Earnings Call: Q1 2018

May 8, 2018

Good morning. Ladies and gentlemen, thank you for standing by. I am Sherry, your Chorus Call conference operator. Welcome and thank you for joining the first quarter 2018 results conference call of the Symrise AG. In the beginning of today's call, all participants will be in listen only mode. The introduction by Mr. Olaf Klinger, the CFO will be followed by a question and answer session. To the host of today's call, Mr. Tobias Greerfirth. Please go ahead, sir. Many thanks, Jerry. Good morning, and welcome to our Analyst and Investor Q and A call on the occasion, the publication of our Q1 statement. Today's call will be led by our CFO, Olaf Klinger, All corresponding materials, including the presentation, have been published on our IR website this morning. A replay of this call will be available of our Q1 numbers before we start the Q And A session. Thank you, Tobias. Ladies and gentlemen, good morning and welcome to the Q and A session also from my side, despite a challenging market environment that was dominated by very tight supply markets and volatile change rates, summarized, delivered, what I would consider a very good set of results. As you can see on Slide 2, we had a dynamic start into 2018 with organic growth amounting to 7.5%. Our portfolio additions, Cobel and Citratos contributed another 1.9% to group sales. As expected, the strong euro continued to have a negative impact on our top line. The FX hit was 60,400,000 or 7.9 percent, resulting in a reported growth of 1.5% and total group sales 776,900,000. Our EBITDA margin in Q1 2018 was dollars compared to 21.6 percent in Q1 2017. However, please bear in mind that we had a positive one time gain of 4,700,000 back then, Q1 2017, excluding this one time gain, would have been 21% margin. The decrease in margin was mainly related to significantly higher raw material prices, the whole industry faced in light of the ongoing raw material crisis, as well as FX headwinds. Furthermore, our strong investment activities as well as the destocking at Probi impacted our profitability. Please turn to Slide 3. For Centene Care, Q1 was a particularly challenging quarter. Organically, sales rose by 6 0.9% with aroma molecules posting the strongest growth. The sales increase was led by our fragrance ingredients business, form a Panova renaissance, which was able to leverage its portfolio of tepine ingredients like the hitromidcinol in the current market environment. As in prior quarters, cosmetic ingredients achieved strong organic growth in the high single digit percentage range with good dynamics coming from Asia and Latin America. Our fragrance business continued at a moderate pace encouraging was the revitalization in Beauty Care And Home Care that we saw in the first quarter as well as the ongoing good performance of fine fragrance especially in of the already mentioned raw material price situation and FX headwinds. Despite this exceptional situation, this many external these coming together, the very unique situation for the whole flavors and fragrance industry, Similes was able to retain full delivery capability, thanks to our industry leading backward integration and our Aruma molecule operations. In this current crisis situation, we have once more proven ourselves as a highly reliable partner, working closely with our customers on in ensuring business continuity and finding solution on a product by product basis. Also, we continue to implement price increases enclosed dialogue with our customers to compensate for higher raw material costs. That said, we expect raw material markets to remain tense at least for the next quarter, most probably two quarters. Let's move to the next slide. Our flavor business delivered outstanding numbers for the first quarter. Organic growth of 11% was driven by all three business units. The price volume mix of 50% price and 50% volume that we saw over the past quarters did normalize to 1 third price and twothree volume is more typical for our company. In terms of revenue drivers, in EME, we saw good momentum for suite and several applications and North America reported strong momentum in beverages stemming from new business wins. In APAC, the country markets, China, Japan and Singapore showed very good dynamics and in Latin America, we saw good signs in Brazil and Mexico from our sweet category. The EBITDA margin for flavor was 20.9% to slight decline compared to 2017, which was 21.1% was related to the Coupell acquisition. Lastly, we come to our Nutrition business on Slide 5 that continued to be impacted by the customer destocking at Pro V, that we have seen for the past 3 quarters. Q1 organic growth for Nutrition amounted to 2.9%. Excluding Pro Vido, the organic growth number would have been 8%. A clear sign that our Diana business both food and pet food continue to be a strong contributor to group performance. Those of you that took a look at probi numbers that were published on May 2nd will not be surprised that we also saw an impact on our nutrition bottom line. The EBITDA margin for the nutrition segment came in at 19.5% compared to 22.7% in Q1 2017. Besides the Probi impact, which we also incurred ramp up costs for the new Diana Food Plant in Georgia, that will come on stream and in the second half of twenty eighteen faster than initially expected. For Q2 we continue to expect a negative Pro V effect in comparison to prior year that should ease in the second half of the year. To sum up, please turn to Slide 6. Q1 2018 was not an easy