Christian Hansen : Q2 Conference call transcript 2022/23

Chr. Hansen Holding A/S

Q2 2022/23 Results

Conference Call Transcript

13 April 2023

PRESENTATION

Mauricio Graber

Good morning, everybody, and welcome to the presentation of Chr. Hansen's Q2 22/23 results. I am here with our CFO, Lise Mortensen, and we will, as usual, walk you through the highlights of our second quarter and the outlook for the year. And we will also update you on the progress of the proposed merger with Novozymes. Before moving on, please take notice of the safe harbour statement.

And whilst you read this well-known statement, I would like to give my appreciation for the very strong support we've received from our shareholders to the proposed merger with Novozymes at our extraordinary general meeting, held on March 30th. With the approval from the shareholders of both Chr. Hansen and Novozymes, we have passed an important milestone towards creating a leading bioscience partner, based on our complementary technology platforms. Please turn to slide three.

Chr. Hansen progressed through the year with a strong performance in the second quarter, delivering 11% organic growth for the Group. Pricing came in as expected, with volumes in health and nutrition that were better than expected. In addition, euro based pricing was also more supportive, compared to our initial expectations for the quarter. Year-to-date, organic growth reached 10%.

Strong growth in food cultures and enzymes was mainly driven by price, but also, with good volume growth above the underlying markets. Solid growth in health and nutrition was volume driven, and with an increasing impact from the latest pricing initiatives implemented in January, we expect to continue the positive pricing impact in both businesses for the coming quarter. Our EBIT margin before special items reached 27% in the second quarter, which was 0.7 percentage points below last year.

1

As continued inflationary pressure, negative impact from product mix, and a high comparable in health and nutrition from Q2 last year were partly offset by a positive impact from pricing, scalability, and exchange rates. Year-to-date, the EBIT margin before special items was 25.9%, compared to 26.2% the year before. Free cash flow before acquisitions and special items was €39 million in the second quarter.

Year-to-date, the cash flow amounted to €56 million, down from €86 million the year before. The drop was due to the cash flow from operating activities being negatively impacted by a change in working capital, driven by inventories, and an increase in taxes paid. Please turn to the next slide, slide four, for the strategic and operational highlights of the quarter.

Adjusting our selling prices to reflect the inflationary environment has been a key focus area in the past year. And it's encouraging to see the increasing impact from our initiatives, especially in food cultures and enzymes, but also, to a lesser extent, in health and nutrition. With these pricing initiatives, we are taking important steps towards recovering from the inflationary environment we have experienced in the past year. However, despite some improvements in global supply, such as energy, we continue to see pressure from various raw materials and external services, and the general cost picture remains challenging short term.

Returning to organic growth, our core business delivered a solid 8% organic growth in the second quarter, and reached 9% year-to-date. Despite the solid growth, the core business was, as expected, outgrown by the lighthouses, which combined, delivered 38% organic growth in Q2, and 21% year-to-date. Let me remind you to be mindful that it is important not to look at the lighthouses on a quarterly basis, as they still represent only about 10% of the global sales for the Group. All lighthouse areas delivered double digit growth in the first half of the year.

Bioprotection started to see an improvement in the execution of the project pipeline, including projects related to the third generation FreshQ. Fermented plant based also showed strong growth, but still from a very low base. Plant health delivered strong growth across the first two quarters, but in part, it was positively impacted by the early timing of orders into the first half.

HMO also delivered strong growth in the first half, but before we move on to these, let me just highlight our joint venture, Bacthera. In March, Bacthera added additional fermentation capacity through a minor acquisition, which supports the long term growth outlook of the live biotherapeutics market.

And in addition to this, Bacthera continues to work on preparing production facilities for the SER- 109 agreement with Seres Therapeutics. Due to the acquisition of capacity, and timing of milestone payment from Seres, Lonza and Chr. Hansen provided additional funding to Bacthera during the first half of the year. Please turn to slide five for the recent highlights on our HMO lighthouse.

2

As many of you know, our investment into the developing market for human milk oligosaccharides, or HMOs, got off to a rough start after the acquisition in 2020. Despite this, we have continued to believe in the market potential of this business, and I am very pleased that we have now, for several consecutive quarters, seen very healthy development, both in terms of the scientific, regulatory, operational, and commercial performance.

Let me mention some of the highlights, not least the encouraging performance in the first half, with strong organic growth, supporting an organic growth for the full year of around 30%. Looking further ahead, we continue to see high customer interest, which is supported by good progress within regulatory approvals.

In February, we received EU approvals for three of our key HMOs to be used in infant formula at the highest dosage. This follows approvals in the US, Canada, Israel, Australia, and New Zealand last year. In human health, we also introduced synbiotic solutions that combine both HMOs and probiotics for women's health. To support these positive developments, we have secured near term production capacity. However, we are still evaluating how to ensure the best expansion of capacity to support the long term profitable growth potential of our HMO business. Let me also mention that the approval process is still ongoing in China, and we await the feedback from the Chinese authorities. Please turn to slide six.

Now looking at the second quarter top line performance for the two business areas. Growth was mainly driven by price in food cultures and enzymes, while in health and nutrition, growth was volume driven, however, with increasing pricing impact. On Group level, the price adjustment contributed by 6% to the organic growth in Q2, and 5% year-to-date.

