Koninklijke's (RDSMY) CEO Feike Sijbesma on Q2 2014 Results - Earnings Call Transcript

| About: Royal DSM (RDSMY)

Koninklijke DSM NV (OTCQX:RDSMY) Q2 2014 Earnings Conference Call August 5, 2014 3:00 AM ET

Executives

Dave Huizing – Vice-President Investor Relations

Rolf-Dieter Schwalb – Chief Financial Officer

Feike Sijbesma – Chairman and Chief Executive Officer

Analysts

Mutlu Gundogan – ABN AMRO

Martin Roediger – Kepler Cheuvreux

Rakesh Patel – Goldman Sachs

Philip Scholte – Rabobank

Neil Tyler – Redburn Partners

Oliver Reiff – Deutsche Bank

Peter Mackey – Morgan Stanley

Andreas Heine – Barclays Capital Inc.

Jaideep Pandya – Berenberg Bank

Andrew Stott – Bank of America Merrill Lynch

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Conference Call on the DSM 2014 Q2 results. 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 second quarter 2014 results we published earlier this morning. Sitting here with me here are Mr. Feike Sijbesma, Chief Executive Officer and Chairman on the DSM Managing Board; and Mr. Dieter Schwalb, Chief Financial Officer and Member of the DSM Managing Board; and Mr. Jos Op Heij, Senior Vice President, Corporate Control and Accounting. They will elaborate on the announcement and after that answer your questions. This call will last until 10.

As a reminder, today's presentation may contain forward-looking statements. In that regard I would like to direct you to the disclaimers about forward-looking statements as published in the press release. Now I would like to hand over the call to Mr. Rolf-Dieter Schwalb.

Rolf-Dieter Schwalb

Thank you, Dave. Ladies and gentlemen, thank you for joining us this morning. Earlier today we reported second quarter results for 2014. Following a slow start in the first quarter we delivered improved results in line with expectations, despite ongoing challenging market conditions.

EBITDA from continuing operations amounted to €293 million compared to €332 million in the same quarter last year. This includes a negative currency effect of €29 million, which was higher than initially assumed at the beginning of the year, an impact from the fire at our intermediates plant in Switzerland in nutrition of €16 million, and more than €10 million lower results in caprolactam.

Connecting these numbers, this means that the underlying results showed good progress of about €16 million EBITDA. Nutrition delivered an improved result compared to the last two quarters, despite the negative currency impact, with an EBITDA margin of 20.7%, back in the target range of 20% to 23%. Animal nutrition is developing well. Human nutrition continues to be affected by an ongoing challenging consumer environment. Developments in the dietary supplements market in the United States were not yet improving as expected. In response, we are undertaking initiatives to reinforce the attractiveness of vitamin and omega 3-based dietary supplements for consumers.

Performance materials saw continued positive momentum in a number of end markets, with Europe showing early signs of improvement. EBITDA increased to €88 million, which is substantially up compared to both Q1 and the same quarter last year. The EBITDA margin improved to 12.5%, close to our target margin. These results reflect volume growth, good cost control and improved efficiencies.

Polymer intermediates saw weaker business conditions for caprolactam. The combination of lower prices with ongoing high bends in input costs resulted in a margin squeeze. In this environment visibility for the remainder of the year as to caprolactam results is limited. We continue our efforts to reduce the exposure to the merchant caprolactam markets, and that is all I will say for now. Cash flow was lower in Q2, mainly due to high operating working capital. Reducing the operating working capital from the current 23.8% to our target of 21% at the end of the year will be a key priority for us for the remainder of the year.

In line with DSM's policy to provide stable and preferably rising dividend, DSM will pay an interim dividend of €0.55 per ordinary share for 2014. As usual, this represents one-third of the total dividend paid for the previous year. For 2014, we target to deliver an improved underlying business performance in the challenging macro environment. We are on track to meet current market expectations, notwithstanding the adverse impact from foreign currency exchanges of about €17 million and weakness in the caprolactam supply chain.

Looking at our longer-term strategic targets, we have made good progress in the first-half year on our growth drivers. First, sales to high-growth economies increased to 42% of our total net sales. Second, innovation sales came in at a good 18% of total net sales with several new product launches. We also made significant progress in our emerging business areas. Biomedical is progressing well with new products in the pipeline.

Advanced services continues to make good progress by testing its new anti-reflective coatings at large solar parks. And the third one, project liberty, the second-generation advanced biofuels plant of our joint venture with POET is in the startup phase. We also realized good progress on our sustainability targets, with improvements in the share of ECO+ products, energy efficiencies and reduction in greenhouse gas emissions.

Overall, while facing short-term challenges in the current macro environment, we are well on track in realizing our longer-term ambitions through our strong market positions and exposure to attractive mega trends. And, with that, I would like to open the floor for questions.

