Earnings Call: Q2 2021

Aug 5, 2021

Good day, and welcome to the Symrise Analyst and Investor Call on occasion of H1 2021 Results. Today's conference is being recorded. And at this time, I would like to turn the conference over to Tobias Erfurt. Please go ahead, sir. Thank you very much, Simon. Good morning, and welcome to our analyst and investor H1 call. All corresponding materials, including the presentation, have been published on our website this morning, and a replay of this call will be available later today. Today's call, like always, will be held by our CEO, Doctor. Heinz Sjogren Bertram and our CFO, Olaf Klinger. After the presentations, we are open for your questions. With this, I hand over to you, and Sjorden, you may begin. Thank you, Tobias. Good morning, ladies and gentlemen. Welcome to our Investor and Analyst Conference Call for the results of the first half of twenty twenty one. Thank you for taking the time to join us today. Our CFO, Olaf Klinger, and I will run you through today's presentation and answer your questions. So this is our agenda for today. I will give an overview of our business development, and Olaf will then go into the details of our financials. We will conclude with highlights from our operations and give an update on our raised guidance. For more than a year now, the corona pandemic has been dominating economic and social life worldwide. But the situation has clearly improved even though it has not come to an end yet. Many nations have already made good progress in acceleration of vaccination rates and fighting the pandemic. These efforts have resulted in a revival of the global economy over the past month. Simaris has clearly capitalized on this economic progress and delivered an excellent performance in the first half of the Current fiscal year. The key figures of the Chart 4 bear witness to this. We increased sales by 4.8% in reporting currency to more than €1,900,000,000 On an organic basis, We achieved an even stronger rate of actually 9.7%. EBITDA increased 6 0.8 percent to €420,000,000 with an EBITDA margin of 22%. The business free cash flow amounted to €181,000,000 Net income increased by more than 16% and totaled €196,000,000 Accordingly, earnings per share increased to €1.45 plus EUR0.20 versus first half year in 2020. We are very proud of these results and we think we can add more to it. Clearly, We still have somewhat limited visibility, and the pandemic will continue. But we do think that consumer demand will further normalized, and this will give tailwind to our business. We are therefore raising our 2021 Guidance for both sales and profitability. Details later on. Let us move to Chart 5 for our sales development on group level. We grew sales by almost 5% to more than €1,900,000,000 The Sensia fragrance and aroma chemicals business, which we had acquired effective April 1, contributed more than €14,000,000 We also achieved strong organic growth of almost 10%. Like many of our peers, of course, also compare against lower prior year results. But we predominantly experienced renewed dynamics in all regions. The link between improved pandemic responses in return to a more mobility and more dynamic everyday Life with corresponding consumer demand is clearly visible. Chart 6 illustrates these dynamics by segment. Cell and Care achieved a very strong organic growth of 9% in the first half of 2021. In reporting currency, sales totaled €749,000,000 The segment benefited in particular from the sharp rise in demand for cosmetics and fine fragrances as a result of increased mobility and travels. Sales in fine fragrance even exceeded the pre corona levels significantly. With the start of the Q2, we have combined our activities in the flavor and nutrition areas in the newly introduced segment, Flavor and Nutrition. The newly combined segment drove organic sales by more than 10%. Overall, the segment top line rose to above €1,100,000,000 Decreasing corona infections are gradually supporting consumer confidence and out of home consumption. These developments push particularly the demand for beverage applications. In addition, our pet food activities where again another strong growth driver for the Flavor Nutrition segment. Let us move to Chart 7 for the performance by region. All regions drove organic growth with Latin America delivering the strongest organic growth of more than 15%. North America and Asia Pacific ranked 2nd And third, with 13% 10%, respectively. EME achieved organic growth of almost 6%. Across all regions, sales were driven predominantly by gradually increasing sales volumes. Let me now hand over to Olaf. He will present the financials in more detail. Yes. Thank you, Hans Jurgen, and also a warm welcome from my side. As usual, I will walk you through our financial performance in some more detail. Let me start with the