Christian Hansen : Q4 Conference call transcript 2021/22

Chr. Hansen Holding A/S

Q4 2021/22 Results

Conference Call Transcript

12 October 2022

PRESENTATION

Mauricio Graber

Good morning and welcome to the presentation of Chr. Hansen's full-year results for the financial year 21/22. I'm here with our CFO, Lise Mortensen, and we will walk you through the highlights of our last quarter and the year, as well as the outlook for the next financial year, before opening up for Q&A. Before we move on, please take note of the safe harbour statement. Please turn to the next slide, slide three.

Let me start by praising our 3,800 employees. They are the reason why we, despite the volatile macroeconomic and geopolitical environment, can present what I see as a very solid set of results for the last financial year, well in line with our guidance. For the full year, organic growth reached 9%, with Euro growth of 13%. The top line performance supported a 9% growth in absolute EBIT. While the EBIT margin before special items contracted to 26.8, mainly due to the inflationary pressure, an initiative to mitigate challenges in the supply chain. Our free cash flow for the year ended €172 million compared to €196 million the year before. However, adjusted for the one-off impact of taxes paid last year from acquisitions, the cash flow generation has actually increased by more than 10%, ahead of the growth in EBIT of 9%.

For the fourth quarter we deliver 6% organic growth, corresponding to 12% Euro growth. The organic growth was as expected, lower than the first nine months of the year in both Food Cultures and Enzymes and Health and Nutrition. While volume was impacted by timing of orders, pricing in Food Cultures and Enzymes picked up as we continue to adjust selling prices to address the inflationary environment. Despite these unprecedented market conditions, the Q4 EBIT margin before special items ended at 27.9%, only 9 percentage points below last year. The decrease was driven by a negative impact from high input cost and increased cost levels to mitigate challenges in the supply chain. This was partly offset by a positive contribution from currencies and the above-mentioned pricing initiative. Please turn to the next slide, slide four.

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Turning now to the strategic and operational highlights of the last quarter. Our focus was on business continuity and delivering to our customers at the service levels they expect, as well as to execute on our strategic priorities in the ever-changing business environment we navigate in today. In HMO we made important progress and I want to highlight the new regulatory approvals, the business received across different geographies in Europe, North America and Israel. Looking at the lighthouses combined, which account for approximately 10% of revenue, organic growth was negative by 9% in the fourth quarter, while the core business delivered 7% organic growth. The decline for the lighthouses in Q4 was expected and driven by the timing of orders in Plant Health and HMO.

The full-year performance was strong and growth for the lighthouses reached 14%, outgrowing our core business, which delivered a solid 9% growth. After an extraordinary strong growth rate in the first nine months, we saw a more normalised growth in our Human Health business during the first quarter, in line with our expectation. Overall, the business delivered solid results, especially in the infant and children segment, driven by the team's strong execution. In Food Cultures and Enzymes we continued to see strong momentum in the cheese segment, whilst fresh dairy market growth was impacted by the current macroeconomic environment. Growth was supported by the work done in close collaboration with our customers, to deliver solutions which drive cost savings by further leveraging our product portfolio of productivity and yield optimising solutions. Please turn to the next slide, slide five, for highlights on why our microbial solutions performed well during these challenging times and how they can help the agriculture industry become even more efficient.

In the current environment, many of our customers are challenged by rising raw material prices, as well as increased energy and labour costs. With our product ranges, such as CHY-MAX Supreme, YIELDMAX and YoFlex Premium, we can deliver solutions across the cheese and fresh dairy segment, that help improve yield and saves meat, protein or sugar, depending on the product type and the production, as illustrated by the examples on this slide. Please turn to the next slide, slide six.

These solutions not only support the financials of our customers, but they also support a more sustainable food system. In Chr. Hansen we are committed to advance the adoption of microbial solutions, to continue to developing a more sustainable agriculture, reducing food waste and improving human and animal welfare. With our microbial and fermentation technology platforms, we can address various global sustainability challenges. Please turn now to slide seven.

