Koninklijke DSM N.V. (OTCQX:RDSMY) Q2 2022 Results Conference Call August 2, 2022 8:00 AM ET
Company Participants
Dave Huizing – Vice President of Investor Relations
Geraldine Matchett – Chief Executive Officer and Chief Financial Officer
Dimitri de Vreeze – Co-Chief Executive Officer and Chief Operating Officer
Conference Call Participants
Matthew Yates – Bank of America
Martin Rödiger – Kepler Chevreux
Chetan Udeshi – JP Morgan
Andrew Stott – UBS
Nicola Tang – BNP Paribas
Dave Huizing
Good afternoon. And thank you for joining this webinar for our half-year 2022 results webcast. I’m tempted to say welcome back with the merger announcement end of may the Capital Markets Day in Paris mid-June, we have demanded a lot of your time already.
Today, we can keep it light as there is no news on the merger and that means, for legal compliance reasons that we won’t talk about it today, nor take questions about it. Once we have published the offering circular together with Firmenich, which is for foreseen for the fourth quarter. We have something to talk about again. So today it is all about the first half results.
Geraldine and Dimitri will give a short introduction by running you through a few slides of the presentation to investors, which we published this morning together with a half year press release, which you both can find on the website as usual here. You will also find the disclaimers about Forward-Looking Statements made in this webcast.
After these introductions, we will open the line for questions as usual and we have planned today an hour for this webcast. So with that, let me give the floor to Geraldine.
Geraldine Matchett
Thank you, Dave and hello everyone from me as well. I have to say it was really nice to see so many of you in person, recently given all of our transformational announcement. But, indeed today it is all about the half year results.
So, I will start by running through a few slides with the key financials and the performance highlights. Then I will hand over to Dimitri. He will run through our core ESG performance and then we will open for the Q&A.
So let’s get started and if we go to Slide 2 of the presentation, which is our quote, now, of course, in this quote, we do make reference to the important moments on our transformation journey that took place during the last six months.
Not only of course, the announcement of the intended merger Firmenich, but also the divestment of DSM engineering materials and protective materials that took place during the first half. Now I’m mentioning this because as we have announced these divestments, they are now reported in Thai as assets held for sale in the balance sheet.
So a word of warning, the balance sheet is not easy to read, because the year-end comparators include everything. And the June balance sheet actually bundles that into assets held for sales. And also when it comes to the income statement, this is all reported under discontinued operations.
So our comments on the call will be predominantly focusing on Health Nutrition and Bioscience the core of DSM continuing activities. But I would just like to say, nonetheless right now, that our materials businesses did have a good half of the year with double-digit organic growth and with a step up in EBITDA versus a high performance last year. So all is good on materials as well.
Now, going to the next slide. Here is the slide that summarizes the performance for the first half and Q2 of our Health Nutrition and Bioscience activities. Now, HNB delivered a good half year with, as you can see a top-line growth, organic growth of 10% and an EBITDA up 7%.
Now this was on the back of resilience demand throughout the market throughout the six months and as well, strong pricing showing that we are able to counter inflation all but sometimes with a bit, uh, of a time delay.
Now, looking at Q2, we have seen broadly similar conditions in Q2 versus Q1 and you see there a double -digit organic sales growth also with strong pricing offsetting inflation. Now, when it comes to volume developments, in the first half, what we are seeing is a good market demand resilient demand throughout the six months, although in Q2 animal nutrition volumes did suffer somewhat from the COVID lockdowns in China. And I will come back to that in a second.
And we also saw some supply chain constraints resulting in order backlogs for H&C and for F&B. Having said that, the conditions during the quarter actually got better, we saw an acceleration in Q2 with June having stronger volume and pricing momentum so going into Q3.
Now, let me pause for a second as well on the step up in EBITDA for the second quarter, you see here an adjusted EBITDA up 5%. That includes 1% from M&A from acquisitions and 6% from foreign exchange. But please also note that that 5% does reflect shortfalls related to these items I just mentioned.
So if you think of the COVID lockdowns in China for animal nutrition, that is about a 3% impact the order backlog in HNC and F&B, probably about 1% and the time lag between cost rising and our ability to get the full impact of pricing adjustments through probably about 3% to 4% for the quarter.
Now, lastly, looking at this slide, the margin. So you see that we closed H1 at 19.5% adjusted EBITDA margin and 19.3 in Q2,so quite similar. Now, in both cases, these margins reflect the dilutive mathematical effect of the inflationary environment with the top-line, of course, reflecting a lot of pricing adjustment to offset the rising costs.
And we have calculated that dilutive effect at about 160 basis points for Q2 and for H1, which means if you back that out, we are actually pretty close to the 21%that you are used to seeing for these businesses.
