Royal DSM Management Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 5.13 | About: Royal DSM (RDSMY)

Royal DSM NV (OTCQX:RDSMY) Q3 2013 Earnings Call November 5, 2013 3:00 AM ET

Executives

Dave Huizing – VP, IR

Rolf-Dieter Schwalb – CFO

Analysts

Laurence Alexander – Jefferies & Co

Mutlu Gundogan – ABN AMRO

Martin Roediger – Kepler Cheuvreux

James Knight – Exane BNP Paribas

Andrew Benson – Citigroup

Andreas Heine – Barclays

Peter Mackey – Morgan Stanley

Patrick Lambert – Nomura

Andrew Stott – Merrill Lynch

Evgenia Molotova – Berenberg Bank

Rakesh Patel – Goldman Sachs & Co

Sachin Soni – Kempen & Co

Joe Dewhurst – UBS

Operator

Ladies and gentlemen, thank you for standing by. Welcome to DSM’s Conference Call on the Q3 Results of 2013. Throughout today’s presentation all participants will be in a listen-only-mode. After the presentation there will be an opportunity to ask questions (Operator Instructions). Now I would like to turn the call over to Mr. Huizing, please go ahead.

Dave Huizing

Ladies and gentlemen, good morning and welcome to this conference call on the third quarter results we published earlier this morning. Sitting here with me are Mr. Rolf-Dieter Schwalb, Chief Financial Officer and Member of the DSM Managing Board and Mr. Jos Op Heij, Senior Vice President Corporate Control in Accounting. They will elaborate on the results and after that answer your questions. This call will last 60 minutes, as a reminder today’s presentation may contain forward-looking statements in that regard I would like to direct you to our disclaimer about forward-looking statements as published on our website and in our press releases.

With that I hand over the call to Mr. Rolf-Dieter Schwalb.

Rolf-Dieter Schwalb

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

DSM maintained its positive momentum in Q3 with a 27% increase in EBITDA despite an ongoing challenging macroeconomic environment. Profitability increased in all our business clusters despite the initial impact from adverse currency movements. Nutrition continued its good performance not withstanding some headwinds that emerged towards the end of Q3 and which continued in Q4. Western Food & Beverage markets faced soft demand as was reported for it by food and beverage companies at their Q3 results.

Additionally demand for fish-oil based Omega 3 dietary supplements being impacted by sharp retail price increases as the entire value chain pushed through higher raw material prices.

In Animal Nutrition the recovery in the global annual protein markets remains fragile, creating pricing pressure especially in Vitamin E. Overall the compelling growth drivers of the Nutrition business remain unchanged. We realized 2% organic growth in this quarter and continue to expect a 5% organic growth for Q4. Also this is in comparison with a low base of Q4 2012. Nutrition results will be impacted by adverse currency movements.

Materials Sciences also delivered solid performance with 27% higher profits, volumes increased in all business groups about Performance Materials cluster, with DSM Dyneema delivering double-digit growth. In Polymer Intermediates the Q3 EBITDA was higher than in Q3 last year when there were negative effects from plants turnarounds. Cost savings and license income further contributed to the improvement, cash flow from our operating activities was €310 million above the same quarter last year.

There is no change to our full year outlook as given five weeks ago at our Capital Markets Day which you can find in full in the press release. Overall based on current economic assumption DSM continues to expect to move towards its 2013 EBITDA target of €1.4 billion. The combination of the factors mentioned in the full outlook statement could however result and EBITDA for 2013 slightly below €1.35 billion.

And with that I would like to open the lines for questions.

Question-and-Answer Session

Operator

Ladies and gentlemen we will start a question-and-answer session (Operator Instructions). The first question is from Mr. Laurence Alexander from Jefferies. Please go ahead.

Laurence Alexander – Jefferies & Co

Good morning I have two questions. First, could you give an update on the merchant caprolactam process and any sense of the odds of an announcement by yearend? Secondly, in the omega – on human nutrition market, can you discuss a little bit some of the headwinds you’re seeing, for example in the omega-3, and how that will play out into next year?

Rolf-Dieter Schwalb

Okay on the first question I cannot really give an update there, we simply don’t do that and as long as processes are running and there’s nothing completed. The objective is clear, reducing the exposure to the merchant market in caprolactam and we are working on that and as soon as we have something to announce we will obviously do so. Whether that is before the end of the year or whether that is, I don’t know when it’s not, it’s difficult to predict so we don’t want to comment on any like that because you can only be wrong there, so it’s all I can say. We are working on it and when we are done we will of course inform you.

