Earnings Transcript for CHR.CO - Q3 Fiscal Year 2021

Operator: Thank you for standing by, and welcome to the presentation for Chr. Hansen's Q3Conference Call. At this time, all participants will be in listen-only mode. There will be a presentation followed by a question and answer session. I must advise you that this conference is being recorded. I would now like to hand the conference over to your speaker today, Chr. Hansen's CEO, Mauricio Graber. Please begin.

Mauricio Graber: Good morning, and welcome to today's conference call on Chr. Hansen's Q3 2021results. Together with our CFO, Lise Mortensen, we will do a short presentation today before opening up for questions and answers. Before we start, please take notice of the Safe Harbor statement on the next slide, Slide 2.

Lise Skaarup Mortensen : Thank you, Mauricio, and good morning, also from my side. Please move to Slide 6 for the segment review. Food Cultures & Enzymes grew 5% organically in Q3 and 7% year-to-date with a 2% contribution from volume mix. Euro pricing contributed 3% in Q3, compared to 6% during first half of the year.

Mauricio Graber: Thank you, Lise. To wrap up, Q3 was a softer quarter, in line with expectations with 8% organic growth and EBIT margin before special items of 27.3% after the first nine months, we are well on track to deliver on our ambitions for the year. The financial year 2021 is a transition year for Chr. Hansen, as we are executing the recent portfolio changes but we are on the right track. The integration of UAS Labs and HSO is largely completed. The divestment of Natural Colors closed on our HMO team is addressing the initial challenges we faced heads on. As the world gradually reopens, advancing our commercial pipeline in bringing new launches to customers is our number one priority, but we must also acknowledge that uncertainty remains high and that the pandemic will continue to pose challenges short-term whether it’s related to weaker end-markets, increased cost focus or potentially supply bottlenecks. What’s important for the coming months is that we stay focused day-to-day while executing on our 2025 strategic priorities. Thank you for attending on this and let’s open up for questions and answers now.

Operator: And the first question comes from Lars Topholm from Carnegie. Please go ahead. Your line is now open.

Lars Topholm: Yes. Thank you. A couple of questions from me. One is about your guidance because the 6% to 8% organic growth is of course unchanged but you are writing a change quite a bit. So after Q2, you said the highest contribution would come from Health and Nutrition, now you say it will be driven by Food Cultures & Enzymes. And I just wonder what’s that change and why it implies for Q4 because if the total growth 6% to 8% and it’s driven by Food Cultures & Enzymes, does that implies that for the full year you see Health and Nutrition growing less than the 6% to 8%? And then to the same paragraph in Q2, you mentioned you saw a contribution from euro based pricing in line with last year which was 2%. Now you just say a positive impact. Is that still expected to be 2%? And then, on your raw material challenges in Human Health, I understand it’s related to some of the add-on services you sell on top of the, how should I call it? I wouldn’t call it the basic probiotic cost, that is a advance but you understand what I mean. I wonder what duration you see on this challenge. What can you do to mitigate it? And how big do you think the impact is? Thanks.

Mauricio Graber: Good morning, Lars. Let me take the first part on your comments about the sentiment on Q4. I will pass it on to Lise next to talk about euro based pricing. But I will take on the raw materials, as well. So, on Q4 and what you read from our comments today, I think what has transpired is that Human Health had a soft quarter due to very high comparables to last year. But it’s the part of the Health and Nutrition business that we also see customer in the traditional channel having larger inventories versus the high demand on the pandemic. So, versus we see in Food Cultures & Enzymes, signs of better trading conditions and momentum going into Q4. So I think you read that correctly that we see some upside going into Q4 in Food Cultures & Enzymes, strength in Animal and Plant and a bit more cautious on Human Health into Q4 due to the factors that I mentioned. And also because there are a lot of supply chain disruptions in overall- let’s say the intriguing sector, I think we have a narrow and focused portfolio were less affected by that, but indeed in our bulk probiotic sales we don’t face any challenges. But our fully bacteria market solutions we do face some challenges that I think largely limits our ability to go and acquire more businesses in Q4. We have planned to see that normalize into fiscal year 2022. With that, Lise, I pass it to you for the euro pricing question.

Lise Skaarup Mortensen: Yes, the euro pricing impact is expected to be 3% for the full year, which would mean 1% to 2% in Q4.