quarter. Nevertheless, despite extensive investments, volatile exchange rates, higher raw material prices, and the temporary destocking at Probi, We managed to deliver 7.5 percent organic growth, an outstanding number, if you ask me, and an EBITDA margin of 20.1%, which clearly within our guidance range. With this, we look ahead with great confidence to our business performance in the coming months and affirm our growth and profitability targets. That said, I would now like to move to Q And A and thank you for your attention until now. Tobias, please go ahead. Many thanks all out. Turning to Q And A, we are now happy to take your questions. We kindly ask you to put only 2 questions. Many thanks, Sherry, please go ahead. Thank you, sir. Ladies and gentlemen, at this time we will begin the question and answer session. You. The first question is from Thomas Swoboda of Societe Generale. Please go ahead. I will take two questions, please. Firstly, on this acquisition, of Fruta, we saw yesterday, I'm sure you you guys have have looked at Frutarom as well. So my my question is if if if you can comment what do you expect from this, this acquisition in the short, in the short to midterm, do do you feel under pressure, to to go for for acquisitions yourself how happy are you with your current structure? The second question is on profitability and the pressure from input costs from your statements with the full year numbers, I understood that most of the pressure from CITROL situation due due to the force majeurettesF, should should already be fixed in in q 1. Today, it doesn't sound so could you split the effect if possible between what is the actual input cost inflation from the market? And how much pain do you feel from Citi trial? Yes, thank you, Thomas. Good morning. So on Frutarom, yes, we recognize, of course, these transaction, and we know, food alone, for a long time. However, I think, it's not to us comment on the acquisitions, which you have recently seen that you will do at the IFF. But for me, this is the best confirmation we could sched for what we have done in 2014 with Diana, when we acquired the 13.5 times multiple a very high quality portfolio of business activities. And then a second comment, I would say this is great confirmation of our strategy, which we have started to diversify out of flavors and fragments, some years ago, which puts us in a unique situation today. I think we have managed so far to focus ourselves on internal growth opportunities we'll be investing. And, in this regard, I see Frutarom not as a challenge for us. I see it as a confirmation of our strategy, which we have started earlier than others, and which helps us today to grow faster than anybody else in the industry. And we want continue this. On the input cost side, you referred to the situation. I would like to put this in a slightly broader sense. This raw material environment started basically in China last year when certain raw material ingredient suppliers were shut down in China and some of them might not come back on stream. We had the fire BSF at the end of October. And for those of you who follow this environment closely, you know, well, that there was a fire DRT in India in February, just last week, there was another fire at Previa, another major supplier to the industry in India. So Putting this in a broader sense, we have currently the biggest raw material crisis in our industry, And I'm pretty proud of our teams to see a serious crisis at the moment and come you see partly in Q1. We managed this extremely well, in close collaboration with our customers, and we want to be an extremely reliable partner and we get a lot of recognition, positive recognition for that in the current environment. So in this regard, also our Renaissance acquisition helps us a lot at the moment. This is, I think the consequence of our backward integration strategy, which is a major element to steer through this crisis. In the current environment, we need to expect that this will continue for some time, again, referring to the recent fires in India. So in a broader sense, yes, BSF will be back at some point. But in this environment, the utmost important point for us is to manage, with customers the supply but also, the respective necessary price increases. In that light, we expect that the raw material price situation will be with us at least for Q2, most likely also with Q3, again, supported by our own backward integration, which is very helpful in this current moment. Welcome. The next question is from Tom Wrigglesworth of Citi. Please go ahead, sir. Good morning, gentlemen. Two questions, if I may. Focused on the organic growth. If you could give us a sense of what the price component was versus the volume component, both at a group and a divisional level, that would very be very helpful at obviously, there was a, strong recovery in growth versus a slightly softer base, but, but, have you seen an acceleration of growth? Is that what we should take away from these first quarter numbers in terms of this organic rate of growth and yeah, your comments around the sustainability of this rate of growth would be much appreciated. Definitely, Tom, thank you for the questions. So on the price volume situation and flavors, I already commented. This is more back to normal now with 1 third price and 2 third volume in Centene Care. We continue to see pretty much no major price, in Q1. This should change in the coming quarters because we are actively working on the price increases with our customers and they