So that is the aggregate financial highlights. Now, if we go to Slide 4, as you know, from the 1st of January, we have started reported our businesses in this format with the three business units, Animal Nutrition and Health, health nutrition and care, and food and beverage. Now, as you can see on this slide, all three business groups actually contributed very nicely to the organic top-line growth, whether it be double-digit or high single-digit in H1 and in Q2.
Now, if we go to animal nutrition, let me give you a little bit more color on the performance for the first six months. So maybe first comment here, a good half year as you can see with double-digit organic growth and what we have seen in terms of pricing is that the strong pricing that we had in Q1 continued in Q2 showing our ability to counter the rise in costs and through our pricing actions.
Now, when we look at volumes, we saw consumer demand for animal protein remaining good. Now having said that, of course, China did have an impact with the COVID 19 lockdowns and we have quantified that at about 3%.
So where you see a 0% volume for Q2 that would have been 3%, if we just normalize for effectively the fact that there was very little out of home consumption and that did have quite an impact on the quarter. We also saw some impact from destocking. You may remember that it began in Q1, it was lesser in Q2 and we saw that destocking fade throughout the quarter towards the end.
Now, a couple of comments on species. We saw the demand for poultry, which as you know, is a stronghold for us, be very strong, actually across all regions. We also saw a good performance in beef in aquaculture during the half year. Now, when it comes to pork. On the other hand, of course, the demand was a bit lower, also linked to this out of home consumption in China.
Now, we also saw during the half year that there was actually a very resilient demand for meats, which also meant a good demand for our products, with the inclusion rates of our essential ingredients being very robust, because they are actually essential, for the life of the animals. And we also saw continued good demand for our performance solutions and especially the feed enzymes.
Now at the bottom there, you have a few logos and I would like to say a few words about the progress on our innovations. Now, firstly, of course Bovaer, a lot of positive news. Firstly, the approvals, as you know, we had the very important approval in the EU for Bovaer, but also in other geographies like Argentina and Switzerland so that is going very well.
It has led to the launch of a number of large scale pilots with many farms such as in the Netherlands with Iceland, Campina with about 200 farms, and with other customers such as Arla, et cetera.
We also signed during this period an agreement with Elanco, the world’s largest animal health company, a licensing agreement that will enable Elanco to develop manufacture and commercialize Bovaer there in the U.S. market effectively accelerating the reach of Bovaer to as many animals as possible, as quickly, as possible, which is pretty critical as well from a climate change point of view.
Now, when it comes to [Vivomaris] (Ph), we are seeing a continued demand for sustainable, pre-produced salmon and high end omega3. We also saw a growing interest for the new areas of pet food and human nutrition.
And when it comes to Sustell, our environmental measuring platform, Sustell has been extended to aquaculture, which is very good. And you may have noticed as well that we closed an acquisition in Brazil that will support our position, animal feed business in Brazil, combining a data driven business model to the animal business in Brazil.
So these were the few highlights on animal nutrition. Now, if we go to HNC on the next slide, so as you see here also a good, a good half year, with 9% organic growth, and we saw the business conditions in Q1 basically continue into Q2. So quite similar with good demand across all segments.
We have seen the pricing initiatives that began in Q1, accelerate in Q2, as you can see there and the pricing supporting the 7% organic growth in Q2. Now volumes were a bit impacted in the second quarter by some reduced availability of some raw materials, which has created some order backlogs, but we have seen that actually easing towards the end of Q2 and into Q3. So we have a better momentum into Q3 on that.
Now regarding a few of the sub-segments of HNC when it comes to dietary supplements, we saw a good performance especially considering the high performance, the high level last year related to immunity optimizing products on the back of COVID 19. And this was amongst others supported by very strong performance of i-Health.
When it comes to Early Life Nutrition performance, it continues to progress actually in-line with improving market conditions, especially in Europe where we had some additional demand linked to the North America market.
We have also seen that with these improving market conditions we are seeing more interests in the launch of innovative products that include HMO and importantly we have made great progress actually on the regulatory journey to get HMOs approved for China.
And we have a good hope that we could obtain this, actually, maybe as quickly as by the end of this year. As for the remaining segments they all performed well being pharma and medical nutrition, PCA, and biomedical. So good performances across the board.
As for innovation well actually it was a rich six months. And we have here a few examples of that. We for example, have obtained approval for MTD in Brazil. If you remember, that is the metabolite of vitamin D that accelerates the immunity enhancement and there is a lot of customer interest for MTD in Brazil on the back of this approval.
We also saw Cultural launch quite a few products, including actually a line of gummies for children that include some health ingredients like lutein for eye health, which has been a great success. We have also introduced during the half year, the world’s first ever fully bio-based vitamin A, which is a very big technical achievement and this fully bio-based vitamin A will go at first for PCA, but we will have a broader application overtime.