On Nutrition headwinds basically what we discussed at the Capital Markets Days, it is in the Human Nutrition area, the general topic that the food companies and beverage companies around the world you hear more negative news there, sluggish developments, lower growth than positive. I mean also in the last one or two weeks when you had various quarter three announcements of food and beverage companies, even yesterday. And that is of course also which we feel that’s a more general thing. In principle in the long run of course we continue to eat what we eat and there’s usually not much habit change going on but okay we’ll see.

And then we have in Human Nutrition, the specific topic around Omega 3 on based on fish oil, last year the winter fishing season in Peru was very low harvest, which led to very strong increases in prices, which we then and other players in the value chain passed on to the final end consumer. Only that at the end of the day and we saw that basically in the later part of Q3 and discussed that at the Capital Market’s Day, we saw that the consumers did not like that at all and reduced basically their off take from the shelf and changed their buying behavior at least for now.

That continues for now, we’ll see how that unfolds later again next year. What we do know is that the fishing harvest in this winter season is expected to be at normal levels again, which should in principle lead to lower fish oil prices as a consequence. But we’ll see how that unfolds and again in principle, generally speaking we do not expect that the habits will really change, those people who take Omega 3 dietary supplements for their health benefits, which are known.

They will also continue to do so in future, and we expect there to be a temporary effect but it’s still at the moment, we still are in that period. That is in Human Nutrition, on Animal Nutrition, in general, I think we see some fragile development comparative pressures also on pricing, especially in Vitamin E. Which we had also seen towards the end of Q3 already and discussed at the Capital Markets Day and that continued into Q4.

So this is basically the nutrition headwinds, there is a general one which is not only affecting Nutrition and there is currency movements in Q3 the euro strengthened versus certain currencies around the world including the US dollars. The US dollar and that cost us versus first half, roughly €6 million EBITDA, In October actually we saw an even stronger euro on average the last days have again improved a bit. But we’ll have to see how that unfolds in the next months.

Laurence Alexander – Jefferies & Co

Thank you.

Operator

The next question is from Mr. Mutlu Gundogan from ABN AMRO, please go ahead.

Mutlu Gundogan – ABN AMRO

Yeah good morning, thank you for taking my questions. I’ve got three. First of all, on nutrition, can you talk about the supply side on vitamins? Have you seen significant capacity additions, because demand isn’t that weak to drive prices lower, I would assume? And then secondly, on your inventories, if I look at your balance sheet, these have increased some €26 million, quarter on quarter, while your revenues have come down. Is this solely a build-up of your official based omega-3 dietary supplements? Or does this number also contain a build-up of other inventory in the other businesses? And then finally, on Dyneema, can you tell us what are driving the double-digit volume growth there? What kind of products are behind that? Thank you.

Rolf-Dieter Schwalb

Okay Nutrition on the supply side of vitamins, there’s only on Vitamin E where we see some increased supply possible it’s not fully there. I mean the two players in China, they have increased their capacity slightly but that is really compared to the global capacity small. There is a potential, but I should say potential, new player in that field who is assumed to construct a new factory of for Vitamin E but again relatively decent sized, or roughly 5% of total global capacity. But it’s not clear whether that company really continues with that construction or not, it sometimes looks like they do not continue but it’s not there yet so it’s not producing. It’s in construction but unclear when and if so, if and when they will even finish.

On inventories, yes inventories have come up slightly, there’s one effect which I know but I cannot really comment fish oil, because the harvesting season now only starts the next one. It is basically we had in the last weeks a maintenance shutdown of our large vitamin facility in Switzerland, and before that shutdown we built up inventories to continue to be able to supply, but that’s a normal thing. Only that in this case it is registered in the quarter and sometimes it is inside the quarter and you don’t see it and this time it is affecting the end of the quarter number. On Dyneema, the basic driver of the growth is the fiber solutions business as we call it, I cannot report any specific area of that I don’t know but Dave you can add something there? But it is fiber solutions is not that we have suddenly again large life protection orders, that is not the case.

Dave Huizing

No actually, we have been always growing the business nicely but the comparisons have changed so –

Rolf-Dieter Schwalb

But it’s good to see.

