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 COO. We published our third quarter trading update earlier this morning. We trust you have had the opportunity to review this press release, which is also available on our website and includes the disclaimers regarding forward-looking statements. Following the opening remarks from Dimitri and Ralf, we will open the line for questions. And as a reminder, 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, please go ahead.

Yes. Thank you, Dave, and a warm welcome to everyone also on my behalf. I will begin with a few introduction and remarks, and then hand over to Ralf to give you a bit more color on the financial performance. Now let me start with the key highlights, as you've seen on this slide. For the third quarter, it represented another important -- it created an important step for delivering the action plan as we have presented to all of you at the Cap Markets Day earlier. This year, we have a plan and we are consistently executing on it. Our group performance has been marked by this consistency with a volume-led like sales growth of 5% in the quarter, which is in line with the first half, despite still a volatile operating environment in the world we're living in. At the same time, for our EBITDA, our margin improved sequentially to 20.4% in the quarter. As you've seen, it is up from 19.5% in the previous quarter. And if I remind you that the currency had an impact on that 20.4%, if you correct for the currency or if you report at constant currency, that 20.4% would have been 21.2%. Now we saw a good performance across all our businesses and also geographical areas during the quarter, once again highlighting the strength and resilience of the portfolio that we have chosen. Looking ahead, business conditions entering Q4 remain similar to those we have seen in the previous quarter, supported by a solid order book could start of October, and we therefore expect our consistent performance to continue, and therefore, have increased our outlook for the organic sales growth for 2025. We then go to the next slide. These results year-to-date, but also for quarter 3 are a good stepping stone for '27 and '28. Remember, we have the starting point for '26 at around 5%, where we've indicated our business and our portfolio should grow between the 4% to 6% during the strategic period and the announcement we made in the CMD. So I think that is nicely aligned. EBITDA quality, we expect around 20% for 2026. The 20.4% for Q3, at constant currencies, 21.2%. Also, the sequential improvement from EBITDA from 19.5% previous quarter to now at 20.4% shows the treasury towards the 21% for 2027 and then another step up in 2028. So it is a good platform for implementing consistently our plan. Now good to know that our cost and restructuring program is according to plan. This basically means that we will see next to the cost restructuring program, which will help us in '27 and '28, maybe a little bit also already in Q4 with the ongoing pricing actions, with the portfolio mix, with leverage, I think you will see that we are well posed for delivering on our action plan, not only for '26 but also for '27 and 2028. And with that, let me hand over to Ralf.