group sales on Slide 9 with a comment on the organic growth. It was fully driven by volume increases. The fragrance and aroma chemicals business from Sensient Contributed €14,400,000 of sales represent an 0.8% growth to the portfolio. This is 3rd party sales only and therefore slightly below the market expectations, which I guess has been based on the sales number of 77 euros 1,000,000 that were published in the past. FX is a negative headwind of €103,000,000 or minus 5.7 percent, mainly from the U. S. Dollar environment as well as high inflation in Brazil and Argentina. Assuming stable FX rates for the remainder of the year, we expect this effect to shrink towards minus 3% to 3.5% by the end of the year. Please turn to the group profitability on Slide 10. Unlike H1 2020, when only the Q2 was hit by corona, this year, both quarters were affected by the pandemic. Higher manufacturing costs, which are partly related to extra shifts and related costs during Q1 In connection with the cyber attack and the lower margin of the Sensient acquisition slowed the gross profit growth below sales growth of 3.6 percent or €756,000,000 EBITDA grew 6.8 percent to €420,000,000 We were confronted with higher logistic costs And some specific raw material cost situations, keywords here are the Texas free and propylene glycol. On the other hand, we benefited from strict cost management and lower travel costs, leading to proportionately lower increases in sales and marketing as well as R and D cost. On top, we had a positive one off book gain effect of EUR 13,200,000 related to the Sensient acquisition. The EBITDA margin of the group reached 22%. Without the one off gain effect, The margin achieved 21.3%. Counting in the transaction related cost of €2,600,000 The EBITDA margin of the group amounts to 21.5% for the 1st 6 months. Following a lower amortization, mainly due to FX translation effects and the expiration of amortization for ERP templates Implemented in the past, the EBIT increased by 11.6 percent to €297,000,000 which led to an EBIT margin of 15.5%. For your modeling, please keep in mind that due to the short period In closing and reporting date, the purchase price allocation for Sensient is still to come. Let's turn to Centimeters Care on Slide 11. Centimeters Care grew organically at 9% In H1 and even 9.6% in Q2, fully driven by incremental volume. The Sensient acquisition added additional €14,400,000 to the portfolio. FX remains a burden, it was minus 5.6% in H1, but slightly eased from Q1 with minus 7% to Q2 with minus 4.1%. The segment, Centimeters Care, achieved an EBITDA increase of 11% to EUR 162,000,000 €146,000,000 last year. This reflects the rebound of the high margin businesses, Fine Fragrances and Cosmetic Ingredients. While the new business from Sensient came with a far below group margin, the EBITDA margin reached a solid 21.7% after 20.6% last year for Cent and Care. Turning to Flavor and Nutrition on Slide 12. Organic growth was driven by volume and reached 10.1% in H1 and 8.3% in Q2. FX headwind was on a similar level as with Cent and Care amounting to minus 5.7% in H1 after minus 6.9% in Q1 and minus 4.5% in Q2. EBITDA increased 4.3 percent to €258,000,000 The EBITDA margin was stable at 22.2 percent, while higher transportation and some specific raw material costs were balanced by a rigid cost management and lower Travel costs. We are specifically pleased with the development of our ADF IDF acquisition, which continues to perform above initial top line and bottom line expectations. Please turn now to Slide 13 for our bottom line performance. The financial result improved by €6,000,000 to minus €23,000,000 due to one off effects last year, I. E, interest on tax liabilities and this year lower interest on pension and leasing obligations. Our tax rate of 26.2 percent targets now the lower end of our expected midterm corridor of 26 to 28%. EPS increased strongly by 16% to a new record level of EUR 1.45 Euro. Slide 14 shows the development of our business through cash flow, which decreased by 5 point 2% to €181,000,000 and corresponds to 9.5% of sales during the 1st 6 months of the year. The slight increase resulted from higher working capital and here mainly higher trade receivables due to the strong sales growth and should also be viewed in the context of an exceptional low working capital level at year end as a consequence of the cyber attack. The group continued to invest into growth opportunities with a specific focus on pet food and ADF IDEA. As a percentage of sales, CapEx was at 3.2 percent or EUR 62,000,000 during the 1st 6 months. The ratio is expected to During the second half of the year, our CapEx guidance of 4% to 5% for the year remains, therefore, in place. One comment on the way of presenting the business free cash flow numbers. We show the full year and half