Mutlu Gundogan – ABN AMRO

Okay, thank you very much.

Operator

The next question is from Mr. Martin Roediger from Kepler Cheuvreux. Please go ahead.

Martin Roediger – Kepler Cheuvreux

Yes thanks for taking my three questions. First, one clarification question on Nutrition; did the situation worsen by end of Q3 versus your statements you have given at the Capital Markets Day? Or is it just the FX exchange rate, which is worsened in the final weeks from – of Q3, compared to what you said in – at the Capital Markets Day? On currency in general, in case that the today’s FX rates remain unchanged, going forward, which drag on earnings should we expect next year compared to this year in a year-over-year comparison please?

And the third question is on networking capital, obviously it increased further by another 50 basis points sequentially versus Q2. We know that Nutrition has a high working capital to sales ratio more than 20% and any sales growth here either its organic or the acquisition increases the group working capital. So assuming you’ve grown the systems further and which is your aim, what is the realistic target for working capital sales ratio at group level?

Rolf-Dieter Schwalb

Okay Nutrition because this is the Capital Market’s Day, now Capital Market’s Day was on September 26th, so basically at the end of the quarter what we had reported there is the headwinds which I discussed on an earlier question, on the Omega 3, on the food and beverage markets in general, on the Animal Nutrition side and that has basically continued into Q4. So most likely it will affect Q4 stronger than Q3 because in Q3 it was only visible in the last weeks before the Capital Markets Day.

Now the currency, of course, that got even worse because I think on the Capital Markets Day we were around 135. And there we discussed it already in the average of October’s probably what which almost 137, it was somewhere between 136 and 137. Now last Thursday, I think it was, it came back to 135, now we’ll have to see how that unfolds. But it looks for now, for Q4, as if exchange rates are a little reverse for us than in Q3.

I don’t remember, I can check what is the average exchange rate in quarter three. But that was 130 to 135 so that is much better of course on the euro versus dollar. Now currency looking forward, if taken assumption I can explain that if we assume the current rate for the full next year, what would that mean versus the average of this year, that is difficult to say for me at the moment.

I do not have the number and I also do, it is difficult to speculate but the year-to-date average of the 2013 for the US dollar is at 132 almost, slightly better so if you had 135 then you have basically $0.03 reverse and we indicated that they’ve helped me and I know the value of, the total value of $0.01 worsening that’s the best kind of 9 million.

If you assume that an average at $0.03 you would end up somewhere between 25 and 30 million reverse or 13 only from that currency, euro versus dollar. Of course we have a few more which are relevant. Of course and then of course we had short of it.

On the working capital question, first I may be, of course I am not completely happy where working capital has been going. The absolute number had come slightly down in Q3, the percent of total sales has gone up because the sales number is lower than and we use the last quarter sales times four to calculate the percent of sales.

That is really important to know. That’s the way you calculate that, so it is also important for benchmarking. We use the last quarter sales multiplied by four as the, sales number for calculating percent of sales, the working capital.

So the percentage came up by the basis points we mentioned because of the lower sales number. Actually working capital is slightly down for the year and we still expect to move towards 121% of sales as we indicated at the Capital Market Day.

Now where will it be if Nutrition continues to gain importance in the portfolio now we indicated that basically the working capital numbers per segment at the Capital Market’s Day so you will find them there in the presentation. So then you can all, of you can take the mix you think of for the future and you will roughly get to a new average for the DSM. So we gave you all the numbers as a new insight at the Capital Markets Day to make your own calculations depending on your own mixed assumptions.

Martin Roediger – Kepler Cheuvreux

Thank you.

Operator

The next question is from Mr. James Knight from Exane BNP Paribas. Please go ahead.

James Knight – Exane BNP Paribas

Good morning. Thank you for taking my questions. I’ve got three of them. Firstly, in animal health, you mention fragile recovery in the quarter, excluding the issues in poultry and aquaculture. Can you just add a little bit more color around where you see that fragility? Secondly, on the innovations segment, now Kensey Nash has included, I was a little bit surprised to see volumes only flat if given that they’re mostly biomedical volumes. Could you explain that a little? And then, thirdly, on Dyneema, there’s a nice volume recovery, but maybe you could indicate either – well, preferably quantitatively but more likely qualitatively, how far we are away from previous peak margins in Dyneema? How much recovery potential that business has? Thank you.

