Earnings Call: Q4 2017

Mar 14, 2018

Okay. Good afternoon, ladies and gentlemen, and welcome to our full year results conference 2017. We welcome our guests here in the Sofitel Hotel in Frankfurt, and we welcome our guests on the phone. With me are our CEO, Dr. Heinz-Jürgen Bertram, and our CFO, Olaf Klinger. All documents have been published this morning on our webpage in the sections investors at events and presentations. In the same area, you will find the playback of this conference call in the course of the day. After the presentation, we are open for your questions. I will now hand over to our CEO, Dr. Heinz-Jürgen Bertram. You may begin. Thank you, Tobias. Ladies and gentlemen, welcome to the Symrise Investor and Analyst Conference for the fiscal year 2017. We are happy that you have joined us here in Frankfurt. We would also like to welcome all participants who are with us on the phone today. In today's session, our CFO, Olaf Klinger, and I will present you the financial and operational highlights of 2017. We will also give you an update on our strategic initiatives and an outlook for the current year. After our present- Hello, Ms. Martinez, this is the operator speaking. Can you please confirm your company name you're calling from? Yes, SMB Global. SMB? Global. Thank you. I'll put you back through. Thank you. We successfully continued our profitable growth course in 2017. For the 12th year in a row, we have grown our sales and expanded our market share. Sales rose to almost EUR 3 billion, and EBITDA climbed to more than EUR 630 million. With an EBITDA margin of 21%, we very clearly delivered on our profitability target. Net income grew to more than EUR 270 million, which corresponds to EUR 2.08 per share. There is more good news for our shareholders. We will propose a dividend increase to EUR 0.80 per share. Please move to chart 5 for the group sales development. Despite unfavorable FX effects, we increased our sales by 3.2% to almost EUR 3 billion. On an organic basis, we grew sales by 6.3%. Let us come to our segments on chart 6. Health and care delivered sales of over EUR 1.2 billion. The decline compared to 2016 is mainly due to the sale of the industrial activities of Pinova. On an organic basis, the segment grew by almost 4%. We saw particularly good momentum in the fourth quarter with organic growth of around 6%. Our Flavor segment increased sales by 8.5%. It benefited from double-digit growth in EAME and North America. Applications for sweet and beverages showed particularly good dynamics. In our Nutrition segment, we grew sales by almost 10%. Pet food was again one of the strongest growth drivers, with a strong double-digit sales growth in some regions. Chart 7 illustrates our regional performance. We once again achieved strong growth in Latin America with a sales increase of almost 8%. Amongst others, we benefited from new business in vanilla applications as well as strong fragrance demand and strong demand in fine fragrance. In North America, sales declined by 4.1% and reflect the sale of industrial activities of Pinova. Overall, we saw good dynamics in the region, amongst others in sweet and beverage applications. The Asia-Pacific region reported sales growth of 1.4%. While oral care developed a bit slower compared to 2016, we saw very good demand in cosmetic ingredients. EAME also delivered very good sales growth of 7.4%. We benefited from very good dynamics in the Nutrition business and expanded sales in oral care. A comparison of mature and emerging markets on the right shows we generated 44% for total sales in emerging markets. Overall, we gained 7.6% growth there. Please turn to Chart 8 for our earnings development. We increased our EBITDA to EUR 630.3 million and delivered a very solid EBITDA margin of 21%. This is a very good result despite targeted investments into growth initiatives, as well as more headwinds from currency effects and certain raw materials. Symrise is not focusing on quick wins. We are long-term oriented and have a clear focus on sustainable, profitable growth. Chart 9 illustrates that very impressively. Over the course of 12 years, we have continuously increased our sales and delivered on our high profitability targets. In other words, we create value. Our compound annual sales growth amount to more than 8% and to over 9% for the EBITDA. Investors appreciate our performance and our stock, as Chart 10 shows. In 2017, we again left the DAX and the MDAX behind us. Our share price gained 22%. We want to share our success with our investors. For the fiscal year 2017, management and supervisory board propose a dividend increase to EUR 0.88 per share. Having said that, I would like to hand over to Olaf for more details on our financials. Olaf? Yeah. Thank you very much, Heinz-Jürgen, and good afternoon also from my side to all of you here in the room, but also on the phone. Following Heinz-Jürgen's initial remarks, I would like to give you a few more details on our 2017 financial performance. Let's start with the group sales development on Page 12. With organic growth of 6.3%, Symrise has once more defended its position as the number one growth player of the flavors and fragrance industry. As in prior years, three quarters of our growth came from new volumes and about one quarter from price increases. The portfolio effect of -1.3% comprises the acquisitions of Nutra Canada, Nutraceutix, and Cobell, as well as the divestiture of Pinova Industry application business. All of these portfolio effects will vanish in 2018, with the exception of Cobell, which contributed EUR 27 million turnover to our 2017 financial figures since consolidation in July last year. Furthermore, since January 17, 2018, we consolidate Citratus, the Brazilian fragrance producer with about EUR 11 million in sales, an acquisition which we announced in December of last year. As previously discussed, during our nine-month call, we faced significant foreign exchange headwinds in the second half of the year, mainly now coming from the US dollar. Overall, this resulted in a negative foreign exchange effect of -1.8%. At least for the first six months of 2018, we expect the US dollar primarily to continue to be a strong headwind for us. On regional growth, I would only like to add to Heinz-Jürgen's comments that adjusted for the Pinova portfolio effect, like-for-like growth in North America would have amounted to +5.4% compared to -4.1% reported growth. Please turn to Slide 13 to take a closer look at our bottom line. 2017 sales growth stronger than gross profit, resulting in a slight margin dilution of 30 basis points from 41.2% gross margin in 2016 to 40.9% in 2017. This development was mainly related to higher raw material costs that were only partially offset by savings in manufacturing costs that we achieved, thanks to ongoing efficiency measures in our production environment. On raw materials, in total, we spent EUR 1.3 billion, which represents a material cost quota of 42.2%, up slightly from 41.6% the year before. The increase in raw materials was related both to naturals and now also to synthetics. Whilst we continue to see an upward trend in natural raw materials, particularly for vanilla and citrus, oil-based raw materials have also started to rise again in 2017. However, this was not only due to the citral crisis that hit the flavors and fragrance market in Q4, but also due to other factors such as the tightening of environmental standards in China and related closure of production facilities, especially in China. Overall, prices