Well, thank you, Dimitri, and good morning, everyone, as well. Dimitri already made a few comments around the total group. So let me keep that short and go through the business units in a bit of a moment later. Overall, looking at this, looking at the continued operation, Top left a nice 5% organic growth, as I said, fully volume-driven with a nice leverage in EBITDA with a like-for-like step-up of 8% in the quarter. Also from a margin perspective, it was important to set the first step into the direction for the '27-'28 plan, we wanted to deliver well over 20%, and we've done so in the third quarter with a nice 20.4% despite the headwind that Dimitri muted to from FX and a nice sequential step-up as we communicated and planned for throughout the year. Overall, the EBITDA hit EUR 482 million, as said, an 8% step up, and we've seen a nice growth in both top line and profitability, both in Q3 and Q3 year-to-date. So that is fairly consistent. But I said, let's spend more time on the business unit. So maybe on the next slide, let's start with Perfumery & Beauty. There, we've seen a continued good momentum as we've seen throughout the year, a very nice 8% step-up, again, all volume driven in the quarter with a step-up in EBITDA on a like-for-like basis of 10%, also coming through nicely. If we look at the segments, Fine Fragrance continued good momentum at a high single-digit growth and Consumer Fragrances continued at a double-digit pace as we've seen throughout the year, largely driven by innovations, reformulations and the fact that fragrance is a clear differentiating element in the growth. Both businesses have delivered a double-digit growth year-to-date, both Fine and Consumer Fragrance, reflecting the very good momentum and strong performance that we've seen consistently throughout the year. Looking at the other businesses, Ingredients, very much in line with what we guided for at the beginning of the year. We've seen in Q3, a mid-single-digit performance in both businesses. Throughout the year, we're steering more to a low single-digit business as we indicated that growth would normalize in our Ingredients business. From a margin perspective, margin stable at 22%. Again, it reflects a 50% negative effect from FX. But as we communicate consistently, we embrace that and we need to navigate through that, but margin continues to progress from that side very well as well. Maybe then moving to the next slide, please, to Taste, Texture & Health. Here, we've seen a solid performance in the quarter with some phasing across the quarters. As Dimitri said, we've seen some business slip into October with a very good start of the quarter. Overall, if we look at Taste, Texture & Health, we basically see around 4%, 5% across Q2, Q3. Remember that we've seen some additional order intake at the end of the second quarter. But the way we look at it is that if you look at the H1 performance of around 4%, we also expect that to continue for the second half with a good Q4 ahead of us. If we look at the allocation between the main divisions, Taste and Ingredients, it's a bit boring where we see consistently performance across the two, both contributing to the growth and also synergies continue to find its way back into the top line. In the third quarter, a nice leverage as well, the 3% volume led to a step-up of a 6% step-up in like-for-like EBITDA performance and margin largely stable versus prior, reflecting largely a 90% basis point impact from currency. Also here, what we wanted to see is a continued progression of margin starting with a little over 19% in Q1 to 20% in Q2 and now nicely towards the 21% in the the third quarter. So also here a continued good development in the business in a market that is still reflecting softness in the U.S. So we see nice growth across all of the regions, the U.S. remains soft for us in Taste, Texture & Health. Then last but not least, on the next page, please. Health, Nutrition & Care. Also here, a very consistent performance throughout the year, reflecting a 5% organic growth in the quarter. 4% volume, 1% price, where we basically see the rounding [indiscernible] nicely to the 1% with a very strong flow-through into EBITDA driven by good focus on pricing and cost and obviously mix. If we look at the segments in Health, Nutrition & Care, growth continues to be supported by strong Early Life nutrition performance. obviously fueled by continued strength in our HMO business, but also Biomedical continues to perform well. If we look at dietary supplements, i-Health, also there, we see a continued cautious behavior in the U.S. impacting that business reflected in a low single-digit business performance or growth performance for those businesses. Very strong margin development on Health, Nutrition & Care, as said, a combination of pricing, mix and good focus on cost discipline. Also here, we've seen a very nice sequential margin improvement, similar as we've seen in Taste, Texture & Health moving from 19% to 20% to 22% now in the quarter despite a very strong headwind from FX, as a good portion of this business is exposed to U.S. markets. I think that summarizes the 3 businesses. Looking across all of the business units that we have, basically, the quarter is a continuation of the story so far in the quarter. We're focused on the execution of the delivery of the results, and throughout the quarters, we've seen continued growth and continued market progression in line with plan. And maybe that's a good moment to leave it at that. Dave, I move to Q&A.

Okay. That's good. Before we start, just a reminder for the sell-side analysts how to get into the queue. Remember that if you want to ask questions, you have to register via the questioners link, which you can find on our website in the financial calendar. And then I hand it back to the operator and see if we already have first one for questions. Operator?

[Operator Instructions] Thank you. Our first question comes from Nicola Tang from BNP Paribas.

First, maybe to ask a little bit about current volume trends. It sounds like, as you said, the quarter has started well. I was wondering if you had any latest thoughts on the potential impact or whether there's any prebuying still going on? I know it's been a topic that we've been discussing through the quarters this year. But it seems like even if there is prebuying, we haven't seen any reversals. So as we go into year-end, as customers kind of maybe want to clean up balance sheet, do you see any risk of a sort of destock? And do you have a view on sort of current balance sheet levels amongst your customers? That's the first one. And then the second question. I was wondering if we could talk a little bit more about input inflation, what you've seen so far this year, especially with the oil price going back up again? And any early take on views for next year? I remember, I think in Q1, you had said that all else being equal, at the time, maybe we were looking at EUR 100 million sort of incremental annualized cost before taking any price actions. I was wondering if that's a kind of relevant data point as we look into 2027 given the fact that oil has gone back up or is that completely relevant?

