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. 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 & Health business from the group. You can find these 3 documents on our website, where you can also find our disclaimers, for instance our forward-looking statements. After the presentation by Dimitri and Ralf, we do a Q&A session. [Operator Instructions] And with that, let me hand over to Dimitri.

Thanks, Dave, and indeed, welcome to all. 2023 was an extraordinary year. Extremely proud that we have created the global leader in nutrition, health and beauty. And I have to say that our teams worked really brilliantly together. I think we've made a huge step in integrating dsm-firmenich. You've seen that in the early benefits of cost themselves 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 FX effect. 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 today, and we will bring a little bit more color into that later. Reflecting our confidence, we propose a dividend of EUR 2.50, which is in line with previous year. And our full year 2024 outlook, there's at least EUR 1.9 billion, which assumes at this early stage that's only our 2x EUR 100 million EBITDA contribution projects from merger synergies, mainly costs, and the vitamin transformation part, building on an underlying effective prior year run rate of EUR 1,700 million. We can 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 an unprecedented dynamics in vitamins. Although we have to say that we do feel that, that is at its trough, and we will 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 actually happening and destocking, the big question out there, and maybe some normalization will follow. We took actions on this macroeconomic 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. We've seen that in quarter 4, about EUR 20 million FX, which helps us in EUR 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 EUR 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 4 where we came in at EUR 999 million. Still tried to convince Ralf to make it EUR 1 billion, but he sticked to EUR 999 million. He's sitting next to me. But hey, in that sense, also, okay, what's in the last million? We've also said that taking swift actions 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 ANH because of the volatility in the vitamin space as well as the higher capital intensity to keep their network up and running off sites in previous locations. And having said that, with all these actions in place, you see that we definitely have a strong future ahead with Animal Nutrition & Health more focused on the sustainable farming part under the new ownership structure. And these then finish with the focus on really consumer ingredients with a very synergetic 3 business units playing, which was also part of the announcement during the merger, of which the EUR 500 million revenue synergies were coming from these 3 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 6 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 had started synergy delivery with the first EUR 15 million contributed in Q4. We have topline 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, we're really filling the EUR 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 2 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 dsm-firmenich was 80%. In these difficult macro circumstances with integration ongoing, with the vitamin transformation ongoing, having an engaged workforce with 80% plus score is quite an achievement, and I see that as a huge plus for building dsm-firmenich into the future. If we then go to the synergy tracks on the next slide, a bit of background on the synergy delivery, very much well on track. Just as a reminder, EUR 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 Ralf and myself are very close to. We're tracking building of the pipeline, remember EUR 500 million topline revenue, and I'm very happy to say that last week, we've passed the EUR 100 million pipeline filling for TTH, which accounts for about 60% of the EUR 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 assure 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 effective. So we will 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 is to see. For me, a very important one, the shampoo with concept haircare. This is for the Asian market. It basically has an healthy ingredient in the haircare shampoo and it prevents hair loss. You don't see it, but definitely, you need it. The active ingredient in this haircare is something which brings dsm-firmenich 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're now working on that, and we're launching this Melody Yogurt in the Middle East market, where with the lower sugar content, we still have to taste in the flavor of dsm-firmenich. We have to the mouthfeel with the hydrocolloids of dsm-firmenich, and you will have culture and enzymes with vitamins from dsm-firmenich, which also makes it healthy. So a quite a unique combination and a nice example of how the synergy is kicking in. We then go on to the next slide to give you a bit of background on the vitamin transformation program, so I'm shifting now from the integration program to the vitamin transformation program. Also there, swift action. We already see an effect in quarter 4 with about EUR 10 million with EUR 100 million for next year. You do see that we have closed vitamin B6 plant in Xinghuo. We have closed vitamin C plant in Jiangshan or at least the part of impacting dsm-firmenich. 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 similarly on the cash, where we really pushed to 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 EUR 100 million from next year. If we then move to the next page to give you a bit of background on the why of the separating out of Animal Nutrition & 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 ingredient 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 in -- after the merger at dsm-firmenich. And we'll make another step with the separating of Animal Nutrition & Health, so very much in line with the strategic reasoning. It also helps to focus on the 3 business units into the consumer ingredient space, really focus for growth, where, as you've seen, the revenue synergies come from Perfumery & Beauty; Taste, Texture & Health and Health, Nutrition & Care, initially at the start of the merger. And by focusing on that consumer ingredient company, I think we can also accelerate and increase the probability of success as that company. So 2 fantastic adventures going forward, one more into the consumer ingredient, one more into improving sustainable farming for the world. Then go to the next slide. This one is a repeat that our purpose and value remains there. We are here for a reason, bringing progress to life with the 3 business units at dsm-firmenich geared around the human space, consumer ingredients, curate nutrition, health and beauty wellbeing for humans. And on the other hand, the way for Animal Nutrition & 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 Ralf for some background on the financial performance. Ralf?

