Earnings Transcript for SY1.DE - Q3 Fiscal Year 2024

Operator: Ladies and gentlemen, welcome to the trading update in January, September 2024 Conference Call. I'm George, the Chorus Call operator. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Dr. Jean-Yves Parisot, CEO. Please go ahead.

Jean-Yves Parisot: Thank you very much, George. Good morning, all of you, ladies and gentlemen. Welcome to our 9 months call this morning, and thank you all for joining Olaf and me. We wanted to use this occasion to give you a brief update on our 9 months number, which will give you an idea of our trading statement at this time. While we do not usually do these calls for our first or third quarter numbers, we decided with Olaf, to make an exception this time because we wanted to concentrate on all your questions about these numbers. After my remarks, Olaf will give you an overview of our price, volume and hyperinflation-related pricing performance, then we'll open the floor for questions afterwards. Now in first 9 months, we're once again strong ones. No surprise there, solid top line growth, with group sales up to 11.1% organically to EUR 3.8 billion at the end of September. For the third quarter, that comes out as a plus of 10.2%. Symrise also continues to perform strongly on the bottom line. Again, no surprise there. As usual, in our 9 months performance, we are not reporting detailed EBITDA numbers for the period, but let me assure you that we are not deviating from our profitable growth course. And most importantly, our solid performance in the third quarter has led us to specify, you might even say, elevate, our full year guidance. We now expect sales to come in at around 7%. As you have come to expect from us, both of our segments have once again performed well in the third quarter, and both contributed to the overall strong results, and that is despite the overall economic development around the globe. We still see significant geopolitical tensions and a relatively high inflation in many of our markets. In that context, the 9-month performance I just talked about is a real testimony of the resilience and strength of our business model. I'm really proud of our diversified portfolio and our broad international footprint, which makes us definitely unique. Let me share with you our international setup is really quite impressive. I just visited our major operations in Asia, Latin and North America. And in the coming days, I will be in Madagascar and make a quick stopover in Dubai. I could not mean -- I couldn't wait so much for meeting our teams. It has been very inspiring for me to meet so many Symrisers around the world in the last few weeks. They are all doing such a great job. I'm convinced that our setup will continue to drive our success going forward. As we said in our trading update this morning, we are firmly convinced that we have set the right course for the future. With that, let me hand over to Olaf, which will give you some more additional context on the numbers we have reported this morning. Before we then we will take all your questions. Olaf, thank you.

Olaf Klinger: Thank you, Jean-Yves, and also a warm welcome to everybody on the phone also from my side here. Let me give you an overview of our price, volume and hyperinflation-related performance with a special emphasis on the latter one. Our strong organic growth of 11.1% in the first 9 months was primarily driven by volume. While we experienced a marginal decrease in real pricing, this was offset by a low single-digit positive impact of 2.3% from hyperinflation-related pricing, leading to an organic growth without this impact from hyperinflation of 8.8%. In Q3, we achieved 10.2% organic growth, which was driven again by volume. A slight negative price impact was offset by an equal positive impact from hyperinflation-related pricing of 0.3%, leading to an organic growth without hyperinflation of 9.9%, i.e., stronger than in the first half. Taste, Nutrition & Health delivered 10.4% organic year-to-date growth. Compared to the first half of the year, the volume performance accelerated in Q3, leading to an organic growth of 11.3% for the segment. Specifically, pet nutrition continued to experience certain price decreases in Q3, resulting in a slight negative price impact on the TNH segment performance. This was offset by a positive low single-digit hypeinflation impact, 0.6%. Scent & Care achieved 12.2% organic growth in the first 9 months with all 3 divisions experiencing double-digit volume increases. The segment was a slight price decline driven by Aroma Molecules. This was partially offset by hyperinflation, 1.0%. Q3 delivered organic growth of 8.4% for Scent & Care, driven by a high single-digit increase in volume. Alongside the continued slight price decline, we saw a slight hyperinflationary headwinds in Q3 for Scent & Care. Based on the good business performance in the first 9 months, we are specifying our full year organic sales growth target to around 7%. So furthermore, please note that hyperinflation-related effects will cause a specific negative impact on our organic growth profile in Q4. Especially, the Argentinian peso has been subject to continuous devaluation for several years, which escalated actually in December 2023 by monetary policy measures of the newly elected Argentinian government and caused a severe devaluation of the peso from ARS 393 to ARS 899 per euro. During the first 9 months of 2024, the difference between current and previous year FX rates led to the earlier mentioned positive contribution to the organic growth from hyperinflation countries of 2.3% for the first 9 months. At the end of 2024, the sharply depreciated exchange rate of the peso from the previous year will flow into the growth calculation and impact the organic growth negatively in a substantial magnitude as headwind in Q4. This will also significantly reduce the growth contribution from hyperinflation countries for the full year before our CapEx. An opposite effect in the same magnitude will be reflected in the FX-related sales growth. From a reported sales growth perspective, this specific impact will be kind of [indiscernible]. So I wanted to highlight this. I'm sorry for being a bit technical here, but I think it's important for you to understand where we are. I hope you appreciate these additional comments to understand our gross guidance of around 7% for the full year in a better rate. And with this, I would like to hand back to Jean-Yves for some final.

