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Edited Transcript of DSM.AS earnings conference call or presentation 7-May-20 7:00am GMT

Q1 2020 Koninklijke DSM NV Earnings Call

Heerlen May 9, 2020 (Thomson StreetEvents) -- Edited Transcript of Koninklijke DSM NV earnings conference call or presentation Thursday, May 7, 2020 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Dave Huizing

Koninklijke DSM N.V. - VP of IR

* Dimitri de Vreeze

Koninklijke DSM N.V. - Co-CEO & Member of the Managing Board

* Geraldine Matchett

Koninklijke DSM N.V. - Co-CEO & Member of the Managing Board

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Conference Call Participants

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* Andrew Gregory Stott

UBS Investment Bank, Research Division - MD and Research Analyst

* Chetan Udeshi

JP Morgan Chase & Co, Research Division - Research Analyst

* Laurence Alexander

Jefferies LLC, Research Division - VP & Equity Research Analyst

* Martin Roediger

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Matthew John Peter Yates

BofA Merrill Lynch, Research Division - Director in Equity Research, Head of European Chemicals Research & Research Analyst

* Mutlu Gundogan

ABN AMRO Bank N.V., Research Division - Analyst

* Reginald Leonard Watson

ING Groep N.V., Research Division - Research Analyst

* Sebastian Christian Bray

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Thomas P Wrigglesworth

Citigroup Inc, Research Division - Director and Chemicals & Basic Materials Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to DSM's conference call on the first quarter results of 2020. (Operator Instructions) Now I would like to hand over the conference to Mr. Huizing. Please go ahead, sir.

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Dave Huizing, Koninklijke DSM N.V. - VP of IR [2]

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Thank you, operator. Good morning, and welcome to this conference call, which we do today in a typical COVID-19 setting. That means we're all doing this call from our homes. I'm joined on this call by our 2 co-CEOs, Geraldine Matchett and Dimitri de Vreeze. Geraldine will give a short introduction. And after that, we will open the lines for questions. As always, I need to caution you that today's conference call 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, which you can find on our website.

And with that, I hand over to Geraldine.

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Geraldine Matchett, Koninklijke DSM N.V. - Co-CEO & Member of the Managing Board [3]

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Thank you, Dave. Good morning, everyone, and welcome to this call on DSM's first quarter results 2020. Before I start, I just want to say that I hope that you are all healthy and well in these very unusual times wherever you are dialing in from today and that I hope the lines will be okay and stable.

Back in mid-February, on our full year 2019 results call, you may remember that we included in our outlook statement that with regards to any potential impact of the coronavirus, DSM will monitor the situation closely. Well, much has happened since then, impacting all of our lives and impacting the way business can operate. For our part, at DSM, we took very early action, thanks to our 5,000 or so colleagues in China who made us alert very early to the seriousness of the threat. This enabled us to focus on the health and safety of our people and partners and to ensure the continuity of supply of our products and solutions to our customers, many of which are classed as vital by national governments around the world. I have to say that we are extremely proud of how our people have worked through significant challenges to keep our operations running and at the same time, finding ways of supporting the communities around us.

With that said, let me turn back to our Q1 results and start with the financial highlights on Page 3 of the presentation that we loaded this morning with the press release. Despite this unusual context, we reported a solid first quarter with both stable sales and adjusted EBITDA. Furthermore, our adjusted net profit was up 8%, and our adjusted net operating free cash flow was up 152%. Nutrition delivered a good performance with sales up 4% and the adjusted EBITDA up 3%, driven by a strong performance in animal nutrition. Included in these numbers, we estimate an overall 1% increase in sales coming from the COVID-19 effects, and I will come back to this in a minute.

Materials also had a solid start to the year, but closed the quarter with volumes down 6% compared to prior year and an adjusted EBITDA down 7%. Demand deteriorated rapidly by the end of the quarter, owing to COVID-19, and we estimate the negative impact on the sales to be about 7% as customers' operations were severely impacted by government containment measures, especially in Europe and North America. In this context, it is important to highlight that we continue to benefit from a strong balance sheet. And combined with our quick and decisive actions as well as our strong and growing nutrition business we feel well positioned to navigate near-term developments. While we are taking all necessary short-term measures, we also remain focused on our long-term strategy to deliver above-market growth, pursuing our innovation programs and growth initiatives.

And this brings me to our statements on the full year outlook 2020 on Page 6. Overall, we are expecting the conditions we saw at the end of Q1 to continue into Q2. We have seen in April, continued good underlying business conditions in nutrition, while at the same time, the lockdown impacting all economies around the world, significant uncertainty persists in the near term over end-user demand and thus limits our ability to estimate business activity for materials. We are taking all necessary actions to sharpen our focus on operational excellence across the company.