Question-and-Answer Session

Operator

Ladies and gentlemen, we will start the question-and-answer session now. (Operator Instructions) The first question Mr. Mutlu Gundogan, ABN AMRO. Please go ahead.

Mutlu Gundogan – ABN AMRO

Yes, good morning, everyone. I have three questions, all on nutrition. The first one is on human nutrition and health. Your sales were down 5% quarter-on-quarter. Can you tell us what's the main driver behind that, was it the infant nutrition business is Asia, or was that other businesses in there?

Secondly, specifically on that infant nutrition business in Asia, can you tell us what is going on there? And can you tell us what your new long-term growth rate assumption is for that business?

And then finally, on vitamin E, if I look on slide 14 of your presentation pack, it seems that spot prices are now heading below the low in 2013. Can you tell us why that is, is there a development in terms of supply? Those were my first questions. Thanks.

Feike Sijbesma

Hi, Mutlu. Indeed, in our nutrition business, it's a little bit mixed bag. The animal nutrition business did very well with good volume growth. On the human nutrition side weaker clearly, and that's especially to do with the food and beverage companies globally also report a little bit sluggish food and beverage markets, globally, and you see that reporting by the big food companies as well.

Secondly, the situation, like Rolf-Dieter mentioned, in the dietary supplements, including Omega-3 in the United States. That market is not really recovering at this moment and clearly below last year, although we are setting up campaigns now to make clear, together with industry players, and to hopefully reverse that. Situation on infant formula, as you remember, there were issues with the dairy companies and the infant formula companies in China, the domestic suppliers, with quality issues and concerns. The western producers benefited from that by supplying a lot of products into China. We benefited last year from that reason, extra growth, above normal in that field, because the western producers were importing a lot into China.

Then one of the western producers came to problems themselves also in New Zealand, although, at the end of the day, that was incorrect, but it hit all newspapers. And then the Chinese government reacted like we need to revise this whole situation. Can Chinese producers not deliver in their own market? As this is a little bit a reset at this moment, which again, reduces a little bit the growth that the western producers can have into China, or the extra growth, I need to say.

So we're a little bit back to normal, with an infant formula market in total, which is growing around 2%, 3%, a little bit, together with global economic growth. Our business can grow a little bit faster than that because of penetration of products, of Martek and others, into Europe and into Asia. So that is on the infant formula.

On vitamin E, you're right. Last year, prices came down. This year after the fire, especially with the BASF factory, prices peaked and they coming down again at this moment. That is the spot prices, that our prices are not directly related to those spot prices but are a little bit longer-term, so we have a dampening effect on that with our own prices. Situation did not really change in the supply side. The stress on the new supplier in China is not really continuing. That new player don’t make any moves, so it's not finishing its factory and entering the market.

Volume wise, the market is doing a little bit better in the total animal health than last year, where last year we had the drought and diseases suffering, and this year picking up. But it remains to say that the vitamin E prices remain volatile and very difficult, of course, to predict exactly how that will run into the second-half. And I agree with you, at this moment, I see spot prices coming down again.

Mutlu Gundogan – ABN AMRO

Okay. Thanks, Feike.

Operator

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

Martin Roediger – Kepler Cheuvreux

Martin Roediger, Kepler Cheuvreux. Three questions also from my side. First, on working capital, it is up sequentially, and also, the working capital-to-sales ratio up sequentially. Have you an explanation for that?

Second question, on polymer intermediates, it looks that you have ramped up your new caprolactam capacities in China. Can you tell us how do you do the ramp up? With 25% increase in volumes, it looks that you – that this is not a smooth ramp up, so any details here would be helpful.

And finally, on human nutrition, is that promotion initiatives and industry-wide campaign launched to support the vitamins and Omega-3 dietary supplements market? I think you have done that already in Q1 and in Q2. So my question is, did you see already any success from these kinds of initiatives, or in other words, did you see any momentum during Q2 for sequentially rising demand? Thank you.

Feike Sijbesma

Thank you. To start with human nutrition, Rolf-Dieter will help me in the others, but on the human nutrition part we did not launch such campaign in Q1 or Q2. We prepared one in Q2, which we will now start launching in the second-half year; partly, promotional campaigns by ourselves, partly with industry players. To make clear, that the nutrition situation in the US needs improvement. I repeat, 85% of Americans have a diet with deficiencies into that and we want to give more education on that one, and hopefully that helps.

But I remain saying, I didn't see yet an improvement in the dietary supplements market in the United States, nor the Omega-3 market, compared with Q1 or Q4. It did not decrease further, but it did not increase and recovered either, and hopefully, in the future, of course, difficult to predict. On polymer intermediates, Rolf-Dieter can help me also there, and operating working capital.