Jean-Yves Parisot: Thank you very much, Olaf, for this clarification. Ladies and gentlemen, thank you for your attention. And before we open the call for questions, just let me invite you, all of you to the coming Capital Market Day in Holzminden, November 19 and 20, where we want to show you are we unleash the full beauty of Symrise. All my Executive Board colleagues will be present. And now I would like to open the floor for your questions. Thank you.

Operator: [Operator Instructions] Our first question comes from Matthew Yates at Bank of America Merrill Lynch.

Matthew Yates: I'd like to ask about the consumer products business within scent that continues to do double-digit growth, as we've seen from your peers as well. Can you disaggregate that as to what is really driving that growth? Do you see significant stocking behavior at your customers and in the channel? Or do you think there's something more underlying and structural about the dosage levels that are going into different product categories.

Jean-Yves Parisot: Thank you for your question. Yes, scent because I think you are focusing on scent or the consumer products. I think that it's difficult. First, it's difficult to answer the stocking question. Very often, I have this question about the stocking impact. I don't have the feeling that customers are out looking, right? I think it's -- this thing is behind us for a while, at least for the extra stocking or the over talking. I think the market is really growing. What we see is definitely is a shift also on some customer portfolio structure. I'm just coming back from different visits, as I told you, from Asia, Latin America, North America, and we see very active local and regional players. And I think the market dynamic is still there. Even if we see in different places in the world, some okay economical or consumption slowdown, the consumption is going up. So I don't see to make a simple storage stocking effect. Concerning the structural part in the change of dosage or things like that, also, it's a very case-by-case impact. I think there is no one fit for all. It depends on the type of product. For fine fragrance, definitely, the market is growing, and we are really eating market share and the growth is really coming from that Consumer Fragrance. It is the same, but Consumer Fragranc fragrance is much more diversified than signed consumer. We see a very good growth, very high growth in fabric care. And also, we are focusing on hair care and cleansing. And the market -- Even if the market are not hyper growing because these are very stable market, these are very resilient market. So they are really growing the right way. So our growth is definitely coming from the structural growth and the fact that we are also gaining market share in some specific countries.

Olaf Klinger: Matthew, if I may add, I think we also should anticipate a little bit that the comps are getting tougher now. I think the recovery of the business started really in Q3 of 2023. It’s not that we are seeing the slowdown yet, but I think at some point, we need to assume that it will be a little bit more modest. Continuing with double-digit growth, I think, would be a surprise, let’s say, this.

Operator: Our next question comes from Ed Hockin in JPMorgan.

Ed Hockin: My first question is to clarify on the FX pricing effect for this year. I've been thinking it would be around 2% contribution to 2024. Can you tell us what your updated thoughts are what the FX pricing effect will be in the year as a whole and maybe clarify on the magnitude of the hands that you're talking about for Q4? And just to check as well that your guidance for around 7% organic sales growth for this year is still excluding that FX effect. And then my second question is on the, a bit of a slowdown in Scent & Care in Q3. Whether you can break this down a bit by Consumer fragrance, Fine Fragrance, Aroma Molecules and Cosmetic Ingredients, it looks on the face of it like there's been some slowdown in Cosmetic Ingredients. Could you just clarify if that's been the case and your thoughts on the growth going forward?

