Christian Hansen : Q1 Conference call transcript 2022/23

Chr. Hansen Holding A/S

Q1 2022/23 Results

Conference Call Transcript

12 January 2023

PRESENTATION

Mauricio Graber

Thank you. Good morning, everybody, and welcome to the presentation of Chr. Hansen's Q1 22- 23 results. I'm here with our CFO, Lise Mortensen, and we will, as usual, walk you through the highlights of our first-quarter results, the outlook for the year, and not least, touch upon the announcement from 12th December on our proposed statutory merger with Novozymes. Before we move on, please take notice of the safe harbour statement on slide two. And with that, let's move on to slide three, please.

We started the new financial year with a solid performance, delivering 10% organic growth in Q1, corresponding to 15% Euro growth. Food Cultures and Enzymes showed solid growth, mainly driven by price, but also with good volume growth, above the underlying markets. Health and Nutrition showed strong growth, driven by volume and an increasing impact from our pricing initiative. Our latest pricing initiatives are taking effect from early 2023, and we expect the positive impact to continue in the coming quarters, in both segments, Food Cultures and Enzymes, and Health and Nutrition.

The Q1 EBIT margin before special items was 24.7%, plus 0.3 percentage point above last year. The improvement in the margin was due to the positive contribution from exchange rates and volume scalability, which was partly offset primarily by a continued inflationary pressure, despite the ongoing pricing initiatives, and a change in product mix in Food Cultures and Enzymes.

Free cash flow before acquisitions and special items amounted to €17 million year-to-date, down from €55 million last year, as cash flow from operating activities before acquisitions and special items was negatively impacted by a change in working capital, due to increasing inventory levels and a reduction in trade payables, as well as higher taxes paid. Please turn to slide four.

I will now address the strategic and operational highlights. A key strategic highlight is, of course, the proposed merger of Novozymes and Chr. Hansen announced mid-December. This, I will

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elaborate further on in the end of this presentation. Focusing on the strategic and operational highlights of the first quarter of the financial year, our core businesses delivered 10% organic growth, supported, as expected, by an increasing impact from pricing in both Food Cultures and Enzymes, and Health and Nutrition. We expect additional pricing impact in the coming quarters, contributing positively to our EBIT margin development.

In Food Cultures and Enzymes, we continued to work closely with our customers on yield optimization-related projects. The momentum in cheese remains strong, while the fresh dairy sector was more challenged due to the microeconomic environment. In Health and Nutrition, our Human Health business had a strong start of the year, driven by the infant and children's category, as well as our business with women's health, especially in Asia-Pacific.

Our agricultural businesses delivered solid performance, driven by pricing in animal health. Looking at the lighthouses combined, which account for approximately 10% of revenue, the businesses delivered 4% organic growth in the first quarter.

Both Bioprotection and Fermented Plant-Based Solutions performed well. Bioprotection was especially strong in meat, which drove a solid performance in Food and Beverages. In Fermented Plant Bases, we launched a new collaboration to accelerate access to new categories beyond plant-based yoghurts.

Plant Health entered Q1 with good momentum and showed strong performance in the quarter. On the backdrop of a very strong Q1 last year, HMO showed, as expected, a decline in the first quarter. The decline was also impacted by order timing, and the full-year outlook remains strong. Let me again repeat that. The full-year outlook for our HMO business remains strong. Please turn to the next slide, slide five.

Continuing with the financial performance, Food Cultures and Enzymes delivered 8% organic growth in Q1. The first quarter was driven by solid growth in dairy, supported by solid momentum in cheese and pricing initiatives. Food and Beverages grew strongly, driven by meat, including strong momentum with Bioprotective Solutions, while Fermented Beverages was negatively impacted by order timing within the wine segment. We saw an increasing impact from pricing adjustments, which contributed by 5% to the organic growth in Q1.