All right, Nicola, thanks for those questions. I will leave the input inflation part to Ralf because he is really fond of that that one. Let me take the Q4 and your link to destocking -- restocking. Indeed, like I mentioned, good start of Q4. October is behind us. So we'll see that continued good momentum also in Q4. You could imagine, we've also raised our outlook on organic sales growth. We would not do that without having a clear confidence that Q4 will come in with a good start of October, but also a good order and brief and innovation pipeline. So not only Q4 but also looking at the brief and innovation pipeline for 2027, we see good momentum. So coming back to your restocking story, indeed, we have indicated a little bit of restocking, predominantly in Perfumery & Beauty, if you recall, well, in the Consumer Fragrances area. We've seen that in Q1 and Q2. We've not seen any restocking in Q3. We basically see on our customer side that they have normalized their stock levels. So we don't expect destocking either. I think it was -- everybody was a bit cautious on what's going on in the world, and therefore, depleting the stocks, we also announced a little bit of destocking in 2025, if you remember well. So we've been extremely consistent. We also wanted to be transparent on that, but we've not seen any restocking in Q3. We don't expect destocking to go to lower levels of stock. I think it's a normalized level. However, as you have indicated towards the end of the year, you normally have your end of the year review but that is everywhere -- every year, so year-on-year, that will not make a change. So normally, I would say, it's a normalized level. I think customers feel happy with the current stock level they see today. And then input, inflation.

Yes. Good morning, Nicola. Overall inflation, spot on, initially, we guided for -- we basically trimmed that down a bit on some easing in the second quarter at the half year, we moved that somewhat down. I think it's more relevant than what do we see in terms of inflation going forward for '27. What we currently see is around 3% of inflation. Overall, I think a manageable number. I mean it's something that we're used to dealing with, and we'll have the usual levers like pricing reformulation. Obviously, focusing on growth on the high-growth segments, but at the same time, taking cost measures and efficiency. So we'll address that as usual going into the year. But a number in that range that you indicated is around accurate for '27. And as said, we'll address that. And you'll see a bit of pricing as well. So I expect that to be positive going into next year.

Our next question comes from Cathal Kenny with Davy. We will circle back to you. Our next question comes from Lisa De Neve with Morgan Stanley.

I have 3, if I may. The first one is follow-up a little bit from Nicola's question on input inflation. I mean year-to-date, your margins are on track, right, for your full year 2026 target? And I know it's really early days looking into 2027, but how should we think about the key building blocks of your margin to next year given you've performed very strongly in high-margin categories this year, such as enzymes, cultures, Fine Fragrance, and there's some volatility on the input dynamics. So I would be very keen to get your thoughts there. Secondly, you had very strong like-for-like results in the third quarter. There were some small pockets of softness, such as in TTH North America. I'd be very keen to hear like what you're seeing in the market, especially in the light of consumer staple companies, doing a little bit more innovation and renovation activity. So any thoughts on that would be great. And then lastly, a quick one on Bovaer. Are you on track for starting up the U.K. Bovaer plant by year-end? And how should we think about the contribution of that plant into next year?

