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Executives

Dave Huizing - Investors Relations

Feike Sijbesma - Chief Executive Officer

Rolf-Dieter Schwalb - Chief Financial Officer

Jos Op Heij - Senior Vice President, Corporate Control and Accounting

Analysts

Mutlu Gundogan - ABN Amro

Peter Mackey - Morgan Stanley

James Knight - Exane

Martin Roediger - Kepler Cheuvreux

Andrew Stott - Bank of America Merrill Lynch

Jean De Watteville - Nomura

Fabian Smeets - ING

Andrew Benson - Citi

Andreas Heine - Barclays

Thomas Gilbert - UBS

Micha Tiekink - Rabobank

Rakesh Patel - Goldman Sachs

Sachin Soni - Kempen

Neil Tyler - Redburn

Sebastian Satz - HSBC

Royal DSM NV (OTCQX:RDSMY) Q2 2013 Earnings Conference Call August 6, 2013 3:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by and welcome to DSM’s conference call on the Q2 results of 2013. Throughout today’s presentation all participants will be in a listen-only mode. And after the presentation there will be an opportunity to ask questions. (Operator Instructions)

I would like to turn the call over now to Mr. Dave Huizing. Go ahead please sir.

Dave Huizing - Investors Relations

Ladies and gentlemen, good morning and welcome to this conference call on the second quarter results we published earlier this morning. Sitting here with me are Mr. Feike Sijbesma, CEO and Chairman of the Managing Board, Mr. Rolf-Dieter Schwalb, CFO and Member of the Managing Board and Mr. Jos Op Heij, Senior Vice President Corporate Control and Accounting.

Mr. Schwalb will present some highlights of the results and after that we will answer your questions. As a reminder, today's presentation can contain forward-looking statements. In that regard, I would like to point you to our disclaimer regarding forward-looking statements, as published on our website and in our press releases.

Rolf-Dieter the floor is yours.

Rolf-Dieter Schwalb - Chief Financial Officer

Thank you, Dave. Ladies and gentlemen again welcome to this conference call on our results for the second quarter of 2013. I will keep my opening comments short to allow as much time as possible for questions.

With that total EBITDA of €345 million in the second quarter we delivered a 19% profit increase versus the same period last year. Nutrition was up 28% versus the second quarter of 2013 by acquisitions and the good 3% organic growth. The positive momentum we saw at the end of Q1 continued into Q2. Nutrition with its higher profits and healthy margins demonstrating the quality of its broad offering across the value trend.

Materials Sciences continue to deliver solid performance despite the negative caprolactam effect of €20 million and the challenging market economic environment. Cash flow from operating activities was €231 million in the second quarter about the same quarter last year as well as about in first quarter of this year.

The core earnings per share of second quarter of this year were up 28% compared to the same quarter last year. We will pay an interim dividend of €0.50 per share as usual this represents one-third of the total dividend paid for the previous year. Our full year outlook remain unchanged you can find that full text in our press release. Overall, based on current economic assumptions, we expect to move toward our 2013 EBITDA target of €1.4 billion.

And with these short remarks, I would like to open the lines for questions.

Question-and-Answer-Session

Operator

Thank you sir. Ladies and gentlemen we will start the question-and-answer session now. (Operator Instructions). Today’s first question is from Mutlu Gundogan, ABN Amro. Go ahead please sir.

Mutlu Gundogan - ABN Amro

Yes. Good morning everyone. I have got three questions two on Nutrition and one of capro. The first question on Nutrition, can you talk about the price increases you announced for certain vitamins in March and whether these are being accepted by customers, because some of your peers and customers made some remarks about that? Then, secondly, on Nutrition, your EBITDA margin this quarter was strong, due to a favorable mix you say. Can you tell us whether that was only due to the old Martek business or also Ocean Nutrition in Canada? And can you tell us what is driving that strong performance. And then finally on capro, there was a story early June, July, actually, on Blumberg which said that you were considering to exit the whole caprolactam business. Today, you say that you look to lower your exposure to the emerging market. I don’t know, I know you don't want to comment on speculation, but my question is more technical. Could you tell us how feasible such an exercise would be, whether you could get totally out of caprolactam? Thank you.

Feike Sijbesma

Now, let's see how we split it, Rolf-Dieter.

Rolf-Dieter Schwalb

Okay. Let me start there with caprolactam. The second we’ve already reduced the exposure of the merchant market position we now made already a couple of quarters it’s completely unchanged. We are working on that and we are looking at options that’s all I can say. I cannot comment on the rumors that were happening a few weeks ago. And also modern questions like feasibility or not when we talk we look at options reduced the merchant markets exposure on Nutrition Feike maybe?

Feike Sijbesma

Yeah, as we indicated some price increases and those price increases they are not fully materialized yet or though we don’t want to bang too much on that for the future either but we have seen in the first, second quarter at least there is no price decrease further the price decrease reported there as compared to this last year but not compared with the first quarter. So that price increase announcement at least take care that there is no decrease and although we have seen some increase in the spot market prices. You know that we are less exposed to the spot market and so if any it will take longer term, longer time from our side to see that but our margin of role like you indicated is healthy in the proper range of the 20% and 23% I think just around 22%.

