Chr Hansen A/S : Q1 Conference call transcript 2021/22

Chr. Hansen Holding A/S

Q1 2021/22 Results

Conference Call Transcript

13 January 2022

PRESENTATION

Operator

Thank you for standing by and welcome to the presentation of Chr. Hansen's Interim Report and Conference Call Q1 2021/22.

At this time, all participants are in listen-only mode. There will be a presentation followed by a question-and answer session at which time if you wish to ask a question, you'll need to press 01 on your telephone. I must advise you that this conference is being recorded.

I'd now like to hand the conference over to our speaker today, Chr. Hansen's CEO, Mauricio Graber.

Mauricio Graber

Thank you, good morning, and welcome everyone. Together with our CFO, Lise Mortensen, [? 00:00:43], we would like to wish everybody a Happy New Year and hope you and your families are healthy and safe.

As always, we will start this conference call with a short presentation on our recent quarter's results. In addition, this time we would like to also take the opportunity to present our new science-based climate targets that were published in November. This will take approximately 20 minutes and then we will move on to Q&A.

Before we begin, please take notice of the safe harbour statement on slide two.

Let's turn to slide three, please. Chr. Hansen delivered a solid start to the fiscal year 22 with 9% organic growth with euro growth reached 10%. Growth was fully volume-driven and supported by solid growth in Food Cultures and Enzymes, as well as a strong rebound in Health and Nutrition. Our EBIT margin before special items was 24.4%, compared to 25.2% last year. Excluding HMO, which was not fully reflected in Q1 last year, we would have seen a margin improvement as

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scalability from solid sales performance more than offset the inflationary pressure and the general ramp-up of activities.

Absolute EBIT before special items amounted to €65 million, up 7% from the €61 million in Q1 last year. Free cash flow before acquisitions and special items was €55 million, compared to minus €7 million last year.

Let's turn to slide four for the strategic and operational highlights. During the first quarter, in- person engagement with customers picked up again and we saw good traction on our commercial pipeline and strategic initiatives. Our core businesses - Food Cultures and Enzymes, Human Health, and Animal Health - grew 7% where our growth areas, which account for approximately 10% of Group revenue - Bioprotection, Fermented Plant Bases, Plant Health, and HMO - grew 35%. Lighthouses are expected to outgrow the core business for the year but please note that the very strong growth in Q1 was in part positive due to order timing.

In line with our 2025 strategy, we continue to reinvest in our core business and lever our technology platforms to expand into new areas while further reaping the benefits of our recent acquisitions.

Let me briefly comment on the key highlights for the quarter. In Food Cultures and Enzymes, we saw very good sales project execution in EMEA as well as continued strong growth in the Cheese market in North America, which led to very solid volume growth in Q1. Human Health exceeded our expectations for the first quarter and delivered a very strong start to the year supported by a rebound in the traditional sales channel in Europe and North America, and positive order timing from Q4.

Further, I am pleased that with our expanded strength to solution offering and our strong supply chain performance, we were able to mitigate supply chains successfully and win new business, which will have a positive impact in the first half of the year.

Our HMO business also reported good progress with the first launches of the 5HMO mix in the US market, which had an extraordinary impact in Q1 as customers ramped up ahead of their product launches.

And lastly, Plant Health entered into a partnership with Indian ag player, UPL, to develop and commercialise microbial crop protection solutions.

Another highlight during Q1 was related to Bacthera, our joint venture with Lonza.

So, please turn to slide five. In November, Bacthera signed a commercial manufacturing agreement with Seres Therapeutics. It's an important milestone and therefore allow me to say a few words about the agreement. After we have successfully established our set-up in [? 00:05:28] and Basel to service customers in the clinical supply market, we are now accelerating investments into commercial manufacturing capabilities based on the long-term commitment from Seres

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Therapeutics, whose lead candidate, SER-109 [ph 00:05:43], has the potential to become the first ever live biotherapeutic product in the market. As part of the agreement, we will build a new production site in Visp, Switzerland, which is expected to be inaugurated in 2024.

Whilst the commercial supply market is materialising faster than we expected, we are seeing that the clinical supply market is developing slower due to delays in clinical trials and patient intake during the COVID pandemic. These developments will require additional funding into Bacthera, but we are very confident in our ability to establish a leading player in the field which can count on our expertise and capabilities from both JV [ph 00:06:32] partners.

With these words, let's turn to slide six to dive a bit more into the sales performance during the first quarter. If we look at the top line performance across the segments, growth was fully volume- driven. Food Cultures and Enzymes delivered 7% organic growth in Q1, driven by volume and with solid growth in Dairy and very strong growth in Food and Beverages. The contribution from euro pricing was insignificant.

Health and Nutrition recovered after a very soft quarter reaching 13% organic growth in Q1. Human Health and HMO delivered very strong growth. As already mentioned, the rebound was largely driven by Human Health while in HMO was in line with expectations.

That said, I'm very pleased that a large part of our fiscal year 22 orders for HMO is already secured through long-term contracts. If we look at our Animal and Plant Health business, growth was solid and driven by Plant Health; we benefited from early orders while Animal Health faced a tough comparable from last year.

Across our businesses we are in close collaboration with our customers to implement price adjustments to reflect the current inflationary pressures. The implementation is progressing as planned and we will start to see the impact here from the beginning of Q2.

