Chr. Hansen Holding A/S
Q1 2021 Earnings Call Transcript

Published: 14 Jan 2021

[Operator:]

Thank you for standing by, and welcome to the presentation of Chr. Hansen Holding Interim Report Q1 2020/2021. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. I must advise you that this conference call is being recorded. I would now like to hand over to your speaker today, Chr. Hansen's CEO, Mauricio Graber. Please go ahead with your meeting.

[Mauricio Graber:]

Good morning, everyone, and welcome to today's conference call on Chr. Hansen's Q1 2020/2021 results. Together with our CFO, Lise Mortensen and the IR team we would like to wish everyone a Happy New Year and hope that you and your families continue to be healthy and safe during these challenging times of the COVID-19 pandemic.

[Lise Skaarup Mortensen:]

Thank you, Mauricio and a warm welcome also from my side. My name is Lise Mortensen and I joined Chr. Hansen in October of last year. Before that, I worked for 10 years at Microsoft heading first finance in Denmark and then in India and then the last five years as CFO for Microsoft Germany. In addition to my finance background, I have a lot of experience with change and transformation that I believe I can put into good use with the ongoing portfolio changes at Chr. Hansen. In my role as CFO I will also be in charge of IT and coming from the software and digital services industry I'm looking forward to bringing in an external perspective to further develop Chr. Hansen's digital agenda not least in the finance area. What I really like about Chr. Hansen and what attracted me to take up this job in the first place, is the company's strong purpose and its ability to contribute to some of the world's largest challenges by using its microbial solutions. I've always been convinced that doing well by doing good is not a dichotomy for corporates and thus Chr. Hansen is a perfect match for me. And with these introductory words, back to Mauricio.

[Mauricio Graber:]

Thank you, Lise. Before we continue, please take notice of the Safe Harbor statement on the next slide, Slide 3. Thank you. Thank you. And let's then turn to Slide 4. Chr. Hansen delivered a strong start to the financial year 2021 with 10% organic growth which was supported by all businesses, though on a relatively easy comparable from last year Q1. Volume growth in Food Cultures & Enzymes picked up compared to Q4 supported by op selling and wins in our cheese and enzymes business, but the quarter was not without challenges as dairy markets, particularly in some emerging markets, remained weak and our ability to drive sales continued to be impacted by travel restrictions. In light of these developments, I am quite pleased with our performance. In Health & Nutrition, our supplement business continued to profit from increased interest from consumers, and customers in immunity enhancing solutions. And animal health benefited from new customer wins in poultry and swine, while plant health delivered a strong quarter in line with our expectations. Underlying EBIT margin before special items meaning our EBIT margin before special items excluding the recent acquisitions was 28.5%, down 50 basis points compared to last year due to FX. Including the acquisitions, the reported EBIT margin before special items was 25.2% in line with our own expectations.

[Operator:]

Please hold while we reconnect to the speaker line. Ms. Lise , you are now live. Please hold while we reconnect to the speaker line. Please hold while we reconnect to the speaker line. You are now live.

[Mauricio Graber:]

Thank you. Are we back in the conference now?

[Operator:]

Yes, you are live. Please go ahead.

[Lise Skaarup Mortensen:]

Okay, let's may be start again with Slide 7 and I apologize for this technical glitch. Food Cultures & Enzymes grew 8% organically in Q1 with a 2% contribution from volume mix and 6% contribution from euro pricing. Dairy market volumes reflects slightly declining in Q1 due to weak fermented milk markets in some of the emerging geographies as just alluded to by Mauricio, which means that even though 2% volume growth is below our midterm ambition, it is still outgrowing the underlying market. If we look at the product segments, we've seen very strong growth in our cheese and dairy enzymes business, while fermented milk sales were muted and probiotics and wine declined. Regarding our lighthouses, we are pleased to see continued good traction in fermented Plant Bases, mainly in the dairy alternative space. And bioprotection on the other hand, had a strong start to the year with mid single digit growth, but we expect this to accelerate throughout the year as we see our commercial pipeline ramping up with the new product launches, which should get us to double-digit growth for the year. Looking at profitability, the EBIT margin for FC&E decreased to 30.7% compared to 32.1% last year, as efficiencies that we continue to realize in our production plants and COVID-19 related lower travel expenses were offset by favorable product mix, higher freight costs, increased depreciations and FX. Please move to the next slide, Slide 8. In Health & Nutrition, we've seen another strong quarter with 15% organic growth supported by all three businesses, though compared to an easy baseline of minus 4% organic growth last year. In Human Health, our supplements business continued to grow very strongly, with variations across regions, partly offset by probiotics for infants and young children that declined because of inventory adjustments and order timing, however leading to solid growth for Human Health overall. Animal Health surprised us positively with very strong growth driven by customer wins in Poultry & Swine, while momentum in cattle business in North America, which accounts for about 40% of total revenues was stable.