Rolf-Dieter Schwalb

22.5%

Feike Sijbesma

22.5% so that upper side of that range and most important of course is the growth of Nutrition with 3% and we saw that the positive momentum in the first quarter continues in this the second quarter and yeah this is our goal profit into that bracket and this on the higher side and for the growth of the business. And of course the last part is indeed the acquisitions integration is all running well and on track although today is not yet in the growth figures represented but that is of course in the profitability figures that’s not into organic growth but on your mix question I think you are exactly interrupt that correctly but it is basically the Nutrition and Lipids growth which is the business formally under Martek and also Nutrition in Canada which shows the strongest growth that also supporting the strong development in Human Nutrition and Health.

Mutlu Gundogan - ABN Amro

Okay, thank you very much.

Operator

Next question is from Peter Mackey, Morgan Stanley. Go ahead please.

Peter Mackey - Morgan Stanley

Thank you. I have got several please if I can. I mean, firstly you talked about the strength and as you've just flagged of in Nutrition in the first half of the year. I mean are you able to sort of give some commentary as to how much of that you think is reflects the sort of buoyant activity we had in particularly in China for Western baby milk products. And whether you think that might be affected by at a very recent issues with Fonterra. And if I can just try and understand the this issue about Nutrition pricing versus the Nutrition margins business, are you able to split the 3% negative price mix effect and just try and give us a feeling for what a price number might be within that price mix effect because it's very difficult to understand the step up in margins you saw given that negative 3% comment. And also are you seeing any pressure on input costs in the fish-oil based Omega 3s at the moment please? Thank you.

Feike Sijbesma

Okay. Let me say something about the infant formula and maybe Rolf-Dieter on the pricing split. No this is was not different or substantially different this quarter the other quarter due to the infant formula situation. Overall we benefit a little bit from the whole infant formula situation in that sense that we are seen as a solid producer out of the west. And our ingredient have a high quality. So well of course for infant formula that is a very sensitive area. So overall we benefit from that and but I cannot say that at a major change from the first and the second quarter not at all and that compared as situation and did not influenced our business either of course we see however that is of course not good if Western producers are now also on the suspicion by the consumers about their quality. So overall this is not what we want but it has not a major impact infant formula in itself of course is very important market for us and it is relatively stable market because people do not switch overnight if your supply is of a high quality and ours is. Rolf-Dieter?

Rolf-Dieter Schwalb

Yeah. Maybe on the pricing also the fish oil then with the 3% price decline which is two point something by the way but anyway as mix you cannot split and then we have tens oft thousands of products. It is impossible to spilt price on mix that is just impossible.

Peter Mackey - Morgan Stanley

Are you able in that case, just to try help us understand the effect in this quarter that you can manage a negative price mix effect to that extent but actually still drive margins up. I mean that the implicitly that’s saying that you’re selling more of lower priced, but higher margin products, I mean is it as simple as that?

Feike Sijbesma

Yeah, no, yes definitely no because the mix plays the role but we cannot identify it. But there is also third element of course first of all first element you mentioned is the volume growth, which of course not on the capacities and then has of course a lower marginal costs. But thirdly also in Nutrition it’s not only materials topic by far not as we have announced a year ago. Also in Nutrition we have strong profit improvement programs running so contributing to the cost reduction so that also the case. I mean, you cannot, you of course have to try if thee is negative price mix effect to compensate but it’s absolutely true. So, we’ve to work on all fronts not just on one. But the good thing is as Feike already said on the previous question of Mutlu is that the pricing versus Q1 was stable, which is a good sign that is important. So, margins are not determined the pricing only. And in fish oil yes, we increased prices substantially to compensate for that.

Peter Mackey - Morgan Stanley

Thanks very much.

Operator

Next question is from James Knight, Exane. Go ahead please.

James Knight - Exane

Good morning all. Thanks for taking my question. Firstly, on Performance Materials, very strong volume growth; was that differentiated at all across the business units or was it fairly uniform? Secondly, I wonder if you could quantify, I guess it’s small, but the avian flu impact in Nutrition in the quarter? And then thirdly, and apologies if you’ve published this that the PIP benefits in the first half, could you give us a total at the end of the first half? Thank you.

Feike Sijbesma

Okay. Well and volume growth was mainly on I think in Performance Materials mainly on engineering plastics and in resins and on the enrolled costs for that. And that is mainly to do with acquisition in December. Innovation into the electronics industry into the car manufacturers also the Germany car manufacturers, where we are well positioned. So, the products we have and in its acquisition let’s say the acquisition driven innovation there we benefit from. So, that’s mainly driver of all, across all three business groups. Avian flu was in fist instances in China rapidly under control or to a certain degree its hindrance our Q2 situation but not happily it was minor impact.