Food cultures and enzymes delivered strong 12% organic growth in Q2, reaching 10% year-to- date. While pricing accounted for 9% in Q2, we saw good volume growth above the underlying markets. Dairy showed strong growth, supported by pricing initiatives, solid momentum in cheese and the lighthouses of bioprotection and fermented plant bases. Despite the decline in probiotics and fresh dairy, the segment delivered solid growth, however, mainly driven by pricing initiatives. In food and beverages, we saw very strong momentum in both bioprotective solutions and fermentation cultures for meat.

Now, organic growth in health and nutrition reached 9% in Q2, driven by volume, leading to 10% year-to-date. Pricing contributed more positively in Q2, and the impact was 3%. Despite a tough comparable from last year, human health and HMO delivered strong growth. Going into the quarter, we were cautious on health and nutrition, especially in the US market. However, the strong performance of the region was supported by our HMO business, which in addition to the good underlying momentum in pricing initiatives, was also positively impacted by the timing of orders. Animal and plant health delivered solid growth, driven by pricing in animal health, and strong performance in plant health. Please turn now to the next slide, slide seven, for an update on the regional performance.

3

Overall growth in the second quarter was supported by all regions, except for Asia Pacific, which was flat. Year-to-date, though, all regions contributed to the positive development of the good Group organic growth. Starting with Europe, Middle East, and Africa, that delivered 18% organic growth in Q2 and 17% year-to-date. Strong growth in both health and nutrition and food cultures and enzymes drove the very positive EMEA performance. Growth in health and nutrition was supported by pricing initiative and strong volume growth across all product categories, while growth in food cultures and enzymes was supported by pricing, including euro based pricing and volume growth.

North America improved from the previous quarter, delivering 4% organic growth in Q2 and 1% year-to-date. Growth in food cultures and enzymes was solid, driven by good volume development across all segments, as well as pricing. In health and nutrition, we saw negative growth mainly related to a tough comparable from last year's quarter in human health, which was partly offset by a positive impact from timing of orders in HMO. Based on the current market trends, we see a stabilisation of volumes in North America during the second quarter. The growth of probiotic human health products, however, remains below the midterm outlook of 4% to 6%, mainly due to a slowdown in the North American market and certain Asian markets for dietary supplements.

Asia Pacific reported flat growth in Q2, while year-to-date growth was 6%. Food cultures and enzymes delivered negative growth, due to the lower volumes in China, which was partly offset by strong momentum in India. In health and nutrition, strong growth in China drove the modest growth, while softening market conditions led to a decline in South Korea.

Lastly, Latin America reported the strongest growth in Q2, growing 22%. The year-to-date growth was also very strong at 19%. Both pricing initiatives, including euro based pricing, and volume growth across health and nutrition, and food culture and enzymes, drove the very strong performance for the region.

I will now hand over to Lise for the financial review of the second quarter.

Lise Mortensen

Thank you, Mauricio, and welcome, everyone. Please turn to slide eight for profitability. On Group level, the absolute EBIT before special items in Q3 increased by 8% from the year before, reaching €91 million. The positive development was driven by a positive contribution from exchange rate, pricing initiatives, and volume growth, which was partly offset by a negative impact from higher input cost.

The EBIT margin before special items in Q2 amounted to 27.0%, a decline of 0.7 percentage points, compared to last year. The negative margin development was due to continued inflationary pressure, a negative impact from product mix, and a high comparable in health and

4

nutrition from the year before, partly offset by a positive impact on pricing initiatives, scalability, and exchange rates.

Year-to-date, the absolute EBIT before special items increased by €18 million to €168 million, while the EBIT margin before special items reached 25.9%, compared to 26.2% the year before. Moving on to the segment margins, profitability in food cultures and enzymes improved in Q2 versus last year. And the EBIT margin before special items was 28.4% versus 28.0 last year.

Pricing initiatives [?], scalability, and the positive impact on exchange rates were partly offset by higher input cost, a change in product mix between fresh dairy and cheese, and the donation of an amount equal to the profit of Chr. Hansen Russia. In health and nutrition, the margin reached 24.7% in Q2, compared to 27.3% last year. The decline was due to continued inflationary pressure, negative impact on product mix, and not least, the high comparable from last year. This was partially offset by a positive impact on pricing initiatives and exchange rates.

Let's move on to the movement in free cash flow, please turn to slide nine. Free cash flow before acquisitions and special items was €56 million year-to-date, compared to €86 million last year. The decrease was due to cash flow from operating activities being impacted by negative change in working capital driven by increase in inventories and taxes paid, and despite the improvement in operating profit.

To secure our supply chains going into the year, we took measures that led to the higher inventories. We expect the inventories to decrease as we progress through the year. And as a reminder, the higher taxes paid in the first half was related to the fact that last year was positively impacted by acquisitions.

In addition, we expect a change in facing of operational investing activities, which will improve the free cash flow for the full year. Return on invested capital excluding goodwill was 23.2% year- to-date, up from 22.6 the year before. The improvement was driven by the strong sales development in health and nutrition. Next, let's have a look at our outlook. Please turn to slide ten.

The strong results of the second quarter made us confident about the attractiveness of the market we serve, both in food cultures and enzymes and health and nutrition. Organic growth was strong at 11%, driven by a mix of both price and volume. EBIT before special items increased by 8%, driven by the organic growth and currencies, and this led to an EBIT margin before special items, up 27.0%.

Based on the increased impact from euro based pricing, we adjusted the outlook for organic growth, while maintaining the outlook for EBIT margin before special items. For organic growth, we adjusted the outlook to 8% to 11% from 7% to 10%. The expected growth is composed of a positive impact from price adjustments, growth in lighthouses, and the successful execution of

5