Chr Hansen A/S : Q4 Conference call transcript 2020/21

Chr. Hansen Holding A/S

Q4 2020/21 Results

Conference Call Transcript

14 October 2021

PRESENTATION

Operator

Thank you for standing by and welcome to the presentation of Chr. Hansen's annual Report and Conference Call 2020 to 2021.

At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session at which time, if you'd like to ask a question, you'll need to press 01 on your telephone. I must advise you that this conference is being recorded. I would now like to hand over the conference to your speaker today, Chr. Hansen CEO, Mauricio Graber. Please go ahead.

Mauricio Graber

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

Thank you. Let's turn to slide three, please.

2020/21 was a year of transition for Chr. Hansen, with increased complexity for the combination of our recent portfolio changes and the global COVID-19 pandemic. In light of these extraordinary circumstances, I am pleased with the financial results that we delivered. Organic growth came in at 7% and at the upper end of our initial outlook. This was achieved despite the unsatisfactory result from human health in the second part of the year here the business faced a drop in demand from customers servicing the traditional sales channel combined with certain supply issues.

Food Cultures and Enzymes, on the other hand, was able to offset part of that with a strong year-end finish, an 8% volume growth in Q4.

Our EBIT margin before special items ended at 27.7%, down from 33.7% the year before. The decrease was in line with our expectations and largely driven by the acquisitions and currency headwinds. But we also saw a decline in the underlying business and Lise will elaborate further on that.

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Free cash flow before acquisitions, special items and divestments ended up €196 million, compared to €225 million last year and was higher than our outlook, mainly due to timing of payables.

2020/21 also marked the first year of our 2025 strategy and we have reached important milestones in our transition towards a dedicated bioscience company with focus on our microbial and fermentation technology platforms. Let me provide a few highlights on each of our strategic pillars in the next slide. Slide four, please.

Organic growth remains our number one priority and we continue to re-invest in our core platforms of Dairy, Animal Health and Human Health. Our investments are focused on bringing new innovations to market faster, expanding our route to market and strengthening our applications and marketing capabilities.

In Dairy we have seen an all-time high launch activity in 2020/21. However, travel restrictions, lower trial [ph 00:03:23] activity at customers focusing more on their existing business and cost savings made it more difficult to bring our new launches to customers and drive new business. This was particularly the case for fermented milk markets, such as Latin America and China where consumer price sensitivity is higher.

In Animal Health, we further expanded our route to market by strengthening our local sales partner network, regionalising our marketing capabilities and rolling out our product offering globally.

Overall, we completed more than 50 new registrations globally and launched our first pet probiotic range. We also made good progress in China during the year, but the return of the African swine fever hampered growth in the second half of the year.

In Human Health, focus was very much on the integration of UAS Labs and HSO Health Care and addressing the challenges in the second half of the year. But we also advanced our strength-to- solution strategy and scientific agenda by working globally on more than 30 clinical trials.

Next to growing our core business, we continue to leverage our lighthouses. Buyer protection and fermented plant bases today account for approximately 8% of Food Cultures and Enzymes revenue. Both businesses delivered double digit growth in 2020/21 and made strategically important launches.

In Plant Health we continue to increase penetration and reach of our bionematicides. Commodity prices were supported, but COVID-19 has delayed the market entry into Canada as well as the launch of our first biofungicide. On the positive side, we entered the Asian market with our new biostimulant Akuto [ph 00:05:20] in South Korea and today we have announced a new partnership with UPL which will further expand our commercial reach. Due to the typical long registration timelines, we expect meaningful revenue from this partnership by the end of the strategy period.

Lastly, looking at Bacthera, we received the manufacturing licences for our clinical trial production and the team, which has grown to 70 people today, continue to mature commercial

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opportunities with leading players in the life-biotherapeutic space. Extending our microbial platform via acquisitions and partnerships is our third strategic priority.

Please turn to the next slide, slide five.

The integration of our three acquisitions, UAS Labs, HSO Health Care and Jennewein have largely been completed. The three businesses delivered €105 million in revenue and €17 million in EBITDA, below our initial expectations, but in line with the corrected outlook. While we must recognise that the first year was not without challenges, especially related to HMO, all three acquisitions have delivered on our expectations in terms of strategic fit and potential for our 2025 strategic priorities.

In Human Health during the second half of the year, we have seen that our dependency on large accounts on the traditional sales channel can be a disadvantage for the business. With the acquisition of UAS Labs and HSO Health Care, we are addressing this imbalance and are building a more resilient business with a more defined, diversified customer base and a larger presence in the e-commerce space and a broader product offering, not least in the fast-growing Human Health category. We believe that for Human Health, the future lies in what we call the strength- to-solution strategy where we can support customers along the entire value chain from strength selection to finished product manufacturing. This is why we have also completed the insourcing of additional packaging capabilities in Q4 to take full control of our supply chain.

Coming to Jennewein and HMO: we have added one of the pioneers in the HMO space to our portfolio. HMOs and probiotics represent complementary and synergistic ways of modulating the microbiome and as such presents an attractive synergy opportunity for Chr. Hansen. That said, it's still an industry in its infancy and regulatory approval delays related to COVID-19 and generally longer customer project timelines have slowed the development of the market. We are however progressing well in our dialogues with key customers who will drive the penetration of HMO and infant formula in the years to come and our capacity expansion plans to the outcome of these discussions.