At this moment, we see some avian flu activities in Mexico not a big impact on DSM. But you always see as we have seen that in animal health since you are dealing with living organism here that flu or a drought or whatever can have temporarily effects. At the end of the day, animal health goes into the same supply chain as human health into consumption for humans and the main fundamental drivers are exactly the same and do not change that’s growth of population under this urbanization and maybe type of diets more healthy products etcetera but that is unchanged but you see always in animal health if you compare quarter-by-quarter some impact. The bottom line avian flu in China under control not a big impact and some issues in Mexico not a big impact on DSM.

Rolf-Dieter Schwalb

On the profit improvement program we do not have detail except some for the first half and the second half year only total year under €20 million that is the expectation of contribution there. I would expect because some of the projects have responded recently that the second half is slightly higher than the first half. So, not a 50:50 split. I don’t know actually needed for modeling. I don’t know, I would probably assume something like project by 55 or so. But this is guessing not at a bottom line number.

James Knight - Exane

Okay, thank you very much.

Operator

The next question is from Martin Roediger, Kepler Cheuvreux. Go ahead please sir.

Martin Roediger - Kepler Cheuvreux

Yes. Also three questions from my side. Can you talk about prospects in caprolactam and polyamide going forward, what you see sequentially right now taking place? And maybe shedding some light on one of your competitors talked about a further weakening in these activities; do you see this as well? Second question is on working capital, I saw that there was a massive increase from €1.9 billion to €2.3 billion in working capital. And so, therefore, the working capital to sales ratio is up from 20.7% to 23.2% year-over-year. Should we be concerned about that strong increase in working capita year-over-year? And the third question is on net debt, which increased 17% or roughly or (€340 million) quarter-on-quarter. Is this because of the acquisition of Tortuga or the dividend outflow or are there any other reasons why net debt increased so strongly? Thank you.

Feike Sijbesma

Yeah. Let me address caprolactam and walk into the (indiscernible) and the net debt. On caprolactam the situation is basically unchanged in the last I’d say 12 months. New capacity expansion in China reduced of course the margins okay but at some on top of that spending prices increased which reduced the margins as well and those two effects are there. They are more or less stable relatively stable since the last 12 months. We don’t see a lot of changes. At this moment, we saw new capacity in 2013 all kind of announcements. Also we need to see whether in 2014, 2015 all the previous announcements remains. Of course some people in China will maybe seeing exactly the same margins as we see and I’m sure that not all projects will fully continue. But we need to see that next year at this moment no change, no huge change in benzene also its always a little bit fluctuating but at a relatively higher level than it was let’s say a year, two years ago. (indiscernible)

Rolf-Dieter Schwalb

I was trying to. The working capital is a couple of effects. One is of course you see that every year kind of (indiscernible) seasonal effect but working capital is the lowest at the end of the year in terms of an increase in the first half year and then in the last in the last part of the year go down again. There is second effect those of the change of business mix more Nutrition business unless especially fundamental (indiscernible) business because they are the lowest in the working capital. For standup sales, the Nutrition is the highest. We see a mix effect. And then look of course you see in the working capital an 18 million increase from the acquisition of Tortuga that was in the balance sheet, in working capital obviously and the cash flow it’s a cash flow and the acquisition. So, this is the main issues we expect to go back towards the end of the year to around 21% of working capital.

On net debt, yeah there is of course many changes. The single most important one in Q2 is the payment of the acquisition of Tortuga that closed on April 5 or 6 and has a cash outflow of about €400 million and that is assumed the biggest change. Of course there was dividend payment and there were so many other changes but this is the single biggest one for the net debt.

Martin Roediger - Kepler Cheuvreux

Thank you.

Feike Sijbesma

And we wanting to add on the acquisitions its 10 more than 10 acquisitions over the last 24 more months four big ones of course Martek, Ocean Nutrition Fortitech and Tortuga. All of those are on check if you look to gross, if you look at margin and if you look to integration and synergy. So, we discussed in the past quite a bit the acquisitions but at least now especially the four big ones, we did and Kensey Nash fifth one also fully on track so that‘s also good to realize.

Martin Roediger - Kepler Cheuvreux

Thank you.

Operator

Next question is from Andrew Stott, Bank of America Merrill Lynch. Go ahead please.

Andrew Stott - Bank of America Merrill Lynch

Yeah. Good morning. Just a follow-on first of all from your previous answer, Rolf-Dieter, on working capital, did you say guiding to 21% for the average for the year or did you say by the yearend, because clearly, there's a difference so just a point of clarity there? And then secondly, if you just assume nothing else changed on your average prices today, what would your second half pricing look like for Nutrition? Thank you.

Rolf-Dieter Schwalb

The second one I cannot answer without some analysis, there I would have to get but it will be I mean I would say above last year on average but if you guess more than the analysis now. On the working capital, was end of year statement.

Andrew Stott - Bank of America Merrill Lynch

Yeah. By the end of the year, okay. Perfect, thank you.

Operator

Next question is from Jean De Watteville, Nomura. Go ahead please.