And we are limiting capital expenditure and operating costs in materials to protect earnings and cash generation without compromising a mid- to long-term potential. This leads us to our statement on the full year 2020 outlook, which states, DSM expects nutrition to deliver at least a mid- single-digit increase in adjusted EBITDA for 2020 compared to prior year, but given current limited visibility in Materials, it feels prudent not to express an overall earnings outlook at this time.

To give you a bit more color on our trading conditions and performance by business, let's go first to Nutrition on Page 8. Overall, Nutrition delivered a healthy organic sales growth, up 2%, driven by higher volumes predominantly in animal nutrition and supported by an estimated overall slight increase in sales related to COVID-19 of circa 1%. The adjusted EBITDA increased 3%, driven by higher volumes and the contribution from CSK, offset in part by higher logistics costs and a negative foreign exchange effect. The adjusted EBITDA margin remained broadly stable at 20.6% versus 20.8% in the same period last year.

Let's move to Page 9 to look at the details of animal nutrition. Animal nutrition reported a 12% organic growth, fully driven by volumes with good business conditions across all species and geographies. China and Southeast Asia saw good growth as the effect of the African swine fever started to recede. While the rebuilding of the swine population will be slow, the upward potential is significant given the scale of the devastation caused by the disease. Additionally, given that this rebuilding is led predominantly by the larger, more professional pork producers, this will increase even further the relevance of our portfolio of high value-added solutions.

With regards to COVID-19, the rapid shift from food services to at-home eating, led to increased demand for easy to prepare proteins such as poultry and eggs. Additionally, we saw a positive impact during the quarter from the silo loading effect, which we mean by that, additional purchases from feed producers who increased the stock of nutritional ingredients in anticipation of possible logistics disruptions as a result of the COVID-19 outbreak. We estimate this to account for about 4% to 5% of volumes, increase in animal nutrition during the first quarter.

Now moving to human nutrition. Let's go to Page 10. As expected, human nutrition had a slow start to the year, with the continuation of the softer conditions seen in Q4 in early life nutrition and food and beverage. However, as lockdown measures began to take effect in more markets, strong demand for packaged goods and infant nutrition altered business conditions from mid-March, intensified by household pantry loading. Dietary supplements had a strong start to the year as the good business conditions of Q4 continued into 2020. The increasing demand for immune optimizing products led to further growth over the quarter. These effects continued into April. The overall price mix during the quarter was minus 6%, owing to the continued lower vitamin C prices versus prior and expected lower contractual prices in early life nutrition.

Finally, our other nutrition businesses saw overall a slight negative effect from COVID-19 as we are showing the details on Page 11. Food specialties delivered good growth, especially in baking and savory, on the back of increased consumer demand for processed foods. Personal Care had a weak quarter due to the soft demand for sun filters, while aromas was positively impacted by increased end demand for detergents and disinfectants.

Moving now to Materials. Let's go to Page 12. Materials had a solid start to the year. However, as lock down measures were enforced around the world, the operations of many customers were impacted and the closure of retail outlets significantly reduced demand. As mentioned earlier, we estimate COVID-19 to have a negative effect on sales of about 7% in the quarter. Engineering Materials saw increasing weakness in the global automotive segment, partly offset by stronger demand in packaging and medical applications. Resins volumes were slightly down in the quarter with good coating sales in Europe partly offsetting weaker volumes in Asia, while functional materials remained low as expected, owing to 5G investment delays.

And Protective Materials, which is the new name for the division that sells Dyneema, saw lower volumes in the quarter as large government-driven personnel protection projects were delayed. The adjusted EBITDA for Materials was down 7% compared to prior year, fully driven by lower volumes, while margins were slightly up, owing to lower raw material prices and lower costs. Regarding developments since quarter end, we have seen in April, volumes drop by up to 30%, and we don't expect big improvements in May.

And now to close off, let me go through some key financials on Page 16. DSM continues to benefit from a strong balance sheet and liquidity. In the quarter, the adjusted net operating free cash flow increased by 152% to EUR 151 million versus prior year, driven by limited cash outs on working capital. The operating working capital as a percentage of sales for Q1 closed ahead of last year at 25.9%, with inventories slightly up, being offset by higher payables. Net debt closed at EUR 1,324 million, up EUR 180 million, mainly resulting from the share buyback. I would like to point out here, however, that we also closed the Glycom acquisition on April 1, raising our net debt to slightly above EUR 2 billion.

We remain committed to our capital allocation policy, and we'll continue to reinvest our capital to drive organic growth via disciplined Capex. We are also committed to pursuing our existing policy of distributing stable, preferably rising dividends and our dividend proposal for approval at our AGM tomorrow, remains EUR 2.40 per share, up 4% versus 2019, as communicated in February. At the same time, having bought back EUR 745 million of shares since Q1 last year, we believe it prudent in the current environment to pause the remainder of our $1 billion share buyback program.

