Givaudan S.A.

Ladies and gentlemen, welcome to the Givaudan 2022 half-year results conference call and live webcast. I am Alice, the Chorus Call Operator. I would like to remind you that all participants will be listed in only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and 1 on your telephone. For operator assistance, please press star and 0. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Gilles Landrier, CEO. Please go ahead, sir.

Thank you. Ladies and gentlemen, welcome to our 2022 half-year results conference call. I will be on this call with Tom Hallam, our CFO. We will take you through the presentation before answering your questions at the end. The company news on our half-year results 2022 was published on our website this morning. This is where you will also find the slides for today's presentation. Along with the media release, you will find our 2022 half-year report on our website. I'd like now to start going through the presentation. I invite you to turn to slide number four to go through our performance highlights. So I'm very happy to share you With you, an excellent sales growth and a solid financial performance for the first half of 2022 in a highly challenging environment, to say the least. Once more, forecasts for 2022 were certainly difficult to make at the start of the year, notably due to tough comparables of 2021. COVID-related concerns slowly phasing down, continuous challenges with our supply chains, And then to add to the list, new geopolitical and economic uncertainties emerged at the early stage of the year, making our environment even more difficult to predict and to operate in. Our results for this first half demonstrate again the resilience of our business, supported by our natural hedges, be it in product categories, in types of customers, or through the balanced geographic footprint, and thanks again as well to the unique quality of our organization and the dedication of our employees, whom I'd like to warmly thank. Our sales continued to benefit from a robust demand. Overall, volumes improving further in the second quarter across all categories, and especially the ones which had already strongly rebounded last year, notably fine fragrances. These results were especially good in the strategic product categories we have chosen for the coming five years. Confirming our 2025 strategy makes perfect sense, and to name a few of those categories, health and well-being, naturals, alternative proteins, active beauty, similar to our strategic focus areas in terms of customers and geographies, local and regional clients have continued to outperform and now account for 56% of our group sales I'm equally glad to report that high-growth markets have gathered pace notably in the second quarter and outperformed again mature markets. We have made as well an excellent progress with the integration of our recent acquisitions over the last month, albeit at a slow pace in order to focus the organization's attention on protecting the present customer satisfaction in a very tense supply chain environment. In the first half of 2022, we reached sales of 3.6 billion Swiss francs, a growth of 6.2% on a like-for-like basis and 8.3% in Swiss francs. This was achieved across all markets, segments and customer categories, despite high comparables in 2021, supported notably by a balanced growth between mature markets which are up 5.4% and high-growth markets, which are up 7.4%, local and regional clients, which have been growing double the pace of global customers, and our key strategic product categories, which are already named. Our pricing actions to recover the absolute amount of input cost inflation are well underway with close to 40% of our 6.2% like-for-like growth being pricing, versus 60% volume growth in the first half overall. As I said earlier, fine fragrances continue to grow despite high comparables, largely supported by the upturn in travel retained and the continuous strong momentum of e-commerce. The other part of COVID impacted business. Food service, thanks to a good growth, is now almost fully back to the pre-pandemic level. We achieved a comparable EBITDA of 820 million CHF. It represents an underlying EBITDA margin of 22.5% compared to 24.2% in the first half of 2021. Free cash flow was minus 147 million CHF, representing a minus 4% of ourselves, driven by the higher working capital requirements, notably inventories, and higher investments compared to 2021. I'm really pleased with the solid performance of our business with all parts contributing to these excellent financial results. We have shown our resilience, our focus on supporting our customers and our ability to capture opportunities. Let's now turn to slide five. On a life-or-life basis, our fragrance and beauty division grew 4.7% and our taste and well-being division grew 7.6% versus the same period of 2021. As I mentioned earlier, this performance was driven by further strength in fine fragrances, continued recovery in food service, as well as a good growth in most other categories despite the tough first half 2021 comparables. Once again, all our strategic focus areas, complemented by acquisitions, have contributed to our growth, namely health and wellness, naturals, local and regional customers, outperforming sales with our multinational customers, which also, though, showed a very good momentum. Finally, as I mentioned earlier, these numbers include a pricing element, reflecting the ongoing recovery of our inputs cost inflation, Which brings me to say that thanks to the collaboration with our customers, we are fully completed with our pricing actions to fully recover over a period of 18 months those additional input