Jean De Watteville - Nomura

Hi. Good morning, everyone. Three questions please, one on Performance Materials, you talked about lower prices. Obviously, in Engineering Plastics, we all understand that, but also in Resins. Can you just tell us in which product line you see the competitive environment and what's the situation please? That’s the first question. Second question is on Human Nutrition, a pretty strong organic growth reported this morning. Now, if I remember correctly, last year, you said that there was destocking in Human Nutrition particularly, because of economic situation in Southern Europe. So do you think the 6% you reported today is a sustainable number or that is flattered, because of the low base effect, and just a comment there would be helpful?

And last question on Animal Nutrition, obviously, we know organic growth was impacted by pretty poor pricing. If I understand on your comments, most of the price decline is in Animal Nutrition, but that suggests the volumes are just up about a couple of points. Now, we know that there was an impact of -- a small impact of the Chinese avian flu, but that's still quite moderate in the context of lower crop prices, higher meat prices and what we expect to be a recovery. Can you just update on what's the situation, in your view, in Animal Nutrition? Are we in a progressive reinvestment phase in Animal Nutrition, just a bit of color by markets would be very useful? Thank you very much.

Feike Sijbesma

Let me say something about all three and, Rolf-Dieter where we had the pricing reduction in Performance Materials, in Resins it is mainly due to competitive pressure in composite resins which has an effect on the prices. And in Engineering Plastics, it is of course mainly the caprolactam effect, which has an effect on our Akulon business, PA6 which was reduced caprolactam prices of course we do feel here also its prices. On Human Nutrition, yeah don’t – it’s too much way to stocking or destocking here because that is not the main element which plays a role in Human Nutrition, sometimes it does a little bit in animal but in human there is not much stocking and destocking.

And you said 6% is that a gross figure we can count on, the only gross figure you can count on is what we said before for the total Nutrition, and the GDP it was 2% now gross GDP is what is that 2%, 2.5%. Then we calculate on 4.5% so 2% above global GDP is our focus and we are moving towards that direction with our total Nutrition activities which include human which is not value at this moment, for specialties of course the Animal Health. In the Animal Health, yeah there is always some effect. Last year, it was the drought, now it is the avian flu they’ll always have some temporary reflects. It was a price effect on the volumes, it was the price effect also on some of the vitamins compared with last year. Vitamin E, we mentioned has an effect but we hope to continue that its growth direction for the total Nutrition as we have started in the second quarter also for the coming quarters. Rolf-Dieter, anything to…

Rolf-Dieter Schwalb

Yeah, maybe one additions on the Human Nutrition. Of course now as of quarter three, Ocean Nutrition Canada will also be on the organic growth figures. So, that in addition to what Feike said should of course also support the Human Nutrition help both.

Feike Sijbesma

It takes always 12 months.

Rolf-Dieter Schwalb

12 months to count as organic.

Jean De Watteville - Nomura

Sure. Okay. And any update on what you see in Animal Nutrition market? Do you see a ramp up of activity and an improvement month by month that we should count on for the second half?

Feike Sijbesma

I think our outlook was already very specific per cluster, et cetera. Let's not go now, if you don’t slip that I’ll let go so we are pretty clear about Nutrition that we want our organic growth an indicator that we have 3% of our total Nutrition and we want this organic growth on a certain profit margin and then we want to be in this 20% 23% range and we have pretty much in the upper hand of that range. Now, if we have good profitability and grow the total business with that profitability, then the EBITDA also in absolute terms growth not from time to time supported by our profit improvement plan, by the acquisitions, by the integrations, the synergy and all of the above is on track. Profit improvement program is on track, acquisition is on track and if we can continue now to grow our Nutrition business with that profit margin, yeah together we see other two business growth an increase the EBITDA year-over-year as we did in the last six years I mean last six years, EBITDA in absolute terms of Nutrition was higher every single year.

Rolf-Dieter Schwalb

All right.

Jean De Watteville - Nomura

That’s clear. Thank you, very much.

Operator

The next question is from Fabian Smeets, ING. Go head please.

Fabian Smeets - ING

Yes, thank you very much. Three questions from my side please. In Polymer Intermediates you stated you have seen a positive impact from license income again in the second quarter as well, and also, a negative contribution from the fire-related shutdown in the Netherlands, can you please disclose how big the impact was on both on the EBIT level? And then on Nutrition, given that you stated there is a stable quarterly trend in pricing, is it reasonable to assume that pricing will turn positive in the fourth quarter of 2013? And then on acquisitions, again I think the question, smaller acquisitions are possible you state, but larger acquisitions are out of the question. What exactly is your definition of small and large in this respect? Thank you very much.

Feike Sijbesma

That was due to the other two new acquisitions I mean we said smaller ones it’s fine but larger ones if you talk about tens and millions is fine if you talk about hundreds and millions more it’s not fine, that is largely we’re not focused on that. This year, at this moment we focus on our operational performance on a profit improvement program on integrating the acquisitions done and on organic growth. That is what we focus on right now that’s what we want to focus through organizational and not being busy with finding all kind of big deals. So, of course some small stuffs come and we have a few of that in the recent period, fine. But the organization is focused on this operational performance at this moment.

