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 our half year 2026 results. We hope you've had the opportunity to review the press release and the investor presentation, both of which are available on our website and includes the disclaimer regarding forward-looking statements. Following opening remarks from Dimitri and Ralf, we will open the line for questions. As always, sell-side analysts who want to ask questions have to register via the questions link, which can be found on our website in the financial calendar. And with that, Dimitri, the floor is yours.

Thank you, Dave, and indeed, a warm welcome also on my behalf for our H1 results call, and I'm happy to report good traction of our strategic action plan as we have presented to all of you in the CMD in March, where we would focus, where we would act and execute. Now a good set of numbers for H1 and Q2 on organic sales growth, EBITDA margin and cash and an outlook unchanged, where Ralf and myself will give you a little bit of color a bit later in the call. Also happy to say that our listing is active on the SIX Swiss Exchange as of the May 21, and that will be part of the SMI index as of the September 21 of this year. Now as you all know, as a reminder, the share buyback is still underway and progressing well. If we then go to the next slide to give you a bit of background on Q2. Q2, a good growth, 6% like-for-like improvement in EBITDA margin to 19.5%. If you would correct that 19.5% for FX, the dollar and the Swiss franc, we would be at 20.2% with June in quarter 2 be a particularly strong month, reflecting improved customer sentiment around the Middle East situation where at that time, there was a bit of easing, and we've seen that reflected in orders. Now these orders are not being put into our system with any label, whether it's restocking or prebuying. But if you take the statistic pickup in June, we assume some restocking, and we need to see how that evolves over time. Now EBITDA growth was 10% in Q2, showing the operational leverage of our portfolio. Then move to H1, give you a bit of color on H1. Overall, a 5% growth like-for-like. If we go to the next slide, 5% growth like-for-like. EBITDA margin of 19.3%, also here for the full year, quite some headwind on FX. If you correct for that, it will be 19.9%. And we also made in H1, good progress on our people and planet targets, which I referred to you in the investor presentation that is uploaded at the Internet site of DSM Firmenich. Now let's go to the next slide to accelerate financial performance. We presented this slide to you in March. And at our CMD, we now have made it actionable to act and execute. We had specifically mentioned the margin. 1% margin improvement next to the portfolio, next to the leverage, also the cost and restructuring program. We now have made that fully actionable, which will have a targeted reduction of about 1,000 positions at DSM Firmenich, where we simplify the organization and where we will adapt ourselves according to being the consumer-focused organization for the future. Now let's move to that same action plan of the CMD into the next slide, just as a reminder, and I will zoom in a little bit on the '26 because it's our first year of that action plan, which we have presented. We're delivering a good set of results in Q2 and H1, good like-for-like sales growth, a step-up in EBITDA margin and improved cash flow. That's really good progress. It has to do with the fact that we really stick to our grow what we have, anchor what we do and deliver on our promises. And that approach, you've seen the first fruits in Q1 and now in Q2. Now our targets for '26, where we have an unchanged outlook are, therefore, well underpinned with a few good levers. First of all, our just announced self-help cost program, which we now made actionable. Second, we see ongoing good synergies and a strong innovation and a strong brief pipeline. Also a good start into Q3. We are now at the end of the month in July. We see a good month of July. So it's a good start into Q3. And let me remind you that the FX, which was a headwind in the first half, that is easing a little bit into the second half. So now let's focus on our outlook here. You see it in the green bar a little bit. As you've known, outlook, 3 components. Let me start with cash. Good step-up in H1 2026 7% versus 2% prior year. But last year, we ended at 10.5%, a clear trajectory to the 11% to 12% cash generation, which is part of our outlook. Good progress on the working capital. You've seen that in our press release to 27.9% and with CapEx under control. Remember, CapEx is still including Bovaer, the last year that we have Bovaer investments in this year. And therefore, in that context, we feel very comfortable that apart from realizing the 11% to 12% for '26, we see a good step-up into 2027. Then on EBITDA quality, we delivered on a sequential improvement. Q2 is 19.5% corrected for FX would have been 20.2%. FX headwind fading into H2 and some early benefits of our cost program coming in with additional leverage on the growth that will help our margin. We feel comfortable with the outlook of around 20% for 2026. And it's also positioning us in a good spot for the step-up margin to 21% in '27. Let me then come to organic sales growth. Like you've seen, good start of the year, Q2 at 6%, H1 at 5%, good start into Q3, and we see a good brief innovation pipeline, important for future sales. With that, we feel confident for H2 and therefore, reconfirm our outlook and guided towards the upper end of that range. And this will be predominantly volume driven. Now let me also add a note to it. Please allow us to be a little bit conservative on our outlook for organic sales growth because I think in the current environment, I think you can better be a little bit more conservative. But if you look at the underpinning, I could say that, that conservative is something where we feel it's better to do it at this stage. But looking at the business, I think we feel very confident on what's happened. Now with that conservative in positioning, Ralf, let me hand over to you to give a little bit more color on the financials.

