Edited Transcript of CHRH.CO earnings conference call or presentation 8-Oct-20 8:00am GMT

Q4 2020 Chr Hansen holds A / S earnings call
Horsholm, October 8, 2020 (Thomson StreetEvents) - Issued minutes of the conference call or presentation of Chr Hansen Holding A / S results Thursday, October 8, 2020 at 8:00 a.m. GMT
TEXT version of Transcript
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Company participant
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* Mauricio Graber
Chr. Hansen Holding A / S - CEO, President and Member of the Executive Board
* Søren Westh Lonning
Chr. Hansen Holding A / S - Executive VP & Member of the Executive Board
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Participants in the conference call
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* Annette Lykke
Handelsbanken Capital Markets AB, Research Department - Research Analyst
* Heidi Maria Vesterinen
Exane BNP Paribas, Research Department - Financial Analyst
* James Targett
Joh. Berenberg, Gossler & Co. KG, Research Department - Analyst
* Jonas Guldborg Hansen
Danske Bank A / S, Research Department - Analyst
* Lars Topholm
Carnegie Investment Bank AB, Research Division - Co-Head of Research of Denmark and financial analyst
* Søren Samsøe
SEB, Research Department - Country Head of Denmark and Analyst
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presentation
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Operator [1]
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Thank you for your willingness and welcome to the presentation of Chr.Hansen's results for the fourth quarter of 2019/2020. (Instruction manual) I have to inform you that this conference is being taped today.
And I would like to hand the conference over to your speaker today, Chr. Hansen CEO, Mauricio Graber.
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Mauricio Graber, Chr. Hansen Holding A / S - CEO, President and Member of the Executive Board [2]
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Good morning everyone and welcome to today's conference call on Chr. Hansen's results for the full year 2019/20. I'm here with our CFO, Søren Westh Lonning, and the IR team. And as always, we'll start the call with a presentation that will be a bit more extensive this time. So we have time - so we have a lot to do with the recently announced portfolio changes, but there is still plenty of time for questions and answers after that.
Before we proceed, please see the Safe Harbor on slide 2. Thank you.
Let's turn to slide 3, please. 2019/20 was a decisive and eventful year for Chr.Hansen. And with the recently announced portfolio changes, we've taken a huge step forward as a differentiated microbe and fermentation company pioneering innovative solutions for growing a better world.
I am very pleased with the progress we have made on all four elements of our Strategy 2025, which were unveiled on Capital Markets Day in August: reinvestment in our core businesses of food cultures and enzymes, animal health and human health; Use of the microbial platform for the cultivation of our lighthouses for bioprotection, plant health, Bacthera for living biotherapeutics and our 2 new additions, fermented plant bases and HMOs for oligosaccharides from breast milk; Expansion of our technology platform through M&A and partnerships; and finally, the strategic review of our non-microbial assets, which concluded with the announced sale of Natural Colors to EQT.
Let me elaborate on this a little more on the next slide, slide 4. With the portfolio changes that we have announced in the last 6 months, we are sharpening Chr. Hansen's profile as a leader in microbes and fermentation. In total, we acquired assets with a combined transaction value of EUR 970 million to strengthen the microbial and fermentation technology platforms and to sell Natural Colors for a transaction value of EUR 800 million.
As I've said many times, Natural Colors is great business with great fundamentals. However, since it does not share the technology platform with the rest of Chr. Hansen Group, synergies are very limited. So I'm really excited that with EQT we have found a great new home for our natural color business. I am confident that Natural Colors can continue its strong track record as an independent company and I look forward to seeing the performance of this great team in the years to come.
I believe the recent acquisitions on the other hand will be Chr. Let me reiterate Hansen's future growth and margin expansion path, reiterate Hansen's future growth and margin expansion path while contributing to our mission to advance microbial science to promote food and health for to improve a sustainable future.
With HSO Health Care and UAS Labs, we are truly strengthening our human health business, expanding our product offering and manufacturing capabilities to what we believe to be unmatched in the industry. The integration is well on its way and is expected to be completed by the end of our fiscal year 2021. Over the next 12 months, the focus will be on integrating UAS Labs' two manufacturing sites as our business strategies and goal are aligned. Market approach.