Rolf-Dieter Schwalb

On the Polymer Intermediates side, again licensing, this is the same as in Q1 because it is basically a quarterly impact for the next three years. It is slightly lower than in Q1 because Q1 had some special effect after signing the licensing with the customers in China. So, but that is an impact also in Q2. The higher impact was relatively small because it’s coupled by our insurance, now the impact is between €1 million and €2 million in both in Polymer Intermediates and also in Performance Materials, because of the backward integration with Engineering Plastics here in Europe specifically. So, that smaller impact, smaller negatives.

On Nutrition, yeah, shall we expect stable improving pricing quarter-on-quarter now in the coming periods. I mean the Nutrition has I would basically count now a favorite pricing of course as we said earlier on other question we have announced price increases. Of course, we will continue to try to implement more, but yeah let's see. And prices came down in the second half last year mainly so from that end we expect around bigger pricing. And Human Nutrition as we discussed it’s that they’re expecting more opportunity also coming with Ocean Nutrition becoming an part of organic growth. But overall, I would not assume a major price increases over the next half year or the quarter three or four.

Fabian Smeets - ING

Okay. Thank you, very much.

Operator

The next question is from Andrew Benson, Citi. Go ahead please.

Andrew Benson - Citi

Thank you. Thank you, very much. The debt, obviously, has gone up because of acquisitions. Do you have now any target for that debt over the medium-term? And on biofuels maybe clearly, the plant hasn't been finished now, but could you just give us an update, is it on track? Are there any research results that are looking promising? So, just an update on where we are in the second generation biofuels?

Rolf-Dieter Schwalb

The net debt for us the target, our target to stay A rated, as we are A plus, that is the first and the 3 so similar to A minus on S&P we are reported, but this is good ratings that through €141 hit on the gearing that investment number we use most often this is links toward hearing of potentially up to 40% but we have limited our services so 30% and we are currently at 27% or 28%.

Feike Sijbesma

Yeah on the biofuels we are on track with our investment program in the United States for the second generation biofuels centric kind of moving forward. And we will complete the investments at the end of this year so again 2013 so we will start up somewhere in the first quarter and the beginning of 2014. at this moment everything is on track in terms of the investment, in terms of the technology development we are further working on the improving our performance and yields with our enzymes and yeast program we do not give the market everyday an update on where we are on cost per unit et cetera, but the program is running on our end very well being competitive so we are very lucky and proud with that. We have not any doubt due to the regulatory situation that we can sell all the ethanol, bioethanol which is coming out of the factory somewhere in 2014, 20 million, 25 million gallons and we will sell all of that without any doubt on that one.

In addition, people are asking to discuss further licensing at this moment and we said we want to reframe from that still we have started up the factory ourselves so most likely I will repeat to say message still somewhere mid 2014 in 12 months from now because then when we have really started up the factory and see how it runs and makes material for us to agree on the terms and conditions of the licenses and earlier you will running all that speculative contracts with licenses because nobody knows exactly the performance. So that is our policy, but it looks very promising and everything will come on stream somewhere in next year.

Andrew Benson - Citi

Is it possible to do any benchmarks on how the technology as looks relative to your competitors or is it too early?

Feike Sijbesma

For you or us?

Andrew Benson - Citi

For you, for the performance of your eastern yearend?

Feike Sijbesma

Yeah that is possible to do benchmark portfolio I think from our side.

Andrew Benson - Citi

From your side that goes.

Feike Sijbesma

Yeah, yeah we do benchmarks because especially some of our competitors without managing names get regularly update market which is there cost induced per gallon we do not update the market so much on that because cannot only sell the enzymes effectively hard to reach out the enzymes we are making the ethanol and selling ethanol at the end of today and selling licensing on the whole package. So on our side there is no so much interest to give a full update where is the costing use for enzymes or yeast. But we know of course where we are ourselves and since some of the competitors give those update to the market we can easily benchmark ourselves and we feel very comfortable ourselves.

Andrew Benson - Citi

Thanks very much.

Operator

Your next question is from Andreas Heine, Barclays. Please go ahead, please.

Andreas Heine - Barclays

Hi, good morning, three questions from my side. The first on Performance Materials you said that we’re able to offset in caprolactam impact of €20 million, looking forward I think the last really year-on-year negative impact was in the second quarter, so can we then look on these kind of improvements per quarter in this second half? Second, on Fortitech, is in the second quarter an attrition already some contribution earnings contribution from a higher degree of internal sourcing at Fortitech, and last but not least, could you update your U.S. dollar sensitivity please because you have done quite a number of exhibitions in the U.S. dollar room and you have on the other hand lower profits on Polymer Intermediates which are also dollar related? And these are my questions

Feike Sijbesma

Okay (indiscernible).