Rolf-Dieter Schwalb

Okay, maybe on the last one first, on Dyneema. I find that, yeah, I was thinking of the word dangerous to take that assumption because we have clearly said that in the, what you call peak margins, that was only in the periods where we had these large life protection tender business with the US Military. That will not come again, at least that is our assumption at the moment. And if that doesn’t come again we will not see those peak margins.

But the margins in Dyneema as you know on profit on quantify our, of course, on the better side of the Performance Materials and we continue to grow the business especially in life protection nowadays which is also by far the larger part in the meantime, but that too has a very nice margins. But these kind of margins which you might have thought of but the times of tender business with the life protection that I don’t think we will see in the coming periods.

Now on the Kensey Nash I cannot really comment, to be honest. But it is a relatively small business out of volume effect there, it’s flat volume but I think the margins in Nutrition you see it also that the absolute performance overall has continued to be good. So we are relatively close to the famous question on innovation center breakeven. I think it’s nothing to worry about. It’s going nicely with Kensey Nash, the integration (Indiscernible) we look at every quarter every quarter on all the acquisitions integration delivering the business case, delivering the synergies and for Kensey Nash I think the report clearly shows the green light there.

Now on the Animal Nutrition market, yeah, it is what we discussed earlier. It is this market issue sometimes the diseases, poultry, aquaculture, we discussed that. I’m not aware of a current new one but that’s also why we continue to say that we expect for total nutrition organic growth of 5% for Q4. But this situation which also still had some, how should I say, it’s based on consequential effects of the drought last year in the US, which takes time to really get out of the system.

They have led to this pricing pressure. And that continued into Q4, so that’s all really I can say there’s not a, that’s why call it fragile, it’s not a very strong trend in one or the other direction in volumes or in pricing.

James Knight – Exane BNP Paribas

Okay, thank you.

Operator

The next question is from Mr. Andrew Benson. Please go ahead.

Andrew Benson – Citigroup

Yeah, thanks very much. I noticed you’d – there was an announcement saying that you’d put up your Vitamin D prices by somewhere between 20% and 50%, but what – your comments on Vitamin E seem more cautious. Can you perhaps give more detail on how the overall vitamin market’s trending? Do you think it’s going to be more Vitamin E or more Vitamin D in the fourth quarter? Could you just give us an update on where you are with POET and when you think the start-up will be? And whether you think the EPA proposed changes are going to have any impact on that? And just perhaps could you give us an indication where you think net debt’s going to end up the end of this year?

Rolf-Dieter Schwalb

On the vitamin prices, yes, we announced price increases recently for Vitamin D around 50% and for a few other smaller vitamins, now and principle we follow the value of volume strategy and where we see a chance to increase prices and then of course we will do so and we will try also to really implement it. And in this area where we announced these increases we observed quite some increased market demand and tightness in the supply chain and that is of course an opportunity.

And all of these mainly affect the Animal Nutrition segment. Now the other question you had on vitamins and the mix, whether A will grow more than B or whatever, I mean, that I think that in principle we should assume that that they are all in this mix so there is no, at least to my knowledge not a very specific trend different vitamin by vitamin. So that, I would not assume, also of course we should not forget that the total portion in Nutrition of vitamins has come down over the last year, so I mean, we allow the whole vitamin business it’s less than 40% of the total Nutrition business in the meantime. And that is the combination of all the, or is it roughly a dozen different vitamins. But no specific trends I could report on.

Andrew Benson – Citigroup

Yes, this is, yeah, this is just follow-up on that question. I mean that if you are seeing strong demand and tightening in some areas, why are you not seeing that in the biggest vitamin, Vitamin E that that was alright it’s just –

Rolf-Dieter Schwalb

It might be a good question but it is what it is, and we discussed earlier that some of the competitors also slightly increased their capacities, maybe that also a reason but that, it is what it is at the moment that’s why we see that fragility and that is mainly on A and E. And in these three smaller vitamins where we had price increase announcement that was not the case.

Now on POET no change, what we said earlier, technical completion of the plant is probably in Q1 and then start up some time early Q2. Next year everything is on track. The impact from changed legislation we do not see right now. We still see a huge demand for this kind of process to produce ethanol in the future.