Rolf-Dieter Schwalb

Okay. On polymer intermediates, the 25% volume increase is, of course, quarter 2 versus same quarter last year. And the second line in China started up with some hedge funds in Q4 last year, November, December. But then we had to still wait for the finishing of a feedstock plant of our partner Sinopec in Nanjing and the real start up, then the full start up happened in Q1. If you look at the development quarter 2 versus quarter 1, then the volume increases 7%. So it was a very good start up, in fact, and very smooth except for the delay of our partner with feedstock. But for the rest, it went extremely well and no problems at all. The 25% of costs, you could say, is slightly above the volume relation between second line and the rest, but you have also small distortions with turnaround maintenance stops and so on.

So nothing really there to worry and the volumes are totally okay. What is not okay in caprolactam is basically the margin because of low prices and high benzene costs. On working capital, yes, that is of course, something we don't like, either. I don't like. A couple of explanations, but, of course, explaining is not helping. It is too high for several reasons.

One reason we observed in the total company across all businesses, and that is a tendency that customers, especially at the end of the quarter, pay a few days late to have their balance sheets okay. That is not worrying in the sense that we really have long overdues, it’s really only a couple of days, so basically from the last week of the old quarter moving into the new first week of the new quarter. That is a tendency which we don't like, but it is very broad across industries.

Then the second one is, I would simply say a normal ramp up in Q2 always, Q2 is relatively strong, also in sales our receivables go up.

The third one, which I also accept is especially when there are maintenance stops planned like in Q3, typically for our plant for vitamin A and E in Switzerland then, of course, you pre build inventory to have coverage over that period. But all of that is not really totally explaining. It's also too high, so not totally well managed. And that's why we continue to target and push.

And the main push is there on nutrition to reduce towards the end of the year, because we continue to want to make 21% of sales at the end of the year. So it's not satisfying some explanations, but still not satisfying. But the strong ambition for the second-half year to bring it back to the levels we want.

Martin Roediger – Kepler Cheuvreux

Thank you.

Operator

Next question is Mr. Rakesh Patel from Goldman Sachs. Please go ahead, sir.

Rakesh Patel – Goldman Sachs

Good morning. A couple of questions, if I can. First of all, I wondered if you could tell us the organic growth in China. It looks as though it was down on a reported basis. And slightly linked to that, how was the performance of Martek?

And secondly, just in terms of the promotional activity in dietary supplements in the U.S., can you – could you perhaps give us a bit more color in terms of what you are actually doing? Is it just as simple as running an advertising campaign, and do you really think this will be the answer to bringing the dietary supplement market back?

And then finally, the release talked a lot about innovation in food and beverages, so it seems as though you would be expecting that market to get better soon. Is that a fair assessment? Thanks very much.

Rolf-Dieter Schwalb

All right. Organic growth in China, and let me say, first organic growth in almost all high growth economies is slowing down somewhat. Russia for obvious reasons, but also Brazil is not doing well. India is not excellent and China is also weaker than before, although when you launch, China a little bit with 7% organic growth, it's the second largest economy in the world. It's not bad to call it that, many economies will be jealous about that I think. But indeed, it's weakening somewhat. We did very well in the second quarter in our growth in China, but I have to say that the whole caprolactam situation, of course, in the second line helped substantially on that one.

On the longer run, we see gradually step by step a little bit a shift in the growth in China, more from domestic consumption than from exports and investments. It's a slow, gradual move in the composition of that growth, but in principle, that's helping us. Every time that a food producer is leaving the rural areas because he is becoming a food consumer in the urban areas that, of course, is helping our nutrition business.

So on the longer run, I remain positive on China, even with a little bit reduced growth. Indeed, in the infant formula we had extra growth last year due to the fact that we grew together with the infant formula producers outside China for extra imports in China and that now more or less normalized. Dietary supplements in the United States, it's not only an ad campaign, but it's looking also to opinion leaders. It is also looking to the retailers and special actions together with them, goes a little bit too far to really elucidate to the whole world what we have in mind here.

But it has a lot to do with opinion leaders, with retailers, with ads, et cetera to educate, in fact, what is happening. We need to see that we – the market is roughly 10% down compared with what it was before. That remains that 90% of customers remain buying as they did before and only a small part, although it has a substantial impact, of course, in growth, but only a small part refrained from buying and we need to get that part back.

Food and beverage markets, yes, the global food and beverage market is a little bit sluggish. You see also that the food and beverage companies are reporting that the big ones. And everybody is a little bit suffering from that, Europe, a little bit United States. And obviously, since we sell to them and we sell more to the A brands than the private label then, of course, impacts our products and sales also, to a certain degree.