Rolf-Dieter Schwalb

Yeah, yes, the Performance Materials got to be, of almost €20 million and again that be an increase in the second half that difficult to say you’re of course right that the decline of caprolactam as they are within Q2 last year that’s why we still have got dollar effect than the previous quarters only €20 million now that is within the forecast quality almost that will come in the due trans build next week it will go up or not I mean benzene prices are moving, caprolactam prices are moving, the Performance Materials, plastics prices are moving. So in the way of course you have the kind of benchmark last year, but now sat it should really up €20 million every quarters that and because it’s a bit too far in this business. And it also that 50 also.

On the U.S. dollar sensitivity I mean U.S. dollar – the acquisitions in Europe actually don’t change much on the sensitive approach. They are basically an that one has because you have the cost base in the U.S. and to sell in the U.S. dollar as well, but it sometimes on Forittech yes it has passed in Q2, but obviously the placement process is of touches between (indiscernible) of highly produced own production which have taken a bit of time but it’s, both on track as 5% the integration and the energy development is absolutely on track. Then if you look at our two guys you might expect the first quarter was really good.

Andreas Heine - Barclays

Yeah. Thank you.

Operator

Your next question is from Thomas Gilbert, UBS. Go ahead please.

Thomas Gilbert - UBS

Yeah, good morning Feike, Rolf-Dieter and Dave. One question really, on the market dynamics on Omega-3, could you remind us what your current assumption is for market growth in that category? And also, and I know you're going to tell me, ask them, but BASF bought Pronova, and we recently had FMC buying Apax, so two diversified materials companies buying pharma-grade Omega-3. What do you think the assets -- the assets in the hands of these chemical materials companies, what is going to happen to the marketplace? Is there a change or will they run it as the previous owners? Do you see any change in the dynamics, down trading, up trading and obviously relating to Martek? Thank you very much.

Feike Sijbesma

All right. Yeah the gross entity Omega-3 fill this high single-digit sometimes we have seen double-digit growth but at least high single-digit growth into that field. The pharma-grade of Omega-3 and Omega-6 is a special niche area in that whole field this smaller field which attractive margins by the way, the all margins are attractive, and of course we manage clearly how we see the market developments and of course developments of the companies you mentioned. We are more exposed to all the fields initiatives let’s say the applications in infant formula, in beverages and food in general at dietary supplement and those kids of things that is our main market for those products and also which the farm applications, and in deed like they do what they do you should ask indeed them that I heard you.

Thomas Gilbert - UBS

I was afraid you were saying that. Thank you very much.

Operator

Your next question is from Micha Tiekink, Rabobank

Micha Tiekink - Rabobank

Hi, good morning. Thanks for taking my questions. Maybe two questions on businesses that have not been discussed so far? On Bloomberg, there was a statement that this morning in an interview you said that the Pharma business would have a substantial increase in profit this year. Could you elaborate on that? And in the outlook statement, you added one sentence, I believe, and that was regarding the innovation center where you said H2 2013, will be more or less in line with H2 2012. Is that the result of no further growth of Kensey Nash, or because of additional innovation expenses?

Feike Sijbesma

I think you’re correct. Yeah the statement on Bloomberg you can find back in the press release as well in the outlook statement where we see that pharma will have substantially better results in 2013 compared to the 2012. and if you look to the results you might even say that these are mainly in the second half, because you don’t see it in the first half so something need to happen in the second half and we’re seeing that an improved pharma as you know is always going a little bit bulky, lumpy some orders are placed in this quarter the other quarter etcetera and that whole analysis of course we know our own pipeline will be drilled into substantially better results. Secondly also in pharama we have a profit improvement program running and that especially materializes in the second half. So the two effects will result into a better performance of pharma in the second half.

The other question was that the outlook of innovations no that will not mean that we will stop with Kensey Nash in the second half and growing that further. But our outflow of especially research and development cost in the innovations center is going a little bit irregular over the year and we have in our whole bio-based product program also a much higher outflow of research cost in the second half year compared to this first half year. And therefore with that don’t put yourself on the wrong lack if you look to the performance of the innovation center in the first half of the year and look also to the second half and I think it was clearly formulated in the press release. But that does not mean that we see an issue with Kensey Nash on the contrary.

Rolf-Dieter Schwalb

But it simply means not much for the first half of 2013.

Feike Sijbesma

Yeah.

Micha Tiekink - Rabobank

Okay. Thank you.

Operator

Your next question is from Rakesh Patel, Goldman Sachs. Go ahead please.

Rakesh Patel - Goldman Sachs

Hi there just one quick question, if I may. I wonder if you could give us perhaps some of your thoughts on, given where lower crop prices are relative to last year, whether, when we look into next year, we should see quite a reasonable boost into your Nutrition business, especially on the Animal side, as I remember you talking about high slaughter rates at the beginning of this year. That would be great. Thanks very much.