If we look at the regional picture, please turn to the next slide, slide seven. Growth was largely driven by developed markets. Europe, Middle East and Africa delivered 10% organic growth supported by good execution of the sales pipeline in Food Cultures and Enzymes and a recovery of the traditional Dietary Supplement channel in Europe. North America grew strongly with 12%. Growth in Health and Nutrition was positively impacted by order timing, as Q4 was very soft. We already mentioned launches in HMO, while FC&E continued to benefit from continued solid momentum in the Cheese market.

Latin America reported 8% organic growth, of which approximately one third came from euro pricing. Food Cultures and Enzymes grew solidly despite continuous soft Fermented Milk markets. And Health and Nutrition was driven by very strong Plant Health.

Lastly in Asia Pacific after a soft year end, we returned to growth driven by Food Cultures and Enzymes that saw a positive growth in China. The Fermented Milk market in China, though, is still not developing favourably and our outlook for China is still to be flat to slightly positive in fiscal

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year 22, driven by the low comparable from last year and specific customer projects. Health and Nutrition was on par with last year. Both Human Health and Animal Health faced a tough comparable baseline from last year. In total this resulted in 4% organic growth for Asia Pacific.

And with these comments I would like to hand over to Lise for the financial review.

Lise Mortensen

Thank you, Mauricio, and welcome also from my side. Please turn to slide eight. Looking at the development on profitability, the EBIT margin ended at 24.4% for Q1, down from 25.2% last year. The drop was in line with our guidance, driven by, first, the full inclusion of HMO, which was only partly reflected in last year's numbers as the acquisition closed mid-October; secondly, the general ramp-up of activities including travel; and thirdly, higher input costs from the inflationary pressure, which we only expect to see recovered in sales price increases as we progress through Q2.

This was then partly offset by a positive contribution from production efficiencies and scalability from the sales growth combined with synergies from our probiotics acquisitions. If we exclude the impact from HMO, then the EBIT margin would have been above last year by approximately half a percentage point. Total EBIT before special items amounted to €65 million, which is 7% up, compared to last year, driven by Food Cultures and Enzymes, while EBIT in Health and Nutrition was at the same level as in Q1 of last year due to the negative impact from HMO.

If we look at the segments, Food Cultures and Enzymes EBIT before special items was 3.8% and on par with last year, with production efficiencies and scalability effects from volume growth being offset by higher input costs not yet reflected in the sales prices, and a general ramp-up of activities.

Health and Nutrition's EBIT margin before special items was 11.9%, which is 1.7 percentage points below last year driven by HMO. Excluding HMO, our Health and Nutrition EBIT margin would have been above last year. The profitability improvements were driven by scalability effects and acquisition synergies that were partly offset by higher input costs and the general ramp-up of activities.

Let's look at the cash on the next slide, slide nine. The free cash flow before acquisitions and special items came in at €55 million, compared to a negative of €7 million in Q1 of last year. The increase was due to both an improved cash flow from operating activities and lower operational investments. The increase in the operating cash flow was driven by improved operating profit and a positive impact from working capital, compared to Q1 of last year. And cash flow used for operational investing activities was €18 million, down from €52 million in FY 21. The decrease in spending was driven by the acquisition of the [? 00:13:26] facility last year.

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The return on invested capital, excluding goodwill was 20.00%, compared to 20.6% last year and the decrease was driven by Health and Nutrition, due to the inclusion of HMO, while the return on invested capital in Food Cultures and Enzymes was on par with Q1 from last year.

And with these remarks, let's move to the next slide, slide ten, to recap our guidance for the year. Following the encouraging first quarter, we keep the outlook for the year. Group organic growth is expected to be in the range of 5% to 8% and will largely be volume-driven off, but with some positive impacts from pricing to reflect the inflationary developments. Food Cultures and Enzymes is expected to deliver solid mid-single digit organic growth throughout the year and despite an insignificant contribution from euro-based pricing.

Organic growth in Health and Nutrition is still expected to be volatile across the quarters but is now expected to be more front-end loaded than earlier estimated. As already mentioned, Plant Health benefited from early orders in the first quarter, which will negatively affect Q2. For HMO, as Q1 benefited from customers ramping up for the US launches, the growth momentum will be lower the rest of the year, though still in a range above 20%. And for Human Health, our ability to serve customers has resulted in some extraordinary wins in Q1 and we also see good momentum going into Q2.

When it comes to EBIT margin before special items, this is still expected to be around the same level as last year - between 27% and 28% - as cost synergies from the Probiotics acquisitions, production efficiencies, and a small positive impact from the US dollar exchange rate will be offset by continued ramp-up of activities, investments into HMO business, and the inflationary pressure on certain input costs. The latter we expect to largely recover during the course of the year as price adjustments become effective.

The free cash flow before special items is expected to be around €140 million to €170 million as improved operating profit is expected to be more than offset by significant increases in taxes paid as FY 21 was positively impacted by acquisition- related one-offs. The free cash flow outlook assumes a CapEx in line with FY 21.

As you remember, we updated our long-term financial ambition last quarter to reflect the divestment of Natural Colours and the acquisition of Jennewein. And I would like to emphasise once more that Chr. Hansen remains committed to delivering industry-leading profitable growth and a strong cash flow with focus on spending discipline and capital efficiency.

Until FY25, we aim to deliver: mid to high single digit organic growth averaged over the period; an increase in EBIT margin before special items over the period to above 30%; and average growth in free cash flow before special items to grow faster than EBIT before special items.

And with this I would like to hand back over to Mauricio to present our new climate targets.

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