Stephen Hufton - Communications Manager Geraldine Matchett - CFO

Thanks very much Monique. Good morning everyone and welcome to this conference call on DSM results for the first-nine months of 2017, which we published earlier this morning.

With me is Geraldine Matchett, our CFO, and the Member of our Managing Board. She will elaborate on the results.

And after that, of course, as usual is available to answer your questions. We have until 8:30 this morning.

As a reminder, our presentation could -- today can contain forward-looking statements. And in that regard, I need to point you to to our disclaimer regarding forward-looking statements as published on our website and in our press releases.

That’s the formalities. Now I'd now like to hand the call over to Geraldine.

Please, Geraldine go ahead.

Thank you, Steve. Good morning, everyone, and welcome from my side as well.

And before we get started with the question-and-answer session, I would like to briefly highlight some of the key points from our announcement this morning. In short, we are pleased to report that we continued our very good momentum with yet another strong quarter.

All businesses delivered above market growth in Q3, resulting in an 8% organic growth year-to-date of which 7% is volume growth. Our adjusted EBITDA increased 15% versus the first nine months of the year, driven by Nutrition and by Material.

Our return on capital employed was up 170 basis points and closed at 12.3%, while our adjusted net profit increased 29% to €504 million. And if I include the gain on the disposable of our shares in Patheon of €1.25 billion, the total net profit ended at €1.6 billion year-to-date.

Now looking forward and in-line with our communications during our recent Investor Day, that took place in September, these results feed into our confidence regarding our outlook for 2017. This outlook, which we increased in the middle of the year, and is ahead of our original target, that in our strategy remains unchanged despite slightly less favorable currency developments, with -- and I quote from the press release, an EBITDA growth for the year slightly up from high single-digit to double-digit and a ROCE growth of more than 100 basis points.

Now moving more specifically to the business developments, and starting with Nutrition. Nutrition continued to deliver a strong performance, with organic growth rate in all of our businesses outpacing their respective markets, Animal Nutrition did very well.

In fact had an exceptionally strong third quarter due to a number of factors, including the rebound in the meat export from Brazil, as well as relatively easy comparative figures from last year. We also maintained our strong momentum in Human Nutrition with i-Health, our B2C business continuing to grow double-digit, with Early Life Nutrition delivering a strong performance and with above market growth in multivitamins and omega-3 amongst others.

Overall, the organic growth for Nutrition reached 7% for the first nine months of the year, mainly driven by volumes up 6% and the adjusted EBITDA was up 13%, supported, of course, by the strong volume growth as well as the efficiency and cost-improvement program. Finally, in terms of the EBITDA margin year-to-date, Nutrition reached 18.9% versus 18% over the same period last year, well within the expected range of 18% to 20%.

Turning to Materials, sadly, we had to report a tragic accident at our Resins Augusta sites in Georgia USA on the 27 of September, where a contractor lost his life. This was again -- well this stresses that in all of our activities, our utmost priority has to remain the safety and the health of our employees and our contractors worldwide.

Our thoughts are with those affected, their families and their loved ones. Looking at the business performance, all our businesses in Material delivered strong growth in particular in specialties, resulting in an 8% volume growth and a 13% organic growth in the first nine months, well ahead of our initial strategic target.

This strong growth as well as the group-wide cost savings and efficiency programs, resulted in an adjusted EBITDA increase of 12% for the nine months and the strong adjusted EBITDA margin of 17.3% versus 17.6% in prior year, when if you remember we still benefited fully from the low input cost environment. This robust performance demonstrates the improvements achieved in the quality of the returns of our Materials businesses over recent years.

And finally, looking at some of our key financials and our cash generation, our operating cash flow amounted to €619 million for the first nine months, slightly below the comparative period in 2016 due to a higher absolute working capital, in line, of course, with the higher sales. Looking at the ratios, however, the total working capital as a percentage of sales remained stable at 19.1%, with actually a solid improvement in the operating working capital to sales ratio.

As for our net debt, we closed at €703 million compared to just over €2 billion in September 2016. This decrease is mainly due to the proceeds from the sale of our Patheon shares recorded in this quarter, so in Q3, for a total of €1.477 billion, with another €58 million to come in Q4, so in total over €1.5 billion.

And with that, I think we’ll open up the floor for questions. Operator?

Thank you. Good morning and thanks for your time.

In September Mr. Sijbesma said that the proceeds of the sales of Patheon also made new acquisitions again a possibility.

I was wondering whether you could tell us anything more on that, can you maybe elaborate a bit on where the priorities are, when you are looking at possible acquisitions, in what state of the process you are, and if we can expect anything? Thank you.

Okay, so indeed, as I just mentioned in my comments, we have received the proceeds as we speak pretty much. So it's very fresh.

