization will come absolutely, but we're not banking on it. We take actions. We fully deliver and you can count on us to deliver the savings, the cost savings, the integration, the cost savings on the Vitamin Transformation and continue to focus on the cash. Then 3, we, as you expect from us, we are open to review our segments. We have 4 business units, but in fact, we have 30 underlying business segments. We are reviewing that as we speak, looking at where is high growth, where is high margin, where there is innovation, and we will readdress and reprioritize where we spent the money on resources, on innovation, on science and research and possibly on M&A. And if we do that with the normalized macro, with the actions we take on micro, with a stronger portfolio, we are building something great for the future. And we bring progress to life by combining the essentials, the desirable and is sustainable together. And what's that mean financially, on last slide in terms of the bridge, in terms of where we are today, in terms of the quality of our portfolio, nicely linked to the macro and the micro and the portfolio review. You see, macro normalizing will have to bring about 2%. The vitamin, about 2%. The cost synergies about 2%, with the strengthening of the portfolio between 2% to 3%. And that brings us back into our midterm positioning of the company we are building, DSM-Firmenich. And with that, Dave, back to you.

Yes. Thank you. We took some time. We also did that on purpose. We are not strictly bound to, let's say, the 10:00 call. And we also remember people that the sell-side also has the opportunities to ask us further questions at the teach-in next week in Geneva. So I mentioned at the beginning that we changed the setup and that basically everything is now running through the open exchange setup. And that also means that for the sell-side analysts who want to ask questions, they basically have to register via the questioners link. There are two links. [Operator Instructions] And with that, I hand over to the operator and launch the Q&A session.

[Operator Instructions] Our first question comes from Sebastian Bray at Berenberg.

It's on the vitamins assets, in particular, and it's twofold. Firstly, if I take the guidance, the EUR 500 million EBITDA headwind year-on-year for this business given, but I think those publicly available data suggesting it's made around EUR 400 million previously. Am I right in saying that negative EUR 100 million is the right EBITDA for this business? And the reason I ask it is if I go back to the Roche accounts from 2000 or so before DSM acquired this business, Roche was regularly spending about EUR 200 million to EUR 250 million CapEx seemingly on a recurring basis on the vitamin assets. I'm trying to understand, number one, what level of vitamin EBITDA is required to cover the CapEx in this business? And number two, just allowing for the cost savings with DSM is planning, leaving aside any improvement in the end market, is this asset likely to hit cash flow breakeven?

Yes. Sebastian, thanks for that question, and indeed, the right question. So let me not go back to the Roche times because they operated vitamins slightly different than what we've done also in terms of cash and CapEx as well as resources. But I think the 500 minutes -- EUR 500 million, indeed, let me put some color on that. So first of all, our vitamin transformation program needs to bring about EUR 200 million of part of that recovery. And that's in our own hands, and that we'll do accordingly. That means there's EUR 300 million left, which is a bit linked to recovery of macro pricing. But let's also subsegment a little bit the vitamin effect. So we have a pricing effect, which you've seen is at low prices. The only good news on vitamin prices today is that it's stable at low prices already in Q3. And that has an effect on that, at least, our customers are not destocking longer because we expect that maybe next quarter prices will be lower. But that's the only good news on the vitamin prices as we speak. And we do think that we are at a trough as we speak. Then the second element on vitamins has to do with volumes, and we've deliberately decided to walk away from some of the volumes where we're not making any money. That's a deliberate choice also to focus on the cash. That volume is a deliberate choice and we're also taking actions. We have closed our B6 plant in China as well as vitamin C, and we'll do extended shutdown. And then the third element, Ralf alluded to, are the idle cost, because we are also organizing, reorganizing our inventory because our customers are no longer willing to pay for any of the security supply, you will see that we will have some idle costs ongoing. So overall, EUR 500 million -- EUR 200 million is in Vitamin Transformation, EUR 300 million is in normalizing, that part also has to do with idle cost. In terms of CapEx, to your cash flow part, I think it's clear that in the current environment that we are minimizing CapEx. And you can also do that because at the end of the day, if your OTIF doesn't need to be that high, so OTIF meaning, are on time, in full delivery to your customers you have a bit more flexibility to play also with your CapEx and the resources to spend. So that is the background. But it's a clear assumption that in today's world, nobody is making money on vitamins, and I would even say it is even negative to a certain extent.

Our next question is from Lisa De Neve at Morgan Stanley.