With the takeover of Jennewein, which, by the way, is expected to be completed shortly, we are entering the fast-growing HMO market as one of the leading providers with an unrivaled product portfolio and an extremely cost-effective, competitive IP-protected production process. The HMO lighthouse is managed as an independent value chain with a separate management team in the Health & Nutrition division. The top priority for this team will be the successful marketing of HMOs to key customers while the new manufacturing facility in Kalundborg, Denmark is built over the next few years.
Taken together, the acquisitions are expected to contribute sales of EUR 130 million to EUR 140 million and an EBITDA of around EUR 30 million in our 2021 financial year. Søren will explain the financial implications in more detail, but we firmly believe that the acquisitions and investment, which we mainly want to do in the HMO space, will be very value-adding in the long run, but we also need short-term temporary headwinds due to the higher level of depreciation for our EBIT margin.
With these comments, let me move on to the next slide, slide 5, to look at financial performance for the quarter and all of 2019/20. In the face of the global pandemic, I am very pleased that Chr. Hansen has implemented its guidelines and demonstrated its resilience and strength in this challenging year.
The Group's organic growth of 5% for the full year was in the middle of our range. The Group EBIT margin pre exceptionals of 29.9% was slightly above our forecasts, which is mainly due to prudent cost management and lower COVID-19 costs. The free cash flow before acquisitions and special items finally came to EUR 245 million and was therefore well within the scope of our forecast of more than EUR 200 million, as we noticed some delays in connection with COVID-19 in our CapEx projects.
If we look at the stand-alone fourth quarter and here my comments focus on the microbial platform, which is reported as continuing operations in the annual report, organic growth was 9%, with Food Cultures & Enzymes providing 5% organic growth and Health & Nutrition growing by 18% due to the very strong demand for our probiotic food supplements and because Plant Health is contributing to growth again.
However, if you look at the absolute revenues in euros, the increase was only 3%, as the currencies had a negative effect on 6%, which will also accompany us in the coming quarters, as the US dollar and other core currencies were significantly depreciated against the Euro. The fourth quarter EBIT margin pre exceptionals was impacted by the above drivers, which were partially offset by currencies. This resulted in a margin of 38.4% for the quarter versus 37.9% last year.
When we look at regional performance, please turn to slide 6. Again, let's look at the numbers for the microbial platform. We see that all regions contribute to organic growth. Europe, the Middle East and Africa saw organic growth of 3% for the fourth quarter and for the full year. In the fourth quarter, Food Cultures & Enzymes delivered good growth despite continued weakness in the Middle East, while Health & Nutrition delivered solid growth, led by Animal Health.
In North America, organic growth slowed in the fourth quarter, resulting in 1% for the quarter and 4% for the full year. This is mainly due to slower growth in our animal health business negatively impacted by the COVID-19 pandemic, while Human Health continued its strong growth performance in nutritional supplements. Food Cultures & Enzymes saw slight growth in the fourth quarter with better than expected momentum in cheese, while our wine business was impacted by a difficult harvest year and the smoothness of probiotic yogurts persisted.
Looking at Latin America, we saw organic growth accelerating, with 47% organic growth in the fourth quarter and 24% for the full year. The contribution of euro pricing was roughly half the growth. The main driver of the higher growth in the fourth quarter was our Plant Health business, which, as expected, generated a very substantial part of its annual sales in the fourth quarter. While we are active in Food Cultures & Enzymes, we continue to see very good acceptance of our main solutions such as CHY-MAX Supreme.
Turning to Asia Pacific, we had strong organic growth of 10% in the fourth quarter, which translates to 6% for the year, with human health being the top driver of growth. In contrast, sales of Food Cultures & Enzymes declined compared to the previous year due to the global pandemic, especially in countries such as China and India. In China, yogurt production in the area continues to be below normal and the premium segment continues to be influenced by consumers trading down.
To learn more about the impact of COVID-19 in the fourth quarter, please turn to the next slide, slide 7. Similar to last quarter, we've tried to illustrate the various moving parts here on this slide, but please take They only use the arrows as directional clues about the effects of COVID-19. In the third quarter we reported a positive net effect for Chr.Hansen at the group level, driven in part by the loading of pantries by consumers and customers building additional safety stocks, we saw these effects largely reversed in the fourth quarter. In addition, regional bans and travel restrictions continue to adversely affect our ability to connect with customers in person, even though the number of digital interactions was very high.