[Mauricio Graber:]

Thank you, Lise. Let me keep the wrap up on Slide 14 short. Chr. Hansen have a strong start to the year by all businesses and we see ourselves well on track to deliver our guidance for the financial year 2021. While short term, our EBIT is negatively impacted by the acquisitions as guided and we have said that the financial year 2021 is a transition year, let me reemphasize that we continue to see plenty of opportunities to drive efficiencies in our operations, and expand margins over the strategy period. We are fully committed to delivering on our 2025 strategy, while forming a differentiated bioscience company, we focus on our microbial and fermentation technology platforms, and the successful integration of the three acquisitions, as well as the Carve-out of Natural Colors are our top priority for the coming months. Despite higher than normal uncertainty because of the global pandemic, I've remained very excited about the many opportunities that lie ahead of us by applying microbial solutions to grow a better world naturally. And I am very proud of the entire Chr. Hansen team, and how they have been handling the challenges of the pandemic up to now. Thank you for listening, and with this, let's open up for the questions and answer session.

[Operator:]

Thank you. Our first question comes from the line of Annette Lykke from Handelsbanken. Please go ahead. Your line is open.

[Annette Lykke:]

Thank you so much. My first question is within the Human Health and how you see second half of this year in respect to Europe, in particular Southern Europe, as you highlighted. Are there any risks that it will take some times for some consumers to get back to normal levels or is there a risk that they simply take out they go well without the probiotics? So how do you see the dynamics there? Also, on this HMO capacity, what is the surprise or what was new to you, and why do you have to delay the sales thing in that respect? And then finally, I appreciate all the comments you made on China, but when do you see a normal production in China as such and is there a chance there the ambience you could in favor compared to fresh diary? Thank you so much. Oh and sorry, welcome to Lise as well.

[Lise Skaarup Mortensen:]

Yes, thank you, Annette Lykke.

[Mauricio Graber:]

