Chr Hansen A/S : Q2 Conference call transcript 2021/22

Chr. Hansen Holding A/S

Q2 2021/22 Results Conference Call Transcript

6 April 2022

PRESENTATION

Operator

Thank you for standing by, and welcome to the presentation of Chr. Hansen's Interim Report and Conference Call for Q2 2021/2022.

Currently, all participants are in listening-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 call is being recorded.

I would now like to hand over the conference call over to your speaker of today, Chr. Hansen's CEO, Mauricio Graber. Please go ahead.

Mauricio Graber

Thank you. Good morning, and welcome to the presentation of Chr. Hansen's results for Q2 of the financial year 21/22. I am here with our CFO, Lise Mortensen, and we will walk you through the highlights of our last quarter as well as our outlook for the full year before we open up for Q&A.

Please turn to the next slide. But before we do that, I would like to take notice of the Safe Harbour statement.

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

Before we start today's call, I would like to make a few comments on the implications of the Russian invasion of Ukraine, that's on everyone's minds these days. We are appalled by the escalating violence in Ukraine, and condemn the Russian invasion in the strongest possible terms. Our hearts and thoughts go out to the people of Ukraine, and our top priority continues to be the safety of our employees and their families. Important to say that we will also continue to workwith our Ukrainian customers to support the continued production of dairy products in Ukraine in the best possible way.

As a global supplier to the food and [? 00:02:07] industries, we have responsibilities towards fulfilling the basic needs of civilians for food and health products. This also goes for Russia. And as communicated on March 11, we will therefore, for now, continue to supply ingredients only for basic food and Human Health products in full respect of global sanctions. We are discontinuing supply of products that fall outside of these categories. Additionally, we have decided that profit from our continued operations in Chr. Hansen in Russia during the conflict will be donated to humanitarian aid in support of Ukraine. The donation is expected to be around €1 million to €2 million. We will continue to evaluate the situation as it develops and assess further potential changes in our activities in the coming period.

With these words, let's please move to the next slide, slide four. In a challenging environment, Chr. Hansen continued its strong performance, delivering 14% organic growth in the second quarter. Growth in Health and Nutrition further accelerated, supported by Human Health, while Food Cultures and Enzymes continued its growth momentum driven by its core segments and developed markets.

The Q2 performance took year-to-date organic growth to 12%. Our EBIT margin before special items came in at 27.7%. This is 70 basis points above last year. The improvement was driven by the strong volume development in Health and Nutrition, production efficiencies, as well as positive contribution from currencies, but was partly offset by the higher input cost and general ramp-up of activities. Year to date, the EBIT margin before special items reached 26.2% and was on par with last year.

Free cash flow before special items was €31 million in Q2, and €86 million year to date, meaningfully above last year due to stronger operating cash flow and lower CapEx compared to last year, where we acquired the site in Kalundborg for HMO.

Please turn to the next slide, slide five. If we look at the operational and strategic highlights of the quarter, the focus was very much on commercial execution and safeguarding our strong delivery performance to customers while responding to increasingly inflationary pressures and supply chain challenges. In Food Cultures and Enzymes, cost savings and productivity improvement continue to drive a lot of the dialogues with customers, resulting in new opportunities for bulk conversions and yield-optimising solutions, while growth in add-on concepts such as bio-protection was slower.

Growth in Human Health and HMO accelerated in the second quarter, supported by the rebound of the probiotic supplement market in Europe and the US, high pre-launch activity, new business wins in Women's Health, and strong momentum across all three acquisitions. However, we expect momentum to normalise during the second half of the year.

Dynamics in our agricultural business were mixed. While crop farmers have been benefiting from increased commodity prices, Animal Health customers are increasingly under pressure to save costs, with negatively impacted by the selling environment for animal feed products. That said, we continue to see very good growth with our recent launches, for example, GallliPro Fit in poultry. Also, I am very happy to share that in Plant Health, we received the approval for our first biofungicide, which will first roll-out in the US and Brazil, and we also launched the first product through our UPL collaboration in Asia Pacific.

Overall, our licences delivered 12% organic growth in the second quarter, which was, as expected, lower than in Q1, driven by timing of orders. Growth for the first six months combined was 22% compared to 11% for the core business. As inflationary pressures continue to intensify, a key priority during the second quarter were price adjustments. In close collaboration with our customers, we implemented the first increases at the beginning of the calendar year. However, due to the war in Ukraine, overall market volatility and inflationary pressure have further accelerated in recent weeks, and we are implementing a second round of price increases this month. Lise will elaborate more on the implications of this shortly.

Lastly, I would like to mention that, as we communicated on March 24th, Thomas Schaefer has stepped down from his Chief Scientific Officer and member of the Executive Board, effective April 1st. I would like to thank Thomas for his contribution to Chr. Hansen, and look forward to working with him in his new role as Chief Scientific Adviser. Henrik JørckNielsen, previously leading our Animal Health business, will take over as Chief Scientific Officer and will focus on bringing our commercial and R&D teams even closer together to create a stronger customer-centric organisation and bringing innovations to market faster.

Let's now turn to page six for additional comments on our sales performance. If we look at the top-line performance across the two segments in Q2, growth was, as expected, largely volume-driven. Food Cultures and Enzymes delivered 7% organic growth in Q2 and year-to-date with solid growth in both dairy and food and beverages. Pricing only had a modest impact as increases became effective only towards the end of our Q2 period. Growth in Health and Nutrition accelerated to 26% in Q2, leading to a 20% growth year-to-date, driven by Human Health and HMO that delivered very strong growth, while Animal and Plant Health grew solidly. Pricing was slightly negative as underlying price increases were offset by price settlements in the Plant Health related to our alliance with FMC.