Finally, as a reminder, DSM has committed undrawn revolving credit facilities of EUR 1.5 billion not subject to any financial covenant or a MAC clause, and we have no bonds maturing in 2020 or in 2021.

And with this, I'd like to open the floor for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Mr. Andrew Stott from UBS.

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Andrew Gregory Stott, UBS Investment Bank, Research Division - MD and Research Analyst [2]

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So first question is on pricing. It's on both segments of Nutrition. So first question is on the human nutrition side, the minus 6 in Q1. Just wondering how much of that is the ELN contract resets, if you want to call it that? And how do they work? Is that a one-off every few years? Is it an annual adjustment that's bigger this year? Just to understand a bit more about those contracts. And then the other pricing comment or question was vitamin E. There's no tailwinds in Q1. It's a 0 number. But how are you thinking about Q2 on vitamin E on pricing? And if I can steal a second question, this is on volumes. I just wondered if you could somehow scale the improvement you're seeing in March and April in human nutrition volumes.

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Geraldine Matchett, Koninklijke DSM N.V. - Co-CEO & Member of the Managing Board [3]

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Thank you, Andrew. Dimi, do you want to kick off with the pricing?

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Dimitri de Vreeze, Koninklijke DSM N.V. - Co-CEO & Member of the Managing Board [4]

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Yes. On human nutrition, specifically on the price component. So what we've seen is that the minus 6% on pricing. You basically can link to vitamin C for about 3% and the ELN I'd say about 2%. And then you have 1% pricing on product mix left. To your follow-up question on ELN, these are contracts we have with our partners. You know that the ELN space works with big key accounts. We have an agreement with these key accounts long-term supply agreements where we share the cost benefits we take. We obviously are always in R&D and innovation to see if we can optimize the strain. And if we do so, we have agreements in these long-term supply agreements that we share these savings, and that will basically lower the price, but will certainly not lower our margin impact. So that's about 2% out of that 6%.

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Geraldine Matchett, Koninklijke DSM N.V. - Co-CEO & Member of the Managing Board [5]

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Thanks, Dimi. And then maybe Andrew to your questions on vitamins. I mean your homing and on vitamin E. But let me first start with our usual cautionary statement, which is that movements in spot prices do not equal movements in contract prices. And in fact, you can see it quite clearly in Q1 within animal nutrition, we had a net neutral in Q1. And as Dimitri just mentioned, vitamin C was minus 2% to 3% in our H&H numbers for H1. Now looking at the current market trends around vitamins, we do expect to have a bit of a positive effect overall maybe in the order of EUR 10 million, EUR 15 million.

But please remember that at the same time, vitamin C will remain a headwind in Q2. In 2 ways, I mean, the comps remain tough in Q2. They will fade in Q3, Q4. But also, we definitely see a longer time for any price movements to get into the contractual prices, particularly in human nutrition, as you know, where it's annual contracts. And on top of that, we do need to remember that we will be most likely facing some higher costs going forward, both in terms of our source materials and in terms of logistics, and we expect a negative foreign exchange impact.

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Dimitri de Vreeze, Koninklijke DSM N.V. - Co-CEO & Member of the Managing Board [6]

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And then maybe the question on human nutrition, what we see for April, May, if I'm not mistaken, was also one of the questions. So what we've seen is that towards the end of quarter 1, we saw this change in terms of household country loading as well as the lock down measures became into effect, predominantly with a positive effect on the demand for packaged goods and infant nutrition. We've seen that being continued in April sales and May looks good as well. So we see a continuation of that. Maybe as a bit of a reminder, you've seen the French household pantry loading is the retail selling out to consumers. The retail is buying from our customers. And obviously, they destock their chains, and therefore, we will see the impact predominantly in Q2 because they need to restock their chains. So that's why you see the full effect in Q2.

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Operator [7]

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Next question is from Mr. Mutlu Gundogan from ABN AMRO.

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Mutlu Gundogan, ABN AMRO Bank N.V., Research Division - Analyst [8]

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Some of my questions have already been answered. So the main question that remains is on the share buyback. You're pausing that. Is that for the full year? Or is it just for Q2? And what would make you resume that buyback? And perhaps also relating to this, given your capital allocation priorities, M&A is high on the agenda, is higher on the agenda than the share buyback. How do you see that market at the moment, have valuations come down?

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Geraldine Matchett, Koninklijke DSM N.V. - Co-CEO & Member of the Managing Board [9]

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Yes. Let me take those. So firstly, the pausing of the share buyback, we will have to see how the market develops. As you know, our capital allocation policy is unchanged. So organic growth first, dividend second, third M&A, fourth giving cash back to investors. And so it feels prudent to pause that, which means that EUR 255 million left of the EUR 1 billion. How long will depend a bit on how the world develops going forward. This was always the -- we do it when we can and when we feel it's prudent to do so. And right now, we think it's best to pause. As for M&A, I mean, you know our strategy is predominantly organic, but we are always keeping a look for potential M&A targets. And that is something that we will continue to do, bearing in mind that with current market condition, one has to be extra careful.