will come through, over the coming quarters. So Q1, no price, more or less, and or volume. And for the nutrition business, especially in Diana, we see the more normal situation for the group and one third price and 2 third volumes. So That's an order. As you have seen, I think, taking out probably 8% growth in nutrition is very good outcome. Exceptional growth in flavors, and even in Centene Care, I think organic growth numbers are quite impressive. So strong start into the year. We are working extremely hard to continue this growth story. We are very confident We will bring our new, a cosmetic ingredient facility on stream in the mid of this year. And we are working very actively on other investments, including the Diana Food Ingredients Facility in the United States, all this will help to support the growth story. And therefore, you see us pretty confident to continue with our growth environment. Just as a quick follow-up, so you think you're taking share at the moment. Is that a fair assumption with these growth rates, or is it this is the rate at which your underlying markets correct? I take that from the situation that, we are still growing as the fastest in our industry. So from that, I would say at the moment, we are best positioned with our backward integration to manage year through the crisis situation. And we have done a lot when it comes to the diversification of our portfolio outside of flavors and fragments. And this is paying off now. We are starting to see the attractiveness of Sunrise is increasing. You're getting more and more attention from customers because of this. And, I think from that perspective, I would support your statement. The next question is from Heidi Vesterinen of Exane BNP Paribas. Please go ahead. Hi. So I think you mentioned in your commentary that you have speeded up the startup of your Diana food plant. Does this make you more confident for the year in terms of organic growth because you are ramping up capacities and capacity constrained area. So the volume should come fairly quickly. And I think and is there scope for you to speed up other startups. I think you had been talking about trying to speed up mental, for example, on the back of the crisis. So comments on that, please. And then maybe on the raw material shortage where you talk about an advantaged position, do you think others in the industry may have had issues, supplying the volume? And do you think, you know, have you had inbound calls from customers asking for more, do you think you've gained share on the back of this situation? Thank you. Yes, you're right. We are accelerating the activities around Diana Foods, the new plant. This will be in q 4, where we see the first sales coming in. You should expect a full ramp up of the facility and the major impact from this new plant in 2019. But it's nice to see that we manage this program, this investment very well. And for that, Yes, it's good to see that we will be ready this year, faster than expected. Mental is still scheduled for next year. So no change in time line there. The other big, element which will come on stream this year is in cosmetic ingredients, the investment which we do in the United States. It's built in a way that we can start with a first capacity. And if needed, we can easily expand it at less cost, over the coming years. So it's a very flexible approach which you took there to further expand if needed. And on the raw material situation, hard to, for me to comment on the situation of our competitors I think we work extremely hard to really secure a supply to our customers Given what we have in house and given this flow of products and the effort we do to bring products in the right place, to serve the different production sites around the world at the right time. I would imagine that others will have probably similar if not more challenges than me, and that makes us comfortable with it. Best positioned in this regard to manage through the crisis at the moment. The next question is from Gunther Zechmann of Bernstein. Please go ahead, sir. Hi, good morning. Thanks for taking my questions. Can you help us break down how much of the margin headwind that you experienced in the first quarter was due to raw materials and how much due to FX headwind I think that's the 2 main effects you mentioned in your opening speech. And the second question I have is on demand outlook for the rest of the year. Were you surprised to see double digit growth in flavors in Q1? And how quickly do you expect that part to normalize? Well, probably nutrition, I would expect to ramp up as probably stabilizes. So on the margin headwind, what I can tell you and we have done that before is that the translation effect that we saw was around $12,000,000 EBITDA impact. So that is a substantial number. Raw materials were definitely a major, impact, the combination of the 2 at the end is probably balancing out somehow, which yeah, it's the current headwind we get on both sides. And it's very critical for us to manage through the price increases and as we said, there's hard work going into this, and we should see the, countermeasures coming through in Q2 and Q3. And it still remains to be seen how at the end this raw material crisis will play out because it's the day to day effort to make it happen and serve the customers. FX will be with us also in Q2. Clearly, when you look at the U. S. Dollar development, we can expect a similar impact from foreign exchange, at least in the second quarter. Your question regarding the demand outlook. I