Yes. Okay. Great. So the first question I have is just on destocking. I mean, you mentioned it's fading in some categories, including in Perfumery & Beauty. Can you just share if you've seen any sort of helpful trends in your other three segments and more broadly shed a light on what you're seeing in your order books and customer patterns across the 4 business segments? The other question I have is sort of on your broader asset base. I mean, you're stating that you're reviewing all the 4 or 30 underlying subsegments. I mean, does that mean that you're considering all internal opportunities and actions? Or does that also mean that you would consider potential divestment of some segments if you were not the best owner of it? And how should we think about your financial framework that you are -- or the financial terms that you're considering to make that right decision in terms of returns and so forth?

Yes. Indeed, let me take those two questions. A bit of destocking, indeed. We see destocking still continuing throughout our businesses, and I've highlighted 2, where that we see perhaps a little bit fading. Consumer Fragrances, we definitely see that. And we see customers are really interested to innovate and reformulate again with the fragrances included. So we see definitely that destocking has faded away in that area. Dietary supplements based on retail data and user data in the U.S., we see some stabilization. So that's a first sign of destocking fading away. So it's not there yet, but looking at the data, we are slightly more positive. But for the rest, I have to say that destocking is still ongoing. Let me give you some color on the 4 businesses. So first of all, Perfumery & Beauty. The Fragrances part is doing relatively well with personal care still and strong. The ingredients part is continued destocking certainly in the industrial parts of the ingredients. That destocking is ongoing. Taste, Texture & Health, we do see destocking, although taste enzyme culture, textures are doing well. It's predominantly in the vitamins and these extracts where we see that destocking happening. And agency, I think Ralf already alluded to it, certainly, dietary supplements have just explained for Q3, but we see a little bit of stabilization of the end-use data. Early Life Nutrition, obviously, is low in demand as well as destocking continued. Be aware that also on prior year, quarter 3, was an extremely high quarter with double-digit sales. But nevertheless, that's what we see on early life. In Animal Nutrition, yes, destocking predominantly across the businesses, but with a very good performance on Performance Solutions because they bring something unique to the table. Then to your second question, the underlying segments, indeed, we are reviewing about 30 business segments. We review that from a growth perspective, from a margin perspective, from an innovation and sustainability perspective, innovation headroom going forward. But we also look at the cash flow return on investment or at least our capital intense is it. So where you would spend the money in terms of capital expenditure as well as innovation and research. So we do that in reprioritization, not -- we don't do the analysis to see whether we do with divestment yes or no. We like the portfolio we have. But as you are used to us, we are very open-minded and transparent. But we're in the midst of that review, so we'll bring that back to you in the Capital Markets Day next year. We'll be very transparent on it. But -- and return on capital is an important metric next to innovation headroom and growth as key elements for where we're going to reprioritize where we spend our money.

Our next question is from Matthew Yates at Bank of America.

Can you hear me okay?

Yes, absolutely. Yes.

Yes. Perhaps I'll give Ralf a go. Ralf, can you talk me through the year-end net debt guidance. There's obviously a lot of moving parts on that Slide 17. What I'm trying to understand is relative to what was guided at the end of Q2, what's really changed? Because it looks like, if I'm right, that you're expecting debt to now be a few hundred million less than you were thinking a few months ago. Is that a timing issue? Or is it reflective of the underlying cash generation of the business? And then related to that, forgive me, I haven't seen the balance sheet. So can you give us a sense of where inventories are now sitting? I think it was EUR 3.8 billion at the end of Q2. With all the steps that you've taken, where are we now, either in an absolute number or relative to what you would consider normal?