Olaf Klinger: Okay. Let me take the first one. So first, I confirm that our guidance excludes the impact from hyperinflation. The magnitude is a little bit difficult because we still have not the FX rates in the fourth quarter for Argentina, specifically, but what is currently 2.3% as I flagged for the first 9 months will likely go more towards 1% or even a little bit less in the fourth quarter. The magnitude for us, and you can do easily the math is EUR 40 million, EUR 50 million. So it's quite substantial, and that's why reflected today. We anticipated this, and this is why I communicated on this impact all year long to clarify where our real organic growth is, so please take that into consideration when looking at our around 7% guidance.

Jean-Yves Parisot: Yes, I will take the second one concerning the slowdown in Scent & Care. We have to be very careful about slow down or not slow down because we made a very good Q1, Q3. So we can also overperform all the time also to be very careful to follow the market. We had a very good Q1, Q3. And specifically, you have seen in Cosmetic Ingredients, we got significant orders, which is the proof that we are also really gaining confidence of key customers on the market, and these orders cannot be happening every quarter. So I think it's very important to see the average evolution year after year. And to see quarter-by-quarter is also -- is always a little tricky because as I told you, we can have a specific quarter with significant orders and not the following months. So that's the reason why I think that it's important to see this slowdown as a kind of constant evolution and growth of the turnover. And I answered your specific question about CI. We had a very nice win in the first half of the year, which was really impacting our figures the right way and which will be, also have an impact certainly on the comparable next year. So something also to keep in mind. But the average growth is really impressive, I think, and overperforming the market growth.

Olaf Klinger: If I can add to this specifically on Cosmetic Ingredients, you know that we are running different activities around actives, the microprotection and UV filters. Specifically, the UV filters a little bit softer at the moment by the other parts are going at least with the same dynamics there’s a little bit of split within Cosmetic Ingredients why because they look a little bit softer, but it’s really coming from the [indiscernible] side.

Operator: Our next question comes from Charles Eden at UBS.

Charles Eden: Just one left. On the margin this year, obviously, you don't specifically mentioning around 20 in the press release, but I note your comments in the prepared remarks around continuing the profitable growth momentum. So should we just take that as sort of saying that you do expect the margin this year to be in that 20% to 23% will be, I guess, at the lower end of that range corridor for '24, if you could just clarify that?

Olaf Klinger: Yes. So we consider this 9 months release as a trading update and therefore, we didn’t talk about the margin. We reserve that for the Capital Markets Day. But let’s say, the third quarter was definitely was a good one for us. And therefore, no change in our guidance on profitability for the moment. Naturally, you also know that the fourth quarter is always the weakest quarter, and therefore, we will update you on the Capital Markets Day.

Operator: Our next question comes from Isha Sharma at Stifel.

Isha Sharma: So just to clarify, you did -- obviously, you did 11% growth in the first 9 months, and then you are saying that 2.3% out of it was FX pricing from inflation and now you are guiding for 7% for the full year. So there's still a bit of slowdown in Q4 that you are assuming. Is that right? So, I'm a little bit slow this morning. Just wanted to understand the 7% that you are guiding is without the FX inflation, so it should be then we have to take the 1% out, which should be -- so the real with hyperinflation guidance is close to 8%?

Olaf Klinger: Yes, Isha, thank you for the clarifying question. Yes, the 7% is excluding this hyperinflation impact. You rightly said, 8.8% is the run rate at the moment. We are guiding around 7% with the expectation that Q4 is always the softest quarter for Symrise. Naturally, we are a little bit careful after last year's experience. So take that for the moment. The tricky part is always the month of December where it's kind of difficult to predict how the order positioning will be from the customer side. So might well go into December, it might well go into January. And therefore, I think we feel comfortable with this around 7%, which gives some leeway, of course. I hope this helps.