And you are right, where the A brands and the big food companies would like to see us invest funds and their reaction to private label is, of course, new products, innovations, et cetera. And therefore, we try to serve them with that. So therefore, we focus on a bit innovation, new forms and all that stuff.

Rakesh Patel – Goldman Sachs

Just to add on that, so is it fair to say that the order book looks a bit more healthy going into the second-half with, as you say, the innovation coming through?

Feike Sijbesma

I would be careful on that statement. Those innovations do not run from one product to the other product, so no, I would not say that. As I said, the animal nutrition looks very good, Form growth was also good. I expect that human nutrition does do better in growth in the second-half year than in the first-half year. But I need to say also that in dietary supplements I don't see the improvement yet, that includes Omega-3. And I see the big food companies also very recently reporting a sluggish growth. I don't want to quote the food companies, but you can find the growth if you look it up on the Internet, even very recently from some very big ones, European players.

And so if they say that, then I'm a little bit cautious as well obviously, because they are my customers.

Rolf-Dieter Schwalb

The current business conditions you find at slide number 23 in our presentation to our investors.

Rakesh Patel – Goldman Sachs

That's great. Thank you very much.

Rolf-Dieter Schwalb

I appreciate it.

Operator

Next question is Mr. Philip Scholte from Rabobank. Please go ahead.

Philip Scholte – Rabobank

Yes, good morning. I have two questions. Related to the first one, related to the margins in nutrition, what has actually driven the improvement Q2 versus Q1, because actually it seems like none of the trends have really changed quarter-on-quarter, so can you say a bit more about what drove that improvement?

And the second one is on, specifically, on the Dyneema side where in the press release you say Q2 sales were lower due to the timing of orders. Does that mean that last year was very strong or the timing of orders that's still to come in the second half?

Rolf-Dieter Schwalb

Let me address both. If we start with the second one, your first assumption is correct. Last year was pretty strong in Q2. So the timing of orders refers more to last year than to a weak this year. But as we also say and you saw that Q1 was very strong, so first half of Dyneema, in fact, is well above last year.

On nutrition margins, yes, what drives nutrition margins, I think there are simply three reasons. Number one is pricing, I mean, average price in Q2 versus Q1 was flat [ph] 2%, including mix, so it's price and mix as usual. And of course, we have started in Q1 with implementing some self-help cost reduction measures, which also help Q2 already a bit. So those are the two most important, or three, if you take price and mix, three more important elements to drive the margins.

Philip Scholte – Rabobank

All right, because, if I may, the mix effect should actually be negative, right? So the animal nutrition overall has a lower margin.

Rolf-Dieter Schwalb

Careful. Yes, animal versus human, yes, but inside it can still be positive. So this is only the explanation on a very high level when you distinguish animal from human. At that level you are right, animal is lower than human, so in principle on the high level you have a negative mix effect. But overall, the price mix is 2% positive, and the margin improvement is only 130 basis points. So price mix 2%, in terms of the 200 basis points plus some cost measures, and the currency is relatively similar to first quarter, a little bit worse.

Philip Scholte – Rabobank

Right. And are there further cost measures to be taken in the second half? Is that still continuing, or…?

Rolf-Dieter Schwalb

Yes. As we announced in Q1, we had announced a new program for nutrition specifically with a target cost reduction of €50 million to be achieved by 2015. And of course, in 2014, there is a buildup of – towards the run rate of (inaudible).

Feike Sijbesma

But you are right. If you look to organic growth, animal did very well; human nutrition less for the obvious reasons we discussed. If you look to margins, we are glad that we are in that 20%, 23% range with 20.7%, so close to 21%. And the currencies, if you would correct even what I consider, I think you would be even a little high end of that range.

Rolf-Dieter Schwalb

Yes, if you – but that is a comparison to last year Q2. If you correct for the currency impact, then the nutrition margin would have been much – somewhere between 22% and 23%.

Philip Scholte – Rabobank

Okay. Great.

Rolf-Dieter Schwalb

Philip, that is only an explanation, it is what it is.

Philip Scholte – Rabobank

Yes, unfortunately. Okay, thanks very much.

Operator

Next question is Mr. Neil Tyler from Redburn. Please go ahead.

Neil Tyler – Redburn Partners

Good morning. One question again back to the human nutrition business, please. The – some of the major retailers are clearly facing difficulties, not specifically due to the weak market, but in addition to that, due to the changes of disaggregation of the retail sales channels. Can you talk a little bit about how that impacts your business; whether that's presenting additional challenges or opportunities, given the increasing number of outlets that people are buying these products through? Thank you.

Feike Sijbesma

Yes. Well, it has to do with total spend. You see that's – when you follow what the retailers are saying and what the food and beverage companies are saying is that they are seeing at this moment a pressure on the total spend of consumers. That might have to do with the total economic situation in Europe, although I do not totally understand that fully myself because the European economy is recovering somewhat and not worsening, but apparently there is a delay how people behave in the total spend.