year numbers on Slide 14. Internally, we also use a rolling number for the last 12 months. This number was 15.4% of sales at the end of H1. For the full year, we continue to expect business free cash flow to be above 14% of sales. Our balance sheet on Slide 15 comes with an healthy equity ratio of now 41.9%, which is slightly better than the 39.8% at the end of last year. The biggest change was the increase in inventories And receivables of around €219,000,000 This resulted from our strong sales increase, our ambition to secure supply and the additional Sensient business. Our pension obligations decreased by EUR 67,000,000 primarily due to higher interest rates environment in Germany. Please move now to our solid net debt Development on Slide 16. We are getting closer to our long term net debt, including pension target of 2x to 2.5x EBITDA. With the net debt position of €2,150,000,000 we are already at 2.8 times after 3.0x last year. And with our pension and leasing, we are at €150,000,000,000 which corresponds to 2 times EBITDA. In summary, we provided a very strong Financial figures for H1 2021 during these unprecedented times, which is giving us Lots of comfort to outperform our initial targets for full year 2021. And with this, I would like to hand back to Arnd Jurgen, We will further comment on the operational highlights and our increased guidance for the year. Thank you. Thank you, Olaf. Ladies and gentlemen, before we move on to our updated forecast, allow me to present key projects, which we have driven forward in the first half of this year. As most of you know, our pet food activities are one of our growth engines. The trends to pet ownership has constantly been increasing. We are therefore confident that the market for pet nutrition and health will further grow. This is why we have recently decided to become a strategic shareholder of Sweden Care. We acquired about 5% of the company's Share capital in June. Sweden Care is a fast growing provider of premium pet health products. Sumrais and Sweden Care run complementary activities, and we see great opportunities for collaboration, for example, in Pet Oral Care. In addition, we will jointly explore new growth opportunities in the area of Pet Care and Pet Health. Let us move to Chart 19. It is quite comprehensive, And it illustrates that the wheels never stand still at Sunrise. Let me highlight some strategic initiatives. In the first half of twenty twenty one, we also extended our pet food activities outside of Europe. In China, we opened a new manufacturing site for pet food applications. The plant contains The very first palatability measurement center in Asia Pacific and operates in line with advanced Sustainability standards. As you know, sustainability is one of the cornerstones of our corporate strategy. We place Strong emphasis on our environmental footprint and the sustainability of our supply chain. And we are constantly expanding our efforts in this area. In this context, our food business has introduced a new digital Solution for the traceability of global farming and sourcing practices. In the context of sustainability, I'm also very proud that we successfully renewed our FSC chain of custard certification. We are the 1st and only producer of turpentine oil from Pines who received this certification. To integrate sustainability beyond our operations and into our financing activities has Become a strong preference of the executive board and of Olaf in particular. Consequently, we have not only refinanced our revolving Credit facility of from 2015, but we added a sustainability link for the very first time. Ladies and gentlemen, let us conclude today's presentation with our new outlook on Chart 20. Even though we must expect the current pandemic situation to continue, there is also reason to be confident. We have proven in the first half of the year that we can rely on our robust and diversified business model. We reliably serve customers, drive innovation and expand constantly our capacities. In other words, we drive sales and earnings growth also in more difficult times. These abilities gives us confidence to update our forecast for 2021. We raised our organic growth target from previously 5% to 7% to now more than 7%. We also target an EBITDA margin of more than 21% versus of around 21% as previously stated. We are confident that SimRAS is very well positioned to achieve these targets. Our medium term targets remain unchanged. We strive to continue to be among the fastest growing companies of our industry. Our targeted annual organic growth rate remains at 5% to 7% on average. In addition, we want to be one of the most Profitable players in the industry. Our environmental objectives also remain untouched. With these strong prospects, I would like to conclude today's presentation. And Olaf and I now are