Isha Sharma: That's very helpful. Just one more question on pricing. You mentioned there was still obviously negative pricing in Q3. Do you think that we have reached the bottom there for, especially for pet nutrition? Or do you think that there's still a couple of quarters to go before we start to see the bottom in pricing there?

Jean-Yves Parisot: So I will take this question. So as I said last time, so this price decrease in pet food is [indiscernible], yes, to the nutrition and sometimes on a case by case in for palatability, where there is very substantial price increase in the last 2 years. So we are still in a period where we are stabilizing the business in terms of pricing. So I think the Q4 we will still see effect on that for the pet business as a whole, but next year should be definitely coming back to a much more stable business in terms of price. So certainly, we'll be still an impact in Q4, but next year should be, again, stabilized and back on track to normal market rules and no compensation to any kind of price evolution, which has been done in urgent mode due to the raw material evolution.

Isha Sharma: That's helpful. Just some indication on volume side. Do you see the volumes are still positive?

Jean-Yves Parisot: Yes.

Isha Sharma: On the pet food side?

Jean-Yves Parisot: Yes. Yes. Definitely, pet food. Again, the food population is increasing year-after-year by 2% globally. And we are also having a very strong relationship with pet food customers, whatever is for palatability, nutrition or food protection. And we see in different parts of the world some slow down, but it slowed down meet still an evolution. It's not going down minus. It's really to slow down, but the evolution is there. So the volume will continue to increase in the coming months and my perspective in the coming year.

Isha Sharma: And if you could help us with a bit of magnitude like just an indication.

Jean-Yves Parisot: So if I take my crystal ball, it should be definitely between 5% to 10% volume growth.

Isha Sharma: I'm sorry for being pushy, but what is the current run rate [indiscernible], I may ask?

Jean-Yves Parisot: Sorry?

Isha Sharma: Where Are the volumes right now? What kind of volume increase did we see in Q3, or you mean that full?

Olaf Klinger: Very similar to what we saw in the first half and to the upper teens at the moment, sometimes depending on look at nutrition or liability above or a little bit below, the teens.

Operator: [Operator Instructions] Our next question comes from Nicola Tang at BNP Paribas.

Nicola Tang: I wanted to ask a little bit about your innovation pipeline and the discussions that you're having with customers around innovation. I think there's been a narrative around potentially a step-up in innovation with customers. Is there anything to call out? Are you seeing anything in particular and in which divisions or areas? And the second one, could you just give us an update on input costs more generally and what you're seeing both on the natural side. And also if you could comment on whether the outage or the extended outage with the ASF is potentially having any impact, either positively or negative?

Jean-Yves Parisot: Okay. So thanks, Nicola. So concerning innovation, by the way, that will be a focus for our Capital Market Day to explain to all of you the way we are structuring innovation based on our R&D, and we made a meeting with 130 leaders last 2 days, and one of the main topic was also the way we will accelerate innovation. And the way we accelerate innovation will be through an ecosystem. we will build internally. We have a lot of capabilities in the company whatever it is agronomy, technologies of extraction, reaction, biotechnology and the way to apply our solutions to the customers. So the more we go, the more we are creating an ecosystem and proposing an ecosystem rather than products or solutions to our customers, which is much better for co-building solutions and sustainable solution for the customers. So again, that's something we want to go more in detail during the next Capital Market Day. But the very good thing for Symrise is definitely a very strong R&D in taste, in nutrition and in fragrance. So it's a driving first, but we want really to capitalize much more on that. Concerning your input costs, okay, any impact, and I will hand over to Olaf. Is there anything to add, but we did not see any major impact on our business?

Olaf Klinger: No, I think in general, the input cost, the driver were, of course, on the synthetic side, but our portfolio is very much geared towards natural. So kind of neutral and at the same time, the synthetic side probably has bottomed out now. We are in the stage of doing a lot of negotiations for next year. So it’s a little bit too early to guide already for next year, which we typically due then in March, latest, when we have a mother a picture how input costs might play out.

Operator: Our next question comes from Charles Bentley in Jefferies.

