Christian Hansen : Q3 Conference call transcript 2022/23

Chr. Hansen Holding A/S

Q3 2022/23 Results

Conference Call Transcript

6 July 2023

PRESENTATION

Mauricio Graber

Good morning, everyone, and welcome to the presentation of Chr. Hansen's Q3 2022/23 results. I am here with our CFO, Lise Mortensen, and we will, as usual, walk you through the highlights of our third quarter and outlook for the year. And as we communicated in the Q2 results, we will also provide commentary on the outlook for the calendar year covering the period up to 31st December 2023. Before opening up for Q&A, I will also provide an update on the proposed merger with Novozymes. Before moving on, please take notice of the safe harbour statement.

Please turn to slide three. As the organisation remained focused on business execution, Chr. Hansen ended the third quarter of the financial year with a solid result, delivering 9% organic growth for the group. As expected, the positive contribution from pricing continued in both Food Cultures and Enzymes and Health and Nutrition. While volumes were more modest, the positive impact from euro-based pricing was higher, predominantly in Food Cultures and Enzymes.

Looking at the year to date, the group organic growth was strong at 10%. Food Cultures and Enzymes delivered strong growth, mainly driven by price, while volume growth was softer. Health and Nutrition delivered solid growth, mainly driven by price which contributed more compared to the previous quarter, but also by volume growth. EBIT margin before special items was stronger in the third quarter compared to last year, reaching 27.5%. This was 0.8 percentage point above last year, as the margin was supported by strong sales development and scalability effects, which was partly offset by a negative impact from higher input cost, a change in product mix and exchange rates.

Year to date, the EBIT margin before special items was 26.4%, which is 0.1 percentage point above last year. Free cash flow before acquisition and special items reached €76 million in the third quarter. Year to date, the cash flow amounted to €133 million, up from €116 million the prior year. The higher cash flow was due to high cash flow from operating activities and a positive impact from taxes paid.

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Now, please turn to slide four for an overview of the strategic and operational highlights of the third quarter. Starting with price, it's great to see the results we continue to deliver from the efforts of our teams on pricing initiatives. In the third quarter, we still continued pricing impact in Food Cultures and Enzymes, while the impact in Health and Nutrition increased from the previous quarter. We still expect pricing to contribute positively for the rest of the year, but at a lower level than in Q3, due to annualizations of the price adjustments from last year.

As we continue to see increased pressure across part of our cost base, we will work diligently with our customers to ensure these cost increases are reflected in future price increases. Continuing with the organic growth, our core business remains stable, with 8% organic growth in the third quarter. We saw solid volume growth in Cheese, demand driven by products related to productivity improvements and yield optimization, while there was also focus on sustainability impact.

With our CHY-MAX Supreme solution, faster and more precise coagulation enables cheese producers to produce more cheese faster, which leads to not only improved productivity but also reduced cheese carbon footprint. In addition to this, CHY-MAX Supreme helps make the cheese firmer, meaning that the process of slicing, cutting and shedding the cheese at industrial converters, who provide the cheese to food service, is improved and results in less waste.

Within Meat and Prepared Foods, we inaugurated a new customer and application centre, with a microbial laboratory and a meat processing pilot plant in Pohlheim, Germany. This new centre will strengthen customer collaborations, both in the Fermented Meat Products segment and in applications such as seafood, hot dogs and plant-based products.

Year to date, our core business delivered 9% organic growth. Organic growth in the Lighthouses combined reached 15% in the third quarter, and looking at the year to date they delivered very strong growth of 19%. All the lighthouses delivered double-digit growth in the first nine months of the year. And as usual, please note that it is important not to look at the lighthouses on a quarterly basis but on an annual basis instead, since the businesses combined account only for approximately 10% of group sales.

Now, looking at each of the lighthouses separately, Bioprotection continued solid progress, driven by upselling and new business. Fermented Plant Bases grew from a small base, driven by Dairy Alternatives, where the focus remains on improving the taste and texture profile of plant-based products.