Turning back now to the financial performance. Food Cultures and Enzymes delivered 5% organic growth in Q4, leading to 7% for the full year. The last quarter was driven by solid growth in dairy, supported by strong demand in cheese. Pricing initiatives and the projects supporting production efficiencies, while bioprotective solutions showed more modest growth. Pricing contributed 4% in Q4, as we saw increased impact from the inflation-driven price adjustments, which have a positive carry-over effect into 22/23. Health and Nutrition saw solid growth in Q4 with 6% organic growth, leading to a strong 14% growth for the full year, driven by Human Health and HMO. Q4

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was supported by strong performance, especially in the infant and children's segment in Asia- Pacific, while the other regions had a negative impact from customer order patterns, including HMOs from the US market. As mentioned in the beginning, we saw more normalised growth in Human Health in Q4, which was in line with expectations, after the extraordinary first nine months for the business. Organic growth was negatively impacted by Euro-based pricing, while we saw positive sides from the implementation of inflationary price adjustments in Health and Nutrition. Animal and Plant Health delivered strong growth in the quarter, despite Plant Health being negatively impacted by the placing of orders. Please turn to the next slide, slide eight, for the regional performance.

In the last quarter, we saw emerging markets improve and the solid progress from the previous quarters continued in developed markets. Europe, Middle East and Africa delivered 6% organic growth in Q4 and 10% for the full year. Growth in the last quarter was supported by all product areas, except for Human Health, which was negatively impacted by customer ordering patterns. Positive contribution also came from pricing initiatives and from Euro-based pricing, while organic growth was negatively impacted by Russia.

A 1% in North America in Q4 was supported by a continued solid momentum in the cheese and fermented beverage segments and pricing initiatives, while the fresh dairy segment was down relatively to last year, due to market softness. Health and Nutrition declined compared to last year, due to customer order patterns in HMO and Human Health, whereas Animal and Plant Health delivered solid growth. Organic growth in the region reached 8% for the full year, with a strong pipeline of products with customers.

Asia-Pacific grew 17% organically in Q4 and 12% for the full year. The last quarter was driven by volume growth and supported by all product areas, apart from dairy, which was negatively impacted by declining volumes in China due to the COVID lockdowns. A positive impact for pricing initiatives was more than offset by a negative impact from Euro-based pricing. Lastly, in Latin America the performance of Health and Nutrition was adversely impacted by the timing of orders in Plant Health, while pricing initiatives in Food Cultures and Enzymes were partly offset by a negative impact from Euro-based pricing and lower volumes. The region still delivered good organic growth at 3% in Q4 and 7% for the full year. For the financial overview of the last quarter, I will now hand over to Lise.

Lise Mortensen

Thank you, Mauricio, and welcome, everyone. Please turn to slide nine. Supported by a Q4 sales performance of 6% organic growth and 12% Euro growth, the absolute EBIT before special items in Q4 rose by 8% compared to last year, to €91 million. Despite the increasingly positive impact from pricing initiatives and exchange rates, the Q4 EBIT margin before special items came in at 27.9%, which is 0.9% below last year, as a negative impact from higher input costs and increased cost levels to mitigate challenges in the supply chain continued to pressure margins.

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Looking at the full year, EBIT before special items increased by €28 million to €326 million. The full-year EBIT margin before special items was 26.8%, down from 27.7% the year before. The drop was mainly due to increased raw material and freight costs, combined with higher cost levels from efforts to mitigate challenges in the supply chain. This was partly offset by scale effects from the volume growth, efficiency improvements, pricing initiatives and the positive impact from currencies.

Moving into the segment margins. Food Cultures and Enzymes remained affected by higher raw material and freight costs, increased cost levels to mitigate challenges in the supply chain, a general ramp-up of activity, as well as the donation of an amount equal to the profit of Chr. Hansen Russia. This was partly offset by a positive contribution from currencies and pricing initiatives, resulting in Q4 EBIT margin before special items of 32.5%, compared to 33.0% last year. For the full year, the division delivered 29.9% EBIT margin before special items, compared to 32.0% the year before.