costs by June 2023, as promised and guided for at the beginning of this year. Let's turn now to slide six. In the first half of 2022, high growth markets delivered a 7.4% growth gathering pace notably in the second quarter after a relatively slow start in 2022. This was achieved despite the pandemic still disrupting parts of both Southeast Asia and China. Despite high comparables in 2021, Latin America kept performing well, the Middle East contributed with strong growth levels as well, and Asia-Pacific remains a mixed bag with below the below the usual average growth rate. In mature markets, we grew a healthy 5.4%. The strong demand in fine fragrances and the further recovery of food service fueled the strong recovery in Europe, as the economy there reopened later than most of the regions in the last few months. North America reported a slight decline in sales due to the combination of high comparables and the supply chain ongoing challenges throughout the first half of this year. The markets of Asia, notably Japan and Australia, remain affected by the pandemic. Our presence in high-growth markets has always been a key driver for our growth and continues to be one of our key strategies for 2025. Structural demographic trends, the ever-growing middle class, and the strong urbanization trends will continue to support the growth of these markets, especially in Asia, where urbanization and the middle class are still below average. Our market position and our operations footprint give us a unique exposure to these high-growth markets in which we continue to invest, both with additional talent and new facilities to service the wide diversity of our clients. However, we have seen in the past months how critical our geographical balance is, creating natural hedges against a crisis or economic downturns, where the timing or the intensity of the recovery can be very different across geographies as seen over the last few quarters. Please now turn to slide seven. I'd like to highlight the sales development by region for the group. As you can see, EMEA, Europe, Middle East, and Africa has delivered a very strong growth followed by Latin America. EME grew a record 13.7%, supported by the strong recovery of most product segments. It's also worth mentioning that the Middle East has also enjoyed a very high growth rate within the region. Sales in Latin America continue to perform well despite high comparables, with a growth rate of 9%, driven mainly by Argentina, Mexico, and Chile. The growth in Asia-Pacific was 2.7% with flat growth in China against the very high double-digit growth rate in 2021 in China, high single-digit growth in some major markets including India and Indonesia, and more subdued growth in other parts of Southeast Asia, notably Vietnam, Thailand, and the Philippines, and then the mature markets like Japan and the Pacific area. Finally, North America grew a negative 1.5% like for likes against the high comparables of the first half of 2021, which experienced a strong and early rebound of the economy and consumer demand, but equally some supply chain challenges still ongoing in 2022. Let's turn now to slide 8. The fragrance division grew 4.7% on the like-for-like basis against the strong comparable growth of 10.1% in 2021 and a growth of 5.3% in Swiss francs for the first half of 2022. The good growth was driven by the double-digit growth in fine fragrances and in fragrance ingredients, and consumer products returned to growth in the second quarter. Fine fragrances sales increased by 17.9% on a like-for-like basis, already against a very strong first half in 2021, where sales in fine fragrances increased by 34.5%. Therefore, the CAGR over three years for the six-month period is 10.2%. This performance is driven by new business wins, notably in the prestige segment. Consumer product sales increased by 0.4% on a like-for-like basis against a prior year comparable of 4.1%. On a three-year basis, the six-month cargo amount to 5.1%. This performance was driven by local and regional clients. Sales of fragrance ingredients and active beauty grew by 8% on a like-for-like basis against a high sales growth of 14.4% in the prior year, particularly in active beauty. The performance in the first half of 2022 reflects the continued strong demand for fragrance ingredients and premium actives in active beauty. Now let's turn to the next slide, number 9. Taste and well-being sales were 2 billion Swiss francs, an increase of 7.6% on a like-for-like basis, and an increase of 10.9% in Swiss francs. Whilst the sales performance was still affected by the impact of the COVID-19 pandemic across many countries, as well as supply chain challenges, a very good business momentum was seen and maintained across all regions. On a regional basis, sales were driven by Europe, Samaria, and Latin America. In Europe, sales increased by 14%. In South Asia, Africa, and the Middle East, sales increased by 16.9%. In Latin America, sales increased by 17.1%. And in Asia Pacific, sales increased by 5.1%. In North America, sales decreased by 0.9% on a like-for-like basis against a relatively high comparable of 6.1% a year ago. The food service segment continued to experiment a strong recovery and is now almost back to pre-COVID levels, therefore the 19 levels. In the key strategic focus area, sales increased double-digit in plant-based proteins, health and wellness, and a very solid single-digit growth in naturals. Finally, from a segment perspective, the positive sales performance was mainly driven in beverages, sweets, and snacks. With this, I'd like to hand over now to Tom, who will give you more granularity on our financial performance. Tom, over to you.