were up around 4% in 2017, clearly at the upper end of what we have been expecting and also guided for. For 2018, we remain cautious given the current supply and demand imbalance and some uncertainty related to the BASF situation. Overall, we expect a significant increase in raw material costs. That said, in the currently challenging market environment, it's our utmost priority to fulfill our delivery obligations towards our customers. We feel very well-positioned with our industry-leading backward integration in key materials like in menthol, like in CST, and cooperate very closely with our customers on a one-to-one basis to find the right solution for each product going forward. Moving to earnings, group EBITDA amounted to EUR 630.3 million and thus was stable compared to last year. The margin of 21% lies well above our above 20% margin guidance for 2017. As already explained, the earnings performance must be seen in the context of higher raw material expenses, increased CapEx and R&D investments, as well as strong headwinds from foreign exchange. To give you an idea, with an EBITDA impact of EUR 10 million in Q4 only, foreign exchange not only hit the top line, but also the bottom line. R&D expenses were up 5.6% year-on-year, whilst marketing and administration costs were fairly stable. Higher R&D investments were to a larger part related to core list wins, and will support our growth in the future. Group EBIT rose 2.2% to EUR 431.6 million, resulting in an EBIT margin of 14.4%. One final remark on this slide, please note that prior year figures have been slightly restated for the finalized purchase price allocations for Nutraceutix, and as you are well aware, we normalize for acquisition and integration costs related to Pinova in 2016. Please turn to the next slide 14 for the segment reporting. In Scent and Care, we saw demand picking up in the second half of the year, with organic sales growth of 7.7% in Q3 and 5.8% in Q4, leading to a volume-driven organic growth of 3.9% for the full year. So, nice recovery in the second half of 2017 as predicted and as promised. Reported sales were EUR 1,266 million for 2017. Looking at earnings, Scent and Care EBITDA amounted to EUR 248.1 million. The margin at 19.6% was in line with the normalized level of the previous year. Slide 15, coming to our Flavor segment on this slide, we concluded a very successful year with EUR 1,101.9 million in sales, an increase of impressive 8.5% year-on-year. Organic growth was even stronger, amounted to 9.3%. However, please bear in mind that this growth rate was driven by both price and volume, about 50/50, and for 2018, we expect the pricing impact to be slightly less. The portfolio effect of 2.7% stemmed from Cobell. The integration of this business is very well underway. We are very happy with this development. Organic growth in the fourth quarter was 7.1%, mainly driven by sweet and savory applications. Coming to the segment earnings, Flavor EBITDA amounted to EUR 242.9 million. The margin at 22% was below prior year's margin of 23%, but still at a very high level, and this despite the Cobell acquisition, which slightly diluted the Flavor margin. Those who looked at the fourth quarter saw that this quarter was a very good quarter for Flavors. Let's move to slide 16 for Nutrition. Nutrition reported sales of EUR 631.3 million. This corresponds to a plus of 9.6%. Organic growth came in at 6.5%, with about one quarter price and three quarters volume effects. The slight slowdown in organic growth in Q4 was only 3.5%, continued to be related to our probiotics business. As you know, Probi has been experiencing temporary destocking by one of its major clients and expects the impact of this destocking to continue during the first quarter of 2018. The underlying business performance of the segment, however, was very well on track for Probi as well as for Nutrition overall. Excluding Probi, organic sales in Nutrition would have been 9.1% in Q4, so quite impressive also here. EBITDA for Nutrition rose by 4.3% to EUR 139.4 million. Despite increased expenditures for the capacity expansion of diana food™ in the U.S. and investment in the expansion of the pet food footprint, the margin remained high at a level of 22.1%. Having taken a look at the segments, let's continue with the P&L elements below EBIT on slide 17. The financial results amounted to EUR 56.1 million in 2017, EUR 12.5 million lower than in 2016. Whilst the interest result improved by EUR 0.9 million year-on-year, the other financial result was negatively impacted by currency effects of -EUR 7.3 million after a +EUR 8.8 million in 2016. These effects were coming from financing activities related to sourcing activities in Madagascar, as well as one-time effects related to the depreciation of the Argentinian peso, so very special environments and situations. Regarding our interest result, please note that the repayment of the Eurobond only took place in October, so only two months of interest rate savings. Going forward, we expect annual interest rate savings related to the convertible bond issue of about EUR 6 million in 2018 in comparison. Our interest rate exposure has been further reduced through an increase in fixed-rate finance instruments. Income tax in 2017 decreased by 4.9% to EUR 99.8 million, mainly due to the tax reform in the U.S. The resulting tax rate was 26.6%, which is well below our long-term rate expectation of below 30% tax rate. With a net income of EUR 270.3 million, we achieved an undiluted EPS of EUR 2.08. That is attributable to Symrise shareholders after EUR 2.05 in 2016. Subsequently, we will propose a dividend of EUR 0.88, EUR 0.03 more than last year, at the annual general meeting in May. Please turn to slide 18 for the review of our balance sheet. Overall total assets slightly decreased by 1.6% due to scheduled amortization and lower cash compared to the high 2016 number that was impacted by the sales proceeds from Pinova Inc. Non-current borrowings went up due to the issuance of the convertible bond. The equity ratio increased from 36.4% to an even healthier 37.8%. Net debts amounted to 3.0 times EBITDA, including pensions, or 2.2 times excluding pensions. This is slightly above what we expected for 2017, which we had foreseen was 2.7-2.8 times EBITDA. The reason for this were higher than expected working capital build-up related to the harvesting campaigns like in vanilla and the tightening procurement markets in the second half of the year, as well as some higher CapEx spending in 2017. Let's now turn to page 19 for the cash flow analysis. In 2017, we made good progress in strengthening our focus on cash flow. The operating cash flow increased by 16.9% to EUR 396.2 million. Operating cash flow and percentage of sales was up from 11.7% in 2016 to 13.2% in 2017. The improvement in operating cash flow was achieved despite the before-mentioned special working capital effect. Investing cash flow declined from EUR 311 million to EUR 219.3 million, driven by prior year M&A. Overall, EUR 205 million, or 6.8% of sales, were spent on CapEx in 2017, given the number of larger projects Heinz-Jürgen will report on in a minute. The figure is above the 6% of sales, which we forecasted as construction progress was ahead of plans. For 2018, we expect CapEx to come back to around 6% of sales, whilst for 2019 onwards, we forecast a decrease to 4% to 5%, which is the more normal number for Symrise. With this, I would like to hand back to Heinz-Jürgen. Thank you, Olaf. Following the deep dive