Chr. Hansen Full Year Results In Line With Expectations, Reports 8% Organic Growth

22 Oct 2014 --- After solid growth in the fourth quarter Chr. Hansen announces strong full-year results that match the expectations for the year. Revenue of EUR756 million, compared to EUR738 million in 2012/13, with organic growth of 8%. Fourth quarter 2013/14 results had revenue of EUR205 million, up 6% on Q4 2012/13, with organic growth 8%.

For 2014/15, the company expects organic revenue growth of 7-9% and an EBIT margin before special items is expected to be above 26.5%. Research & development expenditures incurred (% of revenue): 7-8%.

“Chr. Hansen continues to deliver solid growth and strong margins. In 2013/14, organic growth was 8%, while the EBIT margin before special items ended at 27.1%. The Cultures & Enzymes Division and the Health & Nutrition Division delivered solid organic growth of 8% and 15% respectively, while the Natural Colors Division delivered organic growth of 2% excluding carmine price effect.”

“The implementation of our Nature’s No. 1 strategy saw good progress during 2013/14 and we will take this further in 2014/15, with increasing investment in our new strategic initiatives for biological plant protection and the establishment of a dedicated sales and application organization in the Natural Colors Division,” says CEO Cees de Jong.

In both the Cultures & Enzymes Division and the Health & Nutrition Division, organic growth is expected to be in line with the long term ambitions for each division In the Natural Colors Division, organic growth is expected to be 5-10%, with conversion from synthetic to natural solutions in the US expected to be slow Research & development expenditures incurred are expected to be 7-8% of revenue, due mainly to higher activity in strategic initiatives. The EBIT margin before special items is expected to be above 26.5%. In the Cultures & Enzymes Division, the EBIT margin is expected to be at the same level as in 2013/14, with a positive impact from implementation of new fermentation capacity toward the end of the year In the Health & Nutrition Division, the EBIT margin is expected to be below that of 2013/14 as increased activity for strategic initiatives, primarily within biological plant protection, will impact margins negatively In the Natural Colors Division, the EBIT margin is expected to be at or below that of 2013/14, as the creation of a dedicated sales and application organization integrated in the Natural Colors Division is expected to impact margins negatively Free cash flow before acquisitions, divestments and special items is expected to be above EUR130 million.

Revenue increased by 3% to EUR464 million, corresponding to organic growth of 8%. The organic growth was mainly driven by strong growth in cultures for fermented milk and meat. There was also good growth in cultures for cheese and enzyme sales, while revenue from probiotic cultures was lower than in 2012/13. Growth in cultures for fermented milk and cheese was driven by fundamental market growth, product innovation, conversion to DVS solutions and pricing. The decline in revenue from probiotic cultures in EMEA and the Americas was partly offset by good growth in APAC. Conversion to CHYMAX M was the main contributor to the good growth in enzymes. Growth in meat cultures was driven by bioprotective cultures for enhanced quality and safety of meat products. Cultures for wine realized solid growth, partly due to an early wine season in Europe in 2014.

EBIT amounted to EUR140 million, up EUR7 million, or 5%, on 2012/13, the prior year being negatively affected by impairments of EUR4 million. The EBIT margin was 30.2%, down 0.2 percentage point on the EBIT margin before impairments in 2012/13, due to a negative impact of 0.6 percentage point from reassessed capitalization of development expenditures.

Chr. Hansen is the leading producer of probiotics for human and animal health. The Health & Nutrition Division supplies products and solutions for the dietary supplement, overthecounter pharmaceutical, infant formula and animal feed industries. The key offering is probiotic cultures with a documented health effect. In addition to its existing business, Chr. Hansen is looking to develop microbial solutions to address attractive new growth opportunities within plant protection (medium term) and second generation human health solutions (longer term).