On the net debt an indication for end of year, my best guess would be but that, we will of course still have CapEx, we do not actually know, expect or plan sizeable acquisitions of any nature. We will have the working capital reduction, we will have an EBIDTA contribution so net debt should not I would guess materially differ from what we have at the end of Q3.

Andrew Benson – Citigroup

Okay, thank you very much.

Operator

The next question is from Mr. Andreas Heine from Barclays. Please go ahead.

Andreas Heine – Barclays

Yes, good morning. On Dyneema, I’d like just to confirm that what you see now is a double-digit growth. That is what we can also predict for the coming quarters, so it’s not driven by any projects. That’s the first question. And then on Animal Nutrition, there was still an organic growth of 1%. And, looking on the price component, which was minus 3% for total nutrition, but probably somewhat worse than that in Animal Nutrition, I would expect that the volume growth in that business is still in the magnitude of 5% to 7%.

So, is it just fragile but, in general, a strong growth what you see here? And last but not least on Tortuga and Fortitech. Sequentially, the sales were down, but the earnings were up, so the margin improved. Is that a seasonal effect? Or is there some cost savings or integration benefits you had at these two companies? Thanks.

Rolf-Dieter Schwalb

For Dyneema yeah I hope it will continue to grow. I am not aware of any specific project in fact in the quarter. So it’s just doing direct to the business finding more applications especially in fiber solutions and try to grow the company. On Animal Nutrition, yeah, I agree there was some volume growth, I think 5% to 7% is more than at least what I believe, but it’s on the highest side but I don’t know exactly how that guestimate comes. But you are in principle right with your basic logic that because of what you say there is more price pressure in Animal Nutrition and that means that the total growth, organic growth is 1% there must be good volume growth.

On the Tortuga and Fortitech, of course, we are integrating these companies and with the integration there comes synergy development, we remind you that in Fortitech the most important surge is the backward integration with our own production of active ingredients, is not in the Fortitech number. That is in the basic nutrition number. But of course Fortitech and Tortuga both have also owned programs in sites which helped develop the business. And in Fortitech, for example, they already, the previous owner, they had a bit of we’re in the process of building a new blending site in Poland to replace a Danish site in Europe.

So go to a lower cost place and that is in process now to transfer the production. And in Tortuga we also look at some site restructuring. So that, of course, helps also with the margins but that’s fully in line with what we have said earlier when there was a little bit of question marks so maybe you can critique on why we acquired Tortuga business which was clearly below our target margin in Nutrition. And we always said, that with the synergy development which we expect we were, we feel comfortable that these businesses also will move into the target range of our Nutrition business. Okay?

Andreas Heine – Barclays

Yes, thanks.

Operator

The next question is from Mr. Peter Mackay from Morgan Stanley. Please go ahead.

Peter Mackey – Morgan Stanley

Hi good morning, everybody. And I’ve got three questions about nutrition, if I can, please. First, just a housekeeping one. Can you give us a bit of guidance on the nutrition D&A line? If I remember rightly, there were some adjustments to take place at some stage, once you’d completed your fair value calculations. So I wonder if you could give us an ongoing quarterly D&A line in nutrition. Second, I think in response to James’s question, you reaffirmed your 5% organic growth rate for nutrition in the fourth quarter.

Can you sort of give us perhaps some of the factors that are necessary to achieve that, where the acceleration is coming from? Do you need to get traction on these other vitamin pricing increases? For instance, if you see further price decreases in E, might that reduce that rate? I’m just trying to understand what the variability might be on that organic growth number. And the final question. I might be missing something very obvious here, but can you – what’s the impact of higher fish prices on a bottle of vitamin supplements in a shop?

Obviously you talk about the impact on consumer activity from rising omega-3 prices. But you yourself mentioned that people have – are taking these supplements for health benefits. So I’d have thought they’d be relatively price inelastic. I just wonder if you can give us an idea of what the impact has been on the retail price on some of these supplements, please.

Rolf-Dieter Schwalb

Okay. In nutrition D&A line I guess because we almost completed purchase price allocation for Tortuga in Q3 that the Q3 in a, is, should be quite representative for the running rate now. Because that was the last one, only the final touch of the PPA is missing which had to be done. Of course, I don’t talk about the various small acquisitions like Unitech and say end of June but for the large ones. So I guess that the Q3 the D&A which was €57 million is probably a good representation.