And last but not least in our examples Hologram Sciences is doing well. It has launched a new brand called Phenology. It is about menopause management and it includes at home diagnostics and includes hormone tracking and also wellness programs that combine all of that. So we are seeing a nice development of that entity that we created to accelerate, personalized nutrition at DSM. So those were the highlights for HNC.
And if we go now to food and beverage, on this next slide indeed, here actually quite a similar picture to HNC in the sense that we saw continuing good conditions from Q1 into Q2. And as you can see 10% organic growth across the period.
Now, we have also seen an acceleration of the pricing actions going from Q1 to Q2 which was good to see. Now when it comes to the segments, good demand, pretty much across all segments with of course, a continued strong demand on plant-based alternatives, plant-based proteins, and on pet food, while we have seen so far limited down trading on packaged foods.
Now, when it comes to the volumes in Q2, they are a little bit low and that is also to do with availability of source materials that has created as in agency a bit of an order backlog, but we have seen here as well, some easing towards the end of the quarter and into Q3.
Now as to the innovations here we are making very nice progress. We would like to highlight in particular that combining Vestkorn and CanolaPRO has enabled us to develop nice capabilities that is so key to this very growth segments of plant-based alternatives. And we are seeing, progressively increased interest in the fermented [stadia] (Ph) ever suite that is within the JV Avansya.
So those were the key highlights when it comes to the business performance. Now, a couple of quick comments on the financials. So down one slide, I just want to comment to the fact that the working capital is on the high side. There is no doubt about that.
Now this is basically in part by design as you will have heard everywhere, supply chains are still a challenge and therefore we are prioritizing being able to deliver to customers rather than inventory levels. But we also see that the balance sheet has become a bit heavier because of foreign exchange, because of inflation into – built into the balance sheet. And that is reflected in the figures here.
And if we drop down to the next slide, this has resulted in effect in a very limited cash generation in the first half which is a reflection of the strong balance sheet, but also actually a renew – a bit higher CapEx in-line with our level of pre-pandemic.
So nothing out of whack, but a bit higher than we have seen during in 2020 and 2021. When of course some of the projects were a bit delayed and postponed. Also, we are flagging here confirming that an interim dividend is confirmed at $0.93 as the interim amount, which is broadly in-line with what we normally do as an interim dividend.
So to wrap up on this section, before I hand over to Dmitri, I think we can summarize that the first half for HNB has been a good half, and that we have been able to deliver a good performance despite what are of course, challenging macroeconomic environments.
We have managed to have effective pricing to counter the rising costs. And we have seen underlying demand remained nicely resilience. And the softness in volumes is really only related to what are effectively temporary factors that have eased by the end of Q2 and into Q3.
So on that basis, we have retained our outlook as being unchanged and that is a high single-digit EBITDA growth for the Europe, for HNB, supported by the resilient market demand, supported by the positive pricing momentum and the foreign exchange.
And with that over to you, Dimitri.
Dimitri de Vreeze
Thank you, Geraldine. And also a warm welcome from my side and literally a warm welcome if you are at the European Continent, in terms of temperature. But, after a lot of profit information that we are a people planet profit company, just to complete the dimensions of our company, a little bit around the planet dimensions.
Also there, I think, incredible news to tell. First of all, we have launched several initiatives from improving our own sites to introducing greenhouse gas emission reduction, not only from ourselves, but also with suppliers, and I will come back to that in a minute.
We have also have committed ourselves to a new, renewable energy target of 100% in 2030. Remember that we started the journey in 2018. And I still remember that, we were at 3% and we were preparing a roadmap to improve our renewable energy target in the current environment, where energy is somewhere at risk.
I think, could you imagine, that we have started at already in 2018 with 3%, today, we are at 77% and we have a roadmap all clarified per site, per machine, per equipment to move that into renewable energy with the full 100%. And I think that is something where we feel really proud about.
Then we have also looked at our Scope 1 and 2 emissions, also something which was a journey, a journey going forward, which was based on the science-based targets initiative. So, these are not just numbers those are validated numbers.
We have had a roadmap, which initially started with 30%. We found ways in implementation execution to which 50%. And we made so much progress, that we now feel that we can move it up to 59%, which is nicely in-line with the 1.5 degree commitment at the COP ‘21 in Paris.
We should see official validation results later this year, because this will also be validated by the science-based target initiative. So, these are not only our numbers in our plan, but we also ask external companies to validate that.
Finally, we are working to move from a relatively Scope 3 intense target towards an absolute reduction target that creates more transparency is easier to follow. And that is what we currently working on and more of that to become available in 2023. So that is in terms of planet.