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Operator [10]

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Next question is from Mr. Matthew Yates, Bank of America.

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Matthew John Peter Yates, BofA Merrill Lynch, Research Division - Director in Equity Research, Head of European Chemicals Research & Research Analyst [11]

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I just had a question on the animal nutrition business and generally around your order visibility. So there seems to be growing evidence, particularly in the U.S. market, there's some bottlenecks around meat packing or processing and the closure of restaurants is actually leading to reduced demand for meat. And potentially, now we're seeing livestock farmers reduce the size of their herds in various categories. I'm just wondering what sort of leading indicators do you track for the animal nutrition business? And whether the issues we're seeing in the U.S. market around meat processing are different to what you've been seeing in Europe and LATAM?

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Geraldine Matchett, Koninklijke DSM N.V. - Co-CEO & Member of the Managing Board [12]

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Yes, Matthew, maybe let me take this one on animal. Now indeed, we have seen these disruptions with some of the slaughter houses closing. And so that we, by the way, believe to be very short term it's more of an operational issue. Now you also refer here to the shift between the sort of food service industry. So in the case of the U.S., there's quite a lot of chicken going to the outlets like the Kentucky Free chicken type outlets. But it's actually quite a U.S. phenomenon because what we're seeing internationally is that the demand for poultry and for eggs is actually stronger because it is very easy to cook and prepare protein.

And of course, eggs are also an important part of sort of household diets pretty much worldwide. So we're obviously keeping an eye on this development in the U.S. Now just to give you a reminder, the U.S. in our animal nutrition is about 12%-ish of our sales. And so I think the impact there will be moderate. But these are the kind of things. And we can see, indeed, these types of -- if you're asking what kind of KPIs we track, we clearly look at the whole chain.

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Operator [13]

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Next question is from Mr. Martin Roediger, Kepler Cheuvreux.

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Martin Roediger, Kepler Cheuvreux, Research Division - Equity Research Analyst [14]

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Actually, most of my questions have been asked already. But maybe on materials. You said you saw 30% lower volumes in April, and you do see -- you are a negative on May. Can you shed some light on by differentiating this minus 30% volumes by the end markets? And you certainly have some order book for May. So maybe you can give us a certain kind of sense how you see May evolving compared to the business you saw already in April?

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Geraldine Matchett, Koninklijke DSM N.V. - Co-CEO & Member of the Managing Board [15]

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Thanks, Mark. And Dimi, do you want to take that?

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Dimitri de Vreeze, Koninklijke DSM N.V. - Co-CEO & Member of the Managing Board [16]

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Yes, let me take that one. Yes, yes, we have an order book for May because we are already in May. So let me contextualize that a little bit. To your point, indeed, towards the end of quarter 1, we saw a huge impact, predominantly with customer operations shutdowns. I mean, you've seen it in the news for GM, BMW, all our value chain partners. We have seen that continued in April with volumes down up to minus 30%. For May, we don't see any different pattern in our order book. So we don't see any big improvement, especially in the European and North America. Although there are some announcements, BMW, smaller production sites have started up. But we don't see that in the order book, so there is still low visibility on going forward. I think it would be a bit early to exactly pinpoint where we will end up. We see some activity, but April and May, we see the same impact. So that is a bit on the order book. Then maybe a little on the end market.

So automotive is an important end market for us, about 6% of DSM sales, 18% for the material cluster. Although with a relatively strong start, and with China coming up in -- towards the end of quarter 1, we were hopeful, but then North America and Europe were really hit by their lockdowns, and we saw that impact at the end of quarter 1. Market decline in automotive, depending on who you ask, are in the range from 20% to 40% going down. And we also see that in our order book. Then building and construction, another important end market for us, also around 6% of sales for DSM, 18% for the materials cluster. Large construction companies basically were impacted by lockdowns. We have seen demand dropping also in the building and construction area, around 20% to 30% in April, so in line with market dynamics. May and June will depend a little bit on reopening of the countries.

This is a segment which could recover more quickly than the value chain of automotive because it's shorter. So this is to be seen, but we've seen April 20%, 30% lower. And then we have obviously, our Dyneema market, personal protection, which is now called DSM protective materials. What we've seen in the protective materials business is that that has indirectly linked to COVID is that we have seen tenders for personal protection, small tenders for law enforcement offices which have been delayed because they're busy with some other priorities. And one of the main priority, obviously, is battling with COVID-19. So this is a delay. It's not a reduction, but it's a delay because of a change of priority. So that is a bit of a quick overview of 3 important end markets. I hope that gives a bit of color.