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 & Beauty and Taste, Texture & 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. And 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, 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. We see a continued good growth in Perfumery & Beauty and Taste, Texture & Health business. The vitamin impact is predominantly impacting in Animal Nutrition and Health, Nutrition & 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 guided for about EUR 90 million, and that's where we landed the year. And also the vitamin impact of EUR 500 million came in line with forecast. The 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 rightsized our production capacity as we started prioritizing cash as we said in Q3, also reflecting on our strong cash performance in the second half. If you put that aside for a minute and you back out the vitamin impact of FX, 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 EUR 15 million from the synergies and about EUR 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 & Beauty, overall, a strong performance in Perfumery with Fine fragrances 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. Ingredients remained weak on the back of low demand in our industrial applications where 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 1% in Perfumery & Beauty, whereas if you back out the effect of the fire, the growth for the year was 3%, again, with different dynamics in Perfumery & Beauty -- in Perfumery, coupled with the weaker 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 & Beauty, you actually see a step-up of 5% in EBITDA, which is net of an FX effect of 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 1% versus prior, and especially the margin in the second half of 20%, 22% is encouraging. Then, if we look at our Taste, Texture & Health business, following a double-digit growth in 2022, it's encouraging to see that overall topline on a like-for-like basis came in, in line with prior year. Here also, a story of 2 tales. We see continued good performance in our Taste part of the organization with solid growth on that front, coupled with a weaker ingredients where we deliberately walked away from some low profitable business, and obviously, a small impact from the vitamins as well. We see that business part continuing to be impacted by the destocking at our customers as we highlighted before. Overall, that translated into an organic growth of minus 1% in TTH. Also here, if you look at the profitability, we focus on profitable growth. Here, you see also a double-digit organic step-up, obviously, and partly set up by a vitamin impact in Taste, Texture & 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 had 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 1% in Taste, Texture & Health to above 18% for the year, which is a good improvement as well. Then a few words on Health, Nutrition & Care on the next page. Here, we see volumes down 6% where we see a persistent destocking and basically softer consumer demand. And despite continued good pricing, where we continue to pass on inflation to our customers, that translated to an overall organic growth of a minus 4%, where dietary supplements is very much impacted by existing consumer spend where the money is allocated to different categories, and we see a reduction there, predominately in the U.S. And we're also working through the normalization of the pre -- the post-COVID 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 adding a reflection in the bottom line performance of our Health, Nutrition & Care business. Overall, the declining EBITDA is very much linked to the exchange rates and the vitamin impact in this business. Then lastly, turning to Animal Nutrition & Health on the next page, despite continued good demand for animal protein on a global basis, the market is still very much impacted by weaker 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 there we're 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 EUR 500 million for the group. About 2/3 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 for this Q3, where we see a continued destocking. We also continue to focus on cash performance. Overall, we delivered a quarter of EUR 440 million, an 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. But yes, here you can see it. So overall, we see continued good growth in Perfumery & Beauty. That is continuing to perform well. And ANH and HNC 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 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 EUR 1.90 a share. We came in at a little over EUR 2, 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. And 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 EUR 3.4 billion. I said that my target was EUR 3.3 billion. When adjusting for some last -- the FX 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 stable dividend of EUR 2.50. Now with that payout, we're above the policy that we set of distributed 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're 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, a reported net debt of EUR 2.2 billion, but a few words of caution readout around that. Obviously, you need to factor in our commitment to buy out the minority shareholders. That is a cash out of around EUR 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 turnaround 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. We have to squeeze our procedures that are currently running, but you need to have that in that calculations. At the same time, we also have the hybrid outstanding. We are 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 2x 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.

