Symrise AG (SY1) Earnings Call Transcript & Summary

Thank you very much, Betsy. Good evening to everybody, and welcome to our forecast update call 2023, spontaneously invited half an hour ago. As you are aware, we just published an update on the sales and profitability development. And in addition to the required publication, which we just did, we would like to share some more information with you in this call. Joining me on the call today are our CEO, Heinz-Jurgen Bertram; and our CFO, Olaf Klinger. Heinz-Jurgen will give you a brief overview before we are open for your questions. Heinz-Jurgen, you may begin.

Thanks Tobias for the introduction. Yes. And thanks for all of you dialing in, and we have thought on how we go about the things and following up our Capital Markets Day, we have decided this year to keep you in the loop on how things are going. So today, as you saw in the press release, we have good and not so good news to share with you, but pretty much everything in line with what we shared with you during the Capital Markets Day. Starting with a positive thing. Symrise has a strong business momentum, which is ongoing. Actually, our growth is above the expectations and pretty much that is what we shared with you during the Capital Markets Day, that we have no growth problem. And going forward, we expect that to continue. On the other side, we already shared with you on the Capital Markets Day that profitability, we see room for improvement and that we are focusing on that. In line with that is we were having the ambition to go for 20% EBITDA. With the latest developments, we see that is too ambitious and that we have to carefully correct it a bit, and that's what we did with this today. As a few issues came in very unexpected. Just to mention 1 thing is the Argentinian currency, which just came in 2 days ago and where Olaf and myself, we were sitting together that we better bring our friends and analysts, everyone following us in the loop. We want to do things better than last year where we waited very long to bring you in the loop. Having said that, the results which we shared with you today are pretty much in line with the message which we had shared with you during the Capital Markets Day. And this here is to just keep you in the loop. Having said that, you all have read the short press release. And if you have any questions, so feel free to ask them, Olaf is with me in this call, and we're ready to take them. Having said that, to be as, I think that's enough for the moment.

Very good. Thank you very much, Heinz-Jurgen. Yes, let's start the Q&A, Betsy. Maybe you can take over and help us with that.

[Operator Instructions] And the first question comes from Matthew with Bank of America.

I guess to the extent, Olaf, maybe you can, can we start with quantifying the revaluation of inventory. You mentioned it in the press release. Maybe if you give us a number that would help us calibrate exactly how much of the margin guide specifically relates to what you may consider to be a onetime effect? But -- I'll let you comment on that. And then can I just -- maybe it's my own misunderstanding. I'm struggling with the contradiction in the way it's working. You're saying on the one hand, you've had a delayed reduction in inventory. But at the same time, you're talking about generally healthy demand. So I'm struggling to understand what the exact message on volumes there is. Does it relate to a specific area of the portfolio where you've got an excess of inventory and you're not seeing the demand recovery?

I can help you there in this. Okay. Matthew, if I -- let me start with the contradiction. Some of it is, in particular, in the chemical section where we start to ramp up our plans. But as we said, it is taking a while to get the inventory off the table and off it. So there is a delay in there. The rest of the business is very healthy. And when we later during the call talk on the business momentum in different business segments, we may shed some more light to it. But it's mostly related to that and the consequence of 1 year plant being down, okay? Olaf, over to you with the rest of the inventory.

Yes, specifically on the inventories, EUR 8 million to EUR 10 million just in November related to this and had an impact on the picture, definitely, which was okay until the end of October. November was specific with a lot of single items, I would say, inventories were sticking out a little bit on both sides. We have still a tough chemicals environment to deal with, and there are chemical prices coming down. And here and there, we need to take some adjustments. And on the TNH side, also on the egg and the chicken side, we have certain adjustments to be made, partly due to quality, partly due to overstocking. So that's what we did. And the other piece is what Heinz-Jurgen referred to already is the FX development currently is going against us, and that has an impact also on EBITDA. Just recently, the Argentinian environment, which goes into this with EUR 4 million to EUR 5 million on an EBITDA level only. So these are the impacts which at the end of the day, triggered this based on the November picture, which was a weak month for Symrise. And therefore, we wanted to be very clear and fair also that we cannot live up to our around 20% EBITDA margin guidance this year. So some items we mentioned, which triggered that.