Then let’s move to the slide on people; people, planet, profit also here. Our employee engagement, 76%, we also do post surveys throughout the year. And I can tell you that, our people are as much engaged as we have ever seen, although I think the difficult environment would expect people maybe to drop-off, but certainly not in DSM. I think we will see during the post survey that we are still having huge engagement within our company, something to be proud of.
Then on safety and also on diversity, I think we are making progress. I think the target on safety is below 0.20, that will be absolutely leading in our industry. And we have the first half of 0.27, but we have all the roadmaps there and behavior sessions there to bring it into a really leading 1.20 frequency index.
And then on diversity, it is always high. We are basically looking at female executives. One of our targets, obviously we look at diversity in a far more broader lens, but this is something which we made very transparent with you. And we are market making progress on that target as well.
So overall, on planet and also on people being a people, planet, profit company, we are making progress and we are also willing to make progress and be very transparent on our ambitions and targets on that.
With that maybe let’s move to Dave to open the Q&A.
Dave Huizing
Yes, thank you very much, Dimitri. [Operator Instructions] As I said, at the introduction, we can take today, any questions on the merger. And I think when I see a signal – yes, I think we already can start. So Operator, I think we can go for the first question.
Question-and-Answer Session
Operator
Thank you Mr. Huizing. Our first question will come from the line of Matthew Yates of Bank of America. Please ask your question.
Matthew Yates
Hey good afternoon everyone. A couple questions then, please. You referenced some of the supply chain challenges that constrained your growth and left someone, your backlog on the June side. Can you elaborate a little bit, what those raw materials were that you were missing and how that is been resolved? And then maybe, particularly for Geraldine just on the guidance, your guidance is in reported currency rather than constant currency. Just trying to get a sense of how incrementally favorable the move we have had in exchange rates this year has been for you and if you wouldn’t mind just reminding me the difference between translation and transaction exposure across the business. Thank you.
Geraldine Matchett
Sure. Hi Matthew, and welcome on the call. Dimitri, do you want to start with the raw materials and then I will do the FX?
Dimitri de Vreeze
Yes let’s do that. Hi Matthew and thanks for that question. So indeed, first of all, it was not only raw material elements, it is a continuous battle to get product and customers being delivered and also having our suppliers delivering to us. I think we have been so far pretty, pretty successful in doing that in Q2.
What we have seen in COVID in China is that a few of our sites were only allowed to run at half capacity or maybe at reduced capacity. We had people camping on site because of the travel restriction because of COVID.
It shows a little bit about the engagement in itself, by the way, we have now seen throughout Q2 and into Q3 that there is a bit of relief there. I think, China is opening up, but, Hey, I mean, it is very difficult to forecast how that will look like for the second half of the year, but that has relieved a little bit.
Just to give you an example, I’m not going to go through all of them, but an important example has been our vitamin C production in Dalry in Scotland where we are depending on raw materials to supply and to produce the vitamin C.
We have operated at rates even below 50% for a certain amount of time that has been resolved because obviously, we are working on supply chains on several fronts. So we are back at a hundred percent capacity production rates at Dalry. But just as an example, what has hit quarter two for us?
Geraldine Matchett
Well thank you Dimitri. And let me come to the foreign exchange. So indeed, we do not report at constant currency. We included all, so when you look at the first half – let me start there, maybe from an FX point of view. You may remember that for H1 we had about a 10 million benefit from foreign exchange, in the second quarter we had about 23, and that is about 6%.
So if I average out it is about a 4% on H1. Now, when we are looking at our outlook so it does include the foreign exchange and really, if you look at the different moving parts what we are seeing going into H2 is a somewhat smaller contribution from M&A, it was 1% in the first half.
It will probably be half a percent simply because of the timing of first choice that was already in from for one quarter last year, we also would expect the FX to be a little bit lower going forward. And then we are seeing this normalization of volumes that we talked about in Q2, you know, the lockdowns, what Dmitri was just referring to.
So that is the buildup for the outlook. And then when it comes to translation and transaction so what we give as a rule of thumb for exposure is an exposure in Swiss Frank of about 700 million. And now in on continuing operations, we have to be a bit careful here. It is about a billion on the U,S, dollar.
Now we hedge transactional exposure, not translation. And it doesn’t really economically make a lot of sense to hedge translation. And there are some currencies that we don’t hedge like the Brazilian real, which is you know, has had at times some impacts as well. So what we are seeing is of course that overall the Euro is somewhat weak versus probably the basket of currencies for us at present.
Matthew Yates
Okay. Thanks very much guys.
Operator
The next question is from Martin Rödiger (Kepler Chevreux). Please go ahead with your question.