Thanks, Ralf, indeed, and putting some color on the financials. Let me start with the next slide to contextualize a little bit the 4 business units or 4 businesses you have alluded to there a little bit. So let me wrap up, I think, Perfumery & Beauty, very good performance, very happy with that. Certainly strong in the Perfumery part. Personal Care doing well. And indeed, the Ingredients part as you alluded to. Taste, Texture & Health, solid performance, a bit weaker in the yeast extraction and the vitamins. Health, Nutrition & Care, solid performance if you back out the vitamins. Obviously, with the separation of Animal Nutrition & Health, that will also reduce the vitamin exposure. And Health, Nutrition & Care is I think really the first 3 units being focused on, on the human space with consumer ingredients, with high growth, high margin with more resilience. And then Animal Nutrition & Health, significantly impacted by vitamins, where we feel the trough has been reached, but also with the actions taken where we already see the first effect in Q4, but certainly full effect in 2024. I think we are on the right track. That has accumulated in an outlook. If you go to the next slide, let me not read out the outlook to you, I'm pretty sure you read it yourself, I think, at least EUR 1.9 billion. And you see on the right-hand side, a bit of housekeeping. If you have questions about housekeeping, then I will refer you directly to Ralf because he's better in that than I am. And then let's move on to a little bit of background on bringing progress to life. You can't do that by pursuing a sustainability journey. We have 3 pillars there. One is Climate & Nature. The other one is Nutrition & Health, and one is Social. And although there's a lot of society discussions about sustainability, let's be aware that this is part of who we are, but also in which value chain we play. This is also requested by our customers to make progress on that journey. So this is not something which we just do. This is something which we breath. This is what we live. And I'm very happy to say that on climate and nature, we have submitted our SBTi target set to be validated. On Nutrition & Health, I'm very happy, and we've announced it that we extend our partnership, a 17 years' partnership with the World Food Program to eradicate malnutrition in the world because we have capabilities, and with capability, there comes responsibility. And on the Social front, I already highlighted a bit -- a little bit, the social front highlight on the engagement of our own workforce with an engagement score of 80%. So if we then go to the next slide, a little bit of background, I think, on an important step as dsm-firmenich, in 2023, we did make quite some progress on Scope 1, Scope 2, Scope 3 and renewable energy. But I think, more importantly is that we have submitted as dsm-firmenich as one integrated company. Our SBTi validated target, we're in the midst of the discussions there. We have submitted it to be net zero in 2045, and this is aligned with the Paris okay in the COP accord to be below 1.5 degrees. Now let me summarize through the almost last slide and then open the floor for Q&As. To summarize, if you go to the next slide, go back to macro and micro, review portfolio. So Macro, started the discussion earlier, China and vitamins are normalizing at said trough. Input prices are normalizing with very variations. Destocking, the jury is out, but we do see some normalization going forward. We didn't wait for that macro recovery. We took actions, and we are delivering on all 3 actions we've promised you. We're delivering on the integration synergies, we're delivering on the vitamin transformation program and we're delivering on cash with focus, as Ralf alluded to. We accelerated our review of portfolio. I think with the move we have announced today, I believe, to separate out of ANH for a better future under a new ownership structure, while focusing with dsm-firmenich really in a synergetic approach for consumer ingredients where we really push through the revenue top line synergy, as initially mentioned during the start of the merger. I think we have a great future. The combination of the micro with the view of your portfolio will deliver a great future. It will not be easy. It is not easy. Sometimes it is with pain. But as you always expected from us, we are looking around the corner. We're making the move ahead of the game, and I think we're doing so, and we're committed to do that in the best interest of all stakeholders. And with that, I hand over to Dave by making the bridging slide. If you go through the next slide, to invite you for the U.S. Investor Event for the ones who couldn't join the Geneva event. We'll do that for our U.S.-based investors around. If you couldn't make Geneva, more than happy to welcome you in Plainsboro on the 22nd of February. And obviously, the CMD, the Capital Market Day in Paris, where we would try to make your life a little bit easier. So we hope you're already around in that week in Paris. And then on the Monday of the 3rd of June, you are more than welcome to join the Capital Markets Day in Paris. And with that, back to Dave.

Yes. Thank you very much, Dimitri. So we move to the Q&A. [Operator Instructions] So with that, let's start with it. So operator, can you give us the first question?

[Operator Instructions] Our first question comes from Nicola Tang at Exane, BNP Paribas.

Do you hear me?

Yes, we hear you.

Yes. Okay, great. I wanted to start on the topic of your Animal Nutrition separation. Firstly, bearing in mind that some of the assets that you have crossover between animal and human, can you just explain a little bit, I guess, in practice, how the separation will work and how you could limit any negative implications on the human nutrition side? I was thinking back to the Geneva event where you nicely showcased some of the synergies between flavors from termination of nutrition ingredients from the DSM side. So can you talk a little bit about how you still maintain that going forward with the separation? And then, I guess, a tagged on question, why keep the Bovaer and Veramaris side? Is it because you're kind of locked in with the partnerships there? Or do you see some kind of strategic overlap with the rest of dsm-firmenich? And perhaps I'll leave it there and let others take the rest of the questions.