into our financials, I would now like to take you through our strategic priorities and initiatives. Chart 21, please. Those of you who have followed us for some time now know the Symrise story is a story of innovation as much as of diversification. The underlying drivers for our business are global mega trends, which we constantly leverage. These include, next to the growing world population, also urbanization and the rapidly increasing consumer focus on natural products. All our activities are fully aligned with exactly those mega trends. More than a decade of sustainable and profitable growth is evidence that we not only have a very effective setup, but that our strategy is spot on. Growth, efficiency, and portfolio diversification are the key pillars of our strategy, as illustrated on chart 22. They are well-proven levers, and they have contributed to our highly reliable performance over the years. Let me show you some concrete projects along those strategic priorities. Chart 23 presents growth initiatives in emerging markets, in particular in Asia Pacific. We have been active in this region for decades now. For already more than 20 years, we have also been present with our own research center and manufacturing facilities in Singapore. Singapore is one of the key centers for business, lifestyle, and technology. Accordingly, it has an important hub for us. Following the significant investments in capacity expansions in 2010 and 2011, we built a brand-new flavor innovation and technology center. The official opening in May last year marked the completion over the expansion for over EUR 30 million on our regional headquarters in Singapore. This event is really a win-win situation. We contribute to Singapore's vision of becoming Asia's regional food and nutrition hub, while at the same time being located right in the middle of it, which allows us to immediately benefit from attractive growth opportunities in the whole region. Yet Singapore is just one of our growth projects in Asia. In 2017, we also established a new creativity center in Mumbai and a new sales office in New Delhi from which we serve the Indian market. We also invested in building a new sales and development center in Vietnam and expanded our site for development and application technology in Indonesia. All these initiatives support our local footprint and even more importantly, customer proximity, a prerequisite for the future growth. Efficiency is the second pillar of our strategy. One area we continuously work on in that context is our sourcing. Please turn to chart 24. You know that our backward integration not only enables us to secure access to high-quality raw materials at all times, it also contributes to most efficiencies in securing as we agree on long-term contracts with suppliers at defined rates. This enables better planning, and it helps us in times of scarcity and volatile prices. Of course, there are limits. For instance, in case of the shortage of the key ingredient, fragrance ingredient citral, which we currently see in the market. Let me assure you in this case, we have been in a good position due to our backward integration. In particular, due to the acquisition and integration of Pinova Renessenz. This perfectly illustrates what we significantly benefit from the constant expansion of our backward integration. It will therefore remain a strategic priority going forward. Let us move to chart 25 for our portfolio now. In today's fast-paced world, the degree of innovation and reinvention of a consumer brand product is crucial. Our customers rely on us in their effort to strengthen their product lines and expand their value proposition. They highly appreciate our innovation drive and the ongoing additions to our own portfolio. Be it in the traditional Flavor and Fragrance business or in new areas such as care and Nutrition. Let me give you an example. We have been significantly exploring the microbiome. This is a new area in which we decided to combine skincare with protection against air pollution. In the face of urbanization, a much-discussed and researched topic. By cross-linking our long-standing expertise in beauty care with the latest insights in environmental pollution, we have developed a solution with not just one, but multiple benefits. The result was SymUrban, which provides skincare like moisture, protect against pollution, and prevents premature aging. During the Personal Care and Health Convention in Asia in March 2017, SymUrban was awarded the most effective new ingredient. Amongst others, we have by far the highest share of relevant patents as the Patent Asset Index illustrates, 33.8% to be exact. To compare, three years ago, we stood around at 25%, a clear proof of our innovation power. From our portfolio to another integral part of our strategy, sustainable management. Please turn to chart 26. You all know that in everything we do, we try to improve constantly our environmental impact. May it be in the way we source our new raw materials or the manner we reduce our ecological footprint. In 2017, we have once again been recognized on several occasions for our sustainable business management. I'm very proud for our A rating by the Carbon Disclosure Project. The CDP rated Symrise as the global leader within the industry in all three categories, climate, water, and forest. We managed to further reduce our carbon footprint and continue to lead the energy and materials sector, as well as the MDAX stock index. We have also been recognized by EcoVadis for our outstanding sustainability management, and we have been honored by the DQS for the Excellence Award in green chemistry and social engagement. We have committed ourselves to a clearly defined set of goals based on the 17 United Nations Sustainable Development Goals. Each one has a specific level to be achieved over the next 15 years. Let us move to what is ahead of us for this year. Profitable growth is also our goal for 2018, and we are confident we have had a good start for the first quarter with strong demand across all business areas. The macroeconomic fundamentals, the good market dynamics, not to forget the additional demand coming from our new product innovations, call for another year of targeted investments. We are also slowly reaching the upper end of some of our capacities. As you know from us, we manage our business with foresight and thus expand in due time. With about 6% of sales, our 2018 CapEx program is therefore again at the right and at the higher end. Take it as a clear sign of our confidence and the market opportunities we have identified. Chart 28 shows some investment projects. We have expanded our pet food production in France from where we are serving customers in any region. in June, we will capitalize on the expanded spray drying capacities in the U.S. In August, we will be able to leverage additional capacities for cosmetic ingredients there. We are also already preparing the ground for 2019. In the U.S., we will have started construction work on an additional plant for diana food™, and we will further increase our menthol capacities. Overall, we will invest about EUR 100 million in the U.S. In China, we are in the process of building a new production site in Nantong. We will be operational there from December 2019 onwards. Let me conclude the presentation with our financial targets on chart 29. I just mentioned it. We are confident about the fiscal year 2018. The fundamental drivers for our business are intact, and we expect a solid global economy. However, some