Thanks, Dimitri, and good morning, everybody. I don't know whether conservatism was necessarily connected with me. As you said, let's run through a couple of financials in more detail without being repetitive in some of the comments. Overall, a good start indeed in still a very volatile environment. So we're very pleased with that on the back of a good set in Q1. I think we're presenting a good set again in the second quarter. So overall, as you say, 5% growth, showing a nice 7% in like-for-like step-up in EBITDA. So some leverage. Keep in mind some of the one-off costs that we flagged in Q1, and that's also where you see in Q2, and I'll come to that in a second on the top of this page, overall, a 6% growth translating nicely into a 10% step-up in EBITDA for the group. Overall, a bit of highlight and more detail around the FX result that Dimitri already alluded to. So overall, we see an impact of a little over EUR 60 million in the first half. We were just short of EUR 40 million in Q1, meaning that Q2 is impacted by a little over EUR 20 million. We see that fading a bit, but there still be a headwind into Q3 and Q4. Overall, we estimate that currently at around EUR 25 million. Now FX rates are volatile as we speak. So let's see how that will evolve. It's a little less than what we originally flagged at the beginning of the year on a bit of a stronger dollar. The reason why it's still a headwind is obviously that you have some hedge effects in there as well. And whilst we were benefiting from a bit of a tailwind in 2025, we now see that full effect continuing a bit into the second half. Another thing that we wanted to focus on is basically the drop-through of EBITDA all the way down to earnings per share. You see that at the bottom left on the page, overall, a 14% step-up in adjusted earnings per share, given also that we previously last year, and we commented on that in our Capital Market Day in London, we had some one-off in '25. We don't see that coming back and it's nicely to Lucy that we can confirm that, so showing a nice step-up. The same for ROCE at the bottom middle. Overall, a step-up of 20 basis points. Now also here, FX does have an impact. Overall, the impact on our earnings is bigger than on capital employed. Adjusting for that, we would have seen 100% -- the 100 basis points step-up that we're targeting for and ROCE would be on a like-for-like basis, somewhat above 12% Cash, we'll come back in that in a second, but definitely a nice step-up versus prior year and 7% is a good start for the year, and that gives us confidence in the 11% to 12% target that we have. Let's look a bit more into the quarter and into the business units on the next page, please, operator, starting with the group. As said, we basically show Q2 and half year. I'll be commenting mostly on the quarter. The full details are as usual, in the presentation on the website for you to take a look at. Overall, top line, nice 6% volume-driven step-up. Pricing, more or less flat. There's a slight positive pricing impact where we started to pass on some of the costs that we've seen, but it's offset by a slight negative hedging impact in the top line. And at the right side, you see that 10% flow-through into EBITDA. If we look at it from a margin perspective, overall, we were targeting a sequential improvement in margin. We've seen that first step into Q2, taking the margin to 19.5%. When comparing to prior year, there is this bigger impact of FX. It's about 70 basis points in Q2. So comparing margin on a like-for-like basis with prior year, there is a headwind of 70 basis points from that FX, which will fade as we go into Q3 and Q4. With that, let's look at the performance of each of the business units in a bit more detail. Starting with Perfumery & Beauty on the next page, please. Here, we see a continuation of the performance that we've seen in the first quarter, a very nice 7% volume-driven growth in Perfumery & Beauty with a continuation of a very strong Fine Fragrance performance. Second quarter in a row, double-digit growth continuing with very nice wins and good customer sentiment. We also see that at the Consumer Fragrance side of the house, where we had a high single digit in Q1. We were able to top that to double digit into the second quarter and Ingredients and our Beauty & Care business is more stable, in line with the guidance that we provided at the beginning of the year. So very pleased with the commercial traction that we see in Perfumery & Beauty. The same for -- from an EBITDA perspective. So we see a nice like-for-like growth in EBITDA. Here, we do see some impact of some one-off costs, especially in the second quarter. We had a fire in one of our sites, and we also have some elevated long-term maintenance, which is not necessarily recurring every quarter. And this year, we knew that we were having a bit of a lift up versus prior. So overall, the quarter was impacted by about EUR 10 million of nonrecurring costs in the quarter. Adjusting for that, both FX and that EUR 10 million made the margin at 21.5% for the quarter with an expectation to see that back up to the levels that we expect for this division going into Q3 and Q4. So overall, a good step-up, good momentum in the business. Then on the next page, if we look at our Taste, Texture & Health business, also here, good growth in Q2. Overall, 6% volume-driven growth in the quarter. You see that at the top left on the chart with a very nice flow-through into EBITDA, an 8% step-up like-for-like. Here in the top line, 6% there is a contribution of about 1% from Bovaer. If we go back to Q1, we called out a negative impact of about 1% of Bovaer because it's a bit more lumpy, and we saw