Feike Sijbesma

Yeah indeed in the Animal Health the drought has all kind of effects there were more short range to were also lesser dosage sometimes so all kinds of effects plays a role. Over the period that slowly normalizes itself you don’t get big positive fact but you see it slowly and that might take some time as also that you cannot grow an animal faster than it grows itself I mean even a breed that’s faster than the time needed for that. So that restoration will go greatly. In top of that I repeat that the aging flue and other things always see some fluctuations quarter-by-quarter into animal health although at the end of the day I am not concerned about any of those fluctuations because it goes into exactly the same supply chain as the food goes for human consumption and if there are not less people when if the people do not eat less and if there is not less organization then the end consumption is all there also.

Rakesh Patel - Goldman Sachs

But if we assume all being equal, certainly looking into next year, some of the negative effects that you experienced at the beginning of this year should disappear and so we should see, I guess, better profitability. Is that fair?

Feike Sijbesma

No, no I would not, I would not like to speak about outlook 2014 I think we’re already specific on 2013. So lets not do that the only outlook I would like to give about 2014 on Nutrition is that we are focusing on an organic growth 2% above global GDP and that will be 4%, 5% and that will be our recent profit margin between 20%, 23% where we are in the high end of the range. And that growth strategy we have solid profitability and growing them in absolute terms the basis by organic growth and then you have an absolute higher EBITDA that is clear strategy I don’t want to go deeper into that or give you any other number guidance on that.

Rakesh Patel - Goldman Sachs

That’s great. Thank you very much.

Feike Sijbesma

Okay.

Operator

The next question is from Sachin Soni, Kempen. Go ahead please.

Sachin Soni - Kempen

Good morning everyone. My question is regarding your current focus of organic growth and your incentive schemes. How are they related and the background is that two, three years ago when Mr. Schwalb put full focus on working capital incentive schemes will change accordingly and results were really great. So is there thought going on in that direction as well?

Feike Sijbesma

Mr. Schwalb this is your here.

Rolf-Dieter Schwalb

Yeah. So the very simple organic growth is one of the short-term incentive elements for the Managing Board and of course you find it also down in the organization here if I know our target and working capital in the last year we had focused on positive cash flow in total which is EBITDA plus or minus working capital changes minus CapEx. This year we have for a lot of people the next level all the business people also part in the Management Board straight working capital target.

Sachin Soni - Kempen

So okay, so if the working capital target is straight working capital it is same as 19% which is for the growth or is it I guess is it realistic to imagine in order to getting to 19% ever?

Rolf-Dieter Schwalb

At the moment and that has basically has to do with the portfolio change as I expand early on a question as you look at Polymer Intermediates, which is around 8% of sale and Nutrition is around 30% of sales with the changed mix in the portfolio of course then the total DSN number also trends up. That’s why I guided earlier to a 21% the end of the year.

Sachin Soni - Kempen

That’s what this year for 2015 because the doubt I am having is regarding the some of the 2015 guidance?

Rolf-Dieter Schwalb

There is no working capital target for 2015 we have said we tried at that moment we said but at that moment to that portfolio we were going to 19 and if you ask me today with the current portfolio the 19 is probably not reachable.

Sachin Soni - Kempen

That’s fair that’s fair. Okay.

Rolf-Dieter Schwalb

Just a mix that even if everybody achieves the same target as we had three years ago you would not get to 19 anymore.

Sachin Soni - Kempen

Okay. So this target is also silently going to be taking out like the royalty for 2013?

Rolf-Dieter Schwalb

No I think that’s a different nature because royalty has certain reasons and we said why we have to take it off but working capital as I said even if all the business achieved except the target which we set three years ago total DSN going to be as higher because of this.

Sachin Soni - Kempen

That is very clear. Thank you. Thanks a lot.

Operator

Your next question is from Neil Tyler, Redburn. Go ahead please.

Neil Tyler - Redburn

Yeah good morning and just one quick question about the about your Nutrition margins. First the can you dust off my knowledge on what the currency effect was on the margin where we are with regards to the, particularly this was Swiss Franc cost base and how the performance improvement program might alter that sensitivity in the future whether there is any specific measures targeting that component. So year-on-year what impact be unwinding as the previous hedges had on the margin? And then just also in the sense but circling back on the Fortitech margin you discussed the internal sourcing possibly as a reason for this but the margin seem to step up quite sharply sequentially and that is what you should have tinted that you would expect on the previous conference call. Is there anything that would prevent us from forecasting Fortitech at the current margin on an on going basis? Thank you.

Rolf-Dieter Schwalb

Yeah Fortitech margin as I explained that in the previous call the benefits of the fact that integration with our own manufacturing of ingredients which Fortitech uses and replaces third-party manufacturing those end up in the normal Nutrition margin they are not part of the core Fortitech results. So they come basically on top but there are extra disclosure but we guided in the announcement of Fortitech in November last year about the total expectations on this. And the Fortitech margin increased slightly yes if you look at our disclosures first quarter the second quarter that is a good development but it is in the range of expectations that’s also what we say in the press release in line with expectations. I would not now make a projection that is every quarter exactly one as this quarter I mean we of course try to improve the margin and the margin will also improve simply because of volume growth.