Health and Nutrition had strong double-digit growth in Q1, with 12% organic growth, driven by volume. Human Health delivered strong growth, while HMO declined due to order timing and a tough comparable from last year's quarter. Animal and Plant Health delivered solid growth, driven by pricing in Animal Health and strong performance in Plant Health. Please turn now to slide six for the regional performance.

In the first quarter, we saw strong progress in EMEA and emerging markets. As mentioned, EMEA delivered 16% organic growth. The strong performance was driven by very strong growth in Health and Nutrition, while Food Cultures and Enzymes delivered solid growth. Strong volume

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growth in Human Health contributed to the growth in Health and Nutrition, while pricing, including euro-based pricing as well as volume growth, contributed positively to the growth in Food Cultures and Enzymes.

The decline of 2% in North America was driven by Health and Nutrition, which was affected by a negative impact from order timing in HMO and softening market in Human Health. The supplements sector in North America showed, as expected, signs of negative impact from inflation and consumer price sensitivity. We expect Human Health's growth rate to be challenged in the short run, also considering tough comparables from Q2 last year. While for HMO, we see a stronger outlook for the full-year22-23. On the positive side, Animal and Plant Health had good performance in the quarter. Food Cultures and Enzymes grew solidly, and this was mainly driven by continued good momentum in both cheese and meat. In addition, pricing initiatives further contributed to the growth.

Moving on to Asia-Pacific, that delivered 14% organic growth in the first quarter, driven by Health and Nutrition, which experienced very strong growth in Human Health, supported by all segments. Growth in Food Cultures and Enzymes was driven by strong momentum across the region, except for China, which declined, partly due to the continued COVID-19 lockdowns during the quarter. Also, pricing initiatives contributed to the growth, while the impact from euro-based pricing was negative.

Lastly, Latin America delivered a double-digit growth rate of 15% organic growth, and this was driven by both volume and pricing initiatives in Health and Nutrition, and Food Cultures and Enzymes. I will now hand over to Lise for the financial review of the first quarter.

Lise Mortensen

Thank you, Mauricio. And welcome, everyone. Please turn to slide seven. Driven by the organic growth of 10% in the first quarter, as well as exchange rates, the absolute EBIT before special items in Q1 increased by 17% from the year before, and reached €77 million. The EBIT margin before special items came in at 24.7%, which was up 0.3 percentage point versus last year. The margin improvement was due to a positive contribution from exchange rates and volume scalability, which was partly offset by continued inflationary pressure, despite ongoing pricing initiatives and a change in product mix in Food Cultures and Enzymes. The EBIT margin before special items, excluding exchange rates, is still lagging versus last year, due to the inflationary pressure, as Q1 of last year was not yet impacted by the accelerating inflation.

Our latest price-up initiatives are taking effect from early 2023, and we expect a positive impact from this in the coming quarters. Looking at the margins per segment, the profitability in Food Cultures and Enzymes was impacted by higher input costs, a change in product mix, and the donation of an amount equal to the profit from Chr. Hansen LLC Russia. This was partly offset by positive contribution from pricing initiatives and exchange rates, which resulted in a Q1 EBIT margin, before special items, of 27.9% compared to 30.8% last year. For Health and Nutrition, the

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margin improved. A scalability effect from the strong volume performance, acquisition synergies. And exchange rates more than offset higher input costs, and the division saw a Q1 EBIT margin, before special items, of 19% versus 11.9% the year before.

Next, I will explain the movement in the free cash flow. Please turn to slide eight. Free cash flow before special items was €17 million year-to-date, down by approximately €38 million from last year. This was due to cash flow from operating activities, before special items, being impacted by a change in working capital and higher taxes paid. The change in working capital was mainly due to an increase in inventory levels and reduction in trade payables. The inventory level was, in part, affected by our efforts to secure supply chains and will normalize throughout the year. The increase in taxes paid versus Q1 last year was related to the acquisition impact we saw in the first quarter of our FY22, and we will not see the same impact compared to last year in the coming quarters.