Martin Rödiger
Firstly on the cash flow. I remember that in Q1, you still had a cash flow guidance of adjust net operating free cash flow to increase. I guess this is not even more the case after the first half with zero net operating free cash flow. Can you talk about your expectation now for the free cash flow primary while the continuing operations there? And secondly on the gas availability in Europe, I know you are not a energy intense company, but can you talk about a direct risk – about not getting sufficient gas for your own production and the indirect risk i.e. from your suppliers not being supplied to in total with raw materials. Thanks.
Geraldine Matchett
Hi Martin. Thanks for your question. So let me start with the cash and then I will hand to Dimitri for the gas. So cash flow. Yes, indeed. So we had a guidance that was for total company. We did not segregate materials with nutrition, et cetera. So we were anyway, not going to – it was difficult to have a comparable start of the year. So we decided to focus on EBITDA growth for the guidance on HNB.
Now, as you have seen, of course, the first half of the year has been challenging when it comes to the cash flow. I think we are not alone in that situation. Now, when it comes to the second half of the year, we will strive to have some positive cash generation, whether it is enough to offset this difficult start of the year, we will have to see it has of course, a lot to do with also the supply chain and the stability that we can see there.
So when we are looking at the level of inventory, and in fact, maybe that is worth giving you a little more color here. When you look at operating working capital, when receivables are fine, we are not seeing any increase in bad debts, et cetera. We are seeing a level of about 70 days receivables.
So nothing unusual versus prior payables are actually a little bit higher, but nothing very unusual either. But we are seeing clearly that we having higher levels of inventory, both in terms of raw materials, some inventory in transit, and also some because of in transit some end products as well.
And that one is a little harder to call, because we will always make the choice of prioritizing customers over working capital. But the intention is of course, to try and reverse this trend in the second half as we go there, but difficult to give you a clear guidance on that. And Dimitri guess?
Dimitri de Vreeze
Yes, indeed a hard topic. Indeed I liked how you introduced it. We are not maybe between brackets no longer an energy intensive company. I think, we are about 3% to 3.5% of total sales, which is linked to energy.
Just to clarify, also for everybody, we don’t use gas as a feed stock. We only use it for generation of electricity and steam at our larger manufacturing locations. So I think that prepares a little bit from a risk perspective.
We have mitigation plans in place for these sites who are using gas to make energy and steam. Remember that in Sisseln in Switzerland, we moved to biomass a couple of years-ago. And I think that was even before we had these issues, which we have seen today.
We have also – I just explained a little bit our journey onto renewable energy where we are moving our renewable energy percentage upsells that is helping us. And we have sites where we have mitigation plan where we could switch to oil if needed to generate steam or electricity. For some of the sites, we have prepared safety stocks. So in case, we will be ready to act.
Overall, our total spend on energy is about €300 million of which 200 million is gas and a 100 million is others. From the 200 million, we have hatched between 60% to 70% and we have mitigations in place.
So from a direct perspective to the first part of your question, I think, we are well prepared. And I have less of a concern. The indirect question I think is more important. And what we have done is we have screened our suppliers from a gas risk perspective.
And I think it is always good for companies and certainly also ours to have multiple sources of suppliers for key products and we have reviewed that and I think we are in a good space, but like everybody’s doing that. I think we need to see how resilient the industry will be, but I think we have – we are well prepared from a direct perspective as well from an indirect perspective.
The last point, be aware that we have a very global infrastructure with sites close to clock with more than 200 sites, including premix sites. And if it is needed, we could switch production from one continent to another, if it is needed to supply our customer. So I think, we are well prepared, although you never can say that you are fully prepared because yes, the unknown is unknown. I hope that is a bit of color.
Geraldine Matchett
Thanks, Dimitri. And actually you reminded me of a point that I should have mentioned on the working capital and that is the shutdowns. So in the second half of the year, because you talked about safety stuff, we also built up some inventory to handle a number of shutdowns. They all scheduled.
So there is nothing unusual, except there is a couple of somewhat lengthier ones that will take place in the second half and that will also obvious help to reduce somewhat the inventory that we have built-up in anticipation of them.
Martin Rödiger
Thank you.
Geraldine Matchett
Thanks Martin.
Operator
[Operator Instructions]. Our next question comes Chetan Udeshi with JP Morgan.
Chetan Udeshi
Hi. Good afternoon. Few questions. First, I’m just referring to your comment about improved exit rate into third quarter. I was wondering if you can give us any more color on how much improvement have you seen in Q3. I’m more interested on organic EBITDA because if my calculations are correct in second quarter it was -EBITDA down about 2% by year-on-year organic basis. Are you expecting an improvement on organic growth on EBITDA in Q3, based on the exit rate that you see, at this point?