Lars Topholm: Okay. And does it correct – that with the euro pricing effect that is a 1% since planned bigger than you implied after Q2?

Lise Skaarup Mortensen: I think we said 2% to 3% as far as I recall. And now we say 3%.

Lars Topholm: Okay. That’s great. Just to get back to your answer Mauricio, so, was I correct in assuming that, for the full year you now see Health and Nutrition growing below the 6% to 8%?

Mauricio Graber: Well, Lars, we are not sort of guiding on that specifically. What I think we imply is that we see our stronger growth coming now from Food Cultures & Enzymes. I think we guide overall for the Group and we are not giving specific guidance for the two business areas.

Lars Topholm: That’s fair enough. Then I have a question on BacThera, actually relating back to your May 31 announcement of the license to begin to produce. So I wonder if you can put some words on how you see revenue ramping up in that business and also disclose your voice going forward. I mean, I know that’s a joint venture. It’s shown on online. But will you give additional information that allows us to see the revenue and the EBIT contribution?

Mauricio Graber: So, Lars, the set up that we have with BacThera in our announcement was we have drug substance set up here in Hørsholm and a drug product set up in Basel where we are able to now produce under the right conditions for pharma grade probiotics for live biotherapeutics and supply those to customers for clinical trials. I think really good questions on BacThera that will probably will defer as we talk about Q4 the full year and looking into 2022. The market has on some areas being affected by COVID and ability to do trials, on the other hand, there is products that are advancing faster to Phase 3 and potential commercialization. So, we will be giving an update on that in the quarters ahead.

Lars Topholm: Perfect. Thank you Mauricio and Lise.

Mauricio Graber: Thank you.

Lise Skaarup Mortensen: Thank you, Lars.

Operator: Thank you. And the next question comes from Heidi Vesterinen from Exane BNP Paribas. Please go ahead. Your line is now open.

Heidi Vesterinen: Good morning. So I’ll go one-by-one. First on APAC please, which was down 6%, Food Culture sounds less that China is improving, but Health and Nutrition is weakening. Could you separate what you are seeing in supplements and in Food Nutrition please? So that’s the first question. Thanks.

Mauricio Graber: Good morning, Heidi. So, indeed Asia Pacific, I was talking about Human Health, we saw challenge – very challenging comparables to last year Q3. It was probably their businesses that had some of the highest comparables both in dietary supplements and in infant formula. And excluding that, I would say our projection for growth in Health and Nutrition going forward in Asia Pacific is quite strong. It’s a very dynamic market with strong sales online and we are in markets like China and Korea, we have historically done very, very well. So, let’s say other than the current comparables, I see strong momentum for that as part of our strategic plan.

Heidi Vesterinen: And could you comment on infant nutrition please?

Mauricio Graber: Infant nutrition in Asia Pacific. So, we saw high - we saw high comparable as I mentioned, Heidi. There has been a lot of moving parts in infant formula in China. Short-term, there was a large customer that sold their brands in the Chinese market. There has been concerns about the rate of growth of children in China. On the other side, you have read the same reports that I have read on the government releasing further the policy of number of children you can have in China. So, a longer term better prospect for growth of infant formula in China. What I always like to remind is the following, our largest opportunity in China with probiotics is about penetration of probiotics in infant formula and we continue to see very good engagement and very strong partnership both with international and infant formula owners, as well as with the leading Chinese brands that by the way under government regulation continue to consolidate. So we are well positioned to win with the Chinese formula our largest place.

Heidi Vesterinen: And speaking about infant nutrition, given the topic of birth rates declining, it’s a global issue, right? We hear about it in Europe and other regions. What have you seen in other regions in that segment?

Mauricio Graber: So, you know what? We continue to see, Heidi, is honestly that the premiumization in infant formula is the largest trend. So, for us, the success and the growth in infant formula will be about our best documented probiotic strengths playing a role in premiumization and obviously the adoption of HMO into the infant formula formulations in the largest markets, first in the North American market and second in the Chinese market once it’s approved will play a fundamental role for our growth in infant formula.