The next question comes from Nicola Tang with BNP Paribas.

Firstly, in terms of EBITDA margin and thinking about the moving parts into 2024, you reiterate your midterm sort of ambition to get to 22 to 23 -- sorry, 20% to 23%. Can you talk a little bit about or help us a little bit in terms of your expectations for 2024? And then the second question, you talked about greater than 7% organic growth for the year. Could you help us with the split between volume and price and perhaps talk a little bit about the sequential volume momentum that you've seen in Q4?

Nicola, let me start with a more qualitative stuff and Olaf, if he wants to give you some numbers. But first, the EBITDA margin for '24, giving you a guidance now. That is too early. We're going to give you a guidance. That's what the typical procedure is, in the first quarter in March, you're going to get a guidance. But we confirm our midterm guidance, which we have handed out for top line growth and bottom line. Nothing has changed there. Having said that, you asked about volume and price. So let's give you a view on how the different segments are doing. Taste and beverage or flavors, in other words, is just doing fine and keeps doing fine. Pet Food had this year seen in the beginning, a turnover, an increase in turnover, mainly or exclusively driven by price increases. But since November, well, price increases -- further price increases in Pet Food at the moment, not [ dual ], and we said that during our Capital Markets Day. But since November, we see carefully, but we see volume increases coming in. So everything which we said is happening. So it will take a bit more to get Pet Food back to where it was. But the volume increase there is happening in Food and Beverages. It has been there and it is there. Scent & Care. Fragrance is improving, as we said, it is getting better. And you see also volume increase. And we get more positive signs just one -- last night, we have a nice big win in fragrances. So it is getting there. Cosmetic Ingredients, no negative news at all, totally in line with what we said during the Capital Markets Day, it keeps going on and being a strong asset. Aroma Molecules still in the dark. It's like chemicals everywhere, and it will take longer. There's no sign at the moment for an immediate recovery, but it is not something which is different than other areas. Having said that, the picture is not different to what we said in general terms in the Capital Markets Day and most recently when we were in London. The only thing a few incidents, which came in, all of a sudden, triggered us to give you an update where we are so far. We learned from what we had a year ago and we want to be very careful on this one. Olaf, you want to elaborate a bit more?

Yes, Nicola, I think you mentioned all year long that price was dominating factor for the growth. As Heinz-Jurgen just elaborated, we see now the volume coming back. I think looking at Scent & Care, actually, the majority in fragrance is already volume and the same holds true for Cosmetic Ingredients. So that shows that's we are on a good track again. The area, which is really a little bit more challenging, is Aroma Molecules. And I think we are in the same boat as many other chemicals environment at the moment and the year we have not a lot of signs, if at all, of improvement at the moment. So that is from a volume perspective, still very negative.

May I ask a follow-up question with respect to what you said on Pet and thinking about the comments you made about TNH inventory adjustments. So I was wondering if there could be a risk of further sort of write-downs next year is indeed the sort of volume environment in Pet doesn't recover as fast as you...

No. Nicola, Pets, we don't see it. Pets, the only thing is all our products. The downside with Pets and that was a onetime thing. If you have raw materials there like meat, that can't be stored too long. You just better do off and writing it off right away. So a specific item Olaf mentioned it, they don't expect anything next year to come there. Okay?

The next question comes from James Hooper with Bernstein.

I think I'll have one in particular. Can you go through just how internally you're bridging the margin guidance you've just provided with getting back to the medium target in 2024 and beyond. And what do you think the key line items will be that will kind of improve the margins going forward?