Yes. Thanks for that question. And indeed, on the assets, so this is one of the reasons why we think ANH is geared up for success. They have a network of sites, premixes and the likes, and they're integrated. And we do feel that, that is needed, and it also requires capital to bring it up to speed. So that capital intensity is different than the more consumer ingredient focused part of dsm-firmenich. Secondly, you do see that the vitamin effect was obviously, predominantly impacting ANH, but it also had some effect on HNC. And therefore, we basically look at continue reducing the vitamin exposure. Remember that our strategy was to reduce the vitamin exposure. We were 25% earlier and maybe in the far distant history, even 30%, 35%. Before the merger, we were at around 25%. Post-merger, that became about 15%. And by separating out Animal, Nutrition & Health, we'll go to 7% to 8% of turnover, which are vitamin-related, and that is predominately in HNC. To further reduce that volatility, we basically will make clear choices on what part of vitamins remain of the dsm-firmenich Group in the consumer ingredients scope. So it could well be that the 7%, 8%, we will reduce more in the direction of 5%. And that means that this 5% with more into the food application approvals, pharma grades and the like. So more resilient, high margin, high growth. And secondly, by bringing the whole network of sites and premix facilities in the animal space, we basically don't need to have the assets in the Health, Nutrition & Care part. You can also source the material, but it also reduced a little bit of volatility. So the idea behind the separation is that the majority of the infrastructure will go to Animal Nutrition & Health. And that we basically, on the vitamin front, will source the vitamins, which we then formulate and premix ourselves in the Health, Nutrition & Care space. Then to your second question, Bovaer and Veramaris, those are 2 businesses which are organized separately. So Bovaer, it's clear that we're in the midst of building our plant in Dalry, Scotland. Bovaer is very much linked to the dairy value chain, so -- also to our dairy customers, where we innovate also on different areas, like low sugar, like flavor, like putting healthy ingredients into the dairy product, and it's very close to the discussions also that have the Bovaer. And so it's a clear choice linked to the dairy value chain to have that. And it's a unique ingredient. It's really a fantastic innovation, which helps us positioning at those customers as well. So there's a clear decision to keep that part of the group and also because it's still in development while we speak. So that's the reason on Bovaer. Veramaris, it's a different story, that's a joint venture with Evonik. There, we feel there is a lot of opportunity to grow in the human space in omega-3, which are algae-based in the human application space, Dietary Supplement space. Also, by the way, in the pet food space. So there, the consumer ingredient focus is absolutely key, and that's also the reason why on Veramaris, we keep that in scope of the group.

And then just to add a quick one in. Sorry if I missed the beginning because I was a bit late to join. Did you talk a little bit about -- or could you talk a little bit about what potential options you would explore? Is there a situation where actually you might maintain some of ownership of this business as you go through the separation?

Yes. I think 2 things there. One is we clearly indicated the timing here that throughout 2025, we think the separation will be complete. That creates a bit of optionality in terms of preparing it. It's one. Secondly, I think it's important that we're going to restore profitability. So we will have a full impact of the vitamin transformation program that is not touched. Maybe it's even being accelerated by the separating. And also the integration part on the cost side will help pro rata the Animal Nutrition & Health business. So the restoring of profitability is a key focus. As you've seen, Ivo Lansbergen, who is currently heading Animal Nutrition & Health, will be the CEO of the Animal Nutrition business. He's really focused on restoring that profitability while separating it out as a unit. Secondly, in terms of time-wise, I think we just started the process. We need to go through the formal procedures and processes and the like, but as you have known from dsm-firmenich also in the past, we always do that with a keen eye on all stakeholders. We never jump into conclusions. I think from all the divestments we've done, I think they landed very well at a very good valuation. You can count on us to do that in the same way as we did in the past.

Our next question is from Charles Eden at UBS.

Can you hear me okay?

Yes.

Perfect. So I'll limit myself to 2, please. So firstly, on the medium-term margin aspirations for the business, excluding ANH, I guess, in 2023, the other remaining 3 divisions, if you include the corporate cost generated a little over 18% EBITDA margin. If I incorporate this EUR 350 million of synergies, this will bring you to around 21% margin. So I guess my question is whether this gives you even greater confidence in the 22% to 23% EBITDA margin targets over the medium term or if perhaps you even see some upside to this range when excluding ANH? I know it may be a bit premature to be talking about upside to that target, but just interested in your thoughts. And then second one is on portfolio construction, and a bit of a hypothetical question for you, Dimitri. Obviously, you've had a little over 6 months of dsm-firmenich in the current format. And the announcement today obviously gives us an indication of the parts of the business you don't see as part of the long-term future of dsm-firmenich. But what about on what you might be missing? Are there white spaces which you would look to fill following any potential exit from ANH? Or are you content with the asset base today, and it's more about delivering compounding growth and margin expansion on these assets?

Nice questions, indeed. You said maybe it's a bit premature to think yet about positive impact, but -- I mean, I will leave it to my CFO to comment on that, on the midterm target, and then, I'll take your question on what we think we're missing.