On the growth in Q4, yeah, basically what we believe is, I mean first of all, I said the basic period, of course, was low and it was especially low that in the second half of last year we saw the most of the price decreases. So we more or less think that on this price side the, compared to last year Q4 not so much will happen and if the volume growth will continue also as discussed on the previous question on the assignment then that total organic growth in nutrition should be reachable.

Peter Mackey – Morgan Stanley

Could I just interrupt just there for one moment? How do you see organic sales in nutrition sequentially then from Q3?

Rolf-Dieter Schwalb

Oh, I don’t have a number for that.

Peter Mackey – Morgan Stanley

Okay.

Rolf-Dieter Schwalb

Have a number for that. On the Omega 3 to my knowledge looking back on first on the one end, the fish oil price increases in Peru were around 70% if I remember correctly. The final consumer price in the shares in the US of the dietary supplements were around 25% and I don’t know the details of the cost calculations in the steps in between obviously but overall it seems that the 25% is more than recovering what the price increase to the retail was.

And so it is basically the retail seems to have pushed for regaining some margin which they might have lost in the periods before. And that was felt by the consumers as a bit too much for now but as I said earlier I think we believe the basic trend of course and the health benefits are clear for those people who take it, they really want it. So it is most likely temporary effect which will also be supported by better fishery season coming forward.

Peter Mackey – Morgan Stanley

Thank you very much, Rolf-Dieter.

Operator

Our next question is from Mr. Patrick Lambert from Nomura. Please go ahead.

Patrick Lambert – Nomura

Two questions. The first one again on Animal Nutrition. Could you comment a little bit on the geographic mix that you have and what you’re seeing in the market, because we had comments that Brazil is actually picking up at least in meat production and then China, with the new preparation, could also – but if you can comment a little bit on what you are seeing currently, despite what you’ve said on the global trends? That’s question number one. Question number two, very simple, on CapEx, can you update us on – I think CapEx in Q3 was slightly lower than probably we were going for. So if you could update is on your plans for the year and next year? Thanks.

Rolf-Dieter Schwalb

Yeah on Animal Nutrition geographically, yeah, I’m not aware of major trends differences around the world of course we had the various diseases in Mexico, in Thailand and China. Those were local or regional effect. Of course we have the big entry into the Brazilian markets with the Tortuga acquisition. And I do know that we’ve grown nicely in China. We also are finishing the construction of an animal nutrition test center in China which I visited just recently and that will also push the Chinese sales up.

We also made in China, I think one small premix site acquisition this year so that also extended our base and we are continuing to push our franchise system in China. So for us China is a nice growth market. Brazil obviously is a very nice growth market and then of course the big market are Europe and Unites Kingdom.

Patrick Lambert – Nomura

That’s alright. Do you think the Chinese New Year could make a stop to the impact of diseases or not?

Rolf-Dieter Schwalb

Well to my knowledge that is already over, it was in the second quarter, in fact. What we had in the second quarter we had this virtually in China at April/May. In July I think it was a similar thing in Mexico and also in Q3 we had an issue with shrimp production in Thailand.

Now CapEx basically well this year the indication is unchanged at roughly 700 million CapEx. For next year you have to think of the change of consolidation as you know that as we informed to in detail at the Capital Markets Day and you’ll find some numbers there in the slide pack. As of the next year we deconsolidate joint ventures 50-50s and that should have an impact on pro forma basis under 2013 numbers approximately 100 million lower CapEx. So of our 700 this year roughly 100 has spent in 50-50s. So on a comparable basis this has been 600 million and that is most likely also the order of magnitude so excluding joint ventures for next year.

Patrick Lambert – Nomura

Okay. Thank you.

Operator

The next question is from Mr. Andrew Stott from Merrill Lynch. Please go ahead.

Andrew Stott – Merrill Lynch

Yeah good morning Rolf-Dieter. Just a question back on this 5% growth rate for Q4. Trying to get a sense of how much is this expectation of improvement and how much of it is based upon what you’ve seen so far, and what the order books look like. That’s number one. Number two is on the same division, on nutrition. The margin improvement in Q3 year-on-year is much more dramatic than in the first half. So what is the shift in Q3 from the first half on margin improvement? Thanks.