foreign exchange rates will remain volatile. Furthermore, we see significantly higher costs for raw materials, but thanks to our long-lasting and close cooperations with our suppliers, as well as our efficient backward integration, we expect to compensate for most of it. To further drive growth, we will capitalize on our global market presence, broad customer base, and expanded portfolio. Therefore, we see ourselves in a very good position to once again outperform the Flavor and Fragrance market, which is expected to grow by 3%-4%. In addition, we want to maintain our strong profitability and target an EBITDA margin of around 20%. Our midterm targets, which last until the end of fiscal year 2020, also remain fully in place. We aim at a sales CAGR of 5%-7%. Furthermore, we strive for an annual EBITDA margin between 19% and 22%. Having said that, I would like to open the floor for your questions now. Thank you very much, Heinz-Jürgen. Thank you very much, Olaf. Let us start now with the question and answers. We will start with the questions here in the room, and we will switch to the guests on the phone afterwards. For all guests in the room, please wait for Sylvia with the microphone that your question is also heard on the phone. We kindly ask you to put only two questions. If we cannot take all your questions during the conference, we will answer the remaining questions later today. Many thanks, and first question, please. Thomas from Société Générale. I will ask two questions, please. Firstly, Mr. Bertram, you elucidated to the recent investment in Asia you have made. Looking at 2017, you just had 1% growth there. What is holding you back? I guess this growth must come. I am just wondering what is in the way currently. Secondly, on the citral situation, and very straightforward, did you lose sales and profit because of the citral situation in Q4, and should we be expecting some pressure there still in Q1? Thank you. Okay. Thomas, thanks for the question. First, investment Asia. Yes, last year in Asia, the growth with 1.4% was not overwhelming. Clear point. To your point, we are confident the growth will come back. This was a temporary issue. It was a few incidents which came together. We lost one business in oral care the year before and which we regained, so it is just a seasonal thing, and there were some other incidents which came together. Overall, we have no reason to believe our dynamic in Asia somewhat is not present anymore. That is also because or why we invested and focused in some of our investments for the Asian market. I am happy for that question. We believe our long-term growth opportunities are intact in Asia, and we will see that in this year already that Asia has a stronger growth momentum. Having said that, it is just a big part of the accidents which came together, some of them. It is not one isolated big thing. Asia is fine. Overall, citral is the second question. Citral top line and the profit, it is something which we encountered. No question about that. Did we not gain business opportunities? I would doubt about that, but we certainly saw higher cost. If you look in our Q4 numbers, we have the material we need, so we are in a good and favorable situation compared to others. In situations like this, where raw materials availability is limited, very often the material is just not there when we need it, so we have to ship it back and forth short-term. It is a lot of air freight going on. You see a lot of extra costs. In a normal, ideal situation, you would have the material there when you need it, and you typically would have shipment not by air. At the moment, this is ongoing. I expect this to go on for several more weeks, and then we should be getting to a bit more normal situation. It is clear our situation is more favorable. I hope it came across from what I said, because at least we have the material. In principle, we have it all. The hit is not on the top line, but it is on the bottom line, in particular, higher cost. Hopefully that answers your question. Okay. Michael Schaefer, Commerzbank. I have two questions also from my side. First, on your raw materials outlook. You recorded 4% increase last year, raw materials. Now you are guiding for something like a significant increase in 2018. Mr. Bertram, you mentioned that you will compensate for this entirely. While on the other hand, you are guiding for a 1% drop, basically, in the EBIT margin. Any kind of clarification, also timing-wise, what do you expect the recovery to happen when? Maybe also splitting on the raw material side between the naturals and synthetics, so what are the key major drivers there? This would be the first question. The second one is on your menthol capacity expansion plans. If you can just update us on what kind of capacity is coming on top, basically, and where this would bring you to basically in total. Thank you. Okay. I start with menthol, the second. First, short-term, we will double our menthol capacities in the U.S., and we go on stream begin of next year. We are very confident we will stay in the timeframe, in the cost frame, so we are very confident we will do that. Let me say that as well, that will not be it. We will further, again, double the capacities. This is begin next year, we will double in the U.S., and that is the first step for doubling our global capacities in general. We are doing quite a big shot there. But the start of this expansion will be next year going on stream, and then from there, continuously expansion. On the outlook, we are very early on the beginning of the year. I think no one here is surprised about the outlook. We are confident, we are optimistic. On the margin, it would be far too early to give a firm commitment on something at this point in time with what is going on, the FX volatility on the one side and the other point on the raw material end. However, that is clear. We believe we will again deliver. We will again outperform the market despite certain FX effects and these things which go on. We will see some additional momentum going forward. We have managed to increase prices. We told you that raw material prices are going up, which means it is a clear signal for us to talk with our partners and our customers that price increases are necessary. I can say we managed to do this, and as we are going forward, you will see the one or the other impact from price increases. The other point is, as was said, this unusual situation of raw material shipment from A to B that has to go back to normal as well. I said it will go on. It is our expectation for several more weeks, and then we should get to a situation that the materials are there where we need it. The prices for raw materials will remain high. That is our anticipation, but we will get some momentum on it. Please bear in mind, we are the leading manufacturer of fragrance ingredients in the market as well. On that side, we clearly also benefit. So there is a few things which will help us during the year and a few effects where we face headwinds, like FX effect at the moment. But overall, that leads us to the assessment that we are confident that we did the right decisions in time. One good example for that is the Pinova acquisition, which now turns out to be just a great thing as it helps us and brought us in a favorable situation. I hope that answers the question. Maybe I can take the opportunity because Tobias gave me a hint on the interpretation of what is significant for us, because apparently the financial market sees this as a 10%-15% increase. That