think the exceptional growth, which we see in flavor is something which we would definitely be, described as a positive surprise. The environment which we are working in this, the 5% to 7% growth expectation which we have. And everything beyond, is, I think, something which is hard work and should not be considered as the new normal. Probably, as you said, we'll normalize in the second quarter, there will be some impact, but the respective customer, which impacted Pro Vee, has started to order. And therefore, we also should expect to see a normalizing effect on the Probi side. The next question is from Patrick Schmidt of Warburg Research. Please go ahead. There's only one left now. And that is referring to your EBITDA margin in terms of your upcoming ramp up costs. Do you expect any more to come in towards the end of 'eighteen or do you have any idea about the magnitude of that impact? Thank you. Running quite a few large investments at the moment, which we have outlined in our full year, presentation. Next to the cosmetic ingredients, it's Mentor, it's the Diana Food. It's the new facility in China, which will also come mid of next year. All this will lead to some additional costs and, some margin impact in the course of this year, which should then ease in 2019. I expect a similar picture, maybe slightly higher picture in the remaining part of the year. But nothing which should really, go beyond the Q1 impact. Okay. Thank you. The next question is from Nade Singh of Equinix. Please go ahead. Yes. Good morning, gentlemen. Thank you for taking my questions. The first one on Probi. Do you consider the stocking we've seen in the first quarter as an isolated event that only affected Probi? Or is that something that you see throughout your customer industries or at other customers, customer industries as well. That would be my first question. And secondly, on raw material, again, I would like to know which are, affected. So you mentioned federal, as one promises sector. Are there other areas where you face, 2 challenges? Thank you. Yes. So Probi is affected by, especially this one specific customer, the largest customer they have in the United States. And The destocking effect, was quite severe. This customer runs some campaigns in the q44 2016 and Q1 2017. As I said, they see first orders coming back. So the situation should normalize. Overall, probably also said that the North America market is a little bit weaker at the moment. And there is, quite some activities through towards online channels. Going on in this market at the moment, but the confidence that probably is clearly there and therefore, the situation should ease in the coming quarters. Otherwise, I would prefer to refer to Pro Vee themselves. They are stock listed and definitely are the better source to ask a few I'd like to have further informations. Sorry to interrupt you. I meant your customers. Do you see some destocking at your customers as well? No. No. Nothing in this magnitude at all. No. Clearly, no. So on the raw materials side, the crisis we have is affecting basically the whole fragrance industry and the portfolio around it. There are some key ingredients, not only provided by BASF, but also coming from the mentioned facilities in India, and that puts a heavy constraint on the ingredients side at the moment. So it's pretty broad, what needs to be managed there. And Again, the good part for us is that we have the Beckford integration in our Aruba molecule space, where we can at least replace, quite some ingredients and make sure that we can serve our customers all this happens in close collaboration with customers. On the more natural flavor side, we continue to see high vanilla prices going on. It, remains to be seen how the next harvesting will go. It will start in June when there's more visibility coming. The demand for vanilla is continuing, on a very high level. So we stay on a high price level, similar to last year for the moment. And the rest will be shown in the course of this year. The next question is from Jean Baptiste Roland of Bank of America. Please go ahead. Hi, good morning gentlemen. Thanks for taking my question. Just one actually for me. On Cobalt, it looks like growth has been quite strong there. Could you maybe shed some light on what's happened and maybe give us some color on the breakdown of growth between volume price and potentially effects? So, Covel, I think, was, the acquisition last year in the UK you can see the impact from Cobalt pretty much in our bridge, which we provide in our fact sheet. With 12,000,000. I think this Q1 effect is in line with what we communicated around will be sorry, Cobalt last year. It's fully integrated by now. Happening us a lot to build a new platform in the UK for beverages and we continue to drive it. I think there's nothing pressure, which I will refer to in the Cobalt situation. We have no, pinpointing to the Brexit situation. No sugar reduction whatsoever. It's as planned and, moves nicely and fits well into our beverage environment. Okay. Thank you. The next question is from Ronald Orr of Redburn. Please go ahead. Hi. 2 from me. Thank you. Firstly, could you perhaps help us a little bit to understand the working capital impact on cash flow from the ramp up of the new plants over the next year and a year or 2. Secondly, I just have a question on the growth in health in flavor and nutrition. Could you perhaps help us understand how much comes from your health and wellness platforms such as SIM Life and what the growth with, with