Rolf-Dieter Schwalb

On the 5% for Q4 I mean this is our expectation, the order book does not really gives you a lot of insight. The only thing based on the trading which we had in October the business does not see a reason to change that expectation for Q4 compared to the Capital Markets Day. On the margins in Nutrition yeah of course that is also a very large mix of different businesses, the currencies play a role and especially the dollar did not help in the Q3. So what drives the margin improvement and there is also profit improvement programs going on in Nutrition which have of course, you have the mix, you have, you saw that we had a very good margin in Fortitech in the last quarter.

We discussed also in an earlier question the synergies, the whole infant nutrition business is doing very well which goes back to Martek acquisition. So overall yeah we are nicely in the range of our target margin that’s fine. And of course margins will always fluctuate a bit here and there I mean there is nothing like in absolute stable margin and continues like a machine. That doesn’t exist.

Andrew Stott – Merrill Lynch

And can I ask –

Rolf-Dieter Schwalb

It’s good to see so it’s just another sign of why we are so happy about the development in nutrition despite some challenges and headwinds some times. But the principle dynamics of the whole business are supporting that for the future. And that should grow, should grow nicely better than in the last quarter as we have discussed and keep our margin in the range.

Andrew Stott – Merrill Lynch

Can I just check what, at the group level, the amount of cost savings you’ve booked for the nine months? Where are we with that?

Rolf-Dieter Schwalb

I do not have the specific nine months number but the indication which we gave for at the Capital Market’s Day is basically the same if anything maybe slightly better but not a big difference.

Andrew Stott – Merrill Lynch

Okay. Thanks.

Operator

The next question is from Miss. Evgenia Molotova from Berenberg Bank. Please go ahead.

Evgenia Molotova – Berenberg Bank

Hi. I have several questions, if I may. One is regarding POET JV. As far as I understand, Novozymes is a supplier till 2017. Is it correct year please? And then, on your pharma business, on custom manufacturing, if you could update us what are the targets and where are you on potential partner search and if you have any deadlines for when you want to decide something about the destiny of custom manufacturing business? Thank you.

Rolf-Dieter Schwalb

Okay on the POET JV I mean that the general progress as we discussed earlier already and on the supply agreement for enzymes with Novozymes look at that I think year 2017 is correct. On the partner search and the partnering objectives for our custom manufacturing pharma business, yes, as we said this is the objective we are working on it. But we will only report something when we have something and I cannot tell you when exactly that should be I mean these processes are always, so uncertain they can drag on, they can finish and I mean history or experience I would better say has told me not to guess and guess on timings, when it happens be sure you will be almost the first one to know. And we’re for mostly likely then when we have something we’ll discuss it also intensively in a call like this.

Evgenia Molotova – Berenberg Bank

Thank you. Also, just one thing to clarify, in your press conference call, you said that you would like to pursue growth in food specialties and enzymes. Does it mean that we should expect more acquisitions in food specialties?

Rolf-Dieter Schwalb

In principle if we want to do acquisition we are willing to them whenever they make sense and that can of course include food specialties, you know of course our status that for now we do not want to engage in any sizeable acquisition because we first need to focus and concentrate our efforts on integrating what we bought and amongst the others also we did a few acquisitions in food specialties. And that has to be done first and then deliver what was promised for the investments in buying new companies.

And when we see that this is happening and that this is going all the right direction then at some moment in the future we might decide again to open the valves for new acquisition but not for sizeable acquisition at the moment. And new food specialties is a potential area as we have seen in the last two years, next to the larger part of nutrition which is headquartered in Switzerland also food specialties received some acquisition funding.

Evgenia Molotova – Berenberg Bank

Yes. Thank you so much.

Operator

The next question is from Mr. Rakesh Patel from Goldman Sachs. Please go ahead.

Rakesh Patel – Goldman Sachs & Co

Hi there and just one question, or two questions if I may. First of all, I wondered if you could give us some insight in how you’re looking at the regulatory scrutiny of the infant formula market in China. How do you think that would affect DSM? It seems as though that the government’s targeting a more consolidated industry. So just wanted to get some of your thoughts on how you think that would play out for you.

And then secondly, in terms of the performance of the acquisitions, if I remember rightly, I think on the last call you kind of alluded to the acquisitions that you’d carried out, were doing a pro forma double-digit revenue growth. I just wondered if that had continued into Q3, or whether actually any of the acquisitions are causing – or seeing a moderation in growth. Thanks very much.

