Chr Hansen A/S : Q3 Conference call transcript 2020/21

Chr. Hansen Holding A/S

Q3 2020/21 Results

Conference Call Transcript

8 July 2021

10:00 AM CET

PRESENTATION

Operator

Thank you for standing by, and welcome to the presentation for Chr. Hansen Q3 conference. At this time, all participants will be 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 will need to press 01 on your telephone. I must advise you that the conference is being recorded. I would now like to hand the conference over to the speaker today, Chr. Hansen CEO, Mauricio Graber. Please begin.

Mauricio Graber

Good morning, and welcome to today's conference call on Chr. Hansen's Q3 2021 results. Together with our CFO Lise Mortensen, we will do a short presentation today before opening up for questions and answers. Before we start, please take notice of the Safe Harbour statement on the next slide, slide two. Let's start with slide three to begin the presentation.

Chr. Hansen delivered Q3 2021 results in line with expectations, but at a slower pace than in the first half of the year. Organic growth in the third quarter was 4%, with equal contribution from volume mix and price leading to 8% organic growth year to date. The slowdown was, as expected, driven by a lower positive contribution from Euro pricing [ph 00:01:25] as well as a high baseline as customers built up safety inventories during COVID-19 last year in Q3.

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In Food Cultures and Enzymes, we saw acceptable volume growth of 2%, driven by continued solid momentum in cheese [ph 00:01:46] and reduced negative impact from China, leading to 5% organic growth in Q3.

The performance in Health and Nutrition, on the other hand, was not fully satisfactory, with zero percent organic growth in the quarter as large Human Health customers adjusted their order volume in the third quarter to reduce elevated stock levels as a response to slower demand in the traditional sales channels.

Contrary to that, our newly-acquired probiotic businesses, whose customers have a strong online presence, deliver a strong third quarter, which reconfirms the strategic decision we have taken with the acquisitions to broaden our customer base in the markets we serve with our strain [ph 00:02:34] to solution offering. Animal and Plant Health delivered solid growth, as expected.

Now, looking at profitability, our EBIT margin before special items in Q3 was 29.3% compared to 34.5% last year. The underlying EBIT margin before special items, meaning our margin excluding the recent acquisitions, was 33.1%. The key drivers for the margin decline of 1.4 percentage points in the underlying business were FX and a return to more normal spending patterns that offset production efficiencies.

Year to date, the EBIT margin before special items stood at 27.3% well on track to deliver on outlook for the year. Free cash flow before acquisitions, divestments and special items was €120 million compared to €144 million last year, and largely driven by the investment in our HMO lighthouse at the beginning of the year.

Let's turn now to slide four for a strategic overview.

In terms of strategic progress, we are well on track to deliver on our priorities for the financial year for investment in the core, leveraging our lighthouse, and executing the portfolio changes. Re-investing in our core platforms of dairy, animal, and Human Health remain our largest priority as the majority of the growth during the 2025 strategy period will come from these businesses. To defend and expand our market position, we will accelerate commercialisation of new innovations and further expand our global reach and proximity to customers.

Despite travel restrictions and limited ways to engage with customers in person during the pandemic, we have seen an all-time high new launch activity in dairy, with more than ten new products that we have

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launched, year-to-date, and we have also expanded our digital offering to work even closer with our customers.

In Animal Health, we successfully completed the global roll-out of our poultry probiotic [? 00:05:01], and we recently launched a new cattle probiotic, Bovacillus, in the Americas. Also, we are further expanding a route to market in close collaboration with local sales partners. For example, in Asia Pacific and Latin America.

Human Health next to integrating the recent acquisitions, and despite the current headwinds, remained focused on building science and strengthening our scientific marketing around our industry-leading strain portfolio. For example, in April, we released a new clinical study on the immune balancing benefits of probiotics on stress and sleep of shift workers. We received two new health claims: one for our DDS-1 strain in Canada, and another for our woman's health strain combination, UREX, in Japan, and we rolled out our education programme, the Probiotic Institute, in China and globally.

Furthermore, our dialogues with dietary supplement customers showed that there is more and more demand for full solution offering all the way from scientifically-documented strains to finished products and with our acquired consumer packaging capabilities from UAS Labs, we are well-positioned to cater to these strains [00:06:27] while taking more control over our full supply chain.

Next to re-investing in the core, we also continue to invest and leverage or microbial expertise to build new markets with our lighthouses. In spring, we launched the third generation of our bio-protection range for dairy products, and we also expanded our product offering for fermented plant bases under the new Vega brand.