Okay. Let me start. Olaf, you can hop in. One point is, and we have highlighted that also earlier. We're going to exit certain businesses and it will happen the first one, probably January at the moment. The other business, we're going to exit, and we have highlighted that as well, is -- both businesses in the magnitude of EUR 20 million to EUR 25 million, let's put it this way. The second one is not that simple as we thought because it is in some parts interwoven with a business which we definitely want to keep and you guys can sort out what it might be. So that's why we cut it off piece by piece, and that will take a bit longer as we want to definitely keep one piece of it. And so during the next year, we're going to exit that. Both of these businesses, total turnover, as I said, a bit more than EUR 40 million, my best shot, Olaf, and EBIT margin -- EBITDA margin of, if at all, 5%. So -- and no room visibility to get this done, that will be accelerated. Second, we accelerate our efficiency program in Scent & Care, and that will have a good contribution and we bring on board and we're in the process of doing this, more business with an accretive margin. All that together will bring us safely in the guidance which we indicated long term. So we're not concerned there, James, at all. Okay. Olaf, you want to elaborate on it?

Yes. I think on the cost structures, of course, that we still have kind of an elevated raw material situation. So here and there, we see raw material prices coming down. So in these days, raw material prices should help us. Important is in this situation that we protect our price levels towards customers so that we take the advantage of the raw material decline effect, hopefully, will be more visible next year. Also to mention, I think here and there, we have started to prune the portfolio also from a product perspective, lower margin businesses here and there, we need to give up to improve our margin level. And last piece I would mention is that we continue to invest into our higher-margin and faster-growing businesses like Cosmetic Ingredients, like Pet Food, which in a total picture should definitely help us to bring us back on track towards the 20% plus level.

Can I just follow up with 1 thing. Olaf, when you mentioned the kind of the pruning of the portfolio and beyond the disposals that Heinz-Jurgen mentioned, can you quantify the impact of that perhaps in terms of the volume headwinds?

No, I think that goes a little bit too far. But rest assured that we have, of course, situations where margins are not sufficient. And here, we take measures, that is definitely taking place without giving you the magnitude.

But James, let me hop in and help Olaf a bit out on that. We will have some of this portfolio pruning definitely in the Aroma Molecules area. We -- in the situation we're in, it is obvious that some of the products will not be supported anymore and we'll have to be exited maybe a bit quicker than we anticipated originally. Okay?

The next question comes from Charles Bentley with Jefferies.

So I just had a couple. So I think if I think about where consensus is for the second half, it implies kind of a EUR 30 million to EUR 40 million gap, and you've explained something like EUR 8 million to EUR 10 million of inventory reduction and kind of EUR 4 million to EUR 5 million of devaluation. I'm just trying to kind of work out what the remainder is. So it would be helpful if you've got any ideas on that. And then secondly, just on this egg and chicken protein point, I mean, you're talking around overstocking. Is that purely spoilage related? I mean, I guess, the other thing it could be is net realizable values being below your inventory costs, which would suggest prices are declining. I mean, is there any evidence of that? So...

Charles, I'll pick the latter question, most is -- it just has to go. It is -- that is one of the specific sites of Pet Food, as we said, volume demand is increasing already as month of November and December. I just had a chat with Jean-Yves from that. And -- but unfortunately, in Pet Food, you can't wait until it has picked up. So that has to go. That is the specific on pet food. And so no reason to be concerned. It just will take a bit to bring Pet Food back to where it will be historically, but volume growth is already showing up doesn't help the inventory anymore. That's why that has to be written off. Olaf, and you pick the rest. You have the long kitchen sink list for Charles, okay?

Yes. Of course, Charles, there's situations in different areas, cost absorption in production areas is a topic. We have -- and then an adjustment on a health care plan in the U.S., which comes into the picture. So there are many, many different items, the most prominent ones we gave you. And then, of course, the comparison to what the market expects might lead to this number you stated. But for us, the benchmark was always to deliver on the around 20%. So I think we have a certain gap which is, at the moment, leading us to the 19% to 19.5%.

Okay. And could I just ask 1 quick follow-up? I mean, like, I guess, at the Capital Markets Day, you were very confident of hitting the 20% number for this year. I mean, like, as you're saying, like you've got pretty good confidence on [indiscernible] the second half. Aroma, we already knew was challenging. So I guess can you just be very specific around what's got worse?