Charles Bentley: I just wanted to ask, firstly, on the Aroma Molecules business. Are you talking about still slightly negative pricing? Just any indication on the direction of travel on margins. I know it's been a tangible headwind, and whether that's improving with the volume leverage? I mean is it reasonable to think that, that can get back to 20% margins? And then secondly, you kind of answered before just in terms of the kind of overall momentum in Scent & Care, it looks like Fine has stepped down in Q3 versus Q2. Some of your peers obviously reporting a lot stronger growth than that. So is that order phasing? Just talking, just kind of any thoughts on market share and direction of travel.

Olaf Klinger: So the negative pricing in EAME results from the last year's negotiations. Typically, we have annual contracts, and I remember what it could. So that's now time when we also negotiate for next year's volume, and it's always a balance between using our capacity and good demand, which we see for our products. So definitely, the period to determine now. And I think it's fair to say that we will definitely not see any kind of substantial price concessions in Aroma Molecules going into next year. Keep it there for the moment. I think when it comes to the margin in Aroma Molecules. It's progressing, of course, very nicely compared to what we saw last year. So extremely good progress, and let's see how we can drive this further next year.

Jean-Yves Parisot: And myself, I will jump on the second question concerning the Scent & Care. In Q3 and any kind of effect of order phasing or not. The first thing is, it's a good news. It's even a very good news that we see all the players around us making good performance in fragrance. The fragrance business is growing one, which is for all of us, a very good news, whether it's home care, laundry, beauty care, personal care, growth is there. And growth is even more important in the so-called developing countries. That's the first very good news. The second thing is, is there any impact on order phasing. Yes, I told that there was an order impact and specifically on the cosmetic ingredient part. Olaf also mentioning some slowdown in UV filter, which is also a seasonal business, by the way, but globally, we see the trend very positive. And now to be more specific to Symrise, we made a very strong restructuring mainly in Consumer Care and Consumer Fragrance, and we also see the impact even short term. When you change an organization, it takes some time for seeing some impact, but we definitely made a stronger organization last month in our Elevate 27 program we launched now 1 year ago, even 2 years ago, and we see the impact in terms of customer perception in terms of wins. So the order phasing is there. But as I mentioned, okay, previously, what is important for me is to see the yearly improvement and the yearly improvement is definitely there.

Olaf Klinger: Maybe just to add on the fine fragrance. It’s also a little bit project related. We had some nice wins in Q3 last year, and then you’re, of course, going against the high comparison if you have these nice wins. I think [indiscernible] was taking part in the opening in our penthouse in New York last week, which was, I think, a nice opening, attracting a lot of customer interest. So the colleagues in Fine Fragrance are very, very motivated and I think doing a tremendous job at the moment for Symrise. We are really positioned for growth here.

Operator: Our next question comes from Oliver Schwarz with Warburg Research.

Oliver Schwarz: My question is, sorry for the delay. My question is basically, you're guiding on an organic growth of around 7% stating that the organic growth was 11.1% after 9 months, which basically strictly speaking, leaves only room for, give or take, 0% organic growth in Q4. That's probably not the message you wanted to convey if I get your remarks in this call, right? So what's deducting the hyperinflation number? Would be the correct organic growth for the first 9 months of 2024, that is comparable to the 7% target for the full year?

Jean-Yves Parisot: 8.8.

Oliver Schwarz: [indiscernible]?

Olaf Klinger: 8.8% This is the picture I described that we have 11.1% for 9 months organic growth and we have 2.3% impact from hyperinflation as a tailwind currently, brings us to 8.8%. And in Q4, we will see a substantial headwind from hyperinflation as described. So 8.8% and 7%, that's the -- around 7% is the comparable.

Oliver Schwarz: Yes. Wouldn't it be more, let's say, convenient for the financial markets to get that number also in a written form in your press release because otherwise, people might compare the 11.1% to the 7% and come to the same conclusion that I just did, which is not really helpful.

Olaf Klinger: Yes. That’s why we have this call, Oliver. And actually, my hope is that the whole topic of hyperinflation will just disappear as in the past. We are in a very specific situation right now based on what we saw in Argentina last year in Q3 – Q4, sorry, and which will have a an impact this year in Q4. And then hopefully, we can all forget about this again. We wanted to have this call exactly for this reason to clarify with all of you where are we and make clear what hyperinflation means to us at the moment.

