Givaudan 2018 net income falls but full-year sales increase 5.6 percent, Naturex integration on target

28 Jan 2019 --- Flavor and fragrance giant Givaudan has posted its full-year results with sales of CHF 5.5 billion (US$5.54 billion), up 5.6 percent on the previous year. Net income decreased to CHF 663 million (US$668 million) in 2018 from CHF 720 million (US$725 million) in 2017. This results in a net profit margin of 12 percent, versus 14 percent in 2017. Financing costs in 2018 were CHF 55 million (US$55.4 million) versus CHF 42 million (US$42.3 million) in 2017, largely related to the increase in the net debt of the group in connection with the Naturex acquisition.

Givaudan says it completed the year with good business momentum and with the project pipeline “being sustained at high levels” as growth was achieved across all product segments and geographies, with key strategic focus areas on naturals, health and well-being.

Flavor Division sales were CHF 3,002 million, an increase of 4.6 percent on a like-for-like basis. Fragrance Division sales were CHF 2,525 million, an increase of 7 percent on a like-for-like basis and 8 percent in Swiss francs. 

The sales performance was reportedly driven by new wins and strong business momentum across all regions. The key strategic focus areas of the 2020 strategy, namely Health and Well-Being and Naturals grew at double-digit and high single-digit levels respectively.

From a segment perspective, Beverages, Dairy, Sweet Goods and Snacks were the main contributors to the Flavor division growth, says Givaudan.

The global flavor house, which marked its 250th-anniversary last year continues to implement price increases in collaboration with its customers to fully compensate for the increase in input costs. 

In September 2018, Givaudan completed the acquisition of Naturex, following the implementation of a squeeze-out procedure and the delisting of Naturex shares. The deal valued the French-headquartered supplier at around €1.3 billion (US$1.61 billion), or a roughly 42 percent premium over its market capitalization before it was announced at the beginning of 2018.

Naturex is a leader in plant extraction and the development of natural ingredients and solutions for the global food, health and beauty sectors. In 2018, Naturex contributed CHF 150 million (US$151 million) of sales, CHF 146 million (US$147 million) in the Flavour Division and CHF 4 million (US$4 million) in the Fragrance Division. Givaudan aims to achieve sales growth of the Naturex portfolio of 10 percent per annum from 2021 and at the same time return the profitability and other key financial indicators of the combined business to pre-acquisition levels by 2021 for the Flavor Division.

“Our strong performance in 2018 demonstrates our continued ability to deliver on our short term objectives, while at the same time investing for the long-term future success of our business,” says CEO Gilles Andrier. 

“I am very pleased with the results we have achieved in 2018 and with the significant progress that we have made towards our strategic objectives under the 2020 strategy,” he adds.

Speaking about the expectations of Naturex, Andrier notes: “We expect that the sales of Naturex will be at around 10 percent growth by 2021, which is very consistent with our growth in naturals today. And, we expect the Naturex business to be back to, what we'll call, pre-acquisitions for the Flavours division by 2021. And in addition to that, we would also expect to be – the Naturex business to be in line with our – the financial matrices or metrics. So that includes working capital as a percentage of sales, the impact on the tax rate etc.”

The gross profit increased by 3.5 percent from CHF 2,250 million in 2017 to CHF 2,329 million in 2018. Despite continued productivity gains and cost discipline, the gross margin declined to 42 percent in 2018 compared to 45 percent in 2017, as a result of the lower gross margin in the Fragrance Division, which was impacted by a sharp and broad-based increase in raw material costs.

The EBITDA was CHF 1,145 million in 2018 compared to CHF 1,089 million in 2017, an increase of 5.2 percent in Swiss francs and 4.3 percent in local currency. The EBITDA margin was 20.7 percent in 2018 compared to 21.6 percent in 2017. On a comparable basis, the EBITDA margin was 21 percent in 2018 compared to 23 percent in 2017.

The operating income was CHF 883 million (US$889 million) compared to CHF 869 million (US$875 million), an increase of 1.7 percent versus 2017. When measured in local currency terms, the operating income increased by 0.1 percent. The operating margin was 16 percent in 2018 compared to 17.2 percent in 2017.

Financial performance
Financing costs in 2018 were CHF 55 million versus CHF 42 million in 2017, largely related to the increase in the net debt of the Group in connection with the Naturex acquisition. Other financial expense, net of income, was CHF 56 million in 2018 compared with CHF 32 million in 2017, mainly as a result of increased foreign currency losses in markets where currencies could not be hedged, most notably in Argentina.

The income tax expense as a percentage of income before taxes was 14 percent, compared to 9 percent in 2017, which was impacted by lower tax expenses in the US. Excluding items of a non- recurring nature, the income tax expense as a percentage of income before taxes for 2017 was 15 percent.

Givaudan also reports that working capital was 26.3 percent of sales compared to 24.5 percent in 2017, mainly as a result of the higher inventory levels in Naturex.

Total net investments in property, plant and equipment were CHF 129 million (US$130 million), compared to CHF 189 million (US$190 million) in 2017. During 2018, the group continued its investment program to support growth in high growth markets, most notably with investments in India, Singapore and China. 

The group completed an agreement to sell and leaseback the Zurich Innovation Center for a total consideration of CHF 173 million (US$174 million), of which CHF 100 million (US$100.7 million) has been received in 2018, with the balance to be received in 2019.

Dividend proposal and outlook 
At the Annual General Meeting on March 28, 2019, Givaudan’s Board of Directors will propose a cash dividend of CHF 60.00 (US$60.46) per share for the financial year (2018), an increase of 3.4 percent versus 2017. This is the eighteenth consecutive dividend increase following Givaudan’s listing at the Swiss stock exchange in 2000.

The company maintains that its 2020 ambition is to create further value through profitable, responsible growth. Building on the first two years of this strategic cycle in 2016 and 2017, Givaudan’s 2020 ambition is built on the three strategic pillars of “growing with customers,” “delivering with excellence” and “partnering for shared success.” 

As part of the company’s 2020 strategy, Givaudan also seeks to create value through targeted acquisitions which complement existing capabilities in providing winning solutions for its customers. 

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