You've done the math, right? So indeed, adjusting for that over 18% and then with the plans announced that will bring us to that space. Remember that when we set the overall targets, we obviously set those in the guidance pre any vitamin impact. We're also anticipating on the growth of our promising ventures, like Bovaer and Veramaris in the space and the growth. We do see a continued step up there indeed. And at this point, we don't see a reason to change the outlook on that front in terms of margin. But like I said, we'll continue to focus also improving the profitability of our Animal Nutrition program. But at the same time, with the acceleration of our strategic review, we're also looking at how to accelerate the growth in the other segments that will basically underpin the confidence in the long-term targets that we set for the group.

And then to your point, what are we missing? I don't think we are missing. I think we have a great portfolio. But you always have areas where you can strengthen your portfolio. And I like exactly your question because it's one of the reasons why we said, let's review also our segments, where can we double down in terms of innovation, research, possibly venture and collaboration and the likes. And there are 4 areas and our Chief Science and Research Officer, Sarah Reisinger, also presented that earlier. And I think she will be also on stage with you during the Capital Markets Day to really focus on one of the platforms we could even strengthen our proposition. And one is in the microbiome area, in your gut health. You know that we've done an acquisition last year in Adare Biome in postbiotics. It's an area which is still relatively -- not hugely researched. It's an area where we have competence and capability. It's an area where I strongly believe in where we can bring in something good for the world. The second area is everything around biosciences, biotechnology fermentation. It's an area of interest of us where we also bring capability. The third area, I think everybody is talking about, is also about the digital AI. We're reviewing that, personalized nutrition, and we need to do more. I think we also have some developments in our Perfumery & Beauty case. And then last but not least, receptor technology, so how does your 400 receptors in your body work, how do they react on all types of ingredients, how can you make sure that you have sugar-reduced food, which still stay sweet and you still find it desirable to take. So those are the 4 areas, and we're working on that, and I will promise you that we'll come back on that in the Capital Markets Day to give you a bit of a feel. But there are still areas where we feel we could strengthen, where we have capability, but where we think maybe we could even do better with the accelerating and reprioritize some of our work more into these directions.

That's really helpful. And maybe I can squeeze in a housekeeping one, and maybe for you, Ralf. Just in terms of the volumes ex-vitamins for Q4, obviously, you reported minus 3 . Do you have a number of what it was ex-vitamins in Q4?

Yes, but similar trend as you see in the full year. If you back out the vitamins, the overall, we would come out flat to slight positive in terms of growth wise.

Our next question is from Sebastian Bray at Berenberg.

Can you hear me?

Yes, brilliantly.

That is great. I would have 2, please. The first one is another housekeeping one. What is the depreciation and amortization charge associated on an annual basis with Animal Nutrition after taking into account the impairments of various assets over the last 18 months? And my second one is on the strategy review. Is this done now? Or is there a chance for that the Capital Markets Day we wake up and let's say, DSM wants to invest this -- divest its Ingredients business, and if I might develop on that, let's pretend that a potential buyer of Animal Nutrition comes along and says, well, it's an okay business, but I really want Bovaer in there, would you be open to having a discussion?

Let me take the housekeeping and then Dimitri to answer your second part. Overall, we gave guidance in the PTI as well around the full year guidance on depreciation, amortization and the impacts of PPAs and the like. We don't guide the separate segments and the EBITs of that. On the other hand, it's also a bit premature of finalizing the scope and looking, but overall is included. We're just starting the process of that. And once we have more visibility on that, we will be able to provide more insights as we go. So it's a little premature to dive into separating out the individual components of each business unit at this stage. Dimitri?

Yes. And then indeed -- yes, I like how you phrased it, any surprise in the Capital Markets Day. I mean normally, looking at your strategy is you need to do that on a continuous basis, right? And I think of dsm-firmenich is that we always look around the corner. And we really enjoy to challenge ourselves. And I think you've seen we never shy away from the discussion. There is no no-go area. We always challenge ourselves. And we will -- if you don't mind, we'll continue to do so. However, we really now have made a step where we say Animal Nutrition & Health goes into the growth of sustainable farming with a new ownership structure where they can grow with -- coping with the volatility and the higher capital intensity. The dsm-firmenich part with 3 business units, which are very synergetic, bringing the revenue, we talk about growth. So how can we accelerate growth? How can we play in the consumer ingredient space? So you will see us more, where can we redirect to the earlier question, on one of the key areas where we still think we can accelerate and we can bring our capabilities, so it's really a growth question in itself. However, let's face it, strategy is never done, and you always need to look around the corner. But I think what we've announced today is having the next step within the journey of dsm-firmenich. Then on Bovaer, there is a clear contribution to the discussion on the dairy value chain, obviously, with our customers to bring that into the next phase of more sustainable dairy value chain. So there's a clear reason why that should be the case. We also know that Bovaer, we are in the midst of it, we are building our plant in Dalry, Scotland, which will be commissioned in 2025. So it's far too early to say that how that works out. So I would say that's too early to answer that question. Let's just bring that Bovaer to a success and really help our dairy value chain customers to make that a success.