Operator: Our last question comes from [indiscernible] in Barclays.

Unidentified Analyst: Two, if I may. One, again, sorry, on the guidance. this 7% excluding hyperinflation, should we consider that as kind of a locked in because of your order books and contracts? Or is there still just trying to understand what the upside or downside risk here into Q4? And then secondly, on your Taste, Nutrition & Health business. I guess looking at probiotics specifically, Probi reported quite a soft quarter last week or earlier this week, and they mentioned a lot of weakness in China and the North American market. Just wondering if that something that's very specific to probiotics or if that's building over into other business lines as well.

Olaf Klinger: So let me start with the 7%. So we've phrased it consciously and it's around 7%, which indicates is leeway. And the reason is just what I said in a certain way, it's not predictable how the order flow will be in December. That has always an impact, and you might see the orders coming in for December or in January, not all those in our hands. And therefore, let's keep it there with the question mark, how we will end the year. What we can say is we had a good continuation into the month of October, which is basically continuing the trend. So as I explained also to Asia, let's see how we can run the end of the year. The around 7% is there's a certain leeway from our perspective.

Jean-Yves Parisot: And I will complement and take the second question about Probi, but just to complement what Olaf said, Myself, I’m very confident about the end of the year, even if perhaps it will be not as strong as you know, the beginning of the year, but I want also to remain all the time realistic. So when you say 7%-ish could be 8%, it could be 6%, okay? So we do not want to disappoint you. Don’t forget the bracket is 5% to 7%, but definitely, it will be the upper end of this bracket, which is, I think, already a very good performance without any kind of hyperinflation impact as explained by Olaf. Now concerning Probi, so Taste, Nutrition & Health is showing a very nice growth, and I just take the opportunity to emphasize the fact that food and beverage is performing very well. We very often speak about pet food and people are following very carefully pet food, but food and beverage, which is a substantial piece of take nutrition has is doing very well. Now concerning Probi, which is consolidated through taste, nutrition through food and beverage, yes, we are like you. We see the results. So myself, I’m a strong believer of these probiotics/privitimbiotics/post biotic, all these biotics type of products, which are definitely very important for the [indiscernible] aging. We see, like you, a weakening in China, gain to compare with the very nice performance of Probi last year in Asia Pacific. China, like every actor is showing a slowdown. Now concerning the way that China, and I’m coming back from China, I was there 3 weeks ago. So as a Symrise – overall Symrise point of view, we are really going very well there because we are also a new entrants, and we are not a Chinese born company, but we invested a lot in pet food, and we are also investing in a new studio for Fine Fragrance. I was also in the little red house. Olaf mentioned the new stud in New York, but you have also studio in China for fragrance. So altogether, Symrise, we are developing quite well in China even if the market is fierce. And now probiotic – coming back to probiotics, the results of Probi, so competition is fierce. And in U.S. also, we are probably making more than almost 80% of the sales. And although the market is not growing as before. Even if I repeat to all of you,–nd a really a strong believer about the potential of the probiotic for the future.

Operator: Ladies and gentlemen, this was our last question. I'll hand back over to the management for any closing remarks.

Jean-Yves Parisot: Thank you very much. I know you understand a little better when I was mentioning to you the reason why with, Olaf, decided to make this call rather than spending the results like that and to compare, you could say we compare peers on apples, 11.1% with a 7%. But as last year, it was creating this Q4 hyperinflation impact or surprise was creating a lot of confusion. And we have decided we all have to really take the time with you today to clarify this hyper inflation impact, which will be, and again, even if Olaf was a little technical. I think it’s important for you to anticipate to understand that there will be also this hyperinflation impact in Q4 and also to – I hope, to go for a much easier way to read our books again and starting next year. We thank you very much for your time, for your questions. And again – and we are waiting for you for – in Holzminden for the Capital Market Day starting the 19th and for the full day, the 20th for presenting you, not only the innovation, as I mentioned to you, but the way we want to unleash the full beauty of Symrise. Thank you very much.

Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.