Thanks. Thank you for your questions. I think I'll take a stab at them one-by-one. So, first with Western Europe and probiotics, what we have seen overall, is that dietary supplements in the market that have a stronger online channels, and in this case, being North America and China, dietary supplements have performed very, very well and you see that in the strength of our results. Now, particularly Western Europe, and as you said, some of the southern parts of Western Europe, you have a very traditional channel through the pharmacy, where in lockdowns consumers go -- left the pharmacy. I do not think the outcome of that will be that people will do away with probiotics. I think you will see several aspects. I think it puts a great opportunity for some of the customers to strengthen the online channels in Europe and I think it also as the lockdowns hopefully by spring, start relaxing, I think you will see a return to more normalization in the pharmacy channel, which is very well established in the process of Western Europe. So overall, we continue to be very optimistic on probiotics. We see a lot of engagement. The number of clicks in our probiotic institute continued to grow a lot. So the science behind some of our probiotics, and the breadth and depth of the portfolio that we have, I think is something that provides a great opportunity for growth, innovation and margin expansion in the future. On HMO, as I tried to mention in HMO, you have both our market demand challenge, which is some of the country registrations, and some of the customer launches are being slightly delayed, but I can tell you very clearly that in all the conversations with the global and regional infant formula customers, HMO is among the top priority of the future product compositions. So you will see very strong launches of these products and the timing of that will vary by some of the markets. Now the capacity constraint that we have, remember that we had always mentioned that we acquired in Jennewein an organization that has very strong IP, probably the leading IP in the field. Our team that I'm extremely proud on their science, their conviction, the experience that they have in the HMO market, but it was a very, let's say, early startup from an infrastructure point of view, the part of the process is outsourced, and then the downstream is in-sourced in Germany but with a very small capacity. So in order for us to address the short term capacity constraints, we will have to work with productivity on our partner on the outsourced side. We will need to invest slightly in our downstream capacity and we expect that we will do most of that within the next few months. But by the time that capacity is debottlenecked, some of that revenue will shift to the fiscal year 2022. I don't want to minimize sort of the impact of that in any way, but the way I view it is a short term negative for a longer term positive, because obviously that will result in a larger acceleration of our revenue growth and organic growth in 2022. Now, in order to drive the full profitability of the HMO segment, we need to in-source and build our facility in Kalundborg, and that will be sort of a state-of-the-art scalability factory with the right growth. I just wanted to give a comprehensive HMO answer given all the questions that have been received recently. Lastly, moving to and I cannot really contain my excitement and enthusiasm about the HMO field. I think we have a very strong IP. I think it will be a high growth, high margin and innovation business. China, you all have the same information about China that I have, so not sure how much more depth I can provide you. In China there was during the COVID when COVID hit, a year ago now, it was not locked down, it was a close down, meaning the largest dairy companies closed. As they reopen, what we have seen is they have enough supply of milk and enough demand of liquid milk to basically run their facilities. And that has resulted in them putting out less volume of fermented product. And that has lasted for longer and you read the same reports that we read, which is the performance of the large dairies in China is good and it is good because of the performance of liquid milk. The fundamentals that fermented products, basically yogurt, is an excellent way to store milk and to add premium value-added products to consumers still remain. So I do not believe that anything has changed in the Chinese consumers interest in both chilled and ambient fermented products. But I think it will take time for that volume, promotion and offering to the consumers to normalize. And that's why we are saying that while we expect a better second half of the year, I think 2021 will be overall a very challenging year for the fermented business in China. And just to provide, and to close on that, if you look at our overall business in China, our Animal Health is doing fantastically well with the new growing swine category in China. Our dietary supplement is performing strongly and we expect also a strong second half of the year with our infant formula business in China.

[Annette Lykke:]

Okay, thank you very much.

[Operator:]

Our next question comes from the line of Soren Samsoe from SEB. Please go ahead. Your line is open.

[Soren Samsoe:]

Yes, hi it’s Soren Samsoe from SEB. First, warm welcome to Lise from my side and then a few questions. First on Food Cultures & Enzymes, the 8% organic growth seems a bit stronger than what you have indicated for this division for the full year. Do we agree on that? And also, what has sort of surprised you positively? What is driving stronger growth from the start of the year and will that continue? Secondly, on Jennewein, I mean, when you made the acquisition, you guided €50 million revenues in 2021? And now you talk about implicitly €15 million, so that's 70% down on your original expectations for revenue this year, that's a big number. You simply have to explain this a bit better how you can go wrong in this way, what has really gone wrong? And also, what likelihood do we put that you actually get €50 million or more in revenues in 2022 then? I think that that's really important. And also if you could tell us when exactly did you become aware of this issue with Jennewein? Yes, that's my questions.

[Mauricio Graber:]