In Health and Nutrition, the Q4 EBIT margin before special items reached 20.1%, compared to 21.6% last year. The decrease was due to higher raw material and freight cost, increased cost levels to mitigate challenges in the supply chain and a general ramp-up of activities. This was partly offset by a positive contribution from currencies. The full-year EBIT margin before special items for the division reached 21.4%, compared to 19.8% last year. Let's move on to the free cash flow, slide ten.

Free cash flow before special items stood at €172 million for the year, down 24 million from last year, driven by higher taxes paid, which impacted the cash flow from operating activities before special items. That said, as already mentioned by Mauricio, with adjustment for the one-off impact from acquisitions on taxes paid last year, the cash flow increased by more than 10% and ahead of the 8% growth in EBIT, which is in line with our long-term ambition. Return on invested capital excluding goodwill was 24.0% for the year, compared to 24.8% last year. The decrease was driven by Food Cultures and Enzymes, which was down compared to last year, due to the negative impact from higher input costs and a general ramp-up of activities. While the return on invested capital in Health and Nutrition improved compared to last year, due to the strong sales development.

The return on invested capital remained impacted by the current pressure on profitability, and that can be seen in the difference between the two business areas. It was also impacted by the acquisitions made in Health and Nutrition in 2020. With the businesses now well integrated, we expect to see improvements in the return in the coming years. Please turn to slide 11.

In Chr. Hansen we have clear capital allocation principles, of which reporting our organic growth is a clear number one. In the past year, 8% of our revenue was allocated for developing our technology platform. In addition, over the same period we continued to strengthen our application setup to build new solutions in close collaboration with our customers. This also includes investments in new application centres which, together with continued capacity

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expansions, led to CAPEX spend of 11.6% in 21/22. Following the high activity in 2020, we have in the past year focussed on the integration of our new business and have not made any acquisitions. Based on a 13% increase in earnings this year and our strong free cash flow generation, the board of directors is proposing an ordinary dividend for the year of €125 million. The proposed ordinary dividend is equal to 55% of the profit of the year. Furthermore, the board of directors during 22/23 will evaluate the capacity to distribute excess cash to a safe harbour share repurchase programme, alternatively, through an extraordinary dividend, in line with the company's capital allocation principles. Such an initiative would have the intent to keep Chr. Hansen at a financial leverage consistent with a solid investment-grade credit profile. Now, let's move to the outlook for next year. Please turn to the next slide, slide 12.

While the underlying market growth is expected to be modest for next year, considering the current uncertain geopolitical and macroeconomic environment, Chr. Hansen expect to deliver organic revenue growth 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 on the project pipeline in the core business, including expansion of the market for bacterial solutions, providing customers with productivity improvements. Based on the current exchange rates, especially related to the US dollar, we expect revenue growth to be positively impacted by approximately 5%.

Given the outlook for revenue and organic growth, the absolute EBIT before special items is expected to grow faster than revenue and the EBIT margin before special items is expected in the range of 27 to 28%. A positive impact from operational efficiencies, pricing initiatives and currency exchange rate is expected to be partly offset by a continued pressure from the inflationary environment and continued actions to mitigate supply chain disruptions. Free cash flow before special items is expected to be in the range of €190 to €230 million. Before I hand back to Mauricio, let me just add a few words to the next slide on how we manage the current environment.

As just mentioned, the outlook reflects continued inflationary pressures on key input costs, such as raw materials, energy and logistics, as well as the need to continuously manage volatile global supply chains. Some of the key drivers of cost pressure relate to our energy exposure, both through our direct spend, but also indirectly, through increased cost on raw materials, transportation, packaging and traded materials, all correlated to the cost of energy. Secondly, we continue to see constraints in the global supply chain and we are mitigating these through optimisation programmes, strict supply chain management and ensuring that alternative energy sources are available for critical parts of our supply chain. Last, but not least, we will continue to closely collaborate with our customers, to adjust our selling prices to reflect the current inflationary environment, but through a balanced approach to secure long-term value creation for both Chr. Hansen and our customers. With these comments, I will now hand back to Mauricio.

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