In HMO, we reached an important milestone during the quarter. Chr. Hansen received the EU approval of the final HMO, 6'-SL, in our 5 HMO mix, for highest use levels in infant formula. This is an important step, since now we are able to offer customers with a mix of 5 HMOs, bringing infant nutrition products closer to human breast milk. Product registrations in China are ongoing, and we still expect the approval at the end of 2023, or the beginning of 2024. Lastly, in Plant Health we saw strong growth both in the third quarter and year to date.

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Now, please turn to slide five. In terms of top line performance, the group in the third quarter was mainly driven by price in both Food Cultures and Enzymes and Health and Nutrition. In Health and Nutrition, the impact from pricing stepped up compared to the previous quarter. The total pricing impact on the group was 7% in Q3 and 6% year to date. The impact from euro-based pricing was significant in the quarter, mainly impacting Food Cultures and Enzymes.

Organic growth in Food Cultures and Enzymes reached a strong 10% in the third quarter and also year to date. This was mainly driven by price which contributed 9% in the quarter, but we also saw slight volume growth. Dairy growth was strong, supported by pricing initiatives and strong momentum in Cheese, while Fresh Dairy was solid, except for probiotics, which continued to decline. Bioprotection and Fermented Plant Bases also supported the growth in Food Cultures and Enzymes. Food and Beverages performed well, driven by pricing, while volume declined due to market softness within Meat and Prepared Food categories.

Moving on to Health and Nutrition, that delivered 7% organic growth in Q3, mainly driven by price but also by volume, leading to 9% year to date. We saw increased pricing impact in the business in Q3, and the contribution of pricing was 5%. Human Health and HMO delivered good growth, driven by pricing. Volumes declined as they were negatively impacted by the timing of orders in HMO.

In general, the market outlook is slightly more positive compared to the previous quarter, and the sector growth of probiotic Human Health products is in line with the midterm outlook of 4% to 6%, with some recent improvements in North American consumption after a period of very soft growth and despite softness in the South Korean markets for dietary supplements. Markets across EMEA and in China have continued to show resilient growth in this segment. Animal and Plant Health delivered strong growth supported by both pricing and volume growth.

Now, let's turn to slide six for the performance by region. All regions, except Asia-Pacific, drove the growth in the third quarter. Looking at the year to date, all regions contributed positively to the group's organic growth. Starting with Europe, Middle East and Africa, the region grew 10% organically in Q3, leading to a 15% year-to-date growth. Organic growth was driven by both Health and Nutrition and Food Cultures and Enzymes. Food Cultures and Enzymes was supported by pricing, including euro-based pricing, as well as slight volume growth, while Health and Nutrition was supported by pricing initiatives and good volume growth.

North America further improved from the previous quarter and reached 9% organic growth in Q3, and 4% year to date. Organic growth was driven by both Health and Nutrition and Food Cultures and Enzymes. Food Cultures and Enzymes was driven by solid volume growth across categories except for Probiotics and Meat and Prepared Foods, which declined in the quarter. Health and Nutrition was supported by pricing initiatives and good volume growth across categories except for HMO. As mentioned, volumes in HMO declined due to negative impact from the timing of orders.

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Asia-Pacific reported a decline of 2% in Q3. Year to date, the region however grew 3% organically. Organic growth in Food Cultures and Enzymes declined due to lower volumes in China and India, while a decline in Health and Nutrition was driven by softening market conditions in South Korea. Food Cultures and Enzymes was impacted by a tough comparable from the year before in India, while in China the business saw less favourable conditions, the country still recovering from the pandemic lockdowns. Notably, the project pipeline continues to strengthen as our interaction with customers in China increases. Organic growth was also supported by pricing.

Latin America continued with strong growth and delivered 23% organic growth in Q3, resulting in very strong growth year to date, at 20%. Organic growth was driven by both pricing initiatives, including euro-based pricing, and volume growth in Food Cultures and Enzymes, while volume in Health and Nutrition declined, driven by negative impact as well on the timing of orders. Now, I would like to hand over to Lise for the financials.