If we look at the regional performance, please turn to the next slide, slide seven. Momentum in emerging markets improved, while we continue to see solid progress in developed markets. I am very pleased to report that all four regions delivered double-digit growth in the second quarter. Europe, Africa, Middle East delivered 13% organic growth in Q2, and 11% year-to-date, driven by a solid sales pipeline execution in Food Cultures and Enzymes and very strong growth in Human Health that was supported by increased activity in the traditional probiotic supplement channel and a strong HMO growth, the latter, however, from a low baseline.

Growth rates in North America remained stable at 12%, with strong momentum in cheese and very strong growth in Human Health, supported by the mentioned high pre-launch activity.

Latin America reported 17% organic growth, leading to 13% growth year-to-date. Food Cultures and Enzymes grew solidly despite continued soft fermented milk markets, while growth in Health and Nutrition was driven by sugarcane sales in Plant Health and good uptake of our animal probiotics.

Lastly, our region Asia Pacific grew 16% in Q2, and 10% year-to-date, with very strong growth in Human Health supported by new business wins in the Women's Health category, as well as solid growth in Food Cultures and Enzymes. Our fermented milk business in China grew slightly, though we remain cautious for the rest of the year as we expect current market dynamics to persist, also in light of increasing dairy production costs and decreased consumer purchasing power.

And with these comments, I would like now 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. Our group EBIT margin before special items in Q2 came in at 27.7%, up 70 basis points. This was largely driven by the scalability benefits from the strong volume growth in Health and Nutrition and production efficiencies, as well as a positive contribution from currencies of approximately half a percentage point. Higher input costs negatively impacted our cost of sales, while operational expenses as a percentage of sales were below last year, in part due to the strong volume growth.

Total EBIT before special items in Q2 amounted to €84 million, which was 20% up compared to last year, and the increase was driven by Health and Nutrition, while EBIT before special items in Food Cultures and Enzymes was on par with Q2 of last year. Year-to-date EBIT before special items amounted to more than €50 million [ph 00:12:40], up 14%.

If we look at the segments, we saw the biggest impact from input cost inflation in Food Cultures and Enzymes. The EBIT margin before special items in Q2 here was 28% compared to 31% last year as production efficiencies and positive impact from currency were offset by higher input costs and higher operational expenses related to increased activity following COVID-19.

In Health and Nutrition, the EBIT margin before special items in Q2 was 27.3%, compared to 19.2% last year. Here, the scalability effects from the strong sales performance, acquisition synergies, and currencies more than offset the higher input cost and the higher activity level.

Given the acceleration of the inflationary pressures, let me elaborate a bit more on the implications for our cost base on the following slide, slide nine. As Mauricio already mentioned, the Russian invasion of Ukraine has further accelerated inflationary pressures, whether it's related to raw materials, energy or logistics. Across our cost base, we are seeing substantial price increases and increasingly challenging supply markets with high volatility. Our number onepriority remains securing availability of key inputs and our ability to continue to deliver to customers. Energy accounts for approximately 5% of our cost base, and we are monitoring the situation closely, implementing mitigating measures where possible, for example, by shifting volumes from air to sea freight.

Short term, a large part of our energy supply is covered by long-term contracts with fixed prices. But the current energy market developments are likely to have a significant unfavourable impact beyond FY22. To compensate for the increase in input costs, we have adjusted our selling prices in close collaboration with customers. First price adjustments have been implemented at the start of the calendar year across our different business units, and in addition, we will implement an additional price surcharge for all customers, which is introduced this month.

In sum, this should bring our pricing contribution to organic growth for the full year up to between 2% to 3%, compared to previously-estimated, between 1.5% to 2%. However, the price increase has come with a certain timing delay. They will not be sufficient to fully compensate for the higher cost base by the end of this financial year, which is the key driver for our adjustment to the FY22 EBIT margin outlook from previously 27% to 28% to now 26% to 27%.

With these comments, let's move to the next slide, slide ten, for the cash flow. Free cash flow before special items stood at €86 million year-to-date, compared to €35 million last year, driven by a strong operating cash flow and lower investments in property, plant and equipment as last year was impacted by the acquisition of the Kalundborg site. The increase in the operating cash flow before special items [? 00:16:34] €108 million last year to €131 million was driven by higher operating profit. Return on invested capital, excluding goodwill, was 22.6% compared to 22.1% last year. The increase was driven by the strong sales performance in Health and Nutrition, while the return on invested capital in FC&E was down compared to last year due to the negative impact from higher input costs and a general ramp-up of activities.

Let's now move to the next slide, slide 11, for the outlook. Starting with the organic growth, we have adjusted the outlook upwards from 5% to 8% previously to now 7% to 11%, supported by the strong performance in the first half of FY22. However, the widening of the range with only six months left of the year underlines the increased uncertainty that we are facing right now.

Let me go through some of the key drivers for the adjusted guidance. If we first look at what drives the guidance up, then this is much due to the strong performance in the first half in Human Health. This we do expect to somewhat normalise in the rest of the year as we did see a very positive impact from early ordering ahead of new product launches by customers, especially in North America in Q2. Secondly, we expect to see an increased impact from pricing initiatives in the second half, and we now expect pricing to contribute between 2% to 3% for the full year. We have also included a small positive impact from euro-based pricing, mainly in Turkey and Russia, of up to half a percentage point based on the current exchange rate levels. The assumption is highly uncertain, especially related to the Russian rouble.