If we look at our two segments, Food Cultures & Enzymes was significantly harder hit than our Health & Nutrition business as the dairy end markets remained subdued in the fourth quarter, particularly in emerging markets. In our animal and phytosanitary business, we haven't seen any material negative impact other than cattle in North America, but we have some concerns about slower testing activity from some customers and delayed product registration due to COVID-19 which could affect performance over the next year .
On a positive note, our human health business achieved another record quarter. We continued to grow strongly, especially in markets with well-developed e-commerce channels like the US and Asia.
If we look at the full commercial pipeline, we made solid progress in developing projects with clients in the fourth quarter. However, we must also acknowledge that travel restrictions and restricted access affect our ability to test, complete projects, and sell new innovations. However, we assume that travel activities will return to normal over the course of the coming year if, hopefully, the COVID-19 situation is better controlled.
I would now like to hand over Søren for segment review, group financing and forecast for the next year.
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Søren Westh Lonning, Chr. Hansen Holding A / S - Executive VP & Member of the Management Board [3]
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Thank you, Mauricio, and welcome from my side too.
Please continue with slide 8. Food Cultures & Enzymes grew 5% organically in the fourth quarter, resulting in 5% organic growth for the year. Organic growth in the fourth quarter was driven by a significant contribution from euro pricing, while volume remained unchanged as growth in cheese, bio-protection and enzymes was offset by muted sales of fermented milk and a decline in probiotics and wine.
As Mauricio said, volumes in emerging markets like China, India and the Middle East were particularly hard hit. Outside of these three areas, organic growth for the quarter was in the high single digits at just under 10%, thus delivering solid volume growth as well as euro prices.
On a positive note, it should be noted that our projects with customers in the fermented plant base have made very good progress despite the COVID-19 challenges and that we were able to double our business in fiscal year 20, albeit from a low base.
Look at profitability. The EBIT margin for Food Cultures & Enzymes rose 40 basis points to 38.4% in the fourth quarter. This is due to a positive one-time sales tax dispute in Brazil, lower expenses due to COVID-19 and operational efficiencies that were partially offset by higher freight costs, unfavorable product mix and negative currency effects.
Please skip to the next slide, slide 9. In Health & Nutrition, fourth quarter growth was due to continued strong human health momentum and an expected strong contribution from plant health, while animal health momentum was driven by COVID- 19- was slower. related disruptions in North America. Overall, this resulted in organic growth of 18% in the fourth quarter and 9% for the full year. The very strong human health performance was due to nutritional supplements, while infant formula had a similar high due to the timing of product launch orders over the past year, and we also saw some COVID-19-related inventory here.
In Animal Health, growth in all species was largely anchored in our new pet food category with very good momentum, while North America declined regionally and the rest of the world saw very strong growth. However, the outbreak of African swine fever in Europe and the negative impacts associated with COVID-19 are a cause for concern, especially in the first half of FY 20. Finally, as expected, Plant Health saw very strong growth as the company entered its fourth year after a weak start Quarter saw most of its sales this year.
In terms of profitability in the health and nutrition businesses, the EBIT margin was 38.3%, an increase of 90 basis points in the fourth quarter. This is due to a single-line consolidation from UAS Labs, cost management initiatives, and lower travel and testing costs, partially offset by unfavorable costs, currencies and EUR 3 million impairment losses related to human health product development.
Now, let's move on to the income statement on the next slide, slide 10, to look at the various profitability drivers for continuing business. Please note that natural colors are shown in the income statement as income from discontinued operations. The gross margin for continuing operations decreased 1.3 percentage points to 60.2% in fiscal 20, as increased freight costs, an unfavorable product mix and negative currency effects were only partially offset by scalability benefits and operational efficiency. Operating expenses, on the other hand, were 1.5 percentage points below the previous year's value due to lower expenses in various cost categories due to COVID-19.
The other operating result of EUR 8 million relates to the acquisition of UAS Labs, which was consolidated as a single item, and to a positive decision on the aforementioned VAT case in Brazil. Overall, this led to an EBIT margin before special items for continuing operations, i.e. H. The microbial platform, by 33.7%, which was slightly higher than last year.