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Operator [17]

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Next question is from Mr. Thomas Wrigglesworth from Citi.

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Thomas P Wrigglesworth, Citigroup Inc, Research Division - Director and Chemicals & Basic Materials Analyst [18]

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Two, if I may. Just following on from the comments on materials, is there any reason to think that there should be -- the drop in volumes that we're talking about should have a more or less proportional impact on the drop off on profitability? And secondly, just kind of around the innovation kind of pipeline, Veramaris, could you share any color as to how that project is coming on stream, utilization rates? And how the COVID impact might affect the kind of or not the timelines for the 2 other key projects, the sweetener and Clean Cow?

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Geraldine Matchett, Koninklijke DSM N.V. - Co-CEO & Member of the Managing Board [19]

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Thank you very much, Thomas. Back to you, Dimitri on materials.

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Dimitri de Vreeze, Koninklijke DSM N.V. - Co-CEO & Member of the Managing Board [20]

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Yes. I think a fair question. Difficult to answer because there are -- it's a mixed bag of activities. But with volume down up to 30%, we do see lower input prices, which we prefer we like trying to hold on. Normally, we have spread management where we can hold on for a while. So that will give us a bit of a positive in Q2, limited because we also see that logistic costs are going up. We have an FX effect. We have cost actions, which we have initiated. So we already started in in quarter 1, initiating actions on materials to protect earnings, which annualized will be in the order of tens of millions. And obviously, the product mix play into game with Dyneema with some delay. So it's difficult to put a one-on-one comparison, but give you a bit of color on the components. I hope you get a bit of a feel.

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Geraldine Matchett, Koninklijke DSM N.V. - Co-CEO & Member of the Managing Board [21]

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Thanks, Dimi. And thank you, by the way, for asking about our big tickets because we continue to be very active on our innovation projects. So given that these 3 big tickets are pretty much in ramp-up phase, we haven't seen a big impact from the COVID disruptions on those projects. So what we're seeing is, and I'll run through briefly the 3 of them. So in terms of Veramaris for the aquaculture space, this is very much hitting the milestones in terms of increasing the productivity. As you remember, this is a gradual curve as we get those big fermenters running.

And we're pretty much on track. So there we will be fine. Then in terms of [Avancia], that is also on the same side, getting its production going. And in terms, of course, the relevance of both remains perfectly supportive. And so there, again, we're pretty much on track. And for Clean Cow, if you recall, the big milestone is the regulatory clearance with the EU, and we have seen no delay in terms of getting that to progress. So that is -- remains the big milestone for 2020. So pretty much in line with what we would have shared with everybody with our full year results in February.

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Operator [22]

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Next question is from Mr. Watson from ING.

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Reginald Leonard Watson, ING Groep N.V., Research Division - Research Analyst [23]

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Sorry, math is not my strong point. So Geraldine, perhaps I could ask you as the accountant. With the 1% positive COVID impact quoted for the Nutrition segment as a whole, I'm just wondering how the animal silo loading effect of 4% to 5% translates to 1% for the overall segment taken together with human? That's the first question.

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Geraldine Matchett, Koninklijke DSM N.V. - Co-CEO & Member of the Managing Board [24]

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Okay. So what you're saying is the 4% to 5% volume on H&H that we're seeing there estimated versus -- oh, yes, yes, sorry. You mustn't forget in there, that we also have personal care. So here, we're looking at total nutrition. It's a net of a number of things. So you've got 4%, 5% in animal nutrition, but then in our human nutrition plus, which is the EUR 2 billion of human nutrition and the other, we have in there personal care that took quite a step down. You remember in my opening comments, we referred to the sun filters. But clearly, that was a negative. So -- and we also saw a mixed bag when it comes to hydrocolloids, for example, where our 3 plants are in China.

So they were clearly disrupted during the first quarter, and we also saw in the food specialties. So when you put that together, it's a negative net. Net effect on, for example, the beer, the brewery, where clearly, that's more of a food service space as opposed to in home. So that's why you have the mix there. (inaudible) Yes, that's the positives in our human nutrition have a bit of a time delay. So our customers saw the pantry loading effect sooner than we do. And now as they refill their supply chain, we see the pool coming through -- is clearly a good order book into Q2. I hope that closes that mathematical issue.

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Reginald Leonard Watson, ING Groep N.V., Research Division - Research Analyst [25]

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Yes. Thank you very much for explaining it to me, it's very clear. And then how have your FMCG orders changed? Because obviously, this was an area of weakness last year, which led you to reorganize the sales platform with fit for growth. And has COVID had an impact on what you've seen from that particular segment of your customer base?

