Q3 2023 highlights
- Perfumery & Beauty performed well and Taste, Texture & Health was resilient
- Health, Nutrition & Care, and Animal Nutrition & Health were weak, driven by record low vitamin prices
- Cash flow prioritized, resulting in an improved cash conversion ratio of 56%
- Vitamin transformation and €200 million cost reduction program well under way
- Merger integration process progressing well, with synergy delivery in line with plan
- FY 2023 outlook: Adjusted EBITDA of around €1,800 million
Dimitri de Vreeze, CEO, commented: “In the current global economic environment we are working hard to mitigate the effects through strong internal actions. To this end, we are driving a broad range of self-help measures, with the largest contributor being the vitamin transformation program. In addition, we have pushed harder on cash flow, a key priority for us, and see good improvements this quarter. At the same time, we remain relentlessly focused on the successful integration of the merger and the delivery of our targeted synergies.
During the quarter we were pleased with the continued good performance of our Perfumery & Beauty and the resilience of our Taste, Texture & Health businesses. However, destocking continued, and vitamin prices remained under pressure, impacting particularly Animal Nutrition & Health and Health, Nutrition & Care businesses. For the remainder of the year, we do not expect a material change in these business conditions, although the last quarter will begin to reflect the contribution from our internal costs actions.
The decisive actions we are taking at this time provide a strong base from which we will be able to deliver attractive innovation-driven growth. With our market-leading and highly complementary portfolio of ingredients, science and technologies, we are confident in achieving our mid-term financial targets. We are reviewing all segments to prioritize and accelerate the company’s high growth and higher margin business. We will provide an update on progress of all our strategic actions at our Capital Markets Day next year.”
The company estimates for FY 2023, on a pro forma basis, an Adjusted EBITDA of around €1,800 million, which includes an estimated negative vitamin effect of about €500 million as well as a negative foreign exchange effect of about €90 million.
Progress on actions to improve performance
The company has embarked on a comprehensive set of short-term and mid-term focused actions:
- Cash focus: addressing the current challenging near-term conditions with a wide range of cost reduction and cash flow improvement actions such as decreasing inventories and optimizing CAPEX
- Vitamins: improving the profitability of its vitamin activities and structurally reducing exposure to volatility from price fluctuations. The vitamin business transformation with a €200 million cost reduction program, including plant closures, route-to-market simplification, and optimized service levels
- Integration: driving the merger-related integration and revenue synergies according to the strict time plan as communicated, and accelerating the cost synergies
- Strategic segment reviews: looking across all segments to prioritize and accelerate high-growth and higher-margin businesses
The company recorded a 7% organic sales decline with -1% pricing and -6% volumes which includes the negative vitamin effect. Without this effect, prices would have been up mid-single digit and volumes would have been down low single digit.
Perfumery & Beauty performed well, and Taste and Texture & Health was resilient while Health, Nutrition & Care, and Animal Nutrition & Health were weak, driven by record low vitamin prices.
Adjusted EBITDA was €409 million, 32% lower than in the comparable period, resulting in a 400bps margin decline. This includes a negative vitamin effect, which is estimated at about €170 million in the quarter. Without this effect, the Adjusted EBITDA would have been down 3% (including a negative foreign exchange effect of about €30m).
Taste, Texture & Health
Taste, Texture & Health (TTH) brings progress to life by tackling some of society’s biggest challenges: providing natural, nutritious, healthy and affordable food and accelerating the diet transformation with appealing taste and texture, and nourishing a growing global population whilst minimizing food loss and waste – sustainably. TTH consists of Taste, which includes flavors, natural extracts, sweetener solutions, and plant-based proteins, and Ingredients Solutions, which includes food enzymes, textures, cultures, natural colorants, nutrients, and yeast extracts.
Against a very strong comparable prior year, TTH delivered a 5% decline in organic sales. Strong pricing was partly offset by low vitamin prices. Volumes were soft, owing to destocking and our deliberate decision to step away from low-margin products including vitamins.
Taste performed strongly, led by pricing. Beverages was particularly strong, with Functional Beverages such as sports recovery and energy drinks performing well. Enzymes, cultures, and texturing solutions also delivered good organic growth. Vitamins and yeast extracts were weak.
The integration of the merged TTH businesses has shown good signs of traction in the areas of cross-selling and the development of new joint concepts. As an example of the latter, a new flavored immunity-supporting dairy drink was launched, combining both taste (strawberry and banana flavor) and ingredients solutions. Other examples of early synergies are for instance in sugar reduction, one of the cornerstone growth platforms of TTH.