In Plant Health, we continue to work closely with our partner FMC to bring biological crop protection solutions to farmers in Latin America, the US, and now, also, in Canada.

And lastly, our joint venture, Bacthera, reached a major milestone in May with the receipt of its manufacturing licences for clinical trial production in Denmark and Switzerland.

Looking at our acquisitions, the extent [ph 00:07:27] pillar of our strategy, we are well on track to deliver around €100 million revenue, and we now expect our EBITDA contribution of around €15 million, up €5 million, driven by a slightly improved sales outlook and efficiencies.

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At Jennewein, we are on plan to expand our downstream facilities in Germany, and we continue to advance dialogues with customers. However, as we have already discussed last time, the pace at which the market is developing is slower than initially expected. On a positive note, during the period, we were able to prove the strength of our acquired HMO intellectual property by favourably resolving an outstanding litigation case.

Finally, with the closing of the Natural Colors divestment at the end of March, we paid out an extraordinary dividend to shareholders in May equal to the amount of a normalised ordinary dividend for the financial year 19/20. And with these comments, let me now turn to page five for the regional review.

Regionally, the picture remains largely unchanged compared to last quarter. Our largest region - Europe, Middle East and Africa - grew 3% organically in Q3, with good growth in Food Cultures and Enzymes, and declined in Health and Nutrition leading to 5% year-to-date. Both businesses faced a high baseline as customers built up safety inventories during COVID-19 last year.

North America reported 5% organic growth in Q3 on a relatively easier comparable. Food Cultures and Enzymes grew solidly in the third quarter, supported by the reopening of the food [ph 00:09:28] service channel, while Health and Nutrition was negatively impacted by Human Health, as we just discussed. Year- to-date growth was 7%.

Moving onto Latin America, the region delivered 19% organic growth in Q3, with a lower contribution from Euro pricing compared to the first half of the year and driven by both a strong performance in Food Cultures and Enzymes and Health and Nutrition, Year-to-date growth was 30%.

Lastly, Asia Pacific delivered negative growth of 6% in Q3 to flat sales here today, as Health and Nutrition was impacted by a very high and tough baseline comparable, and Food Cultures and Enzymes reported another quarter of declining sales driven by China, though to a lesser extent than in the first half of the year.

Market sources indicate that the Chinese yoghurt market continued to decline at a double-digit rate during the third quarter, but we're cautiously optimistic that momentum will improve over the coming quarters as we see good levels of engagement with customers and a solid pipeline.

And with this, I would like to hand over now to Lise for the segment and group financials.

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Lise Mortensen

Thank you, Mauricio, and good morning also, from my side. Please move to slide six for the segment review.

Food Cultures and Enzymes grew 5% organically in Q3 and 7% year to date with a 2% contribution from volume mix. Euro pricing contributed 3% in Q3 compared to 6% during first half of the year.

Although the global market for fermented milk continued to decline slightly, while cheese production grew approximately one percentage point, which means that in FC&E, we continue to outperform the underlying market.

If we look at the product segments, we saw a very strong growth in meat and fermented plant bases in Q3, while cheese grew solidly. Fermented milk and enzymes delivered good growth while our probiotics business continued to decline. While volume growth in fermented milk improved slightly compared to the first half of the year, and despite the high comparable, momentum in enzymes normalised following a very strong first half of the year.

Lastly, our bio-protection lighthouse delivered strong growth in Q3, mainly driven by meat, while growth in dairy was moderate. That said, we are seeing the pipeline in fermented milk filling up nicely with the launch of the third generation FRESHQ, but it generally takes six to 12 months for projects to materialise.

Turning to profitability, the Q3 EBIT margin for Food Cultures and Enzymes decreased to 33.0% compared to 34.4% last year as production efficiencies were offset by FX and a return to more normal spending patterns as we ramp up activities, post COVID-19 and as we invest in strategic initiatives to drive growth in the core. Year-to-date, the EBIT margin was 31.6%, compared to 32.9% last year.

In Health and Nutrition - please move to slide seven - organic growth was heavily impacted by the high baseline from last year and de-stocking in Human Health leading to flat volume and organic growth for Q3 and 9% organic growth year-to-date.

In our Human Health legacy business, sales declined both in dietary supplements and infant formula as customers with large exposure to traditional sales channels adjusted their orders to bring down inventory

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