Yes. Well, the final nail in the coffin was this Argentinian thing. When this 2 days ago, and we have a nice production there. So when that hit us, we say, you know what, let's be straight out there. So that before, as Olaf said, 2, 3 weeks ago, we just thought, hey, it might still be possible. But that was the final nail and we decided, let's put it out. On the other side, let's not forget the positive thing. The business momentum is very healthy, and you will have a hard time finding other strong growth companies like ours. This is the mixed picture, and it is pretty much what we already indicated in the Capital Markets Day. And Charles, as you said, we already said at that point in time, it will be challenging, but we'll do our very best. But the trigger was Argentina, for sure. It was a few million. Again, it was a, hey, let's put it out.

The next question comes from Isha Sharma with Stifel.

Is the guidance on one-offs for the second half still around EUR 15 million in order to estimate the reported margin? And also on the sequential decline in margin in H2 versus H1, is it equal contribution from both the segments, please? .

Okay. Isha, thanks for calling in. I would say the numbers, that is Olaf specified -- Olaf, you want to pick it up, the guidance on margin and then the numbers before I pick it up? But it's a number of things.

Yes. So I think for Scent & Care, we have basically resolved the situation in [ cologne in ] Ireland. The market weakness in chemicals is not helping the Scent & Care environment, and we really need to flag the Aroma Molecules environment, which hasn't helped to improve the picture despite the fact that Fragrances and Cosmetic Ingredients continue to see good momentum. So that is the environment for Scent & Care. And for TNH, it's according to what we expected, that was the slight phaseout of the price elements. We had a slight decline compared to the first half of this year. That is the picture which we are seeing at the moment as a comparison between H1 and H2.

But Isha so coming back to what -- actually, the picture in second half in terms of margin is not a lot better than it was in the first half. And that is a bit different to what we expected during the Capital Markets Day, we expected it to pick up. The good news is Fragrance itself came up very nicely. As we indicated, the downside still is the chemical part where it has been deteriorating beyond what we've seen. So -- but the rest, Cosmetic Ingredients and all this is fine. The margin has not deteriorated in the half, but it has not improved big deal. That's the downside. And that is the only difference to the Capital Markets message, which we had. Growth momentum still overall in the company is good. In Taste, Nutrition & Health, no disclaimers. Everything, as we indicated. No deviations. All fine, all good. And even Pet Food, as I indicated, is starting to creep up, but it will take a bit until it's back to normal. But no other messages compared to what we said a few weeks ago, okay?

Understood. Just to confirm, the one-offs in the EBITDA are around -- still around EUR 15 million. That's still the guidance?

Olaf?

For the second half?

Yes, you should expect probably a little bit more than the EUR 15 million, which we guided for H2. The final number, I don't have yet. Of course, the year is not over, but it might be a little bit more than the EUR 15 million we guided.

So first half, we -- Isha, we had, I think we were EUR 29 million, right? And in the second half, it will be less, but it may be a bit more than EUR 15 million. So put the numbers the rest, Olaf is sitting on the numbers, and he's making the thing. But it's somewhere in between, probably.

The last question comes from Alex [indiscernible] with Barclays.

Sorry if I missed this, but just to -- a couple of things. In the 2024, would you be expecting to be back into the margin corridor, i.e., 20% plus on EBITDA. And on pricing, do you expect to have positive pricing next year?

So Alex, you missed it, and that was -- Nicola already she asked for it. So you're going to get a clear guidance for next year by March. But you heard our ambition long term, no deviation from what we've said, 5% to 7% growth going forward and our ambition 20% to 23% going forward, no deviation. Specific guidance for next year, for '24, will be out end of Q1 next year as usual. And then you will be the first one who we let it -- whom to let know. But again, at the moment, no reason for us going forward to be concerned. We have a healthy business. And as the numbers show, we have a very healthy growth momentum. So that is for the moment. And at this point, it's too early to go into more details concerning next year, okay?

Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Symrise for any closing remarks.

Thank you very much, Betsy. This was first call late in the evening for us. For some of you, it's not even evening. Thank you very much for your participation today, for your interest in Symrise throughout the year 2023, which was not an easy one. We wish you all the relaxing Christmas time, and we are very much looking forward to meeting you again in 2024. Thank you very much. All the best, and goodbye.