Adjusted EBITDA was €134 million and includes a negative foreign exchange effect of around 6%. Without this effect, Adjusted EBITDA would have been up 1%. This resilient performance resulted from the strength in the higher-margin, high-growth activities. Adjusted EBITDA margin of 18.2% was up 130bps versus the prior year period owing to a positive product mix.
Health, Nutrition & Care
Health, Nutrition & Care (HNC) enables people to improve their health by supplementing their diet with critical nutrients and driving medical innovation forward, so helping to optimize immunity, speed up recovery and enhancing quality of life. This business now excludes Personal Care & Aroma, which post-merger was transferred to Perfumery & Beauty.
In a challenging operating environment, HNC recorded 8% lower organic sales compared to the same prior year period, due to 10% lower volumes. Ongoing destocking impacted some of the HNC segments. Good pricing was largely offset by lower vitamin prices.
Dietary Supplements saw continued lower demand (especially in North America and for immunity-supporting solutions) as consumers’ discretionary spend was reduced due to high inflation. However, end-use market data towards the end of the quarter indicated early signs of a possible stabilization in demand. A first new products and concepts have been introduced combining the strengths of the merged businesses to further improve consumer experiences.
Early Life Nutrition (ELN) faced a challenging market dynamic with a further decline in birth rates – especially in China, by far the largest global ELN market – and soft macro-economic conditions. These conditions are driving a strong destocking against a comparable prior year period that benefitted from strong sales growth in Europe due to product shortages in North America. The unit received the first-ever approvals in China for 2 HMOs (human milk oligosaccharides), giving it a strong competitive lead in China in 2024, representing around 40% of the global ELN market.
Adjusted EBITDA was down 48% year-on-year due to lower volumes, the work-through of high-cost inventories, and idle costs due to production shutdowns with the total vitamin effect of around €40m.
Pro forma basis
In preparing the pro forma figures, the financial results of the former Firmenich Group and the former DSM Group have been combined as if the merger had occurred on January 1, 2022, and with purchase price allocation adjustments included as of May 8, 2023. To arrive at these pro forma figures for the current and comparative reporting period, we applied perimeter changes and adjustments related to changes in the Business Unit structure (i.e., the combination of the former units Taste & Beyond and Food & Beverage into the new business unit Taste, Texture & Health; the transfer of Personal Care & Aroma from the business unit Health, Nutrition & Care to Perfumery & Beauty; and other minor adjustments pertaining to the transfer of the Consumer Healthcare business from Taste & Beyond to Health, Nutrition & Care) and the elimination of intercompany profits. The pro forma figures represent the results from continuing operations.
The pro forma information is not intended to revise past performance, but instead intends to provide a comparative basis for the assessment of current performance. This information represents a hypothetical situation and does not purport to represent what the actual result of dsm-firmenich would have been, should the merger with Firmenich actually have occurred at the beginning of DSM’s 2022 financial year, nor are they necessarily indicative of future results of dsm-firmenich. The Group does not claim or represent that the pro forma information is indicative of what the results would have been, had the merger taken place as of the date indicated, or of the results that may be achieved in the future.
The pro forma financials are unaudited and include estimates, including for example approximations due to the different reporting currencies.
Alternative Performance Measures (APMs)
To arrive at the Alternative Performance Measures (APMs), adjustments are made for material items of income and expense arising from circumstances such as acquisitions and divestments, restructuring, impairments and other events (i.e., APM adjustments). Other APM adjusting events include site closure costs, environmental cleaning, litigation settlements or other non-operational (contractual) arrangements. Other than items related to acquisition and integration costs incurred in the first year from the acquisition date (including non-recurring inventory value adjustments) as well as adjustments due to previously recognized APM adjusting events, the threshold is €10 million.
The APMs used here are:
Organic sales growth (OSG)
Organic sales growth is the sales growth excluding the impact of acquisitions, divestments, and currency impacts.
Adjusted earnings before interest, tax, depreciation and amortization (Adj. EBITDA)
Adjusted EBITDA is the IFRS metric operating profit plus depreciation, amortization, and impairments, adjusted for material items of profit or loss, as defined under ‘Alternative Performance Measures (APMs)’.
Adjusted EBITDA margin (Adj. EBITDA margin)
Adjusted EBITDA margin is adjusted EBITDA expressed as a percentage of net sales.
Notes to this trading update
The reported financial data in this trading update have not been audited.