So all retailers, all food and beverage companies are reporting that they see a pressure on total spend. Now that is sometimes shifts in categories, that sometimes gives a shift between A brands and private labels. That gives an impact on the number of outlets, as you said, and all that stuff. And that is totally summarized by us as a sluggish food and beverage market especially in the Western economies. And I mentioned already the upcoming fast-growing economies are slowing down by itself. So that gives a pressure on the total. On the long run I'm not concerned, because this will run together with urbanization in the upcoming economies and with population growth and economic growth in the West further.

So on the longer run, I'm not concerned about this. But this is an effect we see and in that context, together with the dietary supplement situation in the U.S., yes, we see a weaker situation in our human nutrition activities at this moment and we didn't see the recovery yet but, of course, we work on that. And, on the longer run, I think this will come okay, like also the big food and beverage companies are reporting themselves.

Neil Tyler – Redburn Partners

Thank you. Perhaps I could follow up with one on the infant nutrition comment that you make under business conditions. Just to clarify, I mean, I take on board your explanation that you provided about the tougher comparatives and the impact of what the Chinese Government has done. Are you saying that you expect the lower historical growth rate to be an impact beyond this year, or just really for this year until that effect is annualized?

Feike Sijbesma

Yes. What you need to see is that last year the infant formula companies – benefited from – Western infant formula companies benefited from the situation in China and, obviously, we benefited together with them. Due to reaction of the Chinese Government, due to the reaction that one New Zealand player incorrectly came into troubles itself, the market stabilizes to the situation before that spike. And that means that that extra sales is not there. And that means also that the infant formula companies make some corrections in their own stock situation and their own reducing inventories, et cetera.

So I expect that the infant formula market will come back onto the normal growth rate it had before, and then it is our chance to grow faster than that by introducing more of our ingredients in that market globally.

Neil Tyler – Redburn Partners

Okay. That's very clear. Thank you.

Feike Sijbesma

I appreciate it.

Operator

Next question is Mr. Oliver Reiff from Deutsche Bank. Please go ahead.

Oliver Reiff – Deutsche Bank

Thanks. Two questions from me. The first one is on your contract pricing for vitamins. Do you see Q3 contract pricing as still improving, given the spot price movements and Q4 is likely to be the quarter, where lower spot price momentum that we've seen recently is likely to hit your contracts?

And the second question is on the investor letter from Third Point, which has got quite a lot of attention recently. Could you talk about the likelihood of a change in strategy with your next Capital Markets Day or in the future, such as a more aggressive split or carve-out of the non-nutrition business from the nutrition business? Thanks a lot.

Feike Sijbesma

Yes. The vitamin contract prices, some vitamins have been doing better in the second quarter than the first quarter. It's difficult to predict how that will behave in the second half year, but the momentum at this moment was not bad in the second quarter, although I remain careful on especially vitamin E. I mentioned the prices at this moment, but then you talk specifically about vitamin E coming down and I think it remains volatile for the rest of the year, I need to see. Of course, we will try to get the prices stabilize so high and continue to work on that one.

On Third Point, indeed announced to be an investor in DSM, like we have many investors, fortunately in DSM. And on our strategy, another topic, yes you are used to our normal rhythms in the Capital Markets Days and one's history or five years of further updates, et cetera. So that is we continue in that direction.

Oliver Reiff – Deutsche Bank

Thanks.

Operator

Next question is Mr. Peter Mackey from Morgan Stanley. Please go ahead, sir.

Peter Mackey – Morgan Stanley

Good morning, everybody. I hope you don't mind, I've actually got four questions, most of them on the nutrition business, of course. Can you give us an idea of what organic growth might have been without the fire in the second quarter? Did that impact your organic growth numbers?

Secondly, you've already flagged the maintenance outage in Sisseln in the I and E [ph] manufacturing facility. I've noticed over the last year, you basically took a six weeks outage in September/October, a two weeks in May, and then another four weeks this August. So effectively, you've taken that plant down for the equivalent of a quarter in the last year. Is that simply just trying to manage the supply environment, and is it better to manage your profitability, or are there some maintenance issues that we should be aware of, please?

The third question, it really ties into that table on page 11, which shows the dietary supplements progression in Q1 year-on-year and Q2 year-on-year. You talk about an absence of improvement in the second quarter. The one product for which things have improved is vitamin C. And I just wonder whether what you've seen is perhaps a slight structural change in the vitamin supplement market.