Okay. Thank you, Lisa, for those questions. I think all 3 very nice questions. Let me go briefly over it. First of all, the input inflation, I think Ralf was alluding to it, maybe try to my words on it, just to see if we are transparent. So on the EBITDA margin bridge, I think it's clearly that Ralf indicated about EUR 100 million effect. Pricing will be small part of that. I mean we're used to that. But we have a few other levers where we feel very comfortable. Now first of all, remember, the 20.4% EBITDA margin for Q3 is at constant currency, 21.2%. So there's already -- there is confidence that we have the capability to deliver that. Now for next year, we will have our cost and restructuring program. Remember, we announced EUR 100 million with a head count reduction of about EUR 1,000 million we expect EUR 50 million to be delivered for '27 and about EUR 50 million for '28. That will obviously help our EBITDA margin. We also expect growth to continue with leverage on the EBITDA margin. Ralf indicated the bridge on his presentation. So that will help us, obviously, also in '27 and '28. And then last but not least, you indicated to that, we made deliberate choice in tuning our portfolio and accelerate the growth on the higher growth, higher end margin business, cultures, enzymes, probiotics, Fine Fragrance, et cetera, et cetera. So that will also help the portfolio mix. So we feel pretty confident that the trajectory which we started at the beginning of this year on the EBITDA sequential improvement, there's a good bridge to the 21% for '27 and another step-up in '28. And then to your question on TTH. TTH for year-to-date, so for the first 3 quarters, so end of September, we delivered about 4% which is a good delivery according to plan. We have seen a good start of October. So we're confident for a strong Q4 as well. What we do see is North America indeed still be soft. That is the story for 2026 in general, not only for TTH but also for Health, Nutrition & Care. Remember, Health, Nutrition & Care sales is about 40% in North America. So could you remember that the 5% delivery on HNC on organic sales growth is very strong in light of a big part of their sales is in North America, which is obviously helped by good sales for biomedical and medical nutrition but also the HMO and [indiscernible] Nutrition. But I think overall, North America, we expect to remain soft for 2026. We need to see what 2027 will bring. Then maybe Bovaer. Bovaer is a story where -- for this year but also for next year when we're waiting for the plant to come onstream in '27. We will just sell what we have as interim capacity. That's between EUR 35 million and EUR 40 million of sales, which we already have. So it's not something we're building. That is the maximum we can sell for '26 and '27. We still expect that for '26. You'll also see that for '27 at around a flattish profitability, you really see when the plant will come on stream, which will be in '27. When we get commercial volumes, it will have a predominantly impact for '28 and further.

Our next question comes from Cathal Kenny with Davy. Okay. We'll move on to our next question. Our next question comes from Alex Sloane with Barclays.

Two for me, please. First one, maybe a bit of a follow-up, just on TTH North America. Could you give a little bit more detail on what's driven the sort of incremental softness there in Q3? Was it cost to customer destocking sort of weaker end markets, delayed projects? And maybe any kind of color by -- are there any particular categories that were more affected than others would be the first one. And then the second one, just on the '27 targets, which are obviously unchanged today, which is welcome. I mean clearly, you will have a tougher comp in '27 than you had assumed when you laid out those targets in March, given that you're going to grow 5% rather than the 2% to 4%. So I guess the question would be sort of what's giving you confidence in sustaining that 4% to 6% target on this higher comp base? Is it from the already kind of secured pipeline wins, how much visibility comes from that?

All right. Let me try to give some color on TTH North America and then Ralf can take the 2027. But I would take '27 together with '28 because we have a plan for '26, '27 and '28. TTH North America, let me be very clear. We've not seen any weaknesses in segments. I mean, at the end of the day, year-to-date, we've grown 4% I think compared to what you see in the food markets, 4% growth is outperforming the food market growth in itself with the innovation in the market we are in. Now North America is a bit of a softer segment but it's not specifically one segment above the other. What we have seen is that Dairy is a very strong segment. That is a strong segment overall in all regions. Savory, which is a small segment for us. Obviously, we see a bit of a less growth. There's still growth, we see less growth but that has been in Q1, Q2, Q3 as well. What you've seen is in Q3 for TTH, we've seen also some deliveries delayed into Q4. You will always see that a little bit throughout the quarters. We have seen October being very strong. So I would not say there is one segment where we're particularly concerned about. We basically see that throughout the year, we will reach a really solid growth on TTH. We're only flagging North America. If that comes back on stream, we will see another plus based on the good performance for TTH. So that is what I wanted to give us a bit of color. And for us, be aware that Dairy is a very important growth factor also linked to GLP-1, your [indiscernible] development and the likes, and that is a global trend. .