Then the question on currency, we had the main negative effective on the Swiss Franc appreciation in 2011 and 2012 since then it has been rather stable I mean if you now see 123 to the Euro that the peg of the Swiss National Bank is at 120 of course you have a slight positive effect maybe against a year ago but not so sizable. Of course in the long run is which I would hope the Euro prices get served and the Swiss Bank kind of normalized that there should be a tailwind on the margin there. The Swiss Franc cost base of course within the PIP profit improvement program trials will also do something but as we earlier explained this is not huge I mean of course the Nutrition operation in Switzerland is part of our finance program to put a shared service center into India. And actually the accounting functions in Switzerland have already moved. We do a similar thing in IT but you also know that there are two large sites in Switzerland, which are there and will be there. Also we keep the R&D in Switzerland that is also essential. So the flexibility on reducing the cost base in Swiss Franc is limited.

Neil Tyler - Redburn

Okay, that's helpful. Thank you.

Operator

Next question is from Mutlu Gundogan, ABN Amro. Go ahead please.

Mutlu Gundogan - ABN Amro

Yes. Thank you for taking my four question. I had a question on the other line. Rolf-Dieter, I remember that you said in the previous conference call that there would be an impact of the force majeure you had at a couple of facilities in Q1 at Heerlen. And at that moment, you gave a guidance of €90 million to €100 million for the full year. Do you stick to this guidance, given the fact that the EBITDA contribution in the first half is actually quite low. That was my question? Thank you.

Feike Sijbesma

Yeah actually I think we can improve the guidance there, but today I would guide through about €90 million on the underline that has to do also that corporate cost came down as part of our improvement actions and of course we have the negative effect of the insurance claim of the fire in the Polymer Intermediates. And that part is of course always an uncertainty if you have large insurance cases in the second half year the guidance of €90 you might have to change again and of course the shared based payment cost is also impacting the other line. But overall I think today if I want to guide you on number for your calculations I would put 90 in total.

Mutlu Gundogan - ABN Amro

Okay. Thank you and while we're at let’s say a bit smaller and trivial questions. Your net finance expenses increased this quarter. Is that a run rate we can assume going forward, as most the acquisitions have been done?

Feike Sijbesma

It has stable element and it has volatile element of course the net increase so our net interest expense is clearly higher. We had a slight interest income I mean we know that the interest rates were pretty low in the last year which is basically gone and now we have it is different. Secondly we have of course this year the change of the pension interest accounting which has about €15 million for the financial income and expense as an expense. So and we have a volatile element which is a potential impairment in our venturing portfolio of which we had also one in this quarter. So but these are difficult to predict obviously and so overall my guidance today for the financial income and expense would be around €130 to €140 million for the year.

Mutlu Gundogan - ABN Amro

Okay, that’s very clear. Thank you very much.

Operator

The next question is from Sebastian Satz, HSBC. Go ahead please sir.

Sebastian Satz - HSBC

Yeah thanks very much. Good morning. Just a very short question actually from my side. Should you make your EBITDA guidance for this year of €1.4 billion. What kind of ROCE according to your calculation, should we expect you to make this year? Thank you.

Rolf-Dieter Schwalb

That the guidance is of course moving towards €1.4 billion. So we don’t say €124 billion but okay as you all know that Mr. Satz because you all most of you or if I look at the consensus. This is also what you expect towards if we achieved a number like that the ROCE will be somewhere between 9%, 9.5%.

Sebastian Satz - HSBC

Okay. Thanks very much.

Dave Huizing

I think we have to round off

Rolf-Dieter Schwalb

Yes. I think we have to do it close it today.

Dave Huizing

Feike can you maybe.

Rolf-Dieter Schwalb

Okay. We ask Feike maybe to summarize and round it off at the end.

Feike Sijbesma

Okay. Now thank you all for calling in and as we discussed good second quarter results with a strong EBITDA increase in Nutrition, Organic growth in Nutrition was 3%, momentum of the first quarter continue to the second quarter and moving now with this organic growth towards a target of 2% above GDP as discussed. Realized nutrition now accounts for 70% of the Group EBITDA and as we discussed all integration of the acquisitions and the realization of the synergies are on track.

And the other part of the portfolio material sciences, I think, we continued to deliver a solid performance especially within the macroeconomic complex we‘re operating in. the profit improvement program is progressing well and it has a significant impact also further towards 2015 and 2013 we are fully focus as we discussed on operational performance. No major acquisition expected harvesting the synergies of the acquisitions profit improvement program and organic growth. And no change for our full year outlook. Thank you very much for your listening in, calling in and questions.

Rolf-Dieter Schwalb - Chief Financial Officer

This concludes our conference call for today. Thank you very much for your attention and your questions. If you have any further questions on the background information please feel free to contact Investor Relations. With that and I’ll now hand the call back to the operator.

Operator

Thank you, sir. Ladies and gentlemen, this concludes the DSM conference call. Thank you for attending. You may disconnect your line now.

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