happy to answer your questions. Many thanks, Hansjoern. Many thanks, Olaf. Turning to Q and A, we are now happy to take your questions after Simon's instructions. Simon, please go ahead. Thank you to our speakers. We'll now move to our first question over the phone, which comes from Lisa Denivi from Morgan Stanley. Please go ahead. Your line is open. Good afternoon, Jurgen and Olaf. First one is, can you please share some detail on how the Diana Pet Food business performed in the second quarter? And how the recent start up of your Chinese pet food facility will play into the course in the second half of the year? That's the first question. And then secondly, can you provide an update on sort of the EBITDA bridge items in the second half as it relates to where are raw materials trending, Potential synergies from your Flavor and Nutrition division combination as well as some synergies and integration from recent acquisitions. Thank you very much. Okay. Thanks, Lisa, for the question. Two questions actually. I propose I'll start with the pet food part. Olaf, you take the bridge Pardon me. All righty. So Pet Food has been contributing significantly to our growth and has been delivering Well, in the double digit numbers turnover wise and on the bottom line also very healthy contribution as usual. The interesting part in your question was the China start up. And actually, as far as we can see it now, it is It went better than expected. Last time I said, 1st plant for pet food in China with a totally New supply chain, we expected more challenge there than actually we have seen. So far, it is a very smooth and Seamless startup. At least from what I can tell you here now, we have not been able to personally convince ourselves due to travel restrictions. But On the other side, Lisa, it shows that obviously our team is very robust even under some challenging circumstances, Able to deliver according to what our forecast is. Pet food continues to be a strong growth driver, as we said, Has contributed over disproportionately to our growth now in top and bottom line. And the China factory Startup is very well handled and so far no problems there. Olaf, with that your question on the bridge? Yes. So let's start with the tail end of the bridge. In general, our model is, of course, very immune against The currency fluctuations, so you normally don't expect an impact on the margin side. However, we had around €18,000,000 in H1 1 on translation, there was also a little bit of transaction headwinds coming through currency. The raw material side is pretty stable still. So we continue to see a slight headwind, 1% to 2% for the year. Nothing of concern at the moment. Manufacturing costs were higher, Partly related to the already mentioned cyber related extra cost in Q1 that drove this a little bit Faster. Otherwise, good cost discipline and therefore, sales and marketing and R and D growing Less than the top line. There's strong momentum coming from synergies, which you referred to On the flavor, on the ADFI side, we had very nice wins with customers on the top line Through the combination, and this is what we are driving at the moment, with the combination of flavor and nutrition. So good momentum there, and You clearly see that in the Q2 numbers of especially the flavor side and the ADFIS side. So I would stop there with the bridge consideration. All in all, very strong performance also on the bottom line. Thank you very much. You're welcome. Thank you. We'll now move to our next question over the phone, which comes from Heidi Vesterinen from Exane BNP Paribas. Please go ahead. Good morning. I have three questions and I'll go 1 by 1. First of all, how much pricing are you In your full year guidance on organic growth this year, please? That's the first question. Okay. That's a tricky one. Actually, Heidi, In these price models we have so far, the assumption not changed to onethree price increase, twothree Volume increased, but that may very well change. Our internal discussion is not finished there, but You're absolutely right. We're talking with customers now, and we're in the process in advanced stages of price increases, but we're not finished there. So It is a bit early on doing a final assumption on price increase. Olaf is nodding, so I'm obviously giving you an honest And straightforward answer. Before I mislead you and give you a number which would just give you a wrong direction, Straightforward, honest. So we're still in the process. Okay? Thanks. So that sounds like a material step up in pricing because there was no pricing in H1. H1, is that correct? Yes. Thanks. And then the second question, so in your speech, you talked about Tailwinds as things normalize. Could you be more specific, which segments do you think will benefit? And don't you think maybe packaged food demand might Slow as