Christian Hansen : Q4 Conference call transcript 2022/23

Chr. Hansen Holding A/S

Q4 2022/23 Results

Conference Call Transcript

12 October 2023

PRESENTATION

Mauricio Graber

Thank you. Good morning, everyone, and welcome to the presentation of Chr. Hansen's Q4 22/23 results. I am here with our CFO, Lise Mortensen, and we will walk you through the highlights of our fourth quarter and year-to-date results covering September 1st 2022 to August 31st 2023. And we also provide an outlook for the calendar year 2023, covering January 1st 23 to December 31st 23.

Depending on the timing of the closing of the proposed merger with Novozymes, this might be the last financial statement for Chr. Hansen. Before opening up for Q&A, I will also give a brief update on the progress of the proposed merger with Novozymes. Before moving on, please take notice of the safe harbour statement.

Great. Let's start in slide 3. While we have made progress with the work on the proposed merger with Novozymes, the Chr. Hansen organisation continued its focus on delivering results, and we ended the year with 16% organic revenue growth for the group in the fourth quarter. The fourth quarter was driven by solid volume growth, and we continue to see positive impact from pricing in line with our expectations.

The contribution from euro-based pricing continued to be significant, mainly in food cultures and enzymes. Looking at the year to date, the group delivered strong organic growth of 11%, at the upper end of our guidance range. Both food cultures and enzymes, and health and nutrition, delivered very strong organic growth, driven by pricing and solid volumes in food cultures and enzymes, while the growth in health and nutrition was driven by strong volume and pricing.

EBIT margin before special items reached 28% in the fourth quarter, which was 0.1 percentage points above last year. The improvement was driven by the strong sales development, including the impact from pricing initiatives, which were offset by a negative impact from higher input cost and exchange rates. Year-to-date, the EBIT margin before special items was 26.9%, compared to

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26.8% last year. Again, at the upper end of our guidance range for our whole financial year covering the period from September 1st 2022 to August 31st 2023.

Free cash flow before acquisitions and special items amounted to €69 million in the fourth quarter. Year-to-date, the free cash flow before acquisition and special items reached €202 million up from €172 million last year. The higher cashflow was driven by improvement in operating profit and lower taxes paid, which was partly offset by a negative change in working capital.

Please turn to slide 4 for an update on our strategic and operational highlights of the fourth quarter. As I mentioned in the beginning of the presentation, Chr. Hansen continued to focus on business execution and delivering innovative solutions to our customers. That resulted in double- digit organic growth in the lighthouses and our core business.

Starting with the core, the business delivered strong 14% organic growth in the fourth quarter. During the quarter, we continued successful customer collaborations to drive productivity and accelerate innovation in the dairy and plant-based categories. As one of the highlights, I would also mention the introduction in China of live probiotics in the ambient category. This innovation enables our customers to produce shelf-stable yoghurts with our live LGG probiotic cultures in them.

In human health, we introduced a new probiotic strain in the gut-brain area and published its first clinical study in irritable bowel syndrome. The probiotic is an important expansion to our gut health portfolio, further strengthening our offering within the gut-brain area.

The performance for our core business was also strong year-to-date, delivering 10% organic growth. Now, looking at the lighthouses combined, they reached very strong growth both in Q4 and year-to-date, delivering 41% and 24% growth respectively. All the lighthouses reached double-digit growth rates in both Q4 and year-to-date. As the lighthouses combined only account for approximately 10% of group sales, we need to be mindful of looking at the lighthouses on an annualised basis instead of a quarterly basis.

Let's have a look at the lighthouses separately. Bioprotection was driven by pricing, upselling, and new customers with increasing interest in natural solutions. Fermented plant bases continued growing, but from a small base driven by dairy alternatives. Year-to-date, the business remains modest, but we were back to growth compared to last year. We continue to build partnerships with the focus of new product development.

HMO was the largest contributor to growth within the lighthouses. During the quarter, Chr. Hansen received approval from the Chinese authorities with regards to the technology to produce each of three HMOs, 2'-FL, LNT and 3-FL. This approval enables us now to apply for final approval of the three HMOs with the Chinese authorities.

Regarding the final product registrations, we still expect approval of by the end of calendar year 2023 or the beginning of calendar year 2024. Additionally, a new review conducted by Chr.

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Hansen scientists of several clinical studies on HMOs was released, which reported beneficial effects of HMO in gut health and immune systems.

Moving on to plant health, the strong performance in both Q4 and year-to-date was driven by its core products, expansion to new regions, and new product launches, providing novel innovations to our customers. In terms of pricing, we continue delivering on our pricing initiatives, and the pricing contribution was 7% for the group in Q4. Food cultures and enzymes had the largest impact from pricing, but also, health and nutrition contributed with a modest impact.

Lastly, in September, we inaugurated our new innovation campus here in Hoersholm, Denmark. The new facility is a representation of innovation, knowledge sharing, and customer support, including the state-of-the-art dairy application centre that is expected to open in 2024.

Let's turn now to slide 5 for the topline performance. The growth in the fourth quarter was driven by solid volume growth and pricing. Pricing continued to contribute while being aligned with expectations, and the total pricing contribution for the group was 7% in Q4 and 6% on a year-to- date basis. The contribution from euro-based pricing continued to be significant in the quarter, predominantly in food cultures and enzymes.

In food cultures and enzymes, organic growth amounted to 16% in Q4. This was driven by both pricing and volume. Dairy delivered strong growth supported by pricing initiative and strong momentum, not only in cheese, but also in fresh dairy. The lighthouses of bioprotection and fermented plant bases also performed well.