Excellent Soren. Happy to take those. Basically, Food Cultures & Enzymes, I think the growth was indeed stronger than we expected. I view the 2% volume growth as a positive signal. Meaning, I know achieving 10% reading the comments this morning may seem as something that was expected. I believe that being able to achieve 10% growth in Q1, given the current market conditions of lockdowns, et cetera, is very, very strong. Obviously 15% in Health & Nutrition, but the 8% in Food Cultures & Enzymes, here are the strengths. I think North America performed very strongly. And I think it talks a little bit about the resilience and the growth opportunities in the cheese, the probiotics and the first day we market in North America. China was definitely -- continues to be a very challenging market. But Europe also was strong, probably partly driven by in-home consumption versus food service. And I think the team's ability to execute on launching new products, working digitally with customers, was what enables us to deliver this growth, so I'm extremely proud of the team. And hope that gives you a little bit of perspective, meaning we have to help customers innovate virtually, and there's no way you can achieve an 8% growth without new products, new launches and new wins with customers that continue to take place even with less physical visits. Now moving on to the HMO, I know it's a large change on the estimate for this year, but take into consideration the timing or financial year that really ends in August. So, it puts a lot of pressure on our business that we are just starting to own and understand. That was handed over to us from, let's say, a family owned business. And once we took over the business and we looked at the true yields and productivity that you can get from the side versus projections on how they are going to scale up, so it's not something Soren that one day you go into the plant and you learn, oh it is going to be 20 instead of 50. It's a sequential analysis of questions and tests and trials, until we really are very late December, early January, get the confirmation of what we believe, based on our knowledge and understanding is the true output that we can get from that facility. And I will tell you, I'm proud of our Chr. Hansen team that worked all through the break between Christmas and New Year to continue to try to debottlenecking of the facility in the solutions that we can have to continue to build volume for the HMO business. As far as the competition, yes?

[Soren Samsoe:]

No, go ahead.

[Mauricio Graber:]

Go ahead. I think you asked the question about fiscal year 2022. So the volume of HMO will be driven by the dosage and the volume launches in the future. One of the strengths of Jennewein, if the, that they have developed the five HMOs and are able to sell those five HMOs, what you'll find today in the market is mainly one or two HMOs. So the scale of the five HMOs will be an important contribution into our future revenue.

[Soren Samsoe:]

But I was just wondering, how you can come up with an estimate of €50 million to start with, that then becomes €15 million or €20 million. I mean, shouldn't it have been the other way around. So, if you didn't really have know of when you're bought it, then you started out low and then you found out later what's the real output from this facility, that's just really puzzling, I think, but yes?

[Mauricio Graber:]

I think many acquisitions are, we based our assessment also on the acquisition perspectives and prospective and documentations that we based our initial analysis from.

[Lise Skaarup Mortensen:]

Maybe I want to mention here that the decline in the revenue from the acquired businesses is also impacted by FX. It's not all attributable to the capacity constraints of Jennewein.

[Soren Samsoe:]

Okay, then it will be nice if you supply those numbers to us. You don't have to now, but at least afterwards. Then finally a question on dietary supplements, it looks like Spain has decided to actually start using Health claim on probiotics, sort of bypassing the rules that came out several many years ago, actually and Italy has done the same. What do you think this could sort of mean for the European markets as such, do you think more countries will follow and what would that mean to your European dietary supplements business?

[Mauricio Graber:]

Yes, I think it talks about some of the markets exactly having the frustration on the overall European ruling. I think Soren too early to say, but obviously being able to use the word probiotics, being able to talk about the benefits of probiotics, we view that as a positive. I think overall, the healthier solution would be to have aligned European policy regarding that, and we continue to work hard on science and advocacy to…

[Operator:]

Please hold by while we reconnect the speaker line. I apologize about the interruption. Please hold by while we reconnect the speaker line. You are now live, please continue the presentation.

[Mauricio Graber:]

Thank you. Apologies for that, again. It looks like the line dropped. So I think it's positive Soren that some countries will have a more open legislation towards dietary supplements. And we continue to believe that probiotics have an important to play in immunity and preventive health in the whole, good health going forward. So it's a net positive for the business.

[Soren Samsoe:]

Okay, thank you.

[Operator:]

Our next question comes from the line of Lars Topholm from Carnegie. Please go ahead. Your line is open.