General market conditions for human probiotic dietary supplements remained favorable in 2013/14 with increased penetration of probiotic solutions in the overall dietary supplements market, primarily in North America and key markets in Asia. Chr. Hansen continuously invests in providing clinical evidence of the health benefits of probiotic strains to retain and attract customers, and as a market leader Chr. Hansen has some of the best documented strains in its product portfolio. During 2013/14, Chr. Hansen obtained approval for a health claim from the South Korean Ministry of Food & Drug Safety for Urex, a dietary supplement that can help maintain a normal vaginal microbiota.

With a growing world population, there is an ever greater need to increase productivity in the agricultural industry. Chr. Hansen’s probiotic concepts for animal feed help farmers address this challenge. The market for animal probiotics in the livestock industry expanded in 2013/14, primarily through increased market penetration in swine and cattle. The market for silage inoculants also expanded as farmers are looking for efficiency gains from their forage.

The global agriculture sector is facing a massive productivity challenge in the years ahead, and biological solutions are becoming an ever more important way to address this challenge, although still a very small part of the total market for biologicals and chemicals. In collaboration with FMC Corporation, a new product, Nemix C, was launched in late 2013 targeting the Brazilian sugarcane market. Nemix C increases growth and yield through enhanced root development and protection and is a purely biological product. In October 2013 Chr. Hansen further developed the collaboration with FMC by entering into a strategic alliance covering development and commercialization of biological products as part of the strategic initiative to develop opportunities in plant protection.

During 2013/14, the alliance conducted a significant number of trials aiming at new crops, new geographies and new products, all within plant protection. Human microbiome Understanding of the human microbiome and its impact on wellbeing has increased rapidly in recent years, and as part of the Nature’s No. 1 strategy Chr. Hansen has started to explore the opportunities within nextgeneration probiotics and is seeking to increase collaboration with international research institutions and major pharmaceutical and consumer health companies. In 2013/14, an Australian study of 1,100 premature infants showed that the risk of developing necrotizing enterocolitis (tissue death in the intestine, which affects mainly premature infants and may cause fatal complications) could be reduced by more than 50% by feeding the infants with a probiotic mixture consisting of Chr. Hansen’s probiotic strains BB12, TH4 and BB02. To support further exploration of opportunities such as these, an external scientific advisory board has been established, and a dedicated state of the art innovation center is currently under construction.

Revenue increased by 11% to EUR134 million, corresponding to organic growth of 15%. Human health products realized strong growth across all regions. Animal health products also showed strong growth, driven primarily by increased penetration in the Americas region within the silage, swine and cattle segments. EBIT amounted to EUR44 million, up EUR6 million, or 16%, on 2012/13, the prior year being negatively affected by impairments of EUR4 million. EBIT was negatively impacted by reassessed capitalization of development costs and by exchange rate effects. The timing of initiatives, especially new strategic initiatives in biological plant protection and the human microbiome, kept research & development expenditures compared to revenue at the same level as in 2012/13. The EBIT margin before impairments was 33.2%, down 1.4 percentage points on 2012/13, due to a negative impact of 2.7 percentage points from reassessed capitalization of development expenditures and a changed product mix in human health as a result of strong growth in consumer unit products.

The return on invested capital excluding goodwill was 42.7%, compared to 36.7% in 2012/13. Invested capital excluding goodwill decreased by EUR4 million, or 4%, to EUR101 million, due mainly to a reduction in intangible assets.

The Natural Colors Division supplies natural color solutions for the food industry, in particular the beverage, confectionery, ice cream, dairy, fruit preparation and prepared food segments. The colors are extracted from a wide range of natural sources, such as berries, roots and seeds, and Chr. Hansen masters a number of encapsulation techniques that help stabilize the appearance of colors in various food applications. In recent years, consumer demand for more natural products has increased. Chr. Hansen is well positioned to capture these opportunities by providing improved cost in use solutions, addressing the significant potential in emerging markets and developing an enhanced product offering. In addition, work continues on new transformational technology, such as a fermented carmine solution.

The increased consumer demand for natural and “clean label” products, combined with stricter regulation on the use of synthetic solutions in food and beverages, especially in the EU, has led to a conversion from synthetic to natural colors and coloring foodstuff products. While the demand for natural colors remained strong in the EMEA and APAC regions, conversion in the US market was very slow during 2013/14, affecting growth in the market for natural colors and coloring foodstuffs in the Americas region negatively.