The second question was more on animal nutrition. We have seen a lot of data points from across the supply chain, talking about more challenging situation in the livestock industry, especially in Europe because of high crop prices, downgrading, farmers going out of business, but there is no mention, clearly you have not seen any of that in your numbers. But there is also no recognition of that in your commentary. So, maybe can you address that point, why is it that we have not seen that impact on DSM’s numbers so far? Is there a mix issue? Is there a geographical issue or is there a risk that you might see it with the lag?
And last question just on P&L. I noticed there was a big restructuring charge of the sizeable into, sorry, first half or 50 million or so on EBITDA line. Can you maybe give us more color on what is driving that? Thank you.
Geraldine Matchett
Sure, and welcome on the call. Thank you for your questions. Let me start with the first and the third, and then I will hand over to Dimitri on the animal nutrition dynamics. So maybe when it comes to the underlying EBITDA, indeed, if you take Q2, you end up with minus two. But remember that, that also factors in this impact of the China lockdowns of about three, the backlogs of about one.
And then we do see that in this environment of continued inflation, we always have – we still have a bit of a time lag when it comes to pricing versus the inflation of the cost base. So when we are looking forward, we believe broadly this order backlog will unwind over H2. So that should be fine.
We do not expect the COVID lockdowns in China to continue or to be as severe. Of course, that is to be seen. But we hope that, that is the case. So what we do expect is that we will be intuitive in positive territory when it comes to EBITDA growth underlying in the second half of the year. So that should hopefully help you on that bridge.
And then when it comes to the APMs. If you remember last year we heard launched quite a lot of restructuring to get our Health Nutrition and Bioscience organization ready and tilted to how we are now running the company.
And this was – and I know we shouldn’t talk about the merger, but this was actually very important for our future, particularly when it comes to food and beverage, knowing that we wanted to build on that and that will be the pillar for food and beverage/taste and beyond.
Now, this did come with some programs and what you are seeing is basically the unfolding of those programs. And we had given the guidance at the time that in 2022, we would probably have still about 40 million, 50 million related to that. So that is one part.
And the other part that you are seeing coming through in the first half, of course, the cost relating to the portfolio changes. So some to do with the preparation regarding the deal, but also the carve outs, et cetera. So that is the buildup of the 52. Now Dimitri animal nutrition.
Dimitri de Vreeze
Yes. On animal nutrition, to your point, if you look at the USDA a protein demand reports that shows still a good demand for proteins, although Europe in that whole range is on the lower scale of it. So, you hinted on that. If you look at the reports, that is definitely the case.
Be aware that DSM is in the ingredient space, where we help farmers to improve on sustainable farming to reduce emissions. So really in that innovative area, as well as creating yield and productivity. So, that is something which we still see with the very resilient demand.
Input prices are high for the farmers. However, if you look at meat prices, they are also high. If you look at milk prices, they are high. So at today, as a farmer, the margins are still okay. So it looks a bit weird because the input prices are high, but the moment that the meat prices are coping and keeping up the pace, I think we are all okay.
Then the terms of risk of down trading, that is the beauty of our Animal Nutrition and Health business model, because we are relatively independent and relatively immune to all these changes.
So if we would look at down trading and that is something which has happened in the past, and it is also happening one moment that you do see that there are COVID lockdowns, where people are going to easy to prepare proteins, which in this case, in most of the case up poultry and eggs.
For DSM, the poultry and [XPC] (Ph) is one of our biggest and strongest piece in terms of competence. And in terms of sales, it is about 40% to 45% of sales in Animal Nutrition and Health and we have huge competence there.
Secondly, if you go into, let’s say from red meat to white meat in the quote called down trading, the inclusion rates of our ingredients in poultry is higher than in others. So it could even work for us, so that is the reason why you don’t see a saying anything on that because the business model, which we have created, which is a global business model at every continent and every country where it matters, we are there.
So if there are changes in the regional setup, we pick it up somewhere else in terms of species, you would see the same if beef and Aqua is going down, other species will go up. And that is the beauty of the business model we have built with Animal Nutrition and Health. I hope that gives a bit of background.
Chetan Udeshi
Thank you.
Operator
The next question is from Andrew Stott with UBS. Please go ahead.
Andrew Stott
Yes, good afternoon Dimitri, good afternoon Geraldine. So a couple questions for me. So first on HMO, you said when you bought [indiscernible] you thought the market could quadruple by mid decade. How important is China approval to that? And can you give me a sense of how quickly you could start selling in China from the actual rubber stamping of that technology? And then could you also remind me of which other countries you still need approval from. So all those questions are for HMO.
I have got a second question as well very sticking with the pipeline. On Bovaer, as you look into 2023, in my shoes would you put much in for revenue for Bovaer or are you still going to be in the pilot plan? Elanco ramp up stage. Thanks.