will not be the case. This is not the intention to indicate this. We saw 4% in 2017 increase. The chance that it will be a little bit more, but as Herr Sielmann just mentioned, we feel better positioned overall, and therefore, significant should be interpreted in the right way. Hello, Knud Hinkel from IGV Bank. Coming back to your CapEx guidance for 2018, it seems that the U.S. is a little bit in focus here. Is it purely incidental, or is there any overarching consideration behind that? Thank you. Well, I believe it is a positive sign because we believe the acquisition of Pinova was at the right time on the right field, and we clearly have conveyed the message to you that the integration is complete. That is why we are not adjusting, not normalizing, nothing. Now as it is complete, that it is integrated, that we have shaped the company, we sold some industry activities. It is the right start now to leverage and expand on this portfolio. That is why a big portion, you are absolutely right, of our investments at the moment goes to the U.S. Pinova was not just acquired to have a few more materials, but to have a new technology, a new platform for ingredients, which we will build for. It was built and was bought because it gives us the opportunity in an area for sustainable raw material sourcing. It clearly distinguishes us from a lot of other suppliers. If you look what major global customers in the fast-moving consumer goods industry have conveyed as a message that from 2020 on, they are not buying any material from not sustainable raw material sources. I would recommend to the one or the other supplier to do a similar move to prepare the ground for when that time comes. The message is we will clearly be there. We will achieve our objectives. You see on our ambitious investment, we will leverage on it. We clearly see that as an opportunity and also as one of the levers where we build the confidence of this year for us and for our business. Some of our major investments are there, and they will generate additional value. I am totally convinced. Good question. Any more questions in the room? Yeah, there is one. Good afternoon. This is Elise Cowen from Davy. Just two questions for me. Just going back maybe to Scent and Care, and just so I understand, organic growth in Q4 of 5.8%, that was all volume, and there was no pricing in that. Is that correct? Then maybe, from your comments on pricing in Q1, we would assume that you are getting price increases through, so there has been a significant change in Q4. Yes. Q4, unfortunately, I would say would be a rounding error, no price increases. As you know, the citral crisis, to be clear, it was not just BASF. It was different things which happened. But BASF, I would say, was the tip of the iceberg. In China, you see it is a lot of more awareness on environmental aspects. So quite some suppliers are also limiting their supply. BASF was one major thing, but it happened, this force majeure of BASF at the end of the third quarter. So the impact was in the fourth quarter, and you cannot ask for price increases for something which has not happened. So going out to the customers, I expect that we will see raw material price increases because we anticipate a force majeure. It just does not fit. When it has happened, you can go out, and that is what we told you on various occasions. You can go out, you can talk with your partners, with your customers. For them, it is obvious all these numbers, chemical ledger are displayed, what the raw material price increase is. So after certain negotiations, sometimes nicer, sometimes a bit more bumpy, but you can get price increases. I would say Q4 nothing, Q1 minimal. Okay. And just one more question, if I may. Moving on to Nutrition. You mentioned that the Q4 organic growth would have been 9.1%, excluding the impact of Probi. I understand that that is temporary in nature, but it is going to flow through to Q1. And I just want to know, will it be the same impact in Q1, a similar impact to what we have seen in Q4? And also, how confident are you in returning to the high single-digit organic growth rates of 9%, let us say, for the full year for 2018? You are putting me in a tricky situation as you want me to comment on Probi's numbers, and Probi is publicly listed. So I am trying to guide you and be diplomatic. In Q4, I would say some of the deviations, if there were deviations at all between consensus and what you saw, is actually rooted in Probi. So yes, you are right. And Probi had issued in Q3 a profit warning. I think that was what is out on the table. And from what I can communicate, Q4 was certainly something, and from what has been communicated, you may see something in Q1 as well. But that is Probi, and we are still fully committed. That was one of the great ideas of us going into Probi, and in my presentation, I alluded to some of the products which will hit the market where we replace chemistry by biology. We started with SymUrban, and you will see there is more to come over the course of the year. You have seen our strong innovation power. I hope the question now does not show up. Do you spend enough for research? Do you file enough patents? And all this stuff you have been bothering me in the past. You see, more than one-third of the whole intellectual property is with us. And this is not my numbers. It is from a British institute measuring it. And I think this clearly shows that the innovation leader is us. And what you see now going on is we want, and that is logic, this innovation power convert into business opportunities. It is by no way a surprise that our CapEx is for 2 years about on a record high to transform innovation opportunities into market opportunities. I think this is a clear sign of strength. Patrick Hopva from Kepler Cheuvreux. First question is on the sentiment that you see amongst your client base with probably on the one hand, still a focus on cost savings. On the other, we hear some more sounds with regard to a bigger importance on innovation. What is your feel that your client base is looking at today? And second- You get the second, but let me first answer. This is a very good question because I do not know the answer yet, but it is a tricky situation. On the one side, yes, the major clients are still focusing on a lot of cost savings initiatives, a lot of the global brands. But the same is what you ask for is my opinion. That cannot go on for too long, as the biggest value of global companies is the value of their brands. And there has to come an additional value with these brands. Otherwise, why buying branded products which come with an extra cost? What you implied, and is exactly my opinion, there has to come a swing when you have to focus, main focus, move away from just cost saving, cost efficiency, always a target. But cost saving to innovation. Where is the next big thing? Where is the next iPhone? Where is the next idea? And you have seen from our innovation portfolio, it is a pretty good probability that that will come from us. But I am totally with you. In these days, where you will see sooner or later shift onto strong innovation partners, it is good to be positioned to be one of the first choices. Absolutely with you. And this point that the focus from cost saving as the first priority to innovation and getting new products in the market as the first priority is not there yet, but the tipping point will be pretty close. That is as good as I can assess. Second question. This was a good one. You deserve the second one. Come