a bit of phasing. We're happy to confirm that on a half year basis, that impact is neutralized, but we did want to call that out in terms of consistency that is in there. You see a nice flow-through also then for EBITDA because Bovaer is not adding calories to the bottom line yet. That's to come for the future. So a 5% organic growth in the Taste & Ingredient division translating into a nice 8% step-up on a like-for-like basis in profitability. You heard me say Taste & Ingredients, the growth is more or less similar in both divisions with Europe and North America improving in terms of momentum and a nice rebound in Latin America in the Taste division. If we look at it more from a segment basing, we see the strong growth that we've seen in Q1 also again in the second quarter. Dairy is absolutely benefiting from Cultures & Enzyme sales and also beverage, of course, had a good quarter on the back of the World Championship always fueling a bit of that business, too. Margin-wise, in line with guidance that we gave at Q1, back up to 20% plus. Also here, there's a negative impact in the quarter from FX. That's a little over 0.5%. So adjusting on the like-for-like margin will be closer to 21%. But I said, we embrace the FX. It's something that's there. We'll continue to work through that, but at least we want to call that out, but it's encouraging to see the margin going back up, and we expect that to continue. Then maybe moving on to Health, Nutrition & Care on the next page, please. Also here, a continuation of good growth. We've seen 4% in Q1. We've seen another 4% in Q2. A little bit of pricing coming through. We need to pass on some of the costs. We see that here coming through. A very nice step-up into EBITDA margin also back up to above 20%, in line with the journey. We want to have a consistent trajectory in terms of reestablishing growth and improving profitability. And here, you see also the benefit of the portfolio focus that we have in growing in the high-value segments now. If we look at it a little deeper, growth is benefiting with -- from a strong Early Life Nutrition, obviously, supported by continued good, if not very good traction in our HMO sales, clubbed with obviously the benefit from ARA, but also Biomedical continued to perform well already for quite some quarters in a row, and it's nice to see that continued going forward. If you look at it in the U.S., we talked about that before. There you see dietary supplements and eye health continues to be impacted by a bit cautious North American consumer behavior. But also in eye health, we see some first positive signals on that front, where we're also benefiting from the repositioning of the strategy where remember that in London, we called out that we want to focus more on the online channels, and we've also been basically upgrading our -- the look and feel of our brands in terms of -- to fuel the growth going forward. Margin, as said, nicely up to 20%. The FX impact is here negative for more than 1%. So there, you can actually see that with the right mix, we have a very nice leverage into our results. Then a few words on cash on the next page, please. We wanted to zoom in. Overall, as I said, a good step-up versus prior year, 7% adjusted operating free cash flow into the first half of the year. And that includes an elevated level of cash CapEx. We guided that this year would be a bit of an elevated level as we're completing the investment in Bovaer with the plant coming to operation towards the end of the year. But despite that, 7% step-up, whereas we achieved 2% in last year. So an encouraging start is maybe a bit underplaying it, but we're happy with that. Also a continued focus on working capital. We're not yet at the level where we want to be. We want to structurally move towards 27%, but also here, a 1% improvement not only for the first half of last year, but also at the end of the year, we were closer to 29%. So we're making traction on that front as well. Now where does that translate then into -- in terms of net debt on the next page, please. So overall, we landed at the half year at EUR 4.4 billion. Obviously, the first half is impacted by the dividend payment and also the share buyback, which is progressing well. As Dimitri mentioned, we've completed around 60% of that share buyback. So there's some nice tailwind in stock coming still in the second half. But we do expect that net debt to overall normalize back to a level of around 1.9x EBITDA, in line with prior year. Our cash flow is seasonally much stronger in the second half, so that will nicely come in. We also have the proceeds -- the planned proceeds from the transaction coming in, obviously, offset with the remainder of the share buyback program. Now let me wrap up. So we leave time for Q&A. On the next page, please, in terms of outlook. I just want to finish on that one. Overall, 3 angles. We're ahead of the target that we set ourselves at the beginning of the year from a cash perspective, 5% growth, as Dimitri explained earlier. So a good start. EBITDA, we guided for a sequential improvement with 19.5% in Q2. We anticipate a further step-up into the second half. So continue to progress on that. And as said, the start of the year on the cash generation gives us confidence in the 11% to 12%. So that base is very comfortable with the outlook that we've given, maybe a little conservative, as Dimitri mentioned on the sales side, which is good. And with the restructuring, I think we're making the right choices in terms of the strategic program. Also there, we're highlighting that will set us up for a continued improvement in financial performance going forward. And maybe with that, Dave, we for Q&A.