Geraldine Matchett
Okay. Dimitri, do you want to take HMO?
Dimitri de Vreeze
Yes, let me take HMO. So thanks for that question indeed. What we have seen is HMO have grown quite a bit outside ELN, Early Life Nutrition. Initially it was prepared in terms of sales and Early Life Nutrition.
We do see recovery in, in the Early Life Nutrition rates. So we also the pickup of innovation of our customers who preparing product launches with ingredients and approvals. So that I think is really good news. So it is not only now outside ELN but also at ELN itself.
China is an important bit, actually you have seen, we have made far quicker progress than we thought. I think initially discussion, we always said somewhere in 2023, we have made so much progress on the regulatory approval in China that we now are willing to consider the approval and we have got sub-approvals at the meantime that we most probably will get it before the end of the year.
And then we can start selling with inroads also with our key customers into China, but also customers in China themselves. So it is definitely – China is a key market for Early Life Nutrition and therefore this approval is an important bit.
By the way this has something which was when we acquired Glycom we have seen as an additional spinoff. We saw it as an opportunity on top of the business case, what we have seen, and the acceleration of that is really helpful. So that is one.
In terms of innovation we have an approval, so we have certain products which are already approved, but we also innovate the new versions of HMO and that need to go through approval processes. Well, so, the same, another big region for us will be U.S. and there we will follow on that same process. So that is a bit of background on the HMOs then maybe you Bovaer, Geraldine.
Geraldine Matchett
Yes. And when it comes to Bovaer. So as you know we are working on Dalry, which is our site in Scotland, that will bring, you know, the material capacity it should come on stream in 2025, and that is where you will be able to see a nice ramp up. Now from here till then we expect to reach about a hundred million of sales by 2025.
Now exactly how much to put into to 2023 maybe give us a little bit more time. What we are seeing is a lot of traction. Clearly the methane pledge signed by a lot of countries to reduce 30% of methane by 2030 does require effectively a solution from methane coming from agriculture and livestock.
And also what we are seeing is of course that the Scope 3 targets of a lot of our customers also needs means that they have to think about how to address methane, remembering that methane is more than 84 times more potent than CO2 on a 20-year lifespan. And it is when it comes to climate emergency the biggest driver that can be used.
So we are seeing a lot of traction. Now, of course, these pilots are required to make sure that it all fine, et cetera. So give us a few more months and maybe, you know, by the time we give you an outlook for 2023, we can be a little more specific.
Andrew Stott
Thanks Geraldine. Thanks Dimitri.
Operator
And the next question comes from Nicola Tang with BNP Paribas.
Nicola Tang
Hi everyone thanks for taking the question. If I could start and ask about, the cost inflation side, I think the last time you guided was back in February for 5% cost inflation. So I was wondering if you could just talk about what you are seeing today and perhaps a breakdown of what might have moved since then. And whether you are still confident in, or setting that in absolute terms with pricing this year. And then the second question is related to spot pricing and I wanted to ask about spot vitamin prices, and I know that the sensitivity of spot prices has significantly declined over time. But I think we have seen prices starting to fall a little bit. And so I was wondering how easy is it for you to push pricing across the whole of your business against a backdrop of deflating vitamin prices? Thank you.
Geraldine Matchett
Thanks, Nicola. Nice to hear you. And thanks for being on the call. Let me start with inflation, then I will pass the Dimitri on vitamins. So indeed, if you think back to inflation, in fact, we saw inflation really start ramping up in Q4 last year. Then with the full-year outlook, we had done our homework and we estimated that the inflation would be about 5%, and that is what we had in the outlook at the start of the year.
Now if you actually look at Q1, we had given an indication that actually it would probably be a bit higher adding 2% to 3%. So taking us to sort of a 7%, 8% of inflation. And if I look at where we are now, partly because of the energy issue that is across the supply chain, we are probably now looking at about sort of a 9% to 10%.
So it has been an environment of increasing inflationary pressure going through. And maybe that is a good segue into looking at the time GAAP between pricing and inflation. So if you look at pricing element on the top-line for the first half, you see there that we have 8% pricing with animal nutrition at 11%.
But one has to remember that in animal nutrition, we have quite a lot of pass through costs. So ingredients that we source to then include in our premix roughly say about half. So if you adjust that element, we probably are sitting on around 5.5% of effective pricing versus the inflation in our cost base. And that is why we are still seeing this time lag, because we have been a little bit – continuing to be very proactive, but we still have a bit of a GAAP between our ability to fully price through and this inflationary element.
Now what will happen in the second half is we will, of course continue to be extremely diligent on all the pricing actions that we need to do. We will see some of them actually take effect across the whole of the second half. And the big question mark is, of course, what is the world going to do in the second half of this year?