Are people just moving to effectively down trading in the supplements market and just taking vitamin C rather than a multivitamin thing? And I wonder if that ties in, I don't know if you have any thoughts about the FDA labeling proposals in the U.S., which seems to focus a little bit more on vitamin C and a few other products, perhaps at the expense of other vitamins.

And my final question, I apologize for this, is, I mean, is just in broader terms, you require – in order to achieve current consensus, you do need a pretty significant acceleration in EBITDA performance in the second half versus the first. I wonder if you could just give us an idea of how business progressed on a monthly basis and how it looks in July please, to give us some sort of comfort around that acceleration. Thanks very much and apologies again for the number of questions.

Feike Sijbesma

Yes, Rolf-Dieter will help me on several of those. Organic growth, would that be different without the fire? I don't think so, Rolf-Dieter confirms it, because we sold out of stock and so the market did not suffer from the fire. Of course, it had a financial impact, but the market did not suffer.

Rolf-Dieter Schwalb

It was also end of June, basically only one week to go. So that did not have a measurable impact on organic growth.

Feike Sijbesma

Yes. Secondly, do we have maintenance stops in the vitamin E business? Yes. Do we manage also carefully volume demands and the market segments we want to sell and, of course, the margins that we focus on? Correct. And all of the above is happening in our company.

Rolf-Dieter Schwalb

I think that we can clearly say there is no maintenance issue in Sisseln which this is an old plant, we need to regularly shutdown for continued maintenance. That is certainly not the case, and if you have been there maybe once you have seen it. I think this is also, when you look at it pretty obvious. There is one other element which, of course, especially now is important that maintenance or a stop in general helps also to reduce inventories.

Peter Mackey – Morgan Stanley

Exactly. I was just wondering whether it's fair to assume that actually, I mean, the industry press when you talk about it suggests that these are maintenance shutdowns. But actually, it sounds as if it's just more managing the supply side and your inventory positions.

Feike Sijbesma

No, no, no.

Rolf-Dieter Schwalb

Certainly no maintenance issue in Sisseln.

Peter Mackey – Morgan Stanley

All right. Thank you.

Feike Sijbesma

No maintenance issues, but we also are not in a situation of managing the market or whatever. What we do set is, of course, the margins and the prices at which we want to sell. And certain market segments we focus more on than other market segments, that is pretty clear, because we want to have a certain margin environment.

Rolf-Dieter Schwalb

And just certainly remember our words which we've used in the past sometimes for that; value over volume.

Feike Sijbesma

So that means that sometimes if we walk away from business which we think this is not a business we should be in, in terms of margin. The vitamin C is there is a shift from multivitamin to vitamin C? We don't see that. I think you cannot say that, although the total multivitamins indeed is down like we said, together with the Omega-3 dietary supplements in U.S. You need to remind that vitamin C is, of course, by far the biggest vitamin and the most important carrier.

If people enrich their products with vitamins, there's always vitamin C into that. And if there is a shift in categories and a shift a little bit in use and whatever, it can easily have a big impact, especially on the vitamin C, because that is the biggest product. But do we see an overall switch from that? No.

Peter Mackey – Morgan Stanley

Sorry, if I could just interrupt on that. Do you think – is there some other reason then why vitamin C should have been the outlier in that particular table and suggest maybe with a big acceleration in a big recovery apparently in Q2?

Feike Sijbesma

No, it is a good remark, by the way, but it can be influenced quite a bit between what kind of products have been used and indeed, the top segment of the market, maybe the bottom segment of the market, I need to say that, disappeared because the market dropped 10%. So there is a certain group consumers will who dropped out. The main consumers remain 90% is buying the same as last year, but there was a certain group who moved out. And you see then a little bit shift in the buying of products and that easily can have an impact on the sale of vitamin C because that is by far the biggest vitamin. So it's more that effect than that you see a total effect that people say, well, forget the Bs and Es and whatever and then take only the C. That is what we do not see.

Rolf-Dieter Schwalb

But also don't forget the total dietary supplement market is much, much broader than only vitamins and omegas.

Peter Mackey – Morgan Stanley

Yes.

Rolf-Dieter Schwalb

So there are so many other materials, for example, our i-Health business is in totally different segments.

Peter Mackey – Morgan Stanley

Okay.

Feike Sijbesma

Then the consensus second half year, Rolf, did you…?

Rolf-Dieter Schwalb

[Multiple Speakers] you are totally right. When you do the numbers, I mean, which obviously we also did, then you see that half 2 versus half 1, the improvement is to be somewhere around €90 million, maybe €100 million, €90 million, maybe €80 million, some – that order of magnitude. Now do we have indications, or can we give a monthly trend? I don't think so, I mean, the monthly trend is not that clean. I mean, You have some movement seasonalities.