Return on invested capital, excluding goodwill, amounted to 21.5% year-to-date, up from 20% the year before. The improvement was driven by Health and Nutrition, supported by the division's strong sales development. And for Food Cultures and Enzymes, however, was down compared to last year, driven by the negative impact from higher input cost. Please turn to slide nine for the guidance.

The solid results of Q1 show the strength of our business model. Organic growth reached 10%, driven by both volume and pricing initiatives, and EBIT before special items increased by 17%, supported by this organic growth and exchange rates, leading to an EBIT margin, before special items, of 24.7%. Considering the Q1 performance, we are confident to maintain our underlying target for the year, which remains unchanged. Organic revenue growth is still expected in the range of 7% to 10%.

The growth outlook is based on a positive impact from ongoing pricing adjustments, growth in our lighthouses, as well as successful execution of the project pipeline in core businesses, including expansion of the market for bacterial solutions, which provide customers with productivity improvements. For euro-based pricing, we assume a neutral impact for the year.

For the current quarter of Q2, organic growth is expected in the lower end of the expected range for the year, as volume growth will be impacted by a high comparable in Human Health, which experienced very high volume growth in Q2 of last year. This will partly be offset by an increased impact from pricing, following the latest initiatives to address the inflationary pressure. Organic growth is then expected to reaccelerate in the second half of the year.

While the underlying performance is unchanged, the current macroeconomic environment has led to volatile exchange rates, and we therefore update the outlook based on the current level for the euro to US dollar, in line with the sensitivities we announced in connection with the previous outlook from October 12th, 2022.

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That outlook was based on a euro-to-US-dollars of 0.97, while the present outlook is based on a euro-to-US-dollars of 1.07. With an approximate 10% depreciation of the US dollar, the impact from exchange rates on revenue is now expected to be neutral, and the EBIT margin before special items is now expected in the range of 26% to 27%.

For the current quarter, Q2, EBIT margin before special items in FC&E is expected to increase, reflecting the impact from pricing initiatives, while the EBIT margin before special items, in Health and Nutrition, is expected to decrease compared to last year, due to the impact from the high sales comparable in Human Health. Group EBIT margin before special items is expected to increase from the 24.7% in Q1 and throughout the year, mainly in the second half, driven by scalability from sales volumes and full impact from the sales price-up initiatives.

The free cash flow before special items is now expected to be in the range of €170 million to €210 million. I will now hand over to Mauricio for an update on the proposed merger with Novozymes that we announced on December 12th, and for the final remarks. Please turn to slide ten.

Mauricio Graber

Thank you, Lise. As you know, Novozymes and Chr. Hansen announced in mid-December the agreement to propose a statutory merger of the two companies. The completion of the merger is subject to approval by both the extraordinary general meetings of Novozymes and Chr. Hansen, as well as customary merger control and other regulatory approvals from the relevant authorities.

I am proud that we, with this combination, are joining forces to create a global bioscience partner based on our strong complementary technology platforms, highly dedicated employees, and a customer-centric approach. Building on shared purpose-driven values and cultures, as well as a solid business rationale, the proposed combination of these two iconic Danish companies represents a natural next step towards addressing the needs of tomorrow, by unleashing the full potential of biological solutions while generating significant value for all stakeholders and society at large. Let me move to slide 11.

By combining the complementary strengths of each business, we create strong opportunities for revenue and cost synergies, both on the short term and the long term. With regard to revenue synergies, we will be able to utilise each company's broad market access and sales and marketing organisation, and application capabilities, to reach existing and new customers with our products, especially in Human Health, but also across various food and beverage categories, and animal and plant health.

Long term, we will aim to supplement the near-term signatures with new solutions, based on our joint technology platforms, as we create opportunities for food and health for the future.

Cost synergies will, in large part, be from optimising our production, utilising best practices and technologies from each business. As an example, supporting the scaling of our HMO production footprint, and from optimising procurement and logistic savings.

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