Heidi Vesterinen: Thanks. And then a few on the raw material shortage. So, what exactly is the raw material that is short supply? And how long do you expect an impact? And I am also wondering if this is mainly a volume effect or do you also expect a gross margin effect? I am just wondering if you can pass on extra procurement cost that you might incur because of this situation.

Mauricio Graber: Heidi, because of, let’s say competitive reasons we are not going to narrow these to a single raw material. I think as commented that is related to our full package solutions in human health probiotics. So, it – we have mitigated the challenges with great work of our sales and operation planning teams to be able to supply all of our orders in hand, but we will not be able to pursue incremental businesses in Q4. As mentioned earlier, we expect this situation to normalize for fiscal year 2022. I’ve always – first of all, we are not as impacted as many other players that have broader portfolios with the overall inflationary trends. But we have strong customer relationships and good pricing power to be able to pass through any inflationary impacts.

Heidi Vesterinen: So, it sounds like it’s mainly a volume effect. And then, last question. So, on this topic you said the fully packaged solutions business is impacted. So, if there is a global shortage of this raw material, why wouldn’t your customers who have packaging on their own also get affected impacting the rest of your business?

Mauricio Graber: I think everybody is affected by some challenges in the raw material supply chain, Heidi.

Heidi Vesterinen: So, is it possible that the non-fully packaged solution part of your business has an impact due to that?

Mauricio Graber: I don’t think so, because we have good visibility into the orders and the engagement with customers. But as you have seen, as we have talked about a slowdown, that has played – I mean, very well play a role into what we have seen.

Heidi Vesterinen: Okay. Thank you.

Operator: Thank you. Our next question comes from Soeren Samsoe from SEB. Please go ahead. Your line is now open.

Soeren Samsoe: Yes. Thank you and hello. The first question is on Food Cultures & Enzymes. I was just wondering if you could give some more color on your slide. The high expectations for that – for the rest of the year, is it more due to the less price from China or is it more that you see high growth from – in meat and bioprotection for example? And then, the second question is regarding China and yogurt. The market data seems to indicate a slight change of dynamics where Ambient yogurt does not gain so much market share from chilled. Is that also a trend that you are seeing? Yes. Let’s start with those two questions.

Mauricio Graber: Hi, Soeren, good morning. So, FC&E, indeed you highlight some of the key points that we see positive momentum. So, I would say, there is positive momentum in cheese. We see a good momentum in cheese where you see continued in-home consumption and stronger demand for some of the cheese varietals related to food service, whether it’s mortadella or cheddar. So, strong global demand in those areas. Good momentum in Cheese. We have mentioned that we have a very strong pipeline in biop, but at least I mentioned it will take 12 months or so to see that reflected monetized into revenue. But we also see the same dynamic that you see in China comparables with east and we see the balance between Ambient and cheese although what said based on where it is today both hopefully poised for a return to more normalized consumption levels.

Soeren Samsoe: Okay. And the question on Ambient yogurt in China?

Mauricio Graber: Yes, I think that basically what you mention is that Ambient doesn’t seem to be gaining share from cheese and that’s consistent to what we see although I mentioned that the much lower levels of consumption given the high growth of drinking milk that is currently taking place in China.

Soeren Samsoe: And the – as I seem to have seen that IFF your main competitor in yogurt cultures has launched a quite strong products for infant yogurt in China, which basically allows for live cultures in the finished yogurt product. Do you have a similar product and if not is this a risk to your market share in infant yogurt in China?

Mauricio Graber: No, we are – our collaboration with customers in China both in Ambient and in cheese and the products that we have to service those segments, we consider those to continue to be industry-leading. So, we don’t see any major challenges. We have strong competitors and I think the innovation of competitors pushes us also to continue to be one step ahead in innovation.

Soeren Samsoe: Okay. Thank you.

Operator: Thank you. The next question comes from Charles Eden from UBS. Please go ahead. Your line is now open.

Charles Eden: Hi, good morning, Mauricio. Good morning, Lise. Just two questions I think. First, I just wanted to dig into the retention of the lower end of the organic sales growing 6%, because when I look at the 8% year-to-date performance, the low end would require around flattish in Q4. So, I guess, I am asking, do you fear there is still some inventory destocking to come or inventory normalization particularly in H&N? That’s question number one. And then the second question was just picking up on your comments around FC&E in response to an earlier question and momentum recent trading, is that comment largely related to trends in China or was it more broader statement with you? Thank you.