on. Second one is on M&A. How do you consider your balance sheet? Are you open for something big, or are you more on the cautious side and looking for more of the add-on kind of type of deals? That's an easy one. We're not limited on our balance sheet on opportunities. I learned that with Diana. That was the best deal in town, and when I asked our head of the supervisory board on this opportunity, then he said, "How much do you think it's going to cost you?" I said, "Well, EUR 1.2, EUR 1.3 billion." Wow. Looks like a lot of money at that point in time. When we did the financing, that was surprising to me. I could have gotten three times the amount of money. The market rewards good ideas. The challenge is with me. If I come up with a great idea, I'm going to get the money. That's not the problem. The problem is being more savvy and being cautious on the opportunities. Talking on M&A opportunities, many of them at the moment are far too expensive. I see no way on many of these deals which go through that you can drive value out of it. We are valued 12 times EBITDA. The business in our industry, typically in these days, requires, if you want to be successful, 12 times plus some synergies. So 12, 13 times. If you maybe beyond 14, 15 times, for sure, you have passed on all synergies to the vendor. From there on, I do not see any way to make a business case out of it. Let me assure you, for the flavor and fragrance business, I don't see any means that I would spend more than that what I just outlined. If you look what has happened in the industry recently, there have been multiples 16, 17, 18 times. We have been in these processes, but we stepped out, and you will not see us doing these deals. It is your money, and we cannot make a business case out of it. On the other side, of course, we look at opportunities, and there are always opportunities arising. The only thing which is necessary, it may be for us necessary to look a bit more careful and look for opportunities which are not that obvious. If there is a bidding contest out there and the whole industry is going after it, at the moment it's a pretty safe bet we will not get it because others are willing to spend more. But I have to work with your money wisely. I think that was as straightforward and honest as you can think. If there is acquisition opportunities tomorrow or currently, we're looking into it, but if there's unreasonable price expectations, no way. Test us, look at Cobell, what we paid was 11 times EBITDA. Michael Schaefer, Commerzbank again. Two questions. Sticking to synergies, we haven't heard about Pinova synergies for a long time. I wonder whether you could update us, where you're standing, whether you're still targeting EUR 15 million and when you are there on the timing side. Second one is on working capital. You absorbed or you built up something like EUR 130 million net working capital again in the past year. Given what we have heard about the raw materials expectations you have, also the ramp-up process you're planning for the second half. I wonder whether you can shed some light on what we should expect basically in 2018 and maybe also beyond 2019 once those new plants are fully up and running. Thank you. Okay. Let's do it this way. I take the Pinova and Olaf, you're still with me, so you take the working capital. Okay. Pinova synergies, I would say the EUR 15 million are in. It's just not in this specific situation obvious because we shuttle around with Pinova on some of this other raw material mess which is at the moment going on. There is no one in our company who would not say straightforward in first hand that that was not the right acquisition at the right time. The synergies are in. That's why we stopped integrating and all this. This is out. We're not normalizing, we're not adjusting. We may have even a bit more synergies in, but that is, and the question came, that is why we full steam focus now on expanding what we have in the U.S. It is a strong basis, it's strong fundament. We have made good progress. I've been in Jacksonville, Colonels Island and Bushy Park just a few weeks ago. I'm extremely pleased on the progress which is made, and you will see continuous improvement from now on going on. They've transformed from a company which diluted the overall performance to a value contributor. We're pretty confident that we achieve our targets earlier than announced originally. Okay? Now on the working capital, as you know, I put a lot of emphasis on this since I joined, to improve the situation, and I think we are making very good progress, very targeted initiatives, like this overdues. When you compare us to immediate competition, you will probably recognize that our inventory level is higher in proportion. I think one of the major reasons for that is our way more build footprint when it comes to backward integration. The supply chains are longer. Taking vanilla, for example, the campaign starts in June, and we sell off the vanilla in April, May for the ice cream season. Sometimes it sits on our books for 12 months and longer. I think that is something which is part of our business model. This is the reason why we also added last year based on higher volume and prices, in the vanilla space, for example, to the working capital situation. I can assure you that my colleagues know that the working capital environment is extremely important and gets a lot of attention in the environment. It's not easy, but we are going after it, that's for sure. Olaf, I think that was perfect. Olaf was a strong proponent, reducing inventory start with, but vanilla, we all experienced that together. It's a balance which you have to see. Vanilla extract now it's just who has some quantities available. Fortunately, we have inventory and we have a special situation with our backward integration. We told you on various occasions that this is not something to make extra money, but it's like an insurance. Sometimes you benefit, sometimes it's giving you some extra cost. At the moment, it's giving you the benefit because you can pursue all business opportunities at least with those partners which you have long term. Others which show up new and now and want to have some quantities and did not show up in other times, they have to see where they get the material. It has an impact on the working capital, that's for sure. That is something which will, to some extent, be for a long time the case. There is also some exceptional situations. One is menthol, because we will start our menthol plant beginning of next year, and we need starting material, and our partner will not be ready by then, Lanxess. We all recall last time we went through, so I hope we learned our lesson and we start putting material on site and you see that in the balance sheet, that's for sure. That is also one effect. That will go away beginning next year on when we start the production. We will use that material up. That is in addition to something which is permanent, some temporary strains, and which is not small stuff. You will see that. It will continue to be there and even build up a bit over the year. Thomas from Société Générale. One strategic question, please. Symrise is a phenomenal growth story. External organic growth, it's all perfect. We've been seeing that since a couple of years. On the profitability side, it's a good profitability. There is nothing to complain, but we see in the sector that more is possible. Your competitors are doing more. My question is not pointing towards, are you going to 24%, 25% EBITDA