The special items in connection with the three acquisitions amounted to EUR 14 million. Finally, we posted a loss of EUR 4 million in connection with our joint venture Bacthera, which is in line with expectations as business continues to grow.
Further information on cash flow and leverage can be found on the next page, slide 11. The free cash flow before acquisitions and special items of the Group, including Natural Colors, rose significantly to EUR 245 million. Cash flow from operating activities was EUR 36 million compared to EUR 299 million in 2019. The increase was due to a positive development in working capital, particularly trade accounts receivable and temporary initiatives to support government liquidity against COVID- 19th The latter amounted to just under EUR 10 million, which will be reversed in fiscal year 21.
The cash flow from operating investing activities amounted to EUR 140 million and was thus at the level of the previous year if the inflow from the sale and leaseback of the company's main location in Hørsholm was excluded. However, it was lower than expected at the start of the year as COVID-19 delayed several CapEx projects in the second half of the year.
Leverage increased to 3.1x EBITDA as a result of the recent acquisitions, and we will see a further increase to 3.5-4x EBITDA in the first quarter due to the Jennewein acquisition. However, our goal is to reduce the leverage effect by the end of fiscal year 2021 to a level that corresponds to an investment grade rating of around 2x. The proceeds from the sale of Natural Colors will primarily be used for This.
Also note that the Board of Directors had decided not to propose an ordinary dividend, but instead to distribute an extraordinary dividend at least in line with a normalized dividend following the completion of the Natural Colors disposal.
I would now like to move on to the next slide, slide 12, to the guidelines for fiscal year '21. Fiscal year 2021 will be a year of transition given the recent portfolio changes and the relatively high level of uncertainty over the ongoing COVID-19 pandemic. We are therefore cautious about the coming year. We expect the group to grow organically between 5% and 8%, with the largest contribution coming from Health & Nutrition. Both Health & Nutrition and Food Cultures & Enzymes are expected to grow solidly and out of their respective underlying markets. Given the recent currency fluctuations, we also expect euro pricing to make a positive contribution of around 2% at group level.
The EBIT margin before special items is expected to be between 27% and 28%. The free cash flow before acquisitions, disposals and special items is expected to be between 120 and 160 million euros. On the next slide I will explain both the EBIT margin and the free cash flow in more detail.
Please refer to the next slide, slide 13. Looking first at EBIT margin pre exceptionals, there are a number of moving parts that will affect the Group's profitability over the next year. First, portfolio changes. Taken together, the acquisition of HSO Health Care, UAS Labs and Jennewein as well as the sale of Natural Colors should have a slightly negative impact on the EBIT margin. However, the portfolio changes result in an EBITDA margin in the range of 1.5 to 2 percentage points, reflecting a significant increase in depreciation, which is driven by purchase prices.
If we consider the acquisitions separately, we expect that the EBIT margin for HSO Health Care and UAS Labs will gradually increase in the strategy period and reach around 30% by fiscal year 25, as we will realize cost and earnings synergies from 22 onwards. The same applies to Jennewein, but here we first have to set up the production facility in Denmark and achieve a critical mass. So it will take longer for margins to reach around 30% and so we see this happening beyond '25, with very solid progress into '25.
In order to give you a starting point for your models, we expect Jennewein to achieve a net EBIT loss of around EUR 10 million to EUR 15 million in fiscal year 21, while EBITDA is expected to be around 0. And the PPA for Jennewein. We are assuming that the amortization of all three acquisitions together will still amount to around EUR 35 million, which corresponds to a net profit of around EUR 25 million after the sale of Natural Colors. The additional EUR 25 million roughly corresponds to the combined D&A of the purchase prices for the three acquisitions. The significant impact on amortization from the acquisition also means that the EBITDA margin for FY21, including the natural colors business, is expected to be at the prior-year level.
The second driver is currency. Major currencies such as the US dollar and the Chinese renminbi have moved significantly over the past few months. This not only affects our absolute sales, but also our EBIT. From today's perspective, we expect a negative impact of up to 1 percentage point on the Group's EBIT margin. With the portfolio changes, our exposure to US dollars has increased slightly, both in terms of sales and earnings. For further details, please refer to the sensitivities that we state as standard in all of our quarterly reports.