those, those products are. Thank you. Yes. So the working capital, I think, is, something we would want to prefer to comment on in the half year environment because this is a call with a streamlined reporting. And I would actually, like to stick to that because otherwise, we would break with the, the numbers in a way The health environment is, I think, a big contributor from a growth perspective at the moment. I think that is what I can comment at the moment. The next question is from Geoff Haire of UBS. Please go ahead. Good morning. Most of my questions been asked. I just want to really ask a question of confirmation. In the Centon Care And Nutrition, are you suggesting that the margin should be back to historic levels by the time we get to the end of the year as the impact of destocking and raw materials wanes in the second half or will it take longer than that to restore margins? So for Southern Care, I think the big challenges the raw material crisis and assuming that we can manage through this in Q2 and Q3 well, we expect, of course, a gradual improvement of the margin situation. Again, it's a very, very unique situation that you're facing at the moment. So, try to manage this carefully and once we are through, we also expect that the margin environment will, further improve. On the nutrition side, clearly, the impact is coming from Probi as an exceptional situation and partly from the investments, which we are doing these investments as we reset will, come on stream in the 4th quarter, and should be a good contributor as of next year, and that should then bring also the margin environment and nutrition back to what we have historically seen. Okay. Thank you. Welcome. The next question is from Daniel Buchta of MainFirst. Please go ahead. Yes, thank you very much for taking my two questions. The first one is on cosmetic ingredients. Of course, a very good number with high single digit organic growth. Just to understand, is that number also the UV filter business included? And how is the repositioning progressing given the difficulties you had, especially last year on that one? The second one is a bit technical. If I remember correctly, last year in Q2, you had a negative impact from, yeah, strong and volatile FX movements and with the Euro U. S. Dollar churning. So that, if I remember correctly, especially receivable you had to make some write offs. Now we had also this relatively pronounced FX movement from 125 to below 120. Might that be another issue again that there is something on the receivable side given the strong fixed movements or, how do you see the situation here? Thank you very much. Yes. So, on the UV filters side, UV filters are contributing nicely also to the overall organic growth of cosmetic ingredients. So, from that, definitely a different picture from from last year. I think that's as far as I would comment on this, on the FX impact last year, there's no similar situation at the moment when it comes to trade receivables. I think we have further increased the hedging ratio to support the, intercompany flow and to avoid any transactional impact So that is changed from last year. No impact expected at the moment. Welcome. The next question is from Liz Colum of Davy. Please go ahead, ma'am. Good morning or last good morning, Tobias. And just two questions from my side, please. Firstly, on the Asia Pacific Region within Flavors, Just if you could comment please on the very good performance. And if there are any particular business wins or markets, you could call out there. And secondly, just a more broader question relating to CPG customers. Just in terms of the innovation pipeline, would you would you say that's getting stronger quarter on quarter, would you view an improvement there? Thank you. Hey, good morning, Liz. Yeah, so you're right. The, the flavor business in Asia Pacific has a very good run at the moment in several countries, like in Japan, like in Singapore, but also Australia. China is doing very well. It's not related to, any specific business win. It's pretty broad. What we see, and I think a lot is related to the fact that we have, a very good management team in Asia Pacific working very closely with customers. We got some good experience on board, this extremely good customer knowledge. So all this helps at the moment to, support the nice development of flavors in Asia Pacific. On the CPG customers in general, what we see is that our teams are extremely busy at the moment when it comes to working on projects and briefings. It's incredible busy time for us And it's for me, again, the confirmation of the attractiveness of Symrise, which turns a lot of attention to us. So that's a it's a positive And that holds true for the flavor segment as well as the, the fragrance environment, where, hopefully, this will turn into additional business over the coming Okay. Thank you. Welcome. The next question is from David Simmons of JPMorgan. Please go ahead. Hi, it's actually Chetan Udeshi from JPMorgan. Two questions. One is, can you give us an idea of how much of the expansions that you're doing in Diana and menthol, etcetera will result in terms of incremental from next year onwards or 2020 onwards? Just to think of how what is the benefit in terms of growth from the expansion which are ongoing? And second question was, there have been more talks from ingredient suppliers, including yourself and many of your peers about, the demand of naturally sourced ingredients, Can you give us indication of how much of your sales come from naturally