[Lars Topholm:]

Yes, just a couple of questions on my side. You answered a lot of it when you answered Soren before, but on Jennewein in currencies representing the deviation in your outlook for acquired companies, does that imply that expectations to HSO Health Care and UAS Labs is completely unchanged? And maybe in terms of harvesting synergies in these two if you can elaborate a little bit of the plan, understand the scope for in-sourcing production in HSO Health Care, also for ramping up capacity utilization in the new UAS Labs. So, I just wonder how you see the pace of harvesting the various synergies here? And then I have a question on Food Cultures & Enzymes because you point out mix is hurt by the fact you grow strongest in Cheese & Enzymes and you contract in China? How much do these two parameters need to change before we will see positive margin momentum in Food Cultures and Enzymes? Maybe it's difficult to answer because of more moving parts, but some thoughts on the margin erosion you're seeing there and what is required in order to bring that to an end. And welcome, Lise, but we have met already. Thanks.

[Lise Skaarup Mortensen:]

Yes, thank you Lars.

[Mauricio Graber:]

Thank you, Lars. So, let me let me take HMO and Jennewein first. Basically, I think you pointed right, in order to drive the margin entitlement that we see for these business and by the way our analysis sort of validates that this will have a margin entitlement similar to our business of around 30%, we will need to in-source the manufacturing and have the Kalundborg site running. In the meantime, obviously, by the time we are able to debottleneck and ramp up volumes, the business will have continued improving profitability versus what it is today with sort of low volumes and the short-term challenges that we have faced. On the probiotic acquisition Lars, if you carefully read through the text, basically what I'm saying is, we're saying our probiotic acquisitions are on plan. Remember that UAS Labs is a large acquisition, is the largest acquisition we have made, is running on plan or ahead of plan both from a revenue and integration point of view, but it has a large FX negative component because all the revenue is mostly U.S. dollar based. HSO from a go-to-market and organization is fully integrated. The only thing that's pending with HSO is the in-sourcing of the strengths that we bought. But you can see in our report that the combined portfolio in women's health is proving to be a high growth platform, as we've reported. So, let me unbundle the problem on the acquisitions as it has been discussed, which is probiotic acquisitions, UAS Labs, HSO on plan, running well, fully integrated into the Human Health organization with good tracking, just the FX impact. HMO is a strong validation on our business case for the acquisition with short term challenges on the fiscal year 2021, due to the production capacity constraints. On FC&E and the question about mix, you know Lars, if I make the complex simple, I would say the largest mix difference is really between enzymes and cultures. I think when you look at culture for cheese, cultures for dairy is relatively within the same range. And I would not overplay significantly the Chinese premium. You have to take into consideration that China has now become the largest dairy market in the world with very large Chinese customers that have global parameters, negotiating parameters similar to the large global international dairy companies. So, my concern with China is about the underlying fermented market. Our volume and innovation with customers and that's the largest opportunity that we see in China, and where we need to focus our efforts together with the customers to bring that back. If there's any part of the answer that you want me to elaborate a little bit more, please let me know.

[Lars Topholm:]

Yes, maybe a little bit Mauricio, because last time you and I met, we briefly discussed China and I had my concerns, and you mentioned that based on the insight you had into your – into which project you were working with customers on, you were I think at least less pessimistic than I were and now we seem more aligned. So, I wonder what factual observations you have made the past one and a half months that have made you change? Is it underlying same states or is it the pipeline you have that has become thinner or have projects been delayed, or what has made you change your mind?

[Mauricio Graber:]

But Lars, the only -- I would tell you, I hope I don't, I want to bring forth that I -- my confidence in the long-term growth and relevance of the Chinese dairy market is there. I think we will see continued opportunities for fermented product innovation. As I mentioned in the call, we're exploring some new opportunities in milk and you still have the cheese market to emerge. So, and you have the SMEs, those are the growth avenues for China. Short term my disappointment, then the only thing that has changed since we last met is that we continue to see the strength of liquid milk and the customers not yet committing more capacity to put out fermented products. That's probably the only thing that has really changed since we last met and it's very much aligned with the reports that you have as well. When will that change? I will tell you even with the very senior contacts and connections that we have with the Chinese customers I cannot give you an answer. What I can tell you is that the pipeline remains very strong. The progress on the projects and the frequency of digital contacts that we have with the customers remains very strong. So I have not seen anything on the appetite for cheese or ambient projects that has decelerated in our workings with the Chinese customers.