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

A couple of things. I think last one is a follow-up from Nicola's question earlier about disentanglement. How do you think about security supply for the vitamins that you're still going to need in those residual business lines that you'll continue on? Is there any analogy here with what yourself and Ralf did when restructuring the materials business and exiting capro, but continuing to do the downstream polymerization? And then the second question, volume trends obviously remain a bit mixed across the business, but the human, what we call human, was back to positive in Q4. Do you think that is reflective of the overall category or DSM outperforming that category? And just any thoughts on development or organic growth into 2024?

All right. Let me do the disentanglement and then Ralf could say something about Health, Nutrition & Care. Thank you for picking that up. I think we had a very good quarter 4 with some dynamics, where Ralf gave you some background. Let me go through disentanglement. Indeed, we will look at all optionalities. But obviously, we'll look it in a way that really helps our Health, Nutrition & Care business. So secured supply is important. I mean, like I can just said, we're also going to focus a little bit that, that 5% of sales will be more or less the vitamin exposure. We're not talking about a huge amount, but it's an important critical amount. So we will have those discussions. And all options are open there. And indeed, Ralf and myself have some experience in that. So we're going to use that experience to make sure that we create security supply and ease of doing business with us, also with the customers in the future while not immediately having the assets. So definitely, it's on our mind, and we will pursue a setup which suits us. And maybe on human, Ralf?

Yes. No, absolutely, happy to comment on that. And we did see some good growth in a couple of segments within that division, especially highlighting eye health. There is a seasonal effect that usually at the end of the year, it's the strongest quarter there. But we're actually pleased with the performance coming through. At the same time, we saw dietary supplements stabilize a bit as well, and there we actually see growth, obviously, compared to a weaker Q4 last year. But it's encouraging to see that, that is stabilizing as well. It's a little early to say how will that materialize going into the year. You have Dimitri also talking about our guidance and that we are cautious at the start of the year. So I wouldn't comment necessarily over the overall category, but we're pleased with the performance that we're actually seeing in those segments in the fourth quarter.

I think it's fair to say that for Health, Nutrition & Care, vitamin is the issue. I think we covered that in the separation of ANH. The 2 segments, and I think your question is on that as well, Dietary Supplements and Early Life Nutrition. Dietary Supplements, I think is a bit of a temporary effect normalization post-COVID. We do see Dietary Supplements' customers getting a bit more optimistic on demand normalization, but let's see how that spells out. And Early Life Nutrition, let's face it -- I mean, Early Life Nutrition is a premium category. There we really innovate. It's the high end of the market. It's really helped by innovation going forward. Obviously hit by destocking in '23. We see a little bit of easing. But we also see with our HMOs, a nice entry into China, where we are gaining a bit of market share because of it. So there are some positives there, but I think it's too early to say whether that's structural to Ralf's point. We see some positive signs, but let's be cautious, people were also reporting positive signs last year, and that didn't materialize.

Our next question is from Martin Roediger at Kepler Cheuvreux.

3 questions. Just coming back to the carve-out and separation of your Animal business. Do you have any clue what the dis-synergies might be from that carve out? And any clue about one-time costs for this carve out? Secondly, you already touched on your expectation that you see some normalization in destocking. Did you see that already materializing in January and February? And is there any chance for a restocking? And third question is on FX effects. The Swiss currency is relatively strong. You have a significant cost part in Switzerland. What is the FX effect from Swiss currency in 2024 if the FX rates stay unchanged versus today?

Yes Thanks, Martin, for those questions. I will leave the Swiss franc to Ralf. That's a very difficult one to forecast the Swiss franc, although it seems go about in one direction. A bit on ANH separation, I think it's a fair point. We will see hardly any dis-synergy. So the vitamin transformation will be accelerated. I think it will be helped by separating it out. The integration is in full swing, will not be touched by the separation. Remember, ANH is already a separate business unit. Some dis-synergy could happen in global support, stranded costs, if you wish. However, we always look at that in a very strict matter. That's too early to say. Let's say, it's high on our radar screen to see, but I don't see a huge dis-synergy going forward. And if so, then obviously, we have to address it, but it's too early to tell. Then on the restocking -- and I'll leave the one-time cost to Ralf. Then on the restocking, interesting, I'm talking about normalization of destocking. I'm not talking about restocking. If you look at the numbers, and I think you have the numbers as well as I do, you do still see that stock levels in different categories are normalizing. They are not depleted. So I'm not talking about the restocking. I'm talking about normalization of destocking. I do think there was a bit of overstocking, which will normalize. We do see in Consumer Fragrances that, that destocking is fading. And we also see in Dietary Supplements that, that destocking is fading, but it's not restocking because the levels are still reasonable. Maybe one exception, that is on the vitamin front. There, I do think that we have depleted stocks, not only us, but also in the value chain. And there you see a bit of insecurity will -- there's no buffer to react. So I do think that some restocking could be needed in the vitamin change. Then you will easily say, okay, when do you see that? We don't see it now. We don't see it yet. But in my strong opinion is that restocking of vitamins will take place. But all the others, it's more normalization than restocking, and maybe then Ralf, you, on the ANH separation, on the one-time cost and then the Swiss franc.