sourced ingredients at the moment, given that it seems there is some sort of structural push from customers towards that direction? Thank you. Yes. So starting with your last point, the natural ingredient is around 70%. Of the portfolio by now, has increased over the years to this number and as you know, we are clearly driving our environment into the natural space, including the very strong push towards backward integration. So it should further increase over the years. At the same time, we will stay with some synthetic activities which are important, especially on the mental side, you see that and it will not be replaced in the big magnitude. So 70% is the number. The capacity expansion different areas, I If not specified at the moment, we are increasing capacity, of course, and I would describe it in a way that These are investments which really means step changes for us. We can support our superior growth story And hopefully, we can drive not only within the range of 5% to 7%. And if it gets to more than it's related to, these step changing investments, which we are doing at the moment. Okay. That's good. So are you saying that there is a chance that, you know, there may be, the growth may be higher than your 5% to 7% range once you see all of these expansions coming on stream. Is that what you're trying to say? Look, at the market, I mean, the market of service growing was 3% to 4%. So what we have done over the years consistently is to deliver, in the 5 7% bracket and sometimes more, to achieve this 5 to 7%, we need to do something else. And this is reflected in the internal growth opportunities, the investments which we are doing, and that helps us to grow in this environment. Everything is on top would be very nice and you take it, of course, but I will not change our guidance at the moment. I think it's high ambition, which we, are supporting year after year. And, if we can deliver that to you, I think this is an extreme good performance. The last question is from Mr. Thomas Swoboda, a follow-up of Societe Generale. Please go ahead, sir. Yes, thank you for taking my 2 follow ups. Firstly, on on the capacity expansions in in your in in your Q4 reporting, you presented it chart with with his schedule. And and there was a a plant in pet food in in France. He wanted to ramp up in April if I remember correctly. So if this plant up and running already. The second question is on the profitability timeline of this capacity the additions, how fast do you expect those capacities to contribute to to profits. I mean, do do you need a very long time to to to ramp up those plants, make it full, So they generate, does it generate not only revenues, but also profits, or is it, is it a rather short period of time? Thank you. Yes, Thomas. So to your first question, the spray dryer environment, it Diana and France was opened at planned beginning of this year. It's fully utilized by now. As you remember, we had some constraints last year to supply our customers. And for this reason, Diana, needed this capacity urgently, it's now fully ramped up and fully utilized. The same as, it expected for the new cosmetic ingredients environment, which we are building and which we will bring on stream in the mid of this year. As I said, this is a modular approach where we could add additional capacity if we see the demand, which we actually plan already. So, that could be easily expanded if needed. For this first piece, I expect, full ramp up in the course of this year. Already. And for the Diana Food Ingredients Plant, I said it will open in q 4. And we expect that this will be quickly ramped up, beginning of next year so that we should see the full benefit coming through in 2019 for this facility. China major investment is also, scheduled for mid ofnextyear. We have, capacity constraints in our current facility in Shanghai. And therefore, I also expect that we can use the facility in China quickly and bring it up to, a high level of utilization. So as you hear from me and my words, We are really sensitive. We are investing into capacity expansion. That's where the money goes. And we do it in a very sensitive way that we are not creating overcapacity that we basically follow the demand which we see for our portfolio. So very sensitive to to spending. And I think this is the right approach and, which we are working. This is very clear. Thank you very much. You're welcome. Good. So if there are no further questions, ladies and gentlemen, I would like to make one final remark to bring this, today's session to an end. As an early announcement, we will change slightly our reporting as of next year for the Q1 and Q3. I think in line with our competitors and also our clients, we have decided to move to trading updates for Q1 and Q3 from the year 2019 onwards. This is to form you more promptly to the end of the quarter and to further emphasize the long term nature of our business. I think this is, the right step to do and we wanted to make this as an early announcement so that we are not surprised next year. It's nothing we want to hide, but I think it's a reflection of our business environment to give you more trading update, going forward. So with this, thank you very much for your time and interest and summarize. We look forward to meeting you in person in one of the upcoming conferences and all our roadshows. Thank you very much and have a nice day. Ladies and gentlemen, the conference has now concluded. You may disconnect your telephone. Thank you for joining and have a pleasant day.