I mean it's just come in. Now our focus and our priority remains at this stage, without any question, our operational and financial performance, delivering for this year and also delivering the targets that we have set for ourselves in the three year strategic period for 2018 as well.

So priority is focus, focus, focus. As you know we have launched all sorts of improvement and cost efficiency programs which while they are well on track, still need to be completed and anchored in the organization.

So this is really what is keeping us busy primarily. Now on the back of being ahead of target, I have to say in all our financials but also in terms of our ambitions within the three year strategy plan, what we have done is bring forward our strategic review process, that we are effectively kicking off pretty much as we speak and with the ambition of being able to share some outcomes of that review process before the summer next year.

That stage will be a much better point to address some of the questions that you are just raising now.

Okay, and if you say before this summer the publication of the first quarter results would be in that moment?

Honestly at this stage the date has not firmed up, but it will be some time before the summer next year. We will keep you posted once date has been established.

Anything on maybe regions or activities, where acquisitions would be helpful?

The review process is something that we do very thoroughly. There is a strong history in DSM that these strategic reviews are all inclusive.

This will be no exception. We will be doing deep dive in all of our business.

If you remember at our Capital Markets Day in September, we gave a lot of insights already into what are the growth drivers behind our businesses. What are the end market dynamics, what’s the innovation pipeline that’s coming.

These are all the kind of things that we’re going to be continuing to do our homework on and that will lead to conclusions, but right now it's really too early to provide conclusions, we haven’t yet drawn.

Thank you.

Hi, good morning Geraldine. My first question is just, if Feike's around he's rolling his eyes on this one.

So you are going to target.

Yeah, but I mean well given what’s happening with Clariant and FICA is obviously voting unity, so I am just wondering how you see the old topic of separating plastics. Do you see that as something that’s dead and buried, you have been there and done that, or is it a file that's sort of on the desk that you will tackle at some point, because we are seeing White House [ph] behave very differently to -- during third point.

That’s the first question. Just to follow up on the last one, it sounds like the flavor of the review will be a little bit more than targeted innovation, it will be, it will touch on some strategic structural stuff perhaps if you could provide some thoughts on that.

And on i-Health, you have always trended very carefully with this one, because it sort of -- I know it's on the cust -- on the fringes of your customers, but double-digit growth. I just wondered is there any change in your -- in the way you are thinking about in that business, in terms of scale.

And if I may the last one, Caprolactam at the ChemicaInvest looked right down in your report and it seems to be doing really well, looks like it's at the top of the cycle. Is there some incentive to exit now rather than heading to the next cycle phase where and I just -- I suspect CVC want us to do something with that business, you even want to match the investment needed.

So just -- those are the questions. Thank you.

Okay, well to be honest to your first two questions, the answer is similar to what I have just said earlier. The company has a really good history of doing very through strategic reviews.

We always have and as you know DSM can't be faulted for not having transformed over the years. So we will continue to do this and take it seriously.

So nothing is off the table. But at the same time if you look at the dynamic of our businesses et cetera, we're also looking very much to grow the business and the good momentum year-to-date of course is very encouraging and we feel that’s a lot the good work that’s been done particularly in the last couple of years is clearly paying off.

So we are very happy of course with our Q3 and our year-to-date results and we are happy that we are ahead of our three year plan ambitions, that so we are in some ways a luxury position of accelerating our strategic review. So that’s very much the flavor of why we are doing it now and it makes a lot of sense.

Now love your question on i-Health. It’s a B2C business, as you correctly said.

There what’s we are seeing, if you remember, it was primarily a U.S. play.

It came in through an acquisition via Martek originally, but what we are seeing now is that we are taking it overseas and we are effectively positioning products, both we’re looking at the European markets and very excitingly in the China space, where there is a huge demand for trustworthy supplements. That’s --there that the market dynamics are very interesting because it's not only in store, it's also a lot of e-retailing going on.

So what we are seeing is that the business dynamic behind i-Health, both a continued very successful portfolio of brands within the U.S. We have the leading probiotic brand called Culturelle, which by the way does not step on anybody’s toes.

We are very much well positioned there. And we are leveraging this great portfolio of brands now overseas.

So that’s what’s behind the double-digit growth. And for Caprolactam indeed, sorry, that it's a bit buried but indeed it's an associate now.

So remember we have 35% of the joint venture with CVC. But you correctly noted that we are seeing this quarter an improvement in the market.

Now I would say that its early days to call that top of the cycle. We are certainly, which I think is a term that you have mentioned.

There is an improvement which is good. Now we will have to see whether that confirms itself in the coming months and quarters.

Now the good news is that we are fully aligned with our partner, CVC, that’s the aim is to build those businesses and then at some point they will exit, and so will we when we feel the valuation is at the right level.

Okay great. Thank you.