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Geraldine Matchett, Koninklijke DSM N.V. - Co-CEO & Member of the Managing Board [26]

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Dimi do you want to take that?

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Dimitri de Vreeze, Koninklijke DSM N.V. - Co-CEO & Member of the Managing Board [27]

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Yes. Yes. Right, yes. So the human nutrition space has different segments. So let me try to combine that with the trends because that's basically what you're asking for. Let me first show and share a bit what we see in terms of trending. So what we do see for our human nutrition business is that we see a lot of move from food services to eating at home, right, and that has an impact on packaged foods for human nutrition. It has an impact on animal nutrition, like Geraldine explained in terms of the species to be used. But for human nutrition, there was an increased demand for packaged food, which will impact our food and bev. Then we saw very solid growth for vitamins and immunity boosting ingredients, right?

Because of all the COVID and immunity optimizing products where people do take care more of their health than ever before, we saw further growth over the quarter, and we also saw these effects continue into April. And then the third trend we've seen is pantry loading. And exactly like Geraldine said, it's a bit for human nutrition, a bit with delay. So we've seen towards the end of quarter 1 that our customers were selling to the retail and therefore, need to restock their value chain in quarter 2. So we will see having that impact in quarter 2, and that has an impact on early life nutrition and food and bev. So then you see a little bit of trends with our businesses. Hope that's a bit of color to your question.

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Reginald Leonard Watson, ING Groep N.V., Research Division - Research Analyst [28]

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That's really clear. And Dimitri, while I've got you on the line. You answered an earlier question about the -- you gave some color on materials in April and May. But one area you didn't touch on was semiconductors and the electronics value chain. I was just wondering what you're seeing in terms of what happened in April? And what your visibility is to May?

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Dimitri de Vreeze, Koninklijke DSM N.V. - Co-CEO & Member of the Managing Board [29]

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Well, it's very interesting that you asked because that's predominantly the segment where we were a bit worried, also in line with automotive, but we have seen electronics and electric not too bad. I mean it's not brilliant, but it's not as severe hit by COVID as automotive. So we've seen -- and you've seen that mobile phone producers have launched new models at a lower cost. You've seen that electrical components and electronics in health instruments are really needed. It's also one of the reasons why predominantly, all our sites are still up and running because we're seen as vital for the world. So we've seen electrics and electronics holding up pretty okay. There's no growth. I mean, don't get me wrong, but it's not in a decrease as severe as we've seen in the automotive and building construction market.

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Reginald Leonard Watson, ING Groep N.V., Research Division - Research Analyst [30]

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Okay. Okay. Fantastic. And final question from me. Thank you for your patience. This is -- when I think we spoke at your Q3 results last year, you'd taken another leg down in animal nutrition due to African swine fever. And at the time, you had expected that, that impact would last for a full 12 months. Obviously, in today's release, there appears to be some move away from that. I'm just wondering if you could provide us with more color, please, in terms of what you're seeing at that in terms of guidance now versus what you thought you were seeing at the end of Q3 last year.

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Geraldine Matchett, Koninklijke DSM N.V. - Co-CEO & Member of the Managing Board [31]

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Yes, absolutely. This is an important effect for our animal nutrition business. So indeed for about 5 quarters, we had a headwind. And if you remember, last year, in Q1, Q2, we were able -- we saw the offsetting effects with other geographies and other meats kicking in. But then in Q3, Q4, it was too much. And we had the negative effect. Now what we are seeing now is that, particularly in China, the rebuilding of the swine herd is starting. It's going to be a gradual process, and it's not a jump up. If you remember the culling, the estimates were between 40%, 50% last year, and it takes 18 to 24 months for a female breeding animal to be ready to breed. So this is gradual.

But in terms of the momentum for us, it is as we were expecting, which is that it has led to a professionalization of the production of pork. So we're seeing the professional farms getting started earlier. And because we were very good in terms of our hygiene measures at our production facility for the premixes. We were able to supply the market nicely. So we will be seeing basically what we expect to be a continued and probably accelerating recovery quarter-on-quarter. So this will be a positive for us throughout 2020 for sure. And we would expect -- I indicated earlier, we think that out of the 12% volume growth, we had about 1% year-on-year comparison. One could expect that to be bigger going forward.

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Reginald Leonard Watson, ING Groep N.V., Research Division - Research Analyst [32]

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Okay. That's really clear. So would it be fair to say that the professionalization of the recovery ...

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Dave Huizing, Koninklijke DSM N.V. - VP of IR [33]

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Dave here. I mean, you've already had 5 questions.

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Operator [34]

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Next question is from Mr. Sebastian Bray from Berenberg.