On the business environment, I can only say that July we have not heard any indications from our business groups, which does undermine the belief in the current forecast and therefore the outlook. What, of course, is helping on our assumptions, but okay, that can still be wrong, is that the currencies, if our total year assumption will be right, then the currencies in the second half year have to help us compared to the first half, because today, of course, if you look at the U.S. dollar, it's even slightly better.

But that should give an improvement in the second half, that’s s an external factor and we don't have a crystal ball and we don't know what it finally will be, but on the assumptions, that would help the currencies. But on the business environment, we have, of course, gone through it, but I can only say that we did not get any adverse signals out of the business itself recently to undermine our belief.

Peter Mackey – Morgan Stanley

Apologies to keep adding supplementary questions, but are you able to say perhaps – have you some hope in your expectations that, for instance, caprolactam improves in the second-half versus the first, or is it largely due to visibility that you have in nutrition, or how much comfort do you have in the business units?

Feike Sijbesma

We also have on caprolactam some expectations for improvement, especially currently in Q3. But it's across all business basically, so I cannot really add more to that. But of course, an outlook, a forecast, I mean, yes, a forecast is always uncertain, especially if it concerns the future.

Peter Mackey – Morgan Stanley

Absolutely. Thank you very much.

Operator

Next question is Andreas Heine from Barclays. Please go ahead.

Andreas Heine – Barclays Capital Inc.

Yes, good morning. Three questions, if I may. McDonald's is reporting that they have some issues in China with Chicken McNuggets and reduced their sales forecast. Have you seen any impact, or do you expect any impact from this, from the population of chicken and poultry in China?

And the second, in infant nutrition, just to understand this, you were talking about the spike you have seen in the last year. Was this spike specifically in the second quarter so that we in the second half of this year will have normal comparables, or is this decline in infant nutrition something we have to take into consideration also for the second half?

And I don't know why you are so shy on giving comments on what you see on the vitamins side. You usually say that you have contract rather than spot business. So at this stage you should know, or have an indication, whether your Q3 contracts are above what you have seen in the first half or not. These are my three questions. Thanks.

Feike Sijbesma

Okay. McDonald's in China, we don't see any effect on our position, the pig or poultry business. But it stresses, indeed, the point that the quality consciousness and sometimes the issues, and therefore, the volatility coming out of that in China remains an issue. We are just discussing infant formula where there are also to do with quality issues. Now we discuss this issue in the meat. And you have seen that from time to time, especially in China, those issues arise and they have an impact on the business.

I don't see an impact on our business on this one, on the meat at this moment, but it is true that quality issues give that effect. On the infant formula, it's difficult to say because I don’t have the exact figures quarter by quarter, because it was quite a turmoil last year. It was first you had the scandals and even in the Netherlands, in our country, a lot of the shelves were emptied by people buying it from the shelves and shipping it for higher prices to China, so there was a big spike. Then the whole issue with the New Zealand producer turned it in a few weeks upside down. And then the Chinese Government interfered, et cetera.

So it was quite a turmoil in the infant formula in China last year. At this moment, we see, of course, that big infant formula companies say, Okay, so we cannot rely that that gives extra sales to us in China any more or for the time being. And therefore, they are reducing their stocks in the second quarter most likely a little in the first quarter as well. On the vitamin side on the prices, yes, we have seen the increase in the second quarter, I'm careful to give an exact update on prices we will see in the third and the fourth quarter. I do not expect a real further increase now into prices, but vitamin E as the big unknown, since it is dropping. Now that will not immediately impact our business in the third quarter, but what's happening in the fourth quarter, I don't know.

Rolf-Dieter Schwalb

But let me add to that, the contracts, of course, as we have said in the past, also concern prices or price formulas, but not volumes, it's not volume commitments.

Andreas Heine – Barclays Capital Inc.

Okay.

Operator

Next question is Mr. Jaideep Pandya from Berenberg Bank. Please go ahead.

Jaideep Pandya – Berenberg Bank

Thank you. One question on the acquisitions that you made in the last couple of years. Can you just quickly remind us when you did the acquisition, what was the growth rate that you put in, and compared to that, what is the growth rate that you are seeing? Because it obviously does seem that some of the acquisitions that you've made, growth has slowed down. So that's the first question.

And then second question is just on H2. What is the – if there is any cost from this promotional campaign in nutrition that you're talking about. Thanks.

Feike Sijbesma

Yes, let me take those two. The cost of the promotion campaign is rather limited. It's us and, of course, other companies in the same industry, so we talk maybe a couple of million, but not the double-digit number. On the acquisitions, yes, I can talk you through the acquisitions on a broad performance basis. We did not publish growth rate assumptions for our synergies but more like double-digit or so, but not more accurate. And the acquisitions, if I go through the big ones, I can say that, except for Ocean Nutrition Canada, where we all know about the Omega-3 issues which we discussed now for a year already, the other big ones, Martek, Fortitech, Kensey Nash and Tortuga, all do well and according to plans.