Yes, good morning. Two questions, if I did my math correctly, than I would say that in the third quarter of 2017 both the sales and EBITDA growth have slowed down a little bit, because let’s say in the first half year the sales growth would be somewhat over 11%, and the EBITDA about above 16%.

And then for the Q3 it would be 7% and 13% respectively. Are those numbers somewhat correct and can you explain them to me, what has been major factor in a slowdown and the slight slowdown of the growth in the third quarter.

The other question I have is couple of weeks ago, I guess I read in a report by maybe an Emerald [ph] Analyst commenting that DSM would be a be prime takeover target as soon as the Patheon proceeds would be received. I was wondering if you would look at that the same way from within DSM, and if there is some sense of, how you say that, discomfort with the fact that you have so much cash at the moment and there is so much for instance activity going on?

So those are my two questions.

Okay, thank you. So firstly on Q3, I think I need to clarify things here.

By the way look at the second page of the press release you see the Q3 highlights. So you don’t have to do the math.

It just makes it easier. So here I would actually say that Q3 has been a very strong quarter from a growth point of view.

Now if you look at overall sales, what you have is in negative 3% on foreign exchange. That is really the effect of the weakening of the dollar.

But if you look at organic growth, we actually had a 10% organic growth in Q3 or as the year-to-date numbers, 8%. So we saw an acceleration in the third quarter and the great news is that was coming effective from all the businesses.

We had a real step up in Animal Nutrition. The growth there was 10% organic growth, and 14% volume growth.

So very strong dynamics in Animal Nutrition. We had 9% in Human Nutrition, which is also very high.

And all of our Materials businesses performed well, and there we are seeing a 9% volume growth in Q3. So I have to say, it's actually pretty much the reverse.

Q3 is continuing and accelerating the growth momentum. So all is good there.

Now as for the fact that we have liquidity on the balance sheet, now firstly of course this is brand new. Right, so it's just come in.

So it's not as if it's been sitting there for a very long time. Maybe a different picture.

But we anyway look at it quite differently, and that is that we are growth company and our main purpose is to deploy capital to grow businesses which bring value to shareholders. So for us this is very much an opportunity to do our homework, and see where else and how can we continue to accelerate these great businesses and continue to generate value.

So that’s the mindset that we are going, that we are perceiving the situation and it's even [ph] to the fact that we are ahead of our targets on strategy and that we are not doing the strategic review.

Are there any more questions out there?

Good morning, Geraldine. This is [indiscernible].

So my first question would be in the third quarter of 2017, the net sales by origin and the net sales for definition for India have been 1% and 2% respectively, which is very low as compared to the other countries. And on the other hand DSN has thrown its weight behind China’s new home preference for clean energy vehicles and digital connectivity.

So what are your views with regards to the Indian government push for electric vehicles from 2013 and how is it going to benefit DSM.

Thank you for an excellent question. It’s nice to be talking about India.

This is a geography that is full of excitement for us, because it plays exactly to the strengths of DSM. So when we are talking to the -- when we are looking at electrification of cars, the substitution of materials is a very important factor and of course a lot of our portfolio of materials is exactly providing solutions for car manufacturers, and it links as well to the connectivity, because as cars become electric they are so much more connected and we are very much into materials around all the connectors.

And we are already in smart phones and that types of things. So this is a trend which we welcome, of course in India as well as in other geographies.

Now another a very important sector is solar. We have in our emerging business areas, some materials and some solutions to make solar panels more efficient, more durable.

In fact we have a solar field test in Pune, where we are testing various coatings and things and we have invested in a business to make back sheets that are flure [ph] free and much more durable. So solar is also something where we know that’s India is positioning itself strongly and that we feel very excited about.

And on the Nutrition side, we are also very present, both in terms of our Animal Nutrition but also our Human Nutrition offering in this very large country. So we are aiming and very enthusiastic about growing our business with vision for India.

All right. I have one more question related to India, which you would like, I guess.

So the overall sales growth is €2,136 million, which is a rise of 7%. So can you please briefly comment on the contribution of the engineering plastic segment in percentage and also its performance in India over the last nine months and what do the next quarter or year look like?

Oh my goodness, you are getting very granular here, I am afraid. If you would like some insights into the granularity of our business in India, now to be fair engineering plastics has been one of our most early established business in India.

We have been serving the automotive industry amongst others, by the way in the Pune area, which is why I went to see the site recently there, that happened to win, but this is anecdotal, our Global Shield [ph] award within the whole of the company, which is our health and safety award. So very high standard operations in India.

But the exact growth rates on all of that’s I think I would them refer you back to our investor relations team if you really would like those detailed information.

All right. So the next question would be like at the end of nine months what risks and opportunities have been identified by you with regards to DSMs fourth quarter performance?