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Sebastian Christian Bray, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [35]

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I have 2, please. The first is on the exposure to end markets within the food and beverage part of human nutrition. If I'm not mistaken, this is a touch over 25% of sales. Is most of this end category exposure to packaged food? How much of it is packaged food? And what are the other categories within this segment? My second question, I believe, has already been touched on, but I just wanted to check. I missed the first part of the call. Is the base case for meat production at the moment that poultry enjoys above trend demand growth, pork is sort of in line with 2% to 3% forecast at the start of the year and beef below, is that a right assumption?

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Geraldine Matchett, Koninklijke DSM N.V. - Co-CEO & Member of the Managing Board [36]

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Thanks for your questions. You want to start with food and beverage?

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Dimitri de Vreeze, Koninklijke DSM N.V. - Co-CEO & Member of the Managing Board [37]

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Yes. So indeed, food and bev, we have in our human nutrition space. That is predominantly related to packed foods and not to food services. The food services part is [barley] in our DSM food specialties part, where Geraldine were referring to personal care and DSM food specialties. So the H&H part is predominantly packed goods.

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Geraldine Matchett, Koninklijke DSM N.V. - Co-CEO & Member of the Managing Board [38]

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Yes. And then indeed, in terms of the species, we referred to it earlier a little bit, but I can cover that. So we are seeing worldwide an increase indeed in poultry and in eggs, so are easy to prepare proteins with pork holding up well. And clearly, the meats that tend to be more eaten in restaurants. Beef, for instance, being probably more on the -- down. So those are the main trends. Now probably worth reminding everyone on the call that for us, we have a very strong position in poultry. It's about 40%, 45% of our animal nutrition has been historically, then swine is about 20% (inaudible) 20% and then the rest is [aqua] and (inaudible).

So we have a very strong position in poultry. Now there is one caveat that came up in the questions earlier, and that is in the U.S, there's currently some disruption in the market due to the slaughter houses having closed with some of the big players and also the big proportion of sort of fast food chicken like the Kentucky Fried Chicken that are down at present but for us, North America is about 12%. So we don't -- and we see this as most likely to be somewhat of a temporary effect.

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Operator [39]

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Next question is from Mr. Chetan Udeshi from JPMorgan.

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Chetan Udeshi, JP Morgan Chase & Co, Research Division - Research Analyst [40]

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Two questions. First, just thinking long term, there is these talks about China possibly getting stricter on consumption of wild meat in China. Is that something which can have any material impact on DSM over the mid- to long term perspective? And second question, just to clarify, within the nutrition guidance, is it fair to say there's no assumption of major benefit from vitamin pricing for full year?

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Geraldine Matchett, Koninklijke DSM N.V. - Co-CEO & Member of the Managing Board [41]

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Okay. Well, maybe first, in terms of a brief comment on my side. To be fair, we haven't got a health view on the changes in China when it comes to the meat markets and the way that they are managed. But when it comes to our business, of course, our products and solutions go to grow, particularly pork and poultry. So I don't know whether any changes will be around those types of animals in those live markets. But we don't have a house view other than we don't believe it's going to impact consumption, particularly, certainly not in the midterm.

And then when it comes to vitamin prices, I think we covered it earlier. But in short, looking at the current trends and I look at all the vitamins put together. We probably expect a bit of a positive, maybe in the order of EUR 10 million, EUR 15 million. But with a cautionary reminder that vitamin C will remain a headwind in Q2 from a comps point of view. And also that in human nutrition, the translation of market pricing into contract pricing is obviously a much slower and more gradual process. And that we also have increased costs to bear in mind in terms of our source ingredients, but also we expect the logistical costs and also the foreign exchange to be negative given current exchange rates.

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Operator [42]

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Next question is from (inaudible) from Bernstein.

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Unidentified Analyst, [43]

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Two as well. Firstly, on the Nenter side in China, this is something that you had originally planned to start up towards the summer of this year. Can you just give us an update if there's been any delay due to COVID and how the ramp-up is going on on that side? And then secondly, on your second-generation viral ethanol business, given where the oil price and the ethanol price are, do you see any risk there for any impairment? And what's the capital that you have employed in that business, please?

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Geraldine Matchett, Koninklijke DSM N.V. - Co-CEO & Member of the Managing Board [44]

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Sure. Dimi, do you want to kick off with Nenter?

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Dimitri de Vreeze, Koninklijke DSM N.V. - Co-CEO & Member of the Managing Board [45]

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Yes. Nenter. So as you've seen, we have our industry [bay problem], which was locked down. We had (inaudible) facility, which we had basically stopped immediately after having the joint venture just to upgrade it according to DSM standards. Unfortunately, with COVID-19, obviously, nobody was allowed on the site, but we obviously continued our work on engineering. You can do that from home with computers, et cetera. So what we're trying to do is to try to make up the lost time. It's too early to say how that will look. But we're confident that we didn't lose too much time on it because we could continue working from home on the engineering part, obviously, with the Hubei province today with limited restrictions. And we still take care of safety and help our people on the site. But we feel that we could reasonably well make up for the lost time due to the restrictions earlier.