Chr. Hansen established a number of strategic partnerships with suppliers in 2013/14 to ensure lower cost in use solutions for natural colors and less fluctuation in raw material prices. Minimizing price volatility, reducing the cost difference versus synthetic colors and ensuring sustainable sourcing are key focus areas to drive further conversion to natural colors in the food & beverage industry.

Chr. Hansen created value for its customers in 2013/14 through innovative solutions to increase the stability and costinuse effectiveness of natural colors, including: WhiteWhey for reduced color transfer from cheesemaking into whey products, allowing manufacturers of Cheddar and Gouda cheese to enhance the value of whey products DairyMax Red 144 WSS for fruitonthebottom yogurts New generation of encapsulation technology for beverages with significant costinuse reduction Expanding the FruitMax platform for coloring foodstuffs and ensuring full compliance with new EFSA guidance.

To strengthen the commercial focus on capturing the growth opportunities in natural colors, a dedicated sales and application organization has been established by integrating resources previously shared with the Cultures & Enzymes Division into the Natural Colors Division. The new organization will ensure a stronger focus on execution in the color segments, a more agile decision making process and a fully integrated value chain, supporting our ambition to create further value and ensure a return to strong growth in the Natural Colors Division.

Revenue decreased by 5% to EUR158 million, corresponding to organic growth of 1% (2% excluding the negative effect from changes in carmine prices). The loss of a customer in South America in Q4 2012/13 affected organic growth negatively by 6 percentage points. EMEA delivered solid growth, while APAC showed good growth despite sales in China still being below ambition, although improving. Revenue in the Americas declined due to the impact from the lost customer and slow conversion in the US.

EBIT amounted to EUR21 million, down EUR1 million, or 5%, on 2012/13. The EBIT margin was unchanged from 2012/13 at 13.0%. Higher activity levels in research & development impacted the margin negatively by 0.4 percentage point. ROIC The return on invested capital was 26.2%, compared to 29.5% in 2012/13. Invested capital increased by EUR10 million, or 14%, to EUR84 million.

Revenue amounted to EUR756 million, up EUR18 million, or 2%, on 2012/13. Organic growth came to 8%. Revenue was negatively affected by exchange rate effects, primarily related to BRL, USD and AUD. The Cultures & Enzymes Division accounted for 61% of revenue (61% in 2012/13), the Health & Nutrition Division 18% (16% in 2012/13) and the Natural Colors Division 21% (23% in 2012/13).

Gross profit was EUR391 million, up 2% on 2012/13. The gross margin decreased by 0.4 percentage point to 51.7%, primarily due to a negative effect from bottlenecks in production processes in connection with the expansion of fermentation capacity for cultures and a changed product mix in the Health & Nutrition Division as a result of strong growth in consumer unit products.

Operating expenses totaled EUR187 million, compared to EUR192 million in 2012/13, the prior year being impacted by impairment charges of EUR8 million. Adjusted for impairments, operating expenses increased by 1%. A lower level of capitalization of development costs was offset by strong cost focus and scalability effects.

Research & development expenses including amortization but before impairments increased by 24% to EUR43 million, compared to EUR35 million in 2012/13. Capitalized development costs were EUR9 million, down EUR6 million on 2012/13, primarily as a result of reassessed capitalization of development expenditures. Total research & development expenditures incurred amounted to EUR47 million, or 6.1% of revenue, compared to EUR45 million or 6.1% in 2012/13. A later than expected timing of initiatives, especially within biological plant protection, kept research & development expenditures unchanged from 2012/13. Sales & marketing expenses amounted to EUR93 million, or 12.2% of revenue, compared to EUR96 million or 13.0% in 2012/13. Administrative expenses and other operating income/expenses amounted to EUR51 million, or 6.7% of revenue, compared to EUR53 million or 7.2% in 2012/13.