Yes. No, happy to take those, and thanks for the questions. On the one-off cost, obviously, we're going to incur some. On the other hand, we just announced our strategic intent, and we're starting the process. So we need to start off that process. And given it's a complex carve-out and a lengthy process, one of the reasons why we're announcing today, so we can get going on that. Overall, it's difficult to estimate at this point; however, we did get some guestimates. We think it's probably in the range of 50 to 100, but again, to be firmed up as we go and start the process of separating Animal Nutrition & Health. We obviously have some experience with prior transactions to give -- put a bit of context around it. I think we spent around EUR 50 million on the separation of our Engineering Materials business, so we've to give you a bit of guidance on that. But as said, we'll firm that up. We'll start the process. And once we've got better visibility on that, we'll bring that back to you as part of the overall dynamics of impossible transaction. Then maybe pivoting to the FX exposure, I think, generally, we have a sensitivity around the FX. We communicate that around the dollar where [ $1.01 ] has an impact of around EUR 50 million pre-hedge. On the Swiss franc, about EUR 10 million per quarter. We do have some hedges in place, and the combined effect of that, if we would offer at the current rates, is about a negative impact of about EUR 40 million, EUR 50 million going into next year, which we will see coming through predominantly in the first half of the year. So that was a bit of an insight where we currently see took into account.

Our next question is from Chetan Udeshi at JPMorgan.

Can you hear me?

Yes.

Apologies, I have a few technical questions because we don't have the full P&L and cash flow statement yes, so apologies, this is quite basic. But I was looking at the gross margin number that you've given in your P&L, and it seems to have collapsed to 24% in 2023. If I'm not mistaken, DSM -- sorry, Firmenich used to do high 30s sort of gross margin. DSM was doing low 30s, I understand the vitamins parts. But can you throw some light on what is your underlying gross margin? If the gross margin is so much lower, how did you actually come to the EBITDA numbers? Because clearly, there's something between EBITDA and gross margin, which is helping the numbers and maybe that's the OpEx, so just some clarity on that point. The related topic actually was just on the balance sheet as well, the 2 items that sort of stuck out in the early look for me was the employee benefit liability seems to have risen a lot. Again, is this just a combination effect? Or is there some phasing associated with the restructuring costs? And just last point, deferred tax liabilities of EUR 1.75 billion. Again, a big number. Is this again technical associated with merger or something just we need to think about?

All right. Let me take those. First of all, pleased to see that you run through all of the details, and indeed, the balance sheet, indeed the P&L is in the back. And it's good and comforting to know that I'm not the only one looking at those and reading them through. And maybe back to your questions. I think overall gross margin, you do see a drop, and that's predominantly the impact of the vitamins and FX coming through, and that's obviously reflected. And that's also highlighted where we're saying there is an impact of higher input prices, I think, throughout the quarters. When guiding for our results, we also highlighted that we're sitting on high-value inventory on the back of the inflation that we are passing on to our customers, but obviously, that had an impact on the margin in 2023. And rightfully so, at the same time, you're spotting saying, hey, what else are you doing to improve the EBITDA margin. And those are a combination of the programs that we're running, and at the same time, focusing on tight cost control as well to make sure that we deliver an EBITDA performance to the best of our ability whilst weathering through the vitamin impact that we discussed before. Then looking to the balance sheet questions that you have, yes, very well spotted. There is indeed a shift in the employer liabilities. I think if you scroll a couple of lines up, you actually see the provisions. So there was a reclass on some of the employee benefits around some of the pension provisions down to the employer's liability. Sometimes we're confronted with some new rules of the game on the accounting front, and that basically caused the shift. I think that's about EUR 124 million, if I'm not mistaken, at least when I looked at it. So that is merely a reclass on the balance sheet. And then to deferred taxes, that is a real technical thing. It's obviously related to the step-up. And overall we did see a step-up in our asset on the back of the transaction of around EUR 10 million. Obviously, there is an associated deferred tax liability with that. And that's predominantly reflected on the liability that you just highlighted. So that is merely an accounting entry than anything else hidden.

And will you have gross margin number ex-vitamins in your head at the moment? Or -- we're just trying to assess why is the gross margin so much lower, even taking into account vitamins, in fact? But I will follow up separately if...