All right. Good. And let me follow up with the '27 targets and maybe it's a '27-'28 answer overall. When we also communicated our journey in Capital Markets Day earlier in the year. We also obviously did that looking at the pipeline and the wins that we see coming through. And I think the good performance in '26 is a good testimony of that. So our ambition and target for '27 and '28 are clear. pipeline is developing well. We're happy with the wins across all the categories. . But also if you look at our 2026 performance, Alex, it's not that we're firing on all cylinders equally hard. As Dmitry just answered your earlier question around the U.S., I think U.S. is still a market that is not performing at its potential. Same in Asia, we see markets slowly turning there not all countries within Asia are performing equally. But also if we look at our own portfolio, I mean, we're very happy with the momentum that we see in fragrance and that is continuing. But we also guided there that even with the very strong performance that we see in 2026, markets there have the ability to grow well also into the period thereafter. But there are certainly areas across our portfolio where we can see a further step up and based on that, yes, we look ahead into '27 and '28, and we were clear on where our ambition and targets are, and we feel good about that.

Our next question comes from Fernand de Boer with Degroof Petercam.

It's Fernand de Boer from PDPM. One question is coming back on the next year '27 margin guidance. How much tailwind would you have from ForEx given the -- if you assume the [indiscernible] to stay where they are today? .

Well, let me take that. It's a good question and good morning, and thanks for that. I mean, the FX effect there will be easing and leveling off now. FX remains very volatile and the change comes from week-to-week. And let's see what the news of yesterday has an impact. But where the dollar is today, $1 of EUR 112 always makes me happier than $1 of EUR 117. But that's clear. So with the rates as they are today, we should basically anticipate a more neutral effect into next year, which is completely different from what we've seen over the last 2 years. So we had a headwind of about EUR 80 million, EUR 90 million. So that should help next year and the delivery of '27.

Our next question comes from Victoria Nice with Bernstein. Victoria, your lines are muted. Please ask your question. We'll move to our next question. Our next question comes from Artem Chubarov from Rothschild & Co Redburn.

2 quick questions, please. First, could you please update us on your performance in H1, particularly in the academic assets, which I believe was a bit of a tailwind for you this year. So how did that develop in Q3? And equally, on synergies in TT&H, you've been consistently reporting strong contribution from synergies. So how did that develop in Q3? .

Take those?

Yes. No, happy here to take those Overall, as indicated earlier in the year, ARA contributed about 1% of tailwind throughout the year. We've seen an acceleration and effect in Q1 on the back of the events from another supplier where we basically work with our customers and we supported them as much as we could. But we see continued good traction throughout the year because obviously, it gave us more volume and reading through on the question for next year, we've worked on longer-term contracts, securing the majority of that volume also going forward. And that obviously contributes to the overall strong performance that we see in Early Life Nutrition but coupled together with the HMO. Then moving to synergies. Overall, we see that coming through. TTH continues. We've seen about a 1% to 1.5% contribution throughout the year that's baked into the numbers. Traction remains very active. We regularly quote when we have a bit of an extended call on some of the examples, but they keep on coming through, whether they're in beverages where we combine nutritional ingredients, together with taste profiles or whether we have making solutions, we regularly call out customers most recently, again, where we basically increased the overall -- how do you say that longevity in Fragrance, but we make sure that our cookies and cakes remain fresh and that's a clear combination and when synergy. So they continue to come on all fronts. Overall pipeline stands still at a level of around EUR 400 million and there's also well over EUR 100 million of business that we want still to come to market. So we'll continue to see that. We'll continue to track it for now and report out because it's an important metric. And also in the other businesses, both in PNB and HNC. PNB, we had already some earlier wins there less profound as TTH, so we don't specifically call them out, but also on Beauty & Care. We often say that our competitive position has suddenly changed post the merger, and that is giving us additional business on that front, but we also see the first wins coming through in HNC, which is helpful. contributing to the sales performance overall. So we remain confident on the delivery of that synergy, and we see it back in our numbers and pipeline, but more importantly, also in the level of engagement that we have with our customers, this is clearly a benefit from the merger.