Thank you very much, Gilles. I would also like to welcome you all to our conference call. As always, Gilles is taking you through the main business performance of the group. and also the market and the regional development. On the following slides, I would like to focus on the group's operating performance and those of the two divisions. Let's start with the performance highlights on slide 11. So, as Gilles mentioned, the group sales for the first half of 2022 were over 3.6 billion Swiss francs, an increase of 6.2 percent on a like-for-like basis, which excludes the impact of acquisitions as well as any currency impact. In Swiss francs, sales increased by 8.3%. The reported EBITDA increased to 816 million Swiss francs compared to 809 million Swiss francs in 2021, and the underlying EBITDA margin was strong at 22.5%. despite higher input costs and inbound supply chain disruptions. Net income was 440 million Swiss francs, or 12.1% of sales, and as Gilles mentioned, free cash flow as a percentage of sales was minus 4%, mostly driven by higher working capital requirements to support our supply chain and our customers in an extremely challenging operating environment. Net debt to EBTDA was 3.45 times compared to 2.97 at the end of 2021. In the following slides, we will cover the group's performance in further detail, as well as the operating performance of both divisions. If we turn to slide 12, we can look at the exchange rate development. The global political environment and the economic uncertainties causes Swiss franc to fluctuate against some of the major currencies in which the group operates, particularly during the first few months of the year. This had a significant impact on other operating expenses, which I'll comment on later. However, our operational and geographical spread has offset the up and down currency fluctuations and therefore continues to provide good natural hedges, which protects our EBITDA margin. Please turn to slide 13, which shows the group operating performance. In 2022, the group's gross margin decreased due to the gross margin dilution effect of the pricing actions, as well as the impact of higher raw materials energy, and freight costs. This resulted in a gross margin of 40% in 2022, compared to 43.9% in 2021. As I mentioned, the EBTDA increased to 816 million Swiss francs in the first six months of this year. In the period, the group incurred 4 million Swiss francs related to acquisition and restructuring costs, compared to 7 million Swiss francs in the previous period. On an eBTDA level, we continue to maintain a tight cost control on operating expenses, which partially absorbed the impact of the lower gross margin. This resulted in an underlying eBTDA margin of 22.5% compared to 24.2% in 2021. On the next two slides, I'd like to spend a moment on the operating performance of our two divisions, starting with fragrance and beauty. Fragrance and beauty sales increased by 4.7% on a like-for-like basis. and 5.3% in Swiss francs to 1.6 billion Swiss francs. The division recorded 362 million Swiss francs of eBTDA in the first six months of the year compared to 375 million Swiss francs in 2021. The eBTDA margin was 22% on a reported basis and 22.2% on an underlying basis. As commented by Gilles, the sales growth was driven by a strong volume increase in fine fragrance, as well as double-digit growth in fragrance ingredients. The margins, however, have been impacted by higher cost imports seen in the first half of 2022. If you now turn to slide 15, we will continue with taste and well-being. The Taste and Wellbeing Division recorded a high sales increase of 7.6% on a like-for-like basis and 10.9% in Swiss francs. The sales increased to over 2 billion Swiss francs for the first time and in the first half of this year. The reported EBTDA increased to 454 million Swiss francs from 434 million Swiss francs last year, as a result of strong cost discipline to offset the inflation of high raw materials and higher expenses due to supply chain issues. The reported EBITDA margin was 22.6%, and the underlying EBITDA margin was 22.7%. The income before tax decreased to 512 million Swiss francs from 566 million Swiss francs in 2021, caused by higher non-operating expenses compared to the prior year, namely 119 million Swiss francs in 2022 compared to 47 million Swiss francs in 2021. Although financing costs remain stable, The group incurred higher realized and unrealized losses on FX derivatives given the volatility of currencies and interest rates, particularly in the first few months of the year. In addition, there was a 50 million Swiss franc non-cash swing in the value of the company's financial assets. The net income was 440 million Swiss francs or 12.1% of sales. The group's effective tax rate decreased to 14% in 2022 compared to 15% in June 2021. Basic EPS was 47.74 Swiss francs in 2022 compared to 52.19 Swiss francs in the first semester of 2021. Please turn to the next slide for the cash flow performance. During the first half of 2022, Givaudan had a negative free cash flow of 147 million Swiss francs or minus 4.4% of sales compared to 5.5% of sales in 2021. The operating cash flow for the first six months of the year was 131 million Swiss francs compared to 415 million Swiss francs in 2021. The decrease in the operating cash flow is mostly driven by the higher cash investment in working capital, driven by the need to manage the inbound supply chain disruptions that the group has been facing in order to continue to deliver and satisfy to a high level the needs of our customers. The group also continued its investments to support the growth in all markets. As such, total net investments were 164 million Swiss francs in the first half of the year, and as a percentage of sales were 4.5% in 2022, compared to 3.6% in 2021. Working capital increased to 29.6% of sales compared to 28.3% in 2021 with higher accounts receivable and higher inventory levels related to the good sales growth and the supply chain challenges that I have already mentioned. Please turn to slide 18 to look at the amortization of intangible assets. At the end of 2021, we showed you the forecasted amortization of intangibles. The projection has now been updated as we've completed the purchase price allocation for the two last acquisitions we made in 2021, notably Custom Essence and DDW. And this table gives you a perspective of the future expected amortization. Please turn to slide 19, where we will cover the debt profile of the group. The group continues to have a well-balanced debt profile with a weighted average effective interest rate of 1.34%, which is a slight decrease from last year. Furthermore, on this slide, you will find the maturities of our debt profile, as well as the respective average interest rates for each debt maturity. In June 2022, the group refinanced its multi-bank committed credit facility for an amount of 1.25 billion Swiss francs for a period of five years with two-year extension options and the possibility to upsize the facility during its term. This renewed facility is also the first financing event completed under the group's sustainable linked financing framework. Net debt compared to EBTDA was 3.4 times compared to 2.9 times in December 2021 and 3.16 times in June 2021. With this, I would like to conclude my part of the presentation and hand back to Gilles.