That's right. We are a little bit tight. I mean I also want to give the other analysts. I suggest that you drop me a call afterwards, and we will discuss this more in detail.

Our next question is from Stefano Toffano at ABN AMRO.

A few questions from my side. First of all, I understand it's very early in the process, and you're just starting out. But thinking about normalized earnings and normalized valuation, let's say, EBITDA multiple on the ANH part, what kind of confidence can you give us that you will be able to get a, well, let's say, relatively good price for these assets? Obviously -- I mean the worry here is that you're selling an asset at the moment in time where maybe arguably multiples are at cyclical lows as well as the earnings. So I hope you understand -- well, let's say my concern about maybe the issue. Then the second part, again, on the guidance, if I may ask, I mean, obviously, the guidance seems -- and we all learned from 2023, right? So I appreciate the cautious guidance, but this one seems relatively baked in if I heard the comments about stabilization, again, you already mentioned it's stabilization, it's not restocking, et cetera. But we're talking about H2 basically x2 plus something that you should be able to achieve relatively easily. So I don't know, it seems to be a little bit cautious. And the last question is a technical one. Working capital, excluding the ANH part, what kind of movements, or let's say, normalized working capital levels can we expect?

Good. Thanks for that question. Thank you all, indeed. Timing, that's why I really focused on restoring profitability for Animal Nutrition & Health. So as you've known, I hope you agree with us that we're not stupid. So we're not going to find a way on new ownership structures where we do feel we don't get the value for what it's worth. Remember, Animal Nutrition is really unique in the Animal Nutrition & Health space, really a global lead in that with a fantastic infrastructure and also in the way on the big themes of sustainable farming. What we'll do is we're going to restore profitability. I'll give a bit of color on what we think we can do. We saw profitability. We also have throughout 2025 to prepare ourselves, not only because work needs to be done on separation, but also we do feel that we need to restore profitability and confidence in that business going forward. And as you've also seen, we have optionality on how we do that on the new ownership structure. If you go back in the past, we've done that with pharma with a joint venture and then step out. We've done that with straight sales. I mean we have an open mind on how to do what's best for the company from all perspective, and I think we do that in a responsible way. So I hope you trust based on the history of what Ralf and I did, that we do that in a smart way. Secondly, on the vitamins. You've seen we reported EUR 491 million negative impact in 2023. We've launched the vitamin transformation already in June and July, which will bring EUR 200 million of that. So EUR 200 million will be covered by restoring profitability on our vitamin transformation program. Then we have about EUR 200 million which are linked to pricing. So if we get some normalization of pricing, then that's EUR 200 million, not saying that the full EUR 200 million will come back, but some normalization of pricing will have to come. Then if you follow the stock pricing of Feedinfo, there is some movement finally after, I think, 5 quarters. We see some green lights. It's too early to really materialize. But some normalization needs to take place because at current pricing nobody is making money, including us. So that will happen. And then we have about EUR 100 million of that EUR 500 million, which is linked to volumes and demand. And obviously, if volume is not coming back, then you need to adapt your cost structure. If volumes are coming back, that will help you certainly on the idle costs. So I think we have a pathway to partly grossly cover the EUR 500 million. And we do that in a way. We have some time to do that going forward, and we will do that in a smart way. Then on the outlook, you basically said, it looks like a bit cautious. Well, you've seen that very well, and I ask you and all of you to allow us to be somewhat cautious. And then the third question to Ralf.

Yes, working capital. first of all, reiterating, we're pleased with the improvement that we've seen now and also at previous guidance, et cetera, and then working capital needs to continue to improve towards what I think is healthy for the overall business. And when guiding earlier, we said let's work down from 34% down to 31% and realize a similar step-down in the course of '24. That is something that we are geared to and will be disciplined in our actions to drive a further improvement along the way. I think then we're also getting to the place, which is a healthy level for the overall business. It's a bit little early then to see what the implications are on the carve-out of Animal Nutrition. But besides that, we will set a healthy ambition on our working capital going forward, which is balanced because we also want to make sure that we are the supplier that will develop and grow with our customers. Nonetheless, we need to be disciplined in the areas where we need to be. So we'll focus on further improvement going forward.

Yes. And I'm afraid that discipline is indeed now the key word. I mean we're running out of time, unfortunately, but we also have a big other program also with other communications. So, unfortunately, we have to cut it short now. But the good news is you can reach out to our team. We're very happy to talk to you. You can come to Princeton. We still have a few seats where also Dimitri and Ralf will be with a lot of other managers being in place. So, unfortunately, I have to end the session today. Thank you very much for listening in. And with that, I give it back to the operator to finish the call today.

This concludes today's call. Thank you for joining, everyone. You may disconnect.