[Lars Topholm:]

That’s very clear Mauricio. Thank you very much for answering my questions.

[Mauricio Graber:]

Thank you, Lars.

[Operator:]

Our next question comes from the line of Heidi Vesterinen from Exane BNP Paribas. Please go ahead. Your line is open.

[Heidi Vesterinen:]

Good morning. So a few on China then. So, as alluded to in the earlier question, you do sound increasingly cautious on China dairy? How do you know that you aren't seeing competitive pressures? And what is the opportunity that you talked about in liquid milk? And then also on infant nutrition, you said in the statement that it declined given lower demand from physical stores. Do you think the overall market was down or are your customers biased towards physical stores rather than e-commerce? I'm a bit confused because I thought the local players were doing okay and that you would be selling to all players in all channels. So some clarification there would be nice, thank you.

[Mauricio Graber:]

Sure, Heidi. On China, I want to reinforce the only concern that I've had on China is how the financial year 2021 will shape up and when the market will sort of come back. But I am in no way sounding less optimistic about the long-term journey and trajectory of the dairy market in China. But the fact that we are now in January, and we are still seeing a larger output of liquid milk versus fermented is longer than we would have expected. Now, as far as competition, Heidi, and even though we have discussed that several times, I think the competitive landscape in China remains unchanged. We continue to compete with the same large global customers that we compete and that is the competitive framework that we have seen. And actually we have done a deep dive following all the comments around that on the Chinese market to make sure that we have no blind spots around how the Chinese competitive landscape is developing. I don't know Martin or Lise, if you want to take the question around physical stores versus, imported or online.

[Martin Riise:]

Yes, so in the infant formula business in China, there is still quite a bit of volume going through physical stores. And that has been a problem for some of the local players actually to have flow through there, because the stores have been closed due to COVID for a period of time during the first quarter.

[Mauricio Graber:]

But that is just to highlight I think the outlook for infant formula for the balance of the year, we view that with very positive perspectives.

[Heidi Vesterinen:]

Thanks and I would…

[Martin Riise:]

I think in the, sorry Heidi, we need to take one more question and then, please for the rest of you guys that are unable to get through today, you can follow up with me after the call.

[Operator:]

Our final question comes from the line of Charles Eden from UBS. Please go ahead. Your line is open.

[Charles Eden:]

Hi, thank you, and Good morning Mauricio and Lise. I just wanted to come back to your fiscal 2021 organic sales rep guidance, where you mentioned that your pricing is likely to be greater than a 2% contribution for the full year. So that's implying volume guidance of 3% to 6% rounded. Could you help us frame this versus what you expect the overall market is growing this year? Just trying to get a sense of your expected outperformance for the fiscal year. Thank you.

[Mauricio Graber:]

Yes, I mean, we definitely are an ambitious company. We expect or wish to outperform the market. I think our current performance in Q1 we expect to be outperforming the market. We will see that particularly as I mentioned in the underlying dairy market we believe it has been faster in Q1. We do see some signs as we cross reference many data that that is improving the underlying dairy market. And obviously with the strong Q1, I was expecting the call okay with a strong Q1 in a little bit of tailwind from Europe pricing, will you guys sort of increase your guidance, right? But the reality is that we live in very uncertain times. And I think the guidance that we set up at the beginning of the year serves us well for now. The way I view it this one quarter in the pocket, let's see how Q2 develops. We go into Q2 with a strong pipeline, with a very engaged organization. And that's why we are confident that despite the COVID challenges, we're able to deliver on our guidance for organic growth, EBIT and free cash flow. But we take a cautious approach, given the uncertainty that exists about COVID, the economy in the months ahead.

[Charles Eden:]

Thank you, very much.

[Mauricio Graber:]

With that, I would like to thank you for your calls. Obviously, our IR team is available for any follow up calls, but this concludes today's session. Thank you for joining and we would look forward to conducting some of the virtual road shows and I wish everybody to take care and stay safe. Thank you.

[Operator:]

This now concludes our conference call. Thank you all very much for attending. You may now disconnect your lines.