Mauricio Graber: So I’ll comment on the FC&E and then pass it on to Lise for guidance. No, the comment on FC&E was broader. It’s a business where we have, as I mentioned in the call launched lot of innovations specifically for dairy and we see very strong engagement with customers across all the innovation platforms. So our Vega launch for plant bases although from a very small base is growing very strongly. Our launch of FreshQ third-generation has had a very high engagement with customers. We continue to see our enzyme business perform very well and the new generation of cultures that we launched is also continuing to drive good growth and momentum. So, it’s broad and global, the comment on FC&E. Lise, answer your – to the questions on guidance.

Lise Skaarup Mortensen: Yes. So, yes, keeping the guidance at 6% to 8% while we are at 8% year-to-date should certainly be seen in light of that we still operate in uncertain times. What we talked to here is that we do see positive tendencies in FC&E. But we have also just experienced a quarter where with the Human Health and below satisfactory results. And as I’ve also said, Human Health is expected to post another soft quarter. So you can see in the light of that, yes, we are at the low end of the range. It’s not our ambition. But we are living in uncertain times, which is why we keep the 6% to 8%. And we feel that of course that we are on track to – well on track to land it.

Charles Eden: Super. Thank you.

Operator: Thank you. And our next question comes from Christian Ryom from Nordea Markets. Please go ahead. Your line is now open.

Christian Ryom: Hi, good morning. First a question on Food Cultures & Enzymes division. So, as I understand, you are seeing improving momentum in demand from the foodservices particularly in North America. Can you give us sort of some clarity on where you are in – how far progressed to see the recovery in foodservices globally and whether you expect a similar dynamic across the EMEA region so that is – that foodservice, increased demand from foodservice doesn’t crowd out demand from in-home? I’ll start with that question.

Mauricio Graber: Yes. Thank you. I would remind just that as Chr. Hansen, we are largely a retail company from a channel point of view. Our largest exposure to foodservice is really in North America in the cheese market. So, that’s why we mentioned that, I do not expect any impact or shift patterns from the reopening of society or the growth in foodservice that would negatively affect our European business. So, we are – we have limited exposure to foodservice and mainly in the North American cheese markets.

Christian Ryom: Okay. Thank you. Thank you. That’s very clear. And then, just a couple of quick questions on the Health and Nutrition business. So, first on your outlook for the HMO franchise. Can you elaborate a bit on the extent to which new registrations are required to sort of significantly lift sales from the current level? And when do you expect those registrations to arrive?

Mauricio Graber: Yes. I mean, first of all, I can say with a lot of conviction that all the work that we are doing in HMO validates our strategic moving to the space. We think that HMO will be highly synergistic with our probiotic franchise. We believe that HMO will play a substantial role in the premiumization of infant formula. Now, the key growth in the HMO business will come from the launches in the U.S. market and where registrations has been completed, the FDA approval has been granted, and the next big thing after that will be the – our registrations approvals of the Chinese market. That we expect is going to take long. We don’t expect that to happen before 2023, 2024. But that will open up important access to the Chinese market. But indeed, these are products that will require registration of every single HMO. We are now in the process of commercializing the first five cheese HMOs that are the most representatives by volume in Mothers’ Summit.

Christian Ryom: Okay. Thank you. And then, just a question for clarification on your guidance for the revenue contribution of your acquired businesses. So, going by the year-to-date revenue, the €100 million that you are guiding for the full year would suggest sort of a moderate slowdown in revenues for the acquired businesses relative to Q3. Is that sort of a fair interpretation and to the extent that it is what does that reflect? Is that related to raw materials or order facing or what’s the explanation in that?

Lise Skaarup Mortensen: No, no. We are not seeing any of that. You should just see it as a cautious guidance around a range of around €100 million. But we are – as you have noted very well on track to make that number.

Christian Ryom: Great. Thank you.

Operator: Thank you. And as there appear to be no further questions. I will turn the conference to the speakers for any closing remarks.

Mauricio Graber: Thank you very much. This concludes today’s conference call and Q&A session. Thank you for joining and we look forward to continuing our dialogue during the upcoming virtual roadshows. For those of you that are taking a summer holiday, have a nice one and we look forward to talking to you. Thank you.