margin? That we understood. You're not a fan of it. My question is, how high on your agenda is to bring the profitability to the upper end of your target range? What would need to happen for us to see more payback on the investment you have done? Mm-hmm. Well, we're in a privileged situation. We have the opportunity to choose between priority growth, top-line growth, and priority bottom-line growth. This is a choice which most of our competitors do not have. We outgrow the market since years, 8% growth, organic growth per year. That is over the last few years. That is strong. Yes, and to some extent, we compromised a bit on the bottom line. And we told you that a bit more could be possible. But you see it on the long-term guidance, 19%-22%. That is somewhat good, but you feel it could be better. What is the situation at the moment? Givaudan has 21.6% EBITDA. Givaudan FF has 21.2%. We have 21.0%. Which is not a big difference. Well, we all don't believe in this normalized stuff. Let's look what's on the table, and that is pretty much the same. Although we have a higher growth rate, and the message of today is we believe our growth story will continue. Growth story will continue. We also said we will make sure it will be profitable growth in a bandwidth, say 20%-22%. There may be some times where more is possible. But the message from me was, if we're going to the upper level, 22% or whatever, we will continue to invest in further growth as we have the opportunity. You saw our tremendous innovation power. Why not transferring it into growth as the opportunity is there? If you look in our industry, there is not a lot of growth stories. Actually, it is us and not a lot more. Organic growth between 5% and 10%. We said the bandwidth is 5%-7% long term. That's more than you see in other areas, in other companies. And if that is the highest priority, automatically you compromise to some extent on other areas. And to your point, the day we do not see any more the opportunity to outperform the market, and that day I don't see yet, but if that day were there, we would have to look that the bottom line goes up. I think that was straight on. Ladies and gentlemen, we already answered a lot of questions here in the room, and we already are running out of time a little bit. But it would be fair to answer at least some questions from the phone. I know that there are some people that dialed in. Let us switch now to the questions on the phone. Please again, put only one question and we will see how far we can get. First question, please, from the phone. Thank you. Ms. Vesterinen, your line is now open. Hello there. Hi. It is Heidi. Thank you. I have a question on Scent and Care. When I look on a full year basis, I saw that the gross margin actually increased a lot year on year. This I thought was a positive surprise because you were talking a lot about price pressure. I think you started talking about that in Q2. It looks like the reason why EBITDA margins were flat year on year in Scent and Care is the fact that you increased R&D spend as a percentage of sales. Can you talk a bit about what happened to the gross margin, and is this increased R&D spend going to improve the growth rate going forward? Thank you. Okay. Yeah. Thanks, Heidi. Good to have you on the line. Well, we increased the R&D spending in Scent and Care, that is for sure. We made quite some new callers. We informed you about that, and the next logical step is, if you are on the callers, you have a lot of opportunities. You have to increase R&D spending to leverage on these opportunities. First, that is a good news, good opportunity. But of course, yes, you are right, you see the impact short term, but overall, it should result in some outcome of these opportunities as the R&D investments is a clear commitment. I believe the growth rate of Scent and Care should be healthy going on. So far, we were, at least with our predictions, right last year. At this time, most of you were concerned of our growth rate in Scent and Care because it was a bit below the expectation, and we told you by second half of the year it will come in, and it will have a different momentum. I have no reason to believe that this stronger momentum will fall shorter for this year. The only disclaimer we made is this raw material thing. We believe we are positioned in a favorable position with these raw materials, but some isolated special incidents can happen that something is required short term, and we have to find it out somewhere. Overall, I believe, I hope you all heard our outlook is very positive, and that reflects also the outlook for Scent and Care. Okay, Heidi? Heidi, if I may add on the gross margin situation. We made good progress on the efficiency side when it comes to production environment, but there was also the impact from the divestiture of the Pinova Inc. industrial business, which naturally comes with high manufacturing costs as part of the business model. That was one of the drivers for the improvement. Thank you. You are welcome. Next question comes from Jeff Hare, please. Yeah, good afternoon. Thank you for the opportunity to ask the question. Just wanted to come to the dividend payment that you have made of EUR 0.8. It is only a 3% increase year-on-year, and over the last sort of 3 or 4 years, you have been paying dividend growth of roughly 6%. Is this a function of the CapEx spend that you have got going at the moment? Once that is through, could we expect to see the dividend grow faster? Dividend. Olaf, you made the final decision. You sit on the money. You explain. No, I am happy to do that. What we did is, you saw the EPS increasing from EUR 2.05 to EUR 2.08 last year, and we basically put the additional EUR 0.03 straight into the dividend. As we have said before, we always want to make sure that our shareholders participate in our earnings, and the approach there is really to make sure that we have sufficient funds. We found, I think, a good balance between CapEx investments, which we are doing, honoring our financial liabilities, and of course, make sure that our shareholders participate. I think the approach we took is a very fair one, basically into 100% usage of additional earnings for dividend purposes. Mm-hmm. Let me add to that. I had the discussions before we went on the conference call here. Two questions. Yes, we are aware with the opportunities we have that the CapEx ratio we have currently is very high. Let me reassure you, we have no plans to leave it at that high level. As you saw from our innovation machine, innovation power at the moment, that is the opportunity to translate it in business opportunities. The normal situation of CapEx should be more in the 4% range. This is a temporary incident. Having said that, we had to look on where do we allocate the money, and we felt it is at the moment, in this special situation, wiser to pass on the increase in earnings per share in dividend, but that is it. That can be in different times, also different. I hope that was the answer to your question as clearly as possible with an outlook. Yes. Thank you. You're welcome. Thank you. Next question from Ranulf Orr, please. Hi. Thanks very much for taking the question. I just wanted to ask about the new manufacturing facilities being built. Can you give an idea of the scale of them, how the ramp-up works, perhaps any of the volume is pre-sold? What kind of capacity utilization you could expect? Thank you. Mm-hmm. Okay. I can do that. First, I will not tell you the capacity in detail because