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Geraldine Matchett, Koninklijke DSM N.V. - Co-CEO & Member of the Managing Board [46]

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Thanks, Dimitri. And on the biofuels, so bioethanol, now what we have done there in the autumn of last year is that we switched our focus to predominantly the research and development part and the technology testing more so than the sales. So we're not seeing a direct impact of the current prices movements. Having said that, the R&D is all about validating the licensing business model, which was always the original intention. So we don't have much in terms of cash outflow on our joint venture on biofuels at present this year. And -- but we are watching, of course, the lower oil prices, but also the blending rates. So there's a legislation around blending that keeps some of the biofuel volumes going. And in terms of exposure, we have about EUR 60 million to EUR 70 million I think on the balance sheet at present.

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Dave Huizing, Koninklijke DSM N.V. - VP of IR [47]

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Okay, that leaves just one last question, if I look at the time. So who has the last questions, operator?

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Operator [48]

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That's Mr. Adam Bubes from Jefferies.

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Laurence Alexander, Jefferies LLC, Research Division - VP & Equity Research Analyst [49]

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So just wanted to verify -- sorry, Laurence Alexander from Jefferies. Two questions. On protection, how much of that is actually PPE? And secondly, for your overall Materials segment, should we expect any significant work inventory work-down burden in the second quarter?

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Geraldine Matchett, Koninklijke DSM N.V. - Co-CEO & Member of the Managing Board [50]

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I'm not sure I heard your second question well. Do you mind repeating?

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Laurence Alexander, Jefferies LLC, Research Division - VP & Equity Research Analyst [51]

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Sorry. So in the second quarter, should we expect in Materials a burden from inventory work down or inventory timing, FIFO effects?

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Geraldine Matchett, Koninklijke DSM N.V. - Co-CEO & Member of the Managing Board [52]

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Okay. Yes. Dimitri, do you want to take those?

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Dimitri de Vreeze, Koninklijke DSM N.V. - Co-CEO & Member of the Managing Board [53]

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Yes. If you can take the second, I will take the first. So on the DSM Protective Materials business, about half is personal protection, and the other half has to do with commercial, marine, sports, fabrics. So half is personal protection. That is predominantly personal projection of law enforcement offices. So that's really bullet resistant vests and the likes. So I don't know if you want to compare that with other markets, but we are in bullet resistant vests. So personal protection is about half of the composition of the protected material business.

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Geraldine Matchett, Koninklijke DSM N.V. - Co-CEO & Member of the Managing Board [54]

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Yes. And then on inventory, I think you're referring here to potential inventory revaluation. Now of course, we are currently seeing a lower input cost trend. With that, we're always, along the way, adjust our inventories according to IFRS requirements. And similarly, of course, at the same time, the lower input costs is something that we reflect in our pricing dynamics, and it's something that we have shown with the portfolio of our materials business becoming increasingly specialty related, that this is something we've been handling pretty effectively over the last few years. So at least at this point, we don't -- nothing specific to report on that subject.

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Dave Huizing, Koninklijke DSM N.V. - VP of IR [55]

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Okay. So that brings us now to the end of the Q&A. Dimitri, do you want to make some closing remarks?

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Dimitri de Vreeze, Koninklijke DSM N.V. - Co-CEO & Member of the Managing Board [56]

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Yes. Thank you, Dave. Firstly, I would just like to reiterate what Geraldine said earlier. We are very thankful for the continued effort of our colleagues at DSM, especially in these circumstances. And are proud to serve and continue to serve customers and society with our essential products. We're all together taking necessary actions to address the recent challenges in the markets, and we remain focused on driving growth, costs and operational actions throughout the company. We remain well positioned to manage near-term developments with a growing nutrition business and a strong financial position. We stay focused on our long-term strategy to deliver above-market growth (inaudible) in our innovation programs and supported by the execution of our self-help actions. As such, we expect nutrition to deliver at least a mid- single-digit increase in adjusted EBITDA but given the current limited visibility of materials, we suspend the overall earnings outlook.

And having said that, back to you, Dave.

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Dave Huizing, Koninklijke DSM N.V. - VP of IR [57]

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Thank you, Dimitri. And of course, [Geraldine]. This concludes today's conference call. If you have any further questions, don't hesitate to reach out to our team. We're all sitting at home waiting for your calls. Thank you.

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Geraldine Matchett, Koninklijke DSM N.V. - Co-CEO & Member of the Managing Board [58]

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Good bye, everyone.

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Operator [59]

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Ladies and gentlemen, this concludes today's call. You may now disconnect your lines, and I wish you a very nice day.