And maybe just to conclude because I remember you also had an ARA HMO linked question. So let me give you a bit of color on the HMO. I think it's fantastic development for this year. So HMOs, remember, we're the only one approved in China. We also have 8 products -- related products approved around the globe. So this is not a one trick pony. This is a continued development of these HMOs and we already have new ones in the pipeline. So I'm very happy to see that. So remember, on that question, what type of business it could become. We said this will generate EUR 100 million plus sales as a category over time, additional sales in itself. And we said that for '26, you will see that more than half of that is realized in '26. And that will continue into '27. We are extending capacity in Elsburg our plan as we speak, just to fulfill all these demands. So very happy to see that. And it will also help us in '27. Obviously, is a tougher comparison than in '26. But this is a good pipeline momentum and we really see that the early life nutrition category is benefiting from that. It's a premium game category, and you've seen that in the growth of HNC. You've seen that reported year-to-date around 4%; Q3, about 5% sales for HNC. And that is with like we earlier said with a soft North American market, which represents 40% of the sales of agencies. So it shows really the strength of the portfolio. And when North America will normalize over time, and it will even help HNC going forward.

Our next question comes from Victoria Nice with Bernstein. We'll move on to our next question. Our next question comes from Usama Tariq with ABN AMRO ODDO BHF.

I just want to ask, am I audible? .

Yes. .

I have just 3 small questions. The first one on pricing for Perfumery & Beauty this quarter was volume driven. Can you give a little bit of color on pricing? And what do you expect -- if you expect any pressures in 2027 going forward? . My second question would be on buybacks. So the current one is complete. Any color there would be very grateful for your expectations in the future? And my final question would be any update on the ANH disposal.

All right. Usama. Thank you for those questions. By the way, I thought that DSM-Firmenich was a long company name, but you even have a longer company name. So Interesting to see how your e-mail address.

Yes, indeed. .

But let me go through your questions. Indeed, pricing perfumery. Like, I mean, first of all, let's be very clear here that the Perfumery & Beauty business is managed on margin. So if ingredients or costs go up and down, that will be in our system in the ingredient toolbox in [indiscernible], and we will take that when we come for brief and creation possibilities. So it could even be the case -- it's a bad idea, but it could be the case that you reduce price and still have a higher margin. So this is the business model around fragrances. Now what do we expect, indeed, like Ralf was saying, we have this EUR 100 million of part will be in the Perfumery & Beauty at -- we will work accordingly. We will see substitution and reformulation briefs, which by the way, is also good. Any change in regulation, any change in ingredients, any change in pricing will create reformulation, but we'll also see some pricing effect where we pass through the pricing. Now that normally pricing is we have formulas with customers with the regional customers that are going to be quicker. If we have a new brief, we price the new pricing in. If it's logistics and warehousing, there's immediately surcharge. So that's a -- it's a pretty flexible business model where we do feel that the margin management is key, and we can tap in pricing relatively quickly with different measures. Maybe share buyback in ANH for you, Ralf.

Yes. Now happy to take those. So I think we're clear in our capital allocation policy on that. As you said, indeed, we completed the share buyback at the end of September or at least first week of October, reported on that. Maybe good as a reminder, capital allocation, first, focus on growing our business, and we have CapEx as a priority to fuel future growth. That's baked into our cash targets. So we're well covered on that front. Dividend, we continue stable, preferably rising. So that's clear as well. And then you get into the space that you just alluded to, first, have money for M&A. There, we've been very clear, don't expect any transactions from our side in the period ahead of us. We focus on the execution. Our financial targets are clear, and that is priority #1 for us which leaves the share returns asset, we remain disciplined there. We have a clear guidance on our debt level between 1.5 to 2.5x EBITDA. At the end of the year, we expect to be at a little over 1.9x EBITDA. Focus is now on completion of the ANH transaction. And yes, if that is out of the way, we remain disciplined in the way we look at our balance sheet. So hopefully, that gives some color from that perspective. Then maybe turning to ANH, where we're progressing there. was clear that we needed to split the company as part of the transaction. We've released the new names of the 2 businesses a little earlier this month. So markets can familiarize with that. And for the rest, we're focusing on completion of those activities. It is a clear plan in place, and we're on track in the delivery towards a closing at the end of the year for A&H.