Growth was strong in food and beverage, driven by pricing and solid volume. The organic growth year-to-date in food cultures and enzymes was strong at 11%, driven by pricing and also good volume growth. We estimate that the sector outlook for dairy, meat and processed food categories remains challenged. For 2023, we expect flat to slight decline in volume growth, as growth in the cheese segment is expected to be offset by declining markets for fermented milk, meat and processed food.

Health and nutrition delivered 16% organic growth in the fourth quarter, driven by volume growth of 14%, while the impact from pricing was more modest at 2%. Year-to-date, this resulted in an organic growth of 11% in health and nutrition. Human health and HMO delivered very strong growth, mainly driven by volume, but also by pricing. Volumes were strong due to EMEA and North America developing well, while volumes in Asia-Pacific were more modest due to continued market softness in South Korea.

The volume growth was positively impacted by early timing of orders in human health. We estimate that the sector growth in probiotic human health products is in line with the mid-term outlook of 4 to 6%, with continued softness in North America and South Korea, while EMEA and China continue developing positively.

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Animal and plant health delivered solid growth, mainly supported by strong growth in plant health and pricing increases in animal health. The growth was positively impacted by timing of orders in animal and plant health.

Please turn to slide 6 for the regional performance. Now, all regions expect Asia-Pacific grew double digits in the fourth quarter. And year-to-date, all regions contributed positively to the group organic growth. The Europe, Middle East, Africa region grew 20% organically in Q4, and the growth was also very strong year-to-date at 16%.

The performance was driven by both health and nutrition, and food cultures and enzymes. Health and nutrition was supported by very strong volume growth on pricing initiatives, while food cultures and enzymes was supported by pricing, including euro-based pricing, as well as solid volume growth.

Looking at North America, organic growth reached 15% for the quarter and 7% year-to-date. Organic growth was driven by both health and nutrition, and food cultures and enzymes. Health and nutrition was supported by very strong volume growth and pricing initiatives. Food cultures and enzymes was driven by solid volume growth across categories.

In Asia-Pacific, we reported solid 5% organic growth for the quarter and 4% year-to-date. Organic growth was driven by both food cultures and enzymes, and health and nutrition. China has a positive contribution to the organic growth in food cultures and enzymes. The growth was mainly driven by volume, but also supported by pricing.

Lastly, looking at Latin America, that continued to perform strong and delivered 20% organic growth both in Q4 and year-to-date. Organic growth was driven by both pricing, including euro- based pricing, and volume growth in food cultures and enzymes, while health and nutrition showed a slight decline, mainly due to animal health.

Now, let me hand over to you, Lise, for the financials.

Lise Mortensen

Thank you, Mauricio, and good morning, everyone. Please turn to slide 7 for profitability. Absolute EBIT before special items for the group amounted to €99 million in the fourth quarter, an increase of 8% from €91 million in Q4 of last year. The increase was driven by volume growth, a positive contribution from pricing initiatives, and stable operating expenses, which was partly offset by a negative impact from higher input cost and exchange rates.

EBIT margin before special items reached 28.0% in the fourth quarter up from 27.9% in Q4 last year. The margin improvement was driven by the strong sales development, including the impact from pricing initiatives, which were offset by a negative impact from higher input costs and exchange rates.

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Year-to-date, the absolute EBIT before special items was €358 million, an increase of 10% from last year. The EBIT margin before special items year-to-date was 26.9% compared to 26.8% last year.

Looking at the margins per segment, food cultures and enzymes Q4 EBIT margin before special items reached 31.1% compared to 32.5% last year. The decline was mainly driven by higher input cost and negative currency development, which were partly offset by pricing initiatives.

Profitability in health and nutrition improved in the fourth quarter versus last year, driven by a positive impact from scalability and pricing initiatives, which were partly offset by a negative impact from exchange rates and higher input cost. The EBIT margin before special items was 23.0% in Q4 compared to 20.1% last year.

Next, turn to slide 8 for free cash flow. Year-to-date, free cash flow before acquisitions and special items amounted to €202 million, an increase of 17% from €172 million last year. The increase was driven by the improvement in operating profit and lower taxes paid, which was partly offset by a negative change in working capital. The lower taxes paid were due to a one-off tax payment in FY 22 related to the acquisition of HSO. And the negative change in working capital was mainly due to higher trade receivables from timing of orders during Q4 and lower trade payables. Lower cap expense contributed positively.

Looking at return on investor capital excluding goodwill, it was 24.1% year-to-date compared to 24.0% last year. The slight increase was supported by health and nutrition due to the strong sales development, while food cultures and enzymes was down compared to last year.

Please turn to slide 9 for a follow-up on the 12-month outlook. To summarise, regarding the outlook we gave for the 12-month starting September 1st 2022 to August 31st 2023, Chr. Hansen delivered 11% organic growth and 26.9% EBIT margin before special items, at the upper range of our guidance. Free cashflow before acquisitions and special items reached €202 million, on the lower end of the guiding range.

As we have recently changed our financial year to follow the calendar year, I will now go through the outlook for the calendar year 2023. Please turn to slide 10. In light of the performance for the first eight months, the outlook is adjusted for organic growth, revenue growth, and free cashflow before acquisitions and special items, while maintained for EBIT margins before special items. The free cashflow before acquisitions and special items is adjusted mainly due to timing of CAPEX payments.

Organic growth for the remaining four months of 2023 is expected to be driven primarily by pricing growth, including a positive impact from euro-based pricing. While expectations for underlying market growth for the remainder of the calendar year remain modest, given the current uncertain geopolitical and macroeconomic environment, Chr. Hansen expects organic growth to be in the range of 10 to 12%, while the impact from exchange rates on revenue is

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