Yes, and thank you for question. And you're right. So there are a few new moving pieces. So let me first start with the net debt bridge. It is indeed improving from what we communicated at the half. You heard the stock on the one side about taking further measures on the one hand, we're already taking matches earlier. But obviously, before inventory developments actually take through, you rightsize your production asset, and what I said earlier as well in the0 destocking environment, it does take a bit of time. We're happy to see those first improvements. On the one hand, you see an improvement in operating cash flow. And there, we are now guiding to a slightly higher figure despite the fact that, that guidance is now towards the low end of what we communicated before. So that is an improvement. At the same time, you see some of the APMs and that is more of a shift going into next year. So previously, we were guiding around EUR 400 million. We currently see that more at the EUR 200 million level. Maybe one thing, I step back on the APMs. We communicated at the half, we have about EUR 750 million in total, split over EUR 300 million transaction related, of which the biggest part is behind us. And then obviously, we guided for about EUR 200 million for the vitamin improvement program and about EUR 230 million of synergies. Those obviously still need to come. When you take the bigger picture, about half of those costs will be behind us in 2023 and also from a cash point of view, but there has been some shift towards 2024 because obviously, we're trying to phase that as much as we can as well. And that combination with some discipline around in some of the corporate finance activities in our prioritization of cash, we're a bit more prudent in spend and some of our ventures and the like. That is overall causing an improvement in our guidance on net debt. Then to your question around the balance sheet, you're right. You've got the numbers in your head. We were rounded at a EUR 3.8 billion level at the half year. And there, we see an improvement. So although we don't publish the balance sheet on a quarterly basis, the number is now a little over EUR 3.5 billion. So that is a good improvement. Now in all fairness, there's a few elements. One, cash. That is something that we prioritize and with the stock that we initiated in the third quarter, and our discipline around bringing the inventory levels down, you see about a EUR 200 million improvement from that. At the same time, there is also some accounting entries on the back of the merger accounting of about EUR 100 million that is causing the gap. But you have to also keep in mind that the exchange rates are actually moving in the opposite direction. So if you were to compare on the like-for-like at the half year, you would first see an increase in the balance on the back of FX, which is about EUR 50 million. But then you see our inventory reductions causing it to be lower and then there's about EUR 100 million accounting impact, which is now resolved as well. So that takes it down to EUR 3.5 billion. Looking a bit ahead, we went around that, and we will see that number come down further.

Our next question is from Martin Roediger from Kepler Cheuvreux.

I have three quick questions. I saw that your CapEx guidance for this year is lower than previously, so now EUR 750 million. It is EUR 180 million. But in the past, you mentioned the midterm target of 6.5% CapEx to sales ratio. Is that still valid? That's the first question. Second, your dividend policy. You intend to pay out the dividend not purely from retained earnings, but 50% or more from capital contribution reserves. Is that healthy? And thirdly, regarding Perfumery & Beauty. You mentioned the exceptional positive product mix. Was it just due to high exposure to the high-margin of Prime Fragrance business? Or was there anything else?

Thanks, Martin, for that question. Let me take the last one and then ask Ralf to comment on CapEx and dividend. Perfumery & Beauty was an exceptional product mix. Two reasons. One, I think Fragrances were doing very well, whereby ingredients were doing a bit less. So it was the two effects in one. So it was not only the Fragrances, which were doing well, it was also the ingredients which were still having a bit of effect on the destocking and the like, certainly on the industrial part of the ingredients. So that defines the high EBITDA quality for Perfumery & Beauty in Q3. Ralf, for CapEx and dividend?

Yes. Thank you, Dimitri. So correct. So our guidance for CapEx is indeed EUR 750 million. So that is an improvement in the year. Again we're reprioritizing some of the investments in the current context. And the guidance of 6.5% is about right. We'll be a bit more precise when we get to 2024 and provide you with guidance on that. But I think it's a good metric. Keep in mind that next year, there is an elevated level in that number as well, given that we will be moving forward fast on the plant that is delivering the [indiscernible] product and the majority of that spend will actually be happening in 2024. But as an overall guidance, it's a good start point. Then...

Can I add one thing to it? Be aware that we will not reducing CapEx, which is linked to future growth and building our company for the future. This has to do with these segments, so a bit linked to the 30 segments, which we're reviewing in terms of our portfolio review. These are the segments where there is a lower growth, lower margin perspective. Certainly, the vitamins are being part of that, but there are other segments where we also look at. So it's an important distinction to where we really approve for lower CapEx. Ralf?

Absolutely. Thanks for that addition, absolutely. Then with respect to the dividend, a good question. Now we expect to be able to pay a stable dividend over 2023. You're right, if you would purely look at our financial metric, our dividend policy is to distribute about 40% to 60% of our net earnings, that is adjusted earnings. And I think 2023 is also a bridging year that we're building the company for the future. And with that, we're not only looking at the financial metrics, but I think a stable, preferably rising dividend to our shareholders is important as well. And I think to your specific question around, should we pay part of out of capital reserves and part of the cash, I think that is more a mechanical element of it. I think when you look at it overall, I think a stable dividend, given also our balance sheet is affordable in the current context.