Before I hand over to Lise for the financial deep dive, I would like to comment on our sustainability activities in the next page.

At Chr. Hansen more than 3,700 colleagues go to work every day to grow a better world naturally. Eighty-two percent of our revenue today contributes to the UN Sustainable Development Goals and across the organisation we work on embedding sustainability even further in our commercial strategies to drive more sustainable agriculture, better food production and improved health.

2020/21 was also a year where we increased our focus on climate action. During the year, we marked all of our Scope 3 emissions to set carbon emission reduction targets. The targets have been submitted to the science-based targets initiative for validation and we expect to publish them in the coming weeks. We also made good progress on embedding the recommendations from the task force for climate related disclosure in our enterprise risk management. And we

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increased our use of renewable energy beyond Denmark through an agreement at our Nienburg site in Germany.

With regards to our people targets, I am very pleased that we already this year reached our goal of having more than 30% women in key positions and that we kept engagement high, our employees safe during the pandemic year. For the first time, we have also published the result of our gender pay gap analysis reflecting our commitment to fairness and transparency in remuneration, with a clear goal to reduce the pay gap going forward.

Lastly, I am also pleased that our board of director is increasingly involved and has decided to formalise and strengthen its oversight of ESG topics on Board and Committee level in the coming years.

With these remarks, I would like to hand over to Lise for the financial performance review.

Lise Mortensen

Thank you, Mauricio, and welcome also from my side. And let's look at slide seven.

2020/21 was indeed an extraordinary year with the global pandemic, and this is also what we can see in the regional performance of our business. The trends that we saw in the third quarter largely continued into Q4.

To start with a positive development: growth in our largest region, Europe, Middle East and Africa, accelerated in the fourth quarter and ended at 11% organic growth, largely driven by a step-up in Food Cultures and Enzymes, but Animal Health also delivered strong growth. Human Health, on the other hand, declined due to weaker demand. For the full year, this resulted in 6% organic growth for the region.

Looking at North America, the region reported 4% organic growth in Q4 with similar dynamics as EMEA. Food Cultures and Enzymes and Animal Health did well.

While Human Health declined as customers with large exposure to the traditional sales channels reduced their orders to bring down elevated inventory levels.

For the full year, North America reported 6% organic growth driven by Food Cultures and Enzymes and Animal Health.

Moving on to Latin America, the region delivered 15% organic growth in Q4 with a lower contribution from euro-based pricing. Slower end-markets impacted our Food Cultures and Enzymes business, while health and nutrition delivered very strong growth. For the full year growth was 26% with euro-based pricing accounting for approximately half.

Lastly, Asia Pacific delivered negative growth of 10% in Q4, leading to a decline of 3% for the full year. The decline in Q4 was driven by Health and Nutrition, which was impacted by a very tough comparable both in Animal and in Human Health. In addition to this, Human Health was also impacted by adjustment of inventory levels at key customers, including customers for infant formula.

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Food Cultures and Enzymes also saw reported negative growth, but the relative performance has continued to improve during the last quarter, although it was still below our expectations and the Chinese yoghurt market remained under pressure.

Let's move to the next slide, slide eight for further explanations on the segments.

Food Cultures and Enzymes grew 10% organically in Q4, largely driven by volumes in part due to an easy comparable from last year. Growth was broadly anchored across the different product segments.

Our cheese and meat business continued its strong growth trajectory that we have seen throughout the year whilst in fermented milk and probiotics, we saw a step up in Q4. Our bioprotection lighthouse delivered strong growth, driven by meat and cheese applications, while fermented plant bases grew solidly.

For the full year, Food Cultures and Enzymes delivered 8% organic growth, with 3% volume growth outgrowing the underlying markets.

Cheese production volumes grew an estimated 1 to 2% for the year with higher growth in the second half where we saw the reopening of food service channels while retail remained strong.

Fermented milk markets on the other side declined slightly, with an estimated -2 to -3%, largely driven by lower output in China and in Latin America.

Turning to profitability, the Q4 EBIT margin before special items for FC&E decreased to 33% compared to 38.4% last year. The decrease is quite meaningful and there are several explanations for it.

First, last year's margin was positively impacted by a one-time gain from a VAT case in Brazil, which explains around 1.5 percentage points.

Secondly, we've seen a ramp up of activities following the COVID-19 lockdowns last year, which was the largest drag on the margin. And thirdly, we've had to book an impairment loss related to development projects, which explains around one percentage point.

If we look at the gross margin it was actually in line with last year, but our production efficiencies were offset by product mix and higher scrap due to a termination at our [? 00:16:07] plant.

For the full year, the margin declined -2.3 percentage points from 34.3 to 32 mainly due to product mix, higher freight costs and negative currency impact that offset production efficiencies. But we have also invested quite heavily into our R&D activities in FC&E in line with our strategy of reinvesting in the core.

Moving to Health and Nutrition on the next slide, slide nine. Organic growth in the fourth quarter and for the full year was heavily impacted by the weakness in Human Health. Organic growth was -4% in Q4, leading to 5% for the full year. There were two main drivers for the decline in Human Health in Q4 similar to last quarter: a high comparable from last year and customers reducing excess inventories due to lower demand in the traditional sales channels.

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