So what we would expect is that maybe there is still the inflationary environment will continue into 2023, but our ability to close that gap will be really determined by whether inflation continues to go up at scale or whether we will see a bit of a flattening of the curve when it comes to the inflationary trend. So hopefully that helps you a little bit with the bridge on inflation and pricing. And Dimitri vitamin pricing.
Dimitri de Vreeze
Yes. So starting with a good demand for our vitamins and our ingredients. So that is the starting point. Secondly, and we said it many times before there is no vitamin exactly looks the same. So in that sense, all these vitamins have their own supply and demand, but also technology competencies to it and they are all independent from each other.
So what is happening on vitamin A, has nothing to do with vitamin C. E has nothing to do with some of the minerals. So you need to see it in a basket perspective. And I think we have shown throughout the years, also with our production and sourcing.
So a key decision on where we make ourselves and where we source that we manage that very well. And I think at the end of the day, it’s all about the basket where you make a difference. I have mentioned the vitamin C example. So obviously that had a supply capacity issue to it. Also the COVID-19 China has all types of impact to it.
So, we are very confident that the basket in itself, we have managed in a good order. And we are not looking at a downward or an upper trend itself, because at the end of the day, the majority of the ingredients we sell is via premix formulations or formulas in itself. So, direct sales of what we call straight sales has been reduced overtime. And I think we have managed that well that a bit as a background to your question.
Nicola Tang
Alright thank you.
Operator
The last question is from – [indiscernible]. Please go ahead.
Unidentified Analyst
Good afternoon. And thanks my questions. Firstly, on the Food & Beverage division, I think the two largest sub segments within that are beverages and dairy, I think about 55% of total sales. Can you provide some commentary on performance in Q2 and the outlook for those sub segments into the second half of the year? Second question, just a follow-up on animal nutrition. Are you budgeting for volume growth in H2? And my final question then is on ferment – just how that is performing versus internal expectations? Those are my three questions. Thank you.
Geraldine Matchett
Thank you very much for your questions. Let me start maybe with animal nutrition and then I will pass it to Dimitri. So on animal nutrition, as you saw the first half of the year was very much pricing driven, partly we had this destocking going on in the first quarter, on the back of last year, very high levels. So we had a 6% destocking in Q1. We saw that very much fade in the second quarter.
And therefore, we do expect that in the second half, we will have a more balanced volume and price effect, underlying the growth in animal nutrition. So that is to your question of volume ANH. And then Dimitri beverage and dairy.
Dimitri de Vreeze
I think you are right in terms of beverage that is about 25% of the Food & Beverage unit and dairy is about 30%. Let me not go into outlooks per segment and per category. So, I hope you excuse me for that. But I think overall, I think the Food & Beverage businesses have shown a very good pricing momentum. If you look at the pricing momentum from 3% and quarter one into 7% into quarter two, I think we have that pricing momentum ongoing.
Food & Beverage also in terms of volumes, I think are really bringing into a very good momentum into Q2. What we have seen in terms of vitamin C also in the Food & Beverages. So we are now back on-track in our Dalry plant in Scotland, with a good momentum of the order book into Q3. I think across all of segments within the Food & Beverages industry. So also for brewery, also for the enzymes, also for pet food and alike.
Then to Stevia your question, we always have done this with collaboration and partnership with Cargill because they have the route to market to the sweetener part. Remember if we had to do it ourselves that will really take time to build that route market ourselves. So we have chosen that jointly with Cargill to go for a joint approach into the sweet in the market with the Stevia the ever suite product, which we have developed.
What we have seen is that we have great progress into customers where we have new product launches. Boston beer was one of them with the heart seltzers. We have lined up several of them now also with COVID almost gone in the Western part of the world. Innovation and product launches are really the name of the game.
What we do see is that a hundred million of sales, which we have always looked at in 2025, I think is within reach. And that is something where we currently are rating too. What we do see is that there are opportunities Stevia, which is sugar replacement.
But obviously, sugar replacement is kicking sugar out in the existing formulas and that takes a bit longer because then you have got to redefine your existing formula with a new ingredient, but obviously that is a fantastic opportunity as well. But first of all, we go for the new product launches to make Stevia work.
Dave Huizing
Dimitri, you want to make some closing remarks?
Dimitri de Vreeze
Some closing remarks from my side? Yes. Really fantastic to have you all listening in. And we thank you very much for listening to the Q&A session. We thank you for having a fantastic full-year outlook, which was unchanged with good organic growth for the company moving forward. And I think we are very confident that we continue our journey on people, planet and profit. Thank you.
Dave Huizing
Thank you, Dmitri. Yes, that means we are at the end of today’s webcast. As usual, any further questions, please reach out to us before you go to the beach. Anyway, thank you. And have a nice summer.
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