foodservice picks up. And is that still net positive for you in a tailwind? Yes. Okay, Heidi. I dumped that on Olaf because he made the statement, Olaf. So you take that one. Yes. So, Heidi, I think we see now the pandemic Situation in comparison to last year, and we see the momentum coming back in the areas that show up last year. And on the other hand, we have areas which were very strong last year like pet food and therefore, we saw a little bit slower, Still strong growth in pet food. So these are the dynamics. You mentioned that the Out of home environment might come back, and we see that ever actually. The beverage side is extremely strong. The fine fragrance side was Extremely strong in the Q2, and this is the prior year comparison which comes through here. Overall, I think with the fact that people are going out again and can consume that we have Bars open, stadiums open. It will help to further support the business development on the flavor side. Having said that, I think our increased growth guidance signals clearly that we are optimistic for the remainder of the year. I think all in all, we will have a strong performance in the course of 2021, and that It's reflected also in these tailwind opportunities. Thank you. And then one final one for Heinz Jurgen. Are you definitely leaving next year? We know your contract is expiring in October. Is there any update on that? Heidi, before I leave, we will have a glass of red wine, a good one. So I can't and But serious point, the on the succession, we will come up with a clear answer before end of this Yes. We are not allowed to say something according to the legal requirements here in Germany at this point in time, but we're working on a succession And you will have an orderly succession plan before end of this year. And it includes also the answer to your question, Which you just brought up. So let me put it this way. Okay, Heidi. Thank you. You're welcome. Thank you. We'll now move to our next question over the phone, which comes from Matthew Yates from Bank of America. Please go ahead. Hi, everyone. A couple of questions. The first is around combining the Flavor and Nutrition divisions. Should we think of this as more of an opportunity to see some cost savings by removing And some duplicate costs? Or is it much more of a top line ambition? And have you thought about how to Quantify that and over what sort of time frame. The second one actually is to follow-up around governance that Heidi was asking. Sanjay, I'm sure you're enjoying running the scent business, but can you update us on when we might get a permanent head of that division? And also I see that your Chairman recently changed his CEO role. And does that impact in any way his ability to carry out supervisory duties at Sunrise? Thank you. Okay, Matthew. I think all three questions go in my direction, and I'll Take them. The combination of flavor and nutrition was, in our view, a logical step Because as you rightfully said, it offers the opportunity for some cost savings, but also some top line synergies. And actually, we're working right in that direction. And there is not a heavy emphasis on bottom line, neither on top line. We will Leverage on both of them and expect them within the next 2 years or so to be in. Quantification will follow as well, but we have said over the next year's bottom line synergy Not below €10,000,000 but probably a bit more. That's what we have said already, and we confirm that. But again, One of the more priorities was leveraging on the top line opportunities and Grab all synergies there. Having said that, Governance, Centron Care expect a decision on the successor Out there by latest next year, so in the course of next year, which shows we are not in a rush, Not under pressure. We have made an organized and orderly transition to now. As the results from Centenequia It obviously shows we are in the process of making some strategic adjustments, Not a totally new strategy on CenteneCare. That's not necessary, but some adjustments. And as soon as that is ready And we're in full swing of that. In the course of next year, you will have someone presented who is running Cent and Clear and will do a fine job. Leaving that aside, the Chairman role, our Chairman has assumed a new position. And I have to say, I see no problems for him to take care of his duties if he comes To our company, he obviously enjoys being in the supervisory board. We are happy to have him. And I had On the phone, just the day before, yesterday, no problem to get a hold of him. So he is Totally committed. No concern there. I hope that answers all your three questions, Matthew. Very clear. Thank you so much. Thank you. We'll now move on to our next question over the phone, which comes from Thomas Svoboda from Societe Generale. Please go ahead. Yes. Hello, everybody. Thank