Thank you, Ralf. Before we start with the Q&A, just a reminder on how to get into the queue. [operator instructions]. And with that, operator, you can give us the first question.

[operator instructions] Our first question comes from Nicola Tang with BNP Paribas.

I wanted to ask about the outlook and ask a couple of questions, but all around the same topic. So you mentioned there a few times that perhaps the guidance is on the conservative side from top line perspective. Can you talk about where -- which areas you're being most conservative in? And I guess linked to that, you previously said that you expected T&D organic growth to be at the upper end of your group outlook. So I guess, closer to 4%. Given you did 7% in H1, that would imply quite a big slowdown in the second half. So does that commentary still hold? Or has it changed? And perhaps you could give a bit more color around the divisional outlook? And then if I can squeeze a final one in around what you said that June could have potentially benefited from some restocking. I appreciate it's hard to kind of quantify and understand why your customers are buying more or less. But you were helpful in Q1 in terms of quantifying a potential prebuying last quarter. So I was wondering if you could say anything about potentially quantifying that restock effect in June. And given the fact that the Middle East tensions are rising again, do you see any signs? Or are you anticipating, I guess, a bit more cautiousness from your customers with that?

Where are you? All right. Thanks, Nicola for that question, let's give a bit of an outlook. I mean, overall, if you look at the conditions also going into the third quarter, we see them similar. I mean, adjusting for a bit of the extra that we've seen in June that Dimitri will call upon. So overall, continued good dynamics. We see in Fine Fragrance very strong. We're benefiting from wins in that front and good continued consumer demand, and we expect that to continue. We originally guided for the higher end, but with the traction that we've got, we're obviously pleased with that. If you look at it from a Consumer Fragrance point of view, now obviously, a high single and double digit is at the higher end. So let's see, I think that will normalize a bit going into the second half. So on the one hand, continued good traction on Fine Fragrance, a bit maybe normalization towards a more mid-single digit on the consumer. And as I said, Ingredients, we expected a bit more stable throughout the year. So those would be the moving pieces within Perfumery and Beauty. If you look at Taste and the same a bit holds for H&C, when adjusting for the effect of Bovaer in Q1 and Q2, the underlying growth is very much around 4%, in line with that guidance of the high end of the full year guidance. And that's also what we anticipate going into the second half. And if you package that, then you may come if you do the exact analysis and saying with a 5% start, if I then start filling up the models, then I come with a somewhat lower growth into the second half. I think that's in general where the conservatism a bit holds. We look at the outlook for the year, Nicola, as a balance across the 3, a good start or run with the cash flow in the first half. We continue to build and work on that margin, and then you can look at it in isolation in terms of top line. But that's why we also said on balance, we feel comfortable with the outlook that we gave with maybe a bit conservative at the top line, but on balance, we're good. So expect a bit similar conditions as we've seen throughout on average in the year going into the third quarter. And then maybe, Dimitri, you balance it a bit with the outlook and a bit what we've seen in terms of extra volumes coming in, in June.

Yes, indeed. So like Ralf was saying, we don't expect a change in business conditions. So we also assume that the North American market remains a bit cautious in the consumer behavior. So that is all baked in. Now then to your point on restocking, I said it before, our customers are not labeling their orders based on prestocking, restocking or prebuying and the likes. But obviously, if you look at the statistic analysis on the pickup on your order rate, plus a little bit of market knowledge, you can drive a little bit of a feel on what it could be. I want to remind you that we said something indeed in March that was up to maximum 1% -- that didn't rewind in Q2. So in that sense, it could also be that there's a bit of restocking of the value chain. Remember, we called out destocking in the second half of 2025. So with -- I think the world being more resilient than many, many of us thought in terms of economic results. I think that is also creating a bit of the sentiment of restocking. But like I said, it's not been labeled as such. But if you take that for our June month, and we calculated up to maximum 1% being restocking with a little bit of the value chain and the supply chain uncertainty, and we need to see how that evolves for the second half. But that's baked in into our outlook. Let me also add to that, that if we look at our brief and innovation pipeline, which I think is apart from the current market condition, plus the proxy for the future on what you can expect for Q3, Q4, but also next year. I'm very happy to say that we have a strong brief and innovation pipeline also with the global product launches as well as the regional customers are still growing as such. So it means that it now is too throttle. Remember, initially, we said, hey, the global accounts are slowing down a little bit, and that is also helping our growth going forward. So in that sense, we feel we are slightly conservative on the organic sales growth, not only based on the current conditions, but also if you look at our brief and innovation pipeline. And if you put a number on the restocking, but don't ask me for the scientific trail, it will be up to maximum 1%.