Sorry, can you rephrase your question. I didn’t understand that.

Like at the end of the nine months -- like in the third quarter 2017, what are the risks and opportunities that you have identified with regards to DSMs fourth quarter performance?

Okay, so I think in terms of the outlook so we have kept it unchanged. At the half year we increased it, so we started the year a bit lower, the half year we increased and we've kept our outlook unchanged despite the fact that foreign exchange has gone a little bit in the wrong direction for us, particularly the weakening of dollar versus the euro.

We are seeing good momentum in our businesses, so no concerns there. But we have the usual seasonality and timing of events that happen in a company.

So really nothing very much to highlight, and that is why we are confident and comfortable with reaffirming our outlook for the full year despite that FX headwind.

So what would be the areas of focus for the coming quarters?

The areas of focus will -- I mean I refer to the strategic review, I think first and foremost our area of focus is basically operational and financial performance, but that is of course something that we have been working on relentlessly in the last quarter, that will continue. And the only thing that we will be added is of course now this strategic review that we’ve been kicking off where we aim to share the outcome before the summer next year.

Just with a view to time, if there are any other questions, I don't mean to be rude, but is there any of the questions, please now is your chance to ask them. And if you have any more detailed questions from polymer update please feel free to get in touch with those in Media Relations and we will get back to you on those.

Okay.

Sure, thank you so much.

Any other questions than please, now is your chance.

No, thank you so much.

Thank you.

Yes good morning Geraldine and I had a question about the reorganization measures. What is the interim results now at a moment -- at the end of 2017 at which amount of money you will be -- of course you said we'll try to reach about €250, €300 million reorganization [indiscernible] or results?

Yes good morning. Absolutely.

So there I can reiterate the figures that we provided at the half year. So nothing has changed, so we are fully on track.

By the end of this we will have a run rate of a €190 million resulting from these costs savings and efficiency programs. And we have put in motion the necessary programs and actions et cetera to reach the 250 million for the full program.

That is our current status and we provide update from this broadly every six months.

So you are now at the level of €190 million.

We will be at €190 million run rate by the end of the year. Yeah, that’s correct.

But it's not €300 million, because you mentioned €250, 300 million?

Yeah, that is correct. So at this point we know that we have all the actions in place to secure the €250 million.

Now we will continue to attempt to add to that and see whether by the end of 2018 we will then have a final figure of what is the run rate end of 2018, within that range of 250 to 300, but it’s a bit too early to provide any details on that.

Okay, thank you very much.

Yes, good morning, thanks for your availability. I have got two questions here, if I may.

I dropped in a bit later, so maybe these questions have been asked already but anyway. I was just wondering how you will proceed with your joint venture and associates as I understands there were two left.

Are you still on track on divesting them and the second question is you talked about using your liquidity position for investing in growth, can you be a more bit more specific about it and especially about your acquisition pipeline? Thank you.

Yes, good morning, so we indeed cover some of these earlier, so I’ll give a quick answer.

Okay.

That was particularly the use of liquidity for growth, so here as indicated currently our main focus is to keep on driving financial and operational performance, but given the fact that we are ahead of targets on our current strategic period in pretty much every respect, we have decided to bring forward the strategic review that is a regular process within the company, but we are bringing it forward and with a view to be able to share some outcomes of that process by summer next year. So that time of course we will able to share a lot more, but it's too early to dive in it at this point.

And then on the associates you are absolutely right, and that’s in the press release, we still have two key associates, we have ChemicaInvest, the 35% joint venture with CVC, we mentioned earlier that indeed Q3 was a good quarter, we are seeing an uptick in the couple of markets, too early to call that’s top of cycle which was a term used by someone, we would don’t see it that way, but certainly a good development in Q3 with a view that is the right moment we will like that. And the other one is our DSP so, DSM Sinochem which is in -- sectors and there the business is going well.

It's always, in terms of size still could benefit from growing in scale a little bit more because that gives us than more optionality into how to monetize it, but it remains to your question, the intention is to monetize the participations in due course.

And that suppose given the ChemicaInvest and Sinochem.

That’s correct, yeah.

Okay. Thank you.

Okay thanks very much indeed with an eye on the clock, I think we have to close the Q&A. Geraldine do you have any final remarks, you’d like to make.

Yeah, thanks Steve. First of all I would like to thank you all for your time, because we realize it is a very busy earnings morning today.

In short we continue our very good performance and positive momentum in 2017 with Q3 being yet another strong quarter supported by all of our businesses and we confirm that our 2017 outlook despite the slightly less favorable exchange rate remains unchanged. And with this I wish you a good day.

Thanks very much indeed. Geraldine and thanks to all of you.

This concludes our conference call for today. Thank you very much again and wish you all have a good day.

Good bye.