Lise Mortensen

Thank you, Mauricio. Good morning, everyone. Please turn to slide seven for our profitability. The absolute EBIT before special items for the group increased by 9% in Q3 compared to last year, amounting to €92 million. The increase was driven by a positive contribution from pricing initiatives, volume growth and stable operating expenses, which was partly offset by a negative impact from higher input costs and exchange rates.

The Q3 EBIT margin before special items reached 27.5%, which was an increase of 0.8 percentage points compared to the year before. The positive development in the margin was due to the strong sales development and scalability effects, which was partly offset by a negative impact from higher input costs, a change in product mix and exchange rates.

Looking at the year to date, the absolute EBIT before special items increased by 11% compared to last year, to €260 million. The year-to-date EBIT margin before special items was 26.4 compared to 26.3 last year. The Food Cultures and Enzymes profitability in Q3 improved versus last year, and the EBIT margin before special items reached 30.7% compared to 28.4% the year before. The margin improvement was due to pricing increases and scalability, which was partly offset by higher input costs and change in the product mix.

Profitability in Health and Nutrition declined in Q3 versus last year, the EBIT margin before special items amounting to 22.4% compared to 23.9% the year before. The negative development was due to a negative impact from product mix, exchange rates, and higher input costs, which was partly offset by pricing initiatives and positive impact from scalability.

Now, let's look at the free cash flow. Please turn to slide eight. We saw an improvement in the free cash flow year to date compared to last year. The year-to-date free cash flow before acquisitions and special items reached €133 million, up from €116 million last year. The increase was due to improvement in operating profit and lower taxes paid, despite cash flow from

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operating activities being impacted by a negative change in working capital, driven by increased inventories and trade receivables. The lower taxes paid were due to a one-off tax payment in FY22 related to acquisitions.

The higher inventory level we have experienced over the past few quarters is partly driven by our strategic decision to secure our supply chains due to high volatility in the end market demand. We expect the inventory level to start decreasing towards the end of the calendar year. For the rest of the year, we expect a change in phasing of operational investing activities which will improve the free cash flow for the full calendar year.

Return on invested capital, excluding goodwill, was 23.4 year to date, which is slightly higher than the amount the year before, at 23.3. The slight increase was supported by strong sales development in Health and Nutrition, while Food Cultures and Enzymes was impacted by the high inflation on operational results.

Now, let's move to the outlook for the year. Please turn to slide nine. We acknowledge that the underlying market growth expectations for the remainder of 2023 remain modest given the current uncertain geopolitical and macroeconomic environment. However, in light of the solid performance for the first nine months of the financial year, we adjust our outlook for organic growth covering the period September 1st 2022 to August 31st 2023 to 9% to 11%, previously 8% to 11%. The expected growth is composed of price adjustments including euro-based pricing, combined with growth in Lighthouses and successful execution of the project pipeline in the core businesses.

The EBIT margin before special items covering the period September 1st 2022 to August 31st 2023 is still expected to be in the range of 26% to 27%, as a positive impact from operational efficiencies and pricing initiatives is expected to be partially offset by continued pressure from the inflationary environment and continuing actions to protect against supply chain disruptions. The free cash flow before special items coving the period September 1st 2022 to August 31st 2023 is now expected to be in the range of €200 million to €230 million. Previously, it was €180 million to €220 million, reflecting a change in the phasing of operational investing activities and a positive impact from lower taxes paid.

Please turn to slide ten for the supporting outlook for the 2023 calendar year. For the period January 1st to December 31st 2023, organic growth is expected to be 9% to 12%, while the impact from exchange rates on revenue is expected to be negative, estimated to be around 4% to 5%. The EBIT margin before special items for the period January 1st to December 31st 2023 is expected to be in the range of 26% to 27%, compared to 26.3% in the same period last year. The EBIT margin before special items is expected to be negatively impacted by exchange rates, estimated to be around 0.4 percentage points.

The free cash flow before special items for the period January 1st to December 31st 2023 is expected to be €200 million to €250 million, compared to €152 million for the same period last

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