While DSM-Firmenich celebrates a return to growth and a positive Q1 2024, a closer look at the Animal Nutrition and Health (ANH) division reveals a potential strategic gamble brewing beneath the surface. While the narrative around vitamins is one of recovery, the company's deliberate restraint in vitamin A production suggests a calculated bet on future price increases and a potential second-half surge. Could this calculated risk be the key to unlocking even greater profitability in the traditionally stronger second half of the year?

DSM-Firmenich's Q1 2024 trading update paints a picture of overall success. The company is back on a growth trajectory after navigating the choppy waters of 2023. EBITDA is up, margins are expanding, and several divisions are reporting strong performance. However, nestled within the ANH segment lies a more complex story. The company acknowledges that vitamin prices are on the upswing, a welcome relief after a period of unsustainable lows. Yet, when it comes to vitamin A, DSM-Firmenich is exhibiting a surprising level of caution.

The company explicitly states that it's not aggressively chasing volume in the vitamin space, particularly for vitamin A. This strategy, while seemingly counterintuitive in a recovering market, hints at a carefully calculated gamble. DSM-Firmenich appears to be holding back on full-scale vitamin A production, betting on further price increases before unleashing its full capacity. This move, coupled with tight inventory management, suggests a strategic focus on maximizing profitability rather than simply chasing volume.

This calculated restraint is supported by several clues within the Q1 2024 earnings call transcript. CFO Ralf Schmeitz repeatedly emphasizes that vitamin A pricing 'needs to go up more' to be truly attractive. He notes that the company is carefully controlling inventory levels in the Animal space and is deliberately not chasing volume in anticipation of further price increases. This disciplined approach indicates a clear preference for maximizing returns over rapid volume expansion.

The transcript also hints at a potential catalyst for this vitamin A gamble to pay off: improving farmer economics. Schmeitz highlights the positive impact of softer commodity prices on farmer profitability, suggesting that this could translate into increased demand for animal feed and, consequently, higher demand for vitamin A.

Potential Impact on H2 2024 EBITDA

The potential payoff is significant. The second half of the year is traditionally stronger for the ANH business, driven by seasonality. If DSM-Firmenich's gamble pays off and vitamin A prices surge in tandem with increased farmer demand, the company could see a substantial boost to both revenue and profitability in the coming quarters.

Let's examine the potential impact in numbers. DSM-Firmenich's current full-year guidance for adjusted EBITDA is 'at least' €1.9 billion. Assuming the company achieves this target, the implied H2 EBITDA would be approximately €1.44 billion (€1.9 billion - €460 million reported in Q1). If vitamin A prices rise significantly and the company ramps up production to meet increased demand, it's not unreasonable to expect a potential upside to this figure.

Note: The exact impact is difficult to quantify without more detailed information on vitamin A pricing and production capacity.

Risks and Opportunities

While quantifying this potential upside accurately is difficult without further details on vitamin A pricing dynamics and production capacity, even a modest 5% increase in vitamin A prices, coupled with a corresponding volume increase, could potentially add tens of millions of euros to the company's H2 EBITDA. A larger price surge, which DSM-Firmenich seems to be betting on, could lead to an even more substantial impact.

This calculated risk, however, is not without its downsides. If the anticipated price increases fail to materialize or if farmer demand remains subdued despite improving economics, DSM-Firmenich could find itself with underutilized capacity and missed opportunities for volume growth. The company's success hinges on the accuracy of its predictions and its ability to execute on its production ramp-up strategy.

Conclusion

The true outcome of this vitamin A gamble will become clearer in the coming quarters. However, the evidence suggests that DSM-Firmenich is playing a calculated hand, positioning itself for a potentially lucrative second-half surge. This strategic move, largely overlooked in the broader narrative of growth and recovery, could be the key to unlocking even greater profitability and cementing the company's position as a leader in the Animal Nutrition and Health sector. Investors should keep a close eye on vitamin A pricing and farmer demand in the coming months, as these factors will determine whether DSM-Firmenich's calculated risk yields a winning hand.

"Fun Fact: Did you know that DSM stands for 'Dutch State Mines'? The company was founded in 1902 to mine coal for the Dutch government. However, it has since undergone a remarkable transformation, evolving into a global science-based company focused on health, nutrition, and sustainable living. This remarkable evolution exemplifies DSM-Firmenich's ability to adapt and thrive in changing market conditions."

Q1 2024 Earnings Call Transcript

(Transcript provided in the original input)

Scenario

Vitamin A Price Increase

Potential H2 EBITDA Upside

Conservative

5%

Tens of Millions €

Aggressive

10% or more

Potentially more substantial

Note: The exact impact is difficult to quantify without more detailed information on vitamin A pricing and production capacity.