our competitors could calculate. But as we've said, starting with menthol, that's in the magnitude as per now for the first step, close to EUR 50 million. Same is the cosmetic ingredient plant. In total, it's about EUR 45 million, and the capacity will be significant, but it will be built up, the cosmetic ingredient plant, in three steps. The first step to come this year, and based on it's a new process, it's a new material. The process will be tripled over the time to come, I would say over the next two years or so. The second point is the product for the first step, which comes out of the plant, all of that is sold already. So that will not be a problem selling that. Probably in the second step, doubling it will also be very feasible and tripling it, then we have to develop that market. So that outline is a very healthy product range. So we're very confident about that. Actually, we already have made plans to increase the cosmetic plant in Germany as well. So you see, that is taken care of. Second one is the menthol. At the moment, we are basically Menthol and not selling it. With the process we have, although other competitors plan to go also on stream with menthol, we're very confident that we can sell that product, in particular for the first stage of the product, additional quantity in Bushy Park, that is already to a large extent sold as well. So you hear me, we're not concerned at all about getting this additional product quantity in the market. We have a good and very solid process, we believe probably one of the best in the world, so that should be feasible. Talking about the diana food™ plant in Georgia, which will go on stream somewhat mid of next year, and I have talked yesterday with Jean-Yves, and he was very confident. He was in Georgia, and so there's no reason for me not to believe we will sell that product. It's natural products, and the trend for naturalness, where we know the farmer, the field, and the land, how the product has been made, that trend is still ongoing, and that plant reflects this trend. Again, the investment there, I haven't mentioned that, it's EUR 80 million. So you see that is a big commitment, and rest assured, we wouldn't do it if we were not convinced that we can sell these products. As I said, for big part of it's already sold. I hope that answered your question. That's perfect. Thanks. Thank you very much. Next question and last question comes from Chetan Udasi, Jefferies. Please go ahead. Yeah. Hi. I had a question around the Scent and Care growth. If you've seen, the growth over the past few quarters has been more, I would say, more volatile, up and down. Do you think there is some structural element to that? Or should we now expect the growth to be much more in a normal range, like we say, 5%-7% in the coming quarters? Yeah. Second question I had was, can you just remind us how much actual backward integration do you have to raw materials in terms of how much of your volumes that you source come from your captive supply? Thanks. Okay. First, Scent and Care, that is clear. Scent and Care is always and was always, and unfortunately, will always be more cyclical than Flavors. Flavors is a lot more robust. On the other side, that is also an opportunity. So in good times, there is also sometimes more opportunities in that business. At the moment, with some headwind in raw materials, that is the other side. So overall, my prediction is this is the nature of this industry. It is not as solid and stable. On the other side, the volatility or the higher volatility gives also some additional opportunities. So we are happy that we have both of this, and it is our job to manage it properly so that you, as investors, can benefit from upside opportunities, but on the other side, in tough times, you have a safety cushion that the business runs safe. And that is the message we want to convey. We believe at the moment the balance we have is very good, and that is what we would like to keep. Having said that, I hope that answers your question for the volatility on Scent and Care. The other one is on the backward integration. With the Pinova stuff, it has significantly increased our backward integration. If we go by not number of products, but the quantity we use, we are clearly by more than 50% in our backward integration. I would be fooling you if I give you exact number, but it is clearly beyond 50%. We have committed that by year 2020 or 2022, it will be almost everything backward integrated. So there will be also always a certain portion which we buy from third party, but it will be limited. And you see in these days where the uncertainty, is raw material available, that is a clear message we can convey. We will deliver, we will be there for our partners, and it may come at some point with extra cost, but we are known as a safe partner, as a lighthouse in these times, and we believe that is a value. The other point, which may be even more important than just safety and supply, which at the moment is the biggest focus point, is we believe going forward, our responsibility goes beyond just creating flavors and fragrance. Our responsibility as a quality supplier means taking on responsibility also for the raw materials. And if raw material trends go towards big focus on natural materials, sustainable materials, aspects like what is happening to the environment, how is this sourced, become more and more predominant, and our vision, our message is clearly we want to know the farmer, the field, and the conditions where the products have been made of. And that is the avenue we pursue, and we believe that is the right way. Madagascar vanilla is just one of these assets, but that is why we will continue to push our backward integration. At the moment, clearly being already more than half of our materials, and rest assured, till 2020, 2022, it will be almost everything we source. Okay? Understood. Can I follow up on citral? You said you are not necessarily seeing a big impact or you are well-sourced. Can I ask who are the alternatives that you see in terms of filling the gap from BASF outage at the moment? The situation. Well, first the citral situation. You better ask BASF as they declared force majeure, not us. We say we find our ways. Another supplier of citral, DRT, also the factory in India just exploded last week, I read. So obviously, there is a lot of exceptional issues ongoing. The good thing is, as I said, we can manufacture the materials which we need via the Pinova avenue from different sustainable materials. It just takes changes in the production schedules, changes in some of the equipment, but we know how to do it. We have done it, and it came with some extra costs. Some of it you have seen. Understood. Thank you. Just one. The citral is not only the basis material for a lot of fragrance materials. You have clearly pointed out it goes also in the vitamin industry, DSM and all these folks. That is something I clearly cannot answer what the ramifications there are. We are talking about our case, and our message is clear. We know how to deal with this situation. We get there. We see some extra costs there. But the safety of supply from our product is guaranteed. I think that is a clear and strong message. Okay? Ladies and gentlemen, this brings us to the end of our conference and our conference call. Many thanks for your patience with us and 20 minutes overtime. Thank you very much for your time and your interest in Symrise, and have a nice day. Bye-bye. Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.