Rolf-Dieter Schwalb

Okay, on the acquisitions, I think let’s only talk about the real big ones. I mean Martek, Ocean Nutrition, Canada, Tortuga, Fortitech and may be Kensey Nash that was the smallest of the five big ones. Most of them not Fortitech, also Fortitech also nicely grows, the others and Kensey Nash, the other three also nutrition Martek and Tortuga were driven actually in the synergies basically the gross assumptions, bringing these companies, the materials which these companies made from the regions where they were active to the rest of the world.

That was the main motivation and that continuous, there’s no change to that so we have of course discussed extensively the Ocean Nutrition situation with the Omega 3 pricing and the volume consequences so keep that aside, there is no change to the previous statements.

On the infant formula and China I think first of all I would say it’s good, if China goes into the direction to have a stronger focus on quality and good customer service in a general way also with the regulatory authorities, that is very important in general for the industry.

Our own development in this nutrition of course depends mainly on first that the customers decide to fortify the infant formula with Omega 6 that is the main driver because by far not all infant formula products in the world are fortified with Omega 6 yet. That is the most important part but the basic push of the Chinese government for stronger focus on quality and everything around that of course is very much needed and welcomed.

Rakesh Patel – Goldman Sachs & Co

That’s great, thank you very much.

Operator

The next question is from Mr. Sachin Soni from Kempen & Co. Please go ahead.

Sachin Soni – Kempen & Co

Good morning, everyone. My question is regarding 14% to 15% EBITDA margin for 2015. In a quarter where you suffered some headwind from exchange rate, you are still at 14.3%. And this margin, I understood, is excluding impact what you could have from pharma or polymer intermediates. How ambitious is this target? To me it looks like it’s – the bar is way too low. You are there already, so why mention this target?

Rolf-Dieter Schwalb

Yeah – I mean in a way he is of course right; you can calculate the number for the quarter and that is in the range – by the way target is on current portfolio so if any of the projects or the work behind polymer intermediates and pharma make a meaningful difference then as we said at the Capital Markets Days, we would adopt a target so it’s current portfolio.

But still nutrition is our target margin so I assume basically in the targets going forward and that is not only for a quarter but for a full year and the full year number this year is still lower that nutrition will not contribute on the total margin much. It will have to come from improvement mainly in the other areas and predominantly in Performance Materials.

So is it ambitious or not ambitious that question was already raised and some of you felt it was maybe not too ambitious at the Capital Markets Day, let’s see if, but I would not take a single quarter as an indication there. I think the full year delivery is a bit more.

Sachin Soni – Kempen & Co

Perfect, thank you.

Rolf-Dieter Schwalb

Time wise we only have time left for one short question before have to round off.

Operator

Yes. The last question is from Miss. Guilherme Chang [ph] from UBS. Please go ahead ma’am.

Joe Dewhurst – UBS

Hi. It’s Joe Dewhurst here. Just very quickly, a very quick question; have the Omega 3 prices started to come down? And is there any, essentially any inventory write-down risk as a result?

Rolf-Dieter Schwalb

To my knowledge both not.

Joe Dewhurst – UBS

Okay, so we just have to wait for the additional harvest next year, and then you’d see some price correction?

Rolf-Dieter Schwalb

Yeah.

Joe Dewhurst – UBS

Okay, thank you.

Rolf-Dieter Schwalb

Okay, thanks and let me then finish the call and thank you all for your participation, all your questions of course Investor Relations is available if you have more questions. Let me summarize then that we felt this quarter really shows a positive momentum maintained for the company even in the changing environment, total EBITDA 27% up and really across all four business segments.

Our focus for now remains of course on the full integration of acquisitions and the delivery of synergies and that’s together with the profit improvement program will help improve our returns. The current trading conditions are similar to those emerging at the end of Q3 while the currency exchange rates even deteriorated in October.

Nevertheless we are firmly on track to deliver significant increase in the EBITDA for the year and the outlook we gave for the Capital Market Days, they remains unchanged. Thanks again and see you at another time.

Dave Huizing

Okay, this concludes our conference call for today. Thank you very much for your attention and your questions. If you have any further questions or need background information please feel free to contact IR. With that I now hand the call back to the operator.

Operator

This concludes the DSM’s conference call. Thank you for attending. You can disconnect your line by hanging up the telephone. Have a nice day.

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