Just to clarify -- when you say the stocking 1%, is a comment on Q2?

Yes.

Our next question comes from Victor [indiscernible] with Bernstein.

I just wanted to ask a bit more on the restocking. If you see that coming from more low stock levels in the second half of last year, is it fair to think that, that doesn't potentially unwind, if not to the full extent through the latter half of this year or even into next year? And then can you talk us through the strong growth in Fine Fragrances in the quarter? And what you think is driving those higher win rates and how sustainable you think that is looking into the second half?

Yes. Thanks for those questions. So restocking unwinding that we don't know. We don't know exactly how much is restocking. So we made our analysis with a bit of a view on the history. So -- remember in March, we also flagged the 1%, which was indeed was not unwinding in Q2. So we need to see. So that will be difficult to predict. I think if you take H2 2025, there was definitely destocking ongoing. So there needs to be some restocking over time, and maybe that has happened. But maybe you can ask the question yet again on Q3, then we can -- we have progressing insight. So that is the background. Then on fragrances, I think what is really fueling the growth is a few things. Remember that our global accounts in Fine Fragrance is about 60%, 40% is local. That was 50-50, and we're moving towards more into local, global 50-50 by inventing and investing more in the regional accounts. Now what we have seen is that those regional accounts are really continuing to grow. But on addition -- in addition, we've seen our global accounts coming with new innovations, new product launches and that our brief pipeline and the win rate is really helping that growth. So it's next to the regional accounts. We now also see that we have a good brief pipeline win in the global accounts and fueling the growth in the fine fragrance area. That was double digit. Now Ralf was alluding to it. Can we do that till eternity Obviously, that's my preference. But I think in all fairness, you need to be fair to the whole industry and the normal growth rates that will be more into high single digit, and we expect that will moderate towards time into high single digit. But don't get me wrong, if we can do double digit for a few quarters in a row, obviously, we're all geared up to that. And have a look at our breath and innovation pipeline, I feel pretty confident, but let's see.

Our next question comes from Lisa De Neve with Morgan Stanley.

I have 2. First and foremost, how should we think about the main EBITDA bridge items into the second half to get to sort of around 20% EBITDA margins for this year? You called out already very helpfully some one-off costs in P&B in the second quarter, but it would be great to get sort of an idea of any other plus or minus factors. And then secondly, on CCH, I mean, you called out about 200 bps of growth from synergies. Can you sort of share what you're seeing in the broader market environment? Is this very strong growth that you're delivering, I mean, clearly well ahead of peers, driven by market dynamics such as higher renovation activity? Or are there other notable factors that are really DSM specific that are sort of worth calling out?

The EBITDA bridge and then you do the synergies. So overall, thanks for the question, Lisa. So what we said at the beginning is that we'll see that gradual margin improvement for a few reasons. The easiest one is that, of course, FX is fading out. As you said on the half, overall, it has an impact of a little over 0.5% on margin. That, of course, will come down. At the same time, we also see that throughout the year, we normally see a bit of a step-up in terms of margin that's also related to the mix in the underlying portfolios and the one-off costs that we also alluded to. I mean if you look at purely Q2 from a Perfumery and Beauty point of view, the fire will not come back and also that a bit elevated maintenance that is recurring every 18 to 24 months is also not recurring. So in that sense, we have already a natural growth on that front. The same a bit in Q1, we had a bit of those one-off costs in terms of -- in TTH that we called out of a couple of million. So that gradual improvement will come. So we do expect a step-up in margin going into the third quarter on the back of those 2 events. And at the same time, we continue to focus on growth, and we'll see the first benefit of our tighter focus around cost. And we've obviously started with that. We announced it today, but we'll expect a bit of benefit from that impacting us in terms of margin. So a few levers all contributing to the right direction. In the same time, if you look at it, for example, in agency has seasonally always a stronger mix element with iHealth in the second quarter. So there's a few dynamics in each BU. P&B, absence of nonrecurring with the continued good mix, you've seen the leverage come through. PTH with the continued growth, also there a very nice leverage. Looking at Q2, a 5% growth ex Bovaer translating into an 8% step-up in EBITDA. We do expect that to continue with that margin to improve further towards the 20% that we guided for.