you very much for taking my questions. I have a couple around the margin guidance, If I may. Firstly, can you confirm whether your guidance is including 1 offs or Including cash. So just we have that clear, please. And then related to that, You commented on the cyber attack that there were some costs in H1. I'm curious if you Can you give us a hint about how much it was? And related to that, Do you expect an insurance payment? And the size of the insurance payment, if you could give us to us, Would be great. And lastly, I'm so sorry for this nitty gritty stuff. Vanilla prices came down quite significantly. Can you give us a hint what does it mean to your inventories? Is there is Are you planning to write down any inventories in H2? Thank you. Thomas, we are smiling as we thought about exactly some of your questions and have In a very, very careful manner, I addressed most of these. Olaf, you want to take a bit more details to the one offs and The vanilla price. Okay. So the Martin guidance excludes the Sensient impact, which If we have and we will probably have a little bit more in the second half when it comes to the purchase price allocation. So it's Excluded from the margins guidance, we are focusing on operational activities. Cyberattack, you're right, we had some extra cost Probably in the high single digit area, And we expect some insurance reimbursement in connection in the second half of this year. And to your 3rd question, the vanilla environment It's fully reflected already in our financial statements. So everything is in the books When it comes to the current price situation. So nothing to be considered. Understood. I wasn't. I wasn't. Just a clarification, the line wasn't too good at the very beginning. So the one off you booked In H1, this is included in the guidance or is it not? The Guidance of 21%, above 21% excludes the Sensient impact. We are focusing on Operations when it comes to our margin guidance. Perfectly clear. Thank you so much. Welcome. We'll now move on to our next Question over the phone, which comes from Isha Sharma from Stifel. Please go ahead. Your line is open. Hi, good morning both. Thank you for taking my questions. I just have 2, please. We know for a fact that there was a surge in pet demand driven by the global lockdowns. How do you expect the market to develop in the coming years? And what is the more reasonable assumption of growth in the midterm, please? The second is on Sensient, could you remind us of the synergies that you expect from the business and timeline for realizing these synergies and potentially uplifting the EBITDA margin From the very low level where it is right now. Okay, Isha. I'll happily take the question. So first, growth of Pinnova, yes, was also Pet, yes, was impacted by the lockdown, but nothing major, I have to say. And Pet was strong performing before and is Doing it now and is to just a minimal effect benefiting or affected from anything. So That is a very stable organization. Nothing which we're concerned about. It feels like right in the same That bracket which we have said about the opening of the China factory, I think all confidence we can have is in this Pet Division? And Micha, on the midterm, which you actually also need to know, we see that above Average from a group perspective, clearly, it continues high single or even double digit in our forecast. Yes. Not even midterm, I would say long term. There's no change to be visible in this trend. So nothing to be concerned. Sensient, yes. We believe we made the right decision buying this business. We have realized that some major competitors have started to copy our move going in sustainable Sourced raw materials for fragrance ingredients, in particular from pine Needles, you just saw Givaudan has formed a joint venture with Privy. It's a similar direction Before Firmenich has acquired DRT, so they are in the similar direction. It obviously shows that our Pinnova acquisition was the right move. And in the same direction is Sensient. So I should expect the margin to be where the rest of the business is In less than 3 years. So as we already have completed half year, 2.5 years to be precise, okay? Perfect. Thank you. Thanks for that. You're welcome. Well, this was fast and efficient. Thank you very much. This brings us to the end of our conference call. Thank you very much for your time and your interest in Symrise. We are looking forward to seeing you in the upcoming virtual conferences and roadshows. And above all, we hope to see you in person soon. We will publish our trading update for the 9 months Q3 on October 26. That's it for today. Goodbye. Have a nice day and a great summer break. Thank you very much. Thank you to our speakers. Ladies and gentlemen, this does conclude today's call. Thank you very much for your participation. You may now disconnect.