Third, the underlying business's EBIT margin will also be lower than last year as the 2019/20 numbers include some positive one-off items that I highlighted earlier. In addition, we expect to return to normal travel activities and costs in 21 and intend to increase investments in our key strategic initiatives for 2025, such as the new lighthouse with fermented plants. In short, we will implement our strategy and travel back to our trade organization as soon as possible.
In conclusion, let me emphasize that despite the many moving elements in our EBIT margin in FY21, we remain determined to deliver the underlying margin expansion through 2025, and the three most recent acquisitions strongly support that.
Move on to the next slide, slide 14, for some quick comments on CapEx and Cashflow. We expect investment costs of around 200 million euros for the year 21. The increase relates to the HMO lighthouse and in particular to the new factory that we will build in Kalundborg over the next few years. In total, we will spend more than € 200 million on CapEx for HMOs by 2025, less than € 100 million of which will be spent in the next year, including the purchase of the site.
Without the HMO investment, the CapEx-to-Sales ratio for continued business is likely to be lower than 2019/20 and you should expect this trend to continue over the strategy period, as we said on Capital Markets Day.
Operating cash flow is estimated at a similar level to 2019/20, despite a normalization of certain working capital items and higher interest costs, while cash taxes are estimated to be below 2020 due to the acquisitions made. In short, free cash flow would target an increase if it hadn't been for the HMO acquisition.
And with that I want to give back to Mauricio.
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Mauricio Graber, Chr. Hansen Holding A / S - CEO, President and Member of the Executive Board [4]
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Thank you, Søren. 2019/20 was a very eventful year, and we ended with the start of our Strategy 2025, which not only sets the framework for the next 5 years, but also for the next financial year. The priorities are very clear.
First, customers. We will continue to work as closely as possible with our customers during this challenging COVID-19 era to help them cope with the uncertainty and economic headwinds.
Second, innovation. Bringing new innovations to market remains critical. And here I am particularly pleased about the new product pipeline of our lighthouses: bioprotection and fermented plant bases.
Third, operations. We will continue to realize scalability benefits and operational efficiency. A key lever for this is the integration of our recently announced acquisition businesses, but also the continuous improvement of our flagship plant in Copenhagen.
Four people. Our people are Chr. Hansen's greatest asset and employee safety remains our top priority during these unprecedented times of COVID-19. In addition, the focus for the financial year '21 is on the successful integration of the more than 350 new employees from UAS Labs, Jennewein and HSO Health Care.
After all, on purpose. The global pandemic has only increased the urgency for more sustainable development. And at Chr. Hansen, we will continue to advance our sustainability agenda - to develop a better world, of course.
Please refer to the next slide, slide 16. We have made good progress on our new sustainability goals, which have been set along with our new long-term financial ambitions. As of the end of 2019/20, more than 80% were Christians. Hansen's income contributed to the United Nations' goals for sustainable development. And we continue to impact our products by increasing the acceptance of natural solutions in crop production, reducing yogurt waste and increasing the number of people who consume our probiotics on a daily basis.
We also joined the Science Based Target initiative this year to support the Paris Agreement. Our global operations team will continue to drive initiatives to meet our new environmental goals. Ultimately, it goes without saying that we will continue to invest in talent management and advance our diversity agenda while ensuring that Chr. Hansen remains a safe place to work.
Let me finish with that. Chr. Hansen has delivered solid results in the fiscal year of this global pandemic, growing our business profitably and generating strong free cash flow. Trading conditions are expected to remain challenging for the next year, which is why we are proceeding cautiously and have selected a wide range for the year.
Third, Fiscal '21 will be a year of transition as we carve out Natural Colors and incorporate our recent acquisitions. In addition, currencies are expected to have a significant negative impact over the next year, as Søren has already described. Despite this short-term headwind, let me emphasize that I couldn't be more excited about the future that lies before Christ. Hansen as microbial pure play. And I look forward to implementing our strategy for 2025 together with the management team.
I would like to start the call for answers to questions and answers. Thank you very much.
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questions and answers
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Operator [1]
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(Instruction manual) And your first question is from Jonas Guldborg at Danske Bank.
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Jonas Guldborg Hansen, Danske Bank A / S, Research Department - Analyst [2]
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A couple of questions from my side.

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Yes.



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Yes.



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It's good.
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Yes.

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Excellent.


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Yes.

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Yes.
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OK.


Many Thanks.
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