And even Ocean Nutrition Canada, maybe you remember from our Capital Markets Day last year, where we gave you numbers in terms of our NPV calculation based on our assumptions and the price we paid. In most cases roughly our NPV was double the price we paid, more or less, we are still, even at Ocean Nutrition, well above the purchase price of the company and not negative there. We are below our business case true for the time being at least, we need to see the future, but not below our own – not the below the price we paid, we are well in the range.

Jaideep Pandya – Berenberg Bank

Okay. Thank you.

Feike Sijbesma

We still only have time for one remaining question.

Operator

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

Andrew Stott – Bank of America Merrill Lynch

Good morning all. I had a couple of questions. I want to start again on the human side, on the 6% decline year-on-year. And just I'm trying really to get my head around how you get to that 6%. So the rest of the world supplements were up, U.S. supplements according to your table, and I admit that that's an unweighted table, I guess, minus 1%, prices were flat.

So my takeaway is that infant formula really was sort of double-digit decline and/or your food and beverage it really has – well, not only slowed, but has actually turned quite severely negative. So in all of what I've just said, what am I missing? What's wrong and where is my math wrong? I'll finish there and I'll come onto the second question in a minute, thanks.

Feike Sijbesma

I don't know whether we can really give you the detailed math. What you did not talk about and that I just mentioned on the previous question is the Omega-3, which really start to hurt us in Q3, second-half of Q3 last year, so Q2 was still where it looked okay for us. So that is the clear weakness and you will see the market data. That one was not in your list. So that's the only one I can add, but I cannot give you even if I had it here, we would probably not publish it at that detail to give you exactly what the…

Andrew Stott – Bank of America Merrill Lynch

Okay. Can I ask it in another way, then? So if I think about Q2 versus Q1, what are the new negatives? I mean, what I take away from this conference call is that the new negative is food and beverage, the whole comment you made about category A brands, is that the right interpretation?

Rolf-Dieter Schwalb

And infant, we discussed the infant issues in China with regulatory policy changes, which led to – on the short-term to inventory reductions by our customers also. So this is also in Q2 and not before, and as I discussed earlier, we expect normalized ratio in the future.

Andrew Stott – Bank of America Merrill Lynch

Okay. And….

Feike Sijbesma

I think, Andrew, if you look to the dietary supplements, the Omega-3, that is clearly down compared with last year, as we all discussed. And that has a big impact on, of course, the organic growth rates in terms of volumes, that's one. The food and beverage market globally being sluggish, that's not something specifically for the second quarter. If we look already to our customers, they've reported a little bit since the end of 2013. But again, I saw also that they clearly mentioned that again in their Q2 figures, so obviously, it has an impact on us also. And then the infant formula is a little bit the absence of the spike of last year and maybe some inventory reductions. So I don't want to say there is a lot of new factors. Food and beverage market slippage continues, as it is already, and not in suffice at this moment, and dietary supplements, Omega-3, is not improving and, indeed, maybe some inventory corrections in infant formula. So that's a little bit the way I would like summarize.

Andrew Stott – Bank of America Merrill Lynch

Okay. No, thank you, that's great. The second question I had was really the inventory, which I know has been addressed. But looking at this in a slightly different way, if I think about that inventory expansion, is there a chance that the Q2 EBITDA margin in nutrition has been flattered somewhat by the buildup of inventory, i.e., you still had good operating rates in the quarter?

Feike Sijbesma

Yes, I think that’s without any details there was no purpose in doing that. But, of course, by definition if you produce more than you sell, the inventories go up and you have a higher factory utilization than if you produced exactly what you sold and that normally gives a slight benefit. But that's not the objective here, in fact, the opposite. We want to get inventories down and that is the objective now even stronger for second-half and, as I explained on an earlier question, also one of the reasons for the stop now.

Andrew Stott – Bank of America Merrill Lynch

Okay, thanks. And sorry, final one, very small one. CapEx guidance for this year, please.

Feike Sijbesma

No change. We guided before for around €650 million. €600 million to €650, I would say today, because, you see the first-half year, we were below 50% of that.

Andrew Stott – Bank of America Merrill Lynch

Okay, great. Thank you very much.

Feike Sijbesma

Yes, okay. Thank you all then for participating. I think it's clear we will continue to focus on the efficiencies to protect our profitability and by reducing working capital to improve our cash flow in the current environment. And despite the weakness in caprolactam, we continue to anticipate to deliver improving financial results in the coming quarters, as discussed. And thank you again for joining the call.

Operator

This concludes the DSM conference call. Thank you for attending. You can disconnect your lines now. You all have a nice day. Thank you.

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