Business Breakdowns
· Jeremie Fastnacht
[00:00:00] S1: They are the leader with fragrances globally. They have around 25% global market share in fine fragrances. They are very strong in prestige and haute parfumerie. They have also increased their market share because over the last few years they have really strong growth organically. They have doubled their business in fine fragrances since 2019. So very strong. They are also a very strong global player in consumer fragrances. So shampoo, soap, floor cleaner, laundry detergent. They have roughly a 20% market share worldwide. They're really the leader in that part. They are smaller – they are also active in active beauty. They are smaller, they have low exposure to commoditized fragrance ingredients, it's a low single digit. They are the leader –the one which is closer with what we mentioned is Firmenich. And then you have IFF and Symrise. On the other division, the taste and wellbeing, so the flavor, they're also the top player, but it's more fragmented. They have maybe 10-15% market share in the flavor market, so the most customized, not in the very basic businesses, low margin business. They are really a leader of innovation. They own tons of IP and they spend 3 billion Swiss francs over the last few years in R&D. It's 8% of sales, more than the competition. They own 5,000 patents. They have 60 research and creation centers worldwide in Brazil, in Mexico, Eastern Europe, in South Africa. So they have local data on consumers, they have insight. They can anticipate where everything is going on in terms of consumer trends. They have a big team that is chasing and then screening hundreds of startups. They are the pioneer to open a perfumery school, in 1946. Most of the best perfumers went in the school. They have tons of PhD, they have 200 noses. They have some stars, for example, Calice Becker. She created the iconic J'adore Dior, and she's now head of the Perfumery School. They have also very nice, very interesting innovations. They have partnerships with academic partners. They make crazy stuff in encapsulation, the way to release fragrance. For example, it's different in Mexico if you're putting your laundry to dry in the sun. The fragrance must be released thanks to the impact of the sun. It's different if you are in UK, it's rainy, you put your laundry inside, the fragrance must be released differently.
· Jeremie Fastnacht, Matt Reustle
You have blue color, for example, which is very hard to find in nature, so they make it from spirulina. They are very strong in plant-based meat, in sausage and burgers. What's also important is that they have a very strong global footprint. They are in 80 production sites worldwide. They were a pioneer 100 years ago in France and the US. They went into LATAM 8 decades ago, India maybe 50 years, and China several decades. You need in the industry to have scale production. You need to be able to produce big quantities locally and reliably. A critical point is the raw material access to have nice creations of your flavorists and perfumers, you need to be able to have lots of molecules. They have a big library in their innovation center in Zurich. They have long-lasting relationships to have access to scarce raw materials. On the other hand, you need to manage tons of raw materials. They have 3,000 suppliers. You need a big know-how. They have a very dominant position. [00:00:00] S0: Is it right to think about fragrance and beauty and taste and wellbeing as having some overlap in terms of customer base. You mentioned that proposal before, which would've included both angles of fragrance and flavor. Is it right to think that with some of these, they might have some overlap in terms of customer base, and when they make proposals, they're winning the deal for both businesses?
· Matt Reustle, Jeremie Fastnacht
[00:00:00] S0: Is it right to think about fragrance and beauty and taste and wellbeing as having some overlap in terms of customer base. You mentioned that proposal before, which would've included both angles of fragrance and flavor. Is it right to think that with some of these, they might have some overlap in terms of customer base, and when they make proposals, they're winning the deal for both businesses? [00:00:00] S1: I think if you take a company like Unilever, now they are splitting their food business, but over decades they were both in foods and HPC. So there is a high probability that they are clients on both, for example. [00:00:00] S0: You mentioned some of the margin differences that exist, but just at a high level, fragrance and beauty versus taste and wellbeing – is there a drastic difference in the margin profile of those two businesses?
· Matt Reustle, Jeremie Fastnacht
[00:00:00] S0: You mentioned some of the margin differences that exist, but just at a high level, fragrance and beauty versus taste and wellbeing – is there a drastic difference in the margin profile of those two businesses? [00:00:00] S1: The decade before COVID, the EBITDA margin was around 22% in both divisions. But now you have the taste and wellbeing – that is stable, roughly 22%. But the fragrance and beauty is improving to 27%, and it's very likely due to operating leverage and mix due to the strong growth of fine fragrances over the last few years and operating leverage. On margins, they don't disclose this, but from the info you get from experts, it seems that the highest margins are in fine fragrances, and then you have consumer, then ingredients. The taste and wellbeing, they don't publish that, but from the info we found, the margins are higher in beverage than food. Another difference is in terms of input, the natural raw materials are much higher in the taste and wellbeing. It's like 70% of inputs and roughly 30% of fragrance and beauty. Of course, you put more natural raw materials in what you eat and drink. And there is not really a financial logic to put, high-end, high-quality, expensive lavender extract on your floor cleaner, for example.
· Jeremie Fastnacht, Matt Reustle
[00:00:00] S1: The decade before COVID, the EBITDA margin was around 22% in both divisions. But now you have the taste and wellbeing – that is stable, roughly 22%. But the fragrance and beauty is improving to 27%, and it's very likely due to operating leverage and mix due to the strong growth of fine fragrances over the last few years and operating leverage. On margins, they don't disclose this, but from the info you get from experts, it seems that the highest margins are in fine fragrances, and then you have consumer, then ingredients. The taste and wellbeing, they don't publish that, but from the info we found, the margins are higher in beverage than food. Another difference is in terms of input, the natural raw materials are much higher in the taste and wellbeing. It's like 70% of inputs and roughly 30% of fragrance and beauty. Of course, you put more natural raw materials in what you eat and drink. And there is not really a financial logic to put, high-end, high-quality, expensive lavender extract on your floor cleaner, for example. [00:00:00] S0: If we take it down into the financials a little bit, you mentioned that market growth rate around 4 to 5%, which has been the trend line since the IPO. And for the outlook, I would say that's what it hints at as well. Does the business differ drastically from the market growth? Are they growing above that as they grow market share? Talk a little bit about the revenue line and how that tends to trend.
· Jeremie Fastnacht
[00:00:00] S1: The organic growth, two decades before COVID it was 5%. And now post-COVID, if you include COVID, it's like 6%.A bit higher. The last few years they have been doing a bit better than most competitors. In a typical year, if you break down the growth, it's typically 4% volume and 1% pricing. Pricing is used to offset the raw materials by passing on to clients, but it's not really a way to grow. They want to grow with innovation and volumes. What's interesting is that since the IPO, they didn't have a single year of negative organic growth. '08, '09, or 2020, they were positive. So very attractive. If you look at the financials, you also have to be careful because you have to keep in mind that the Swiss franc has been strengthening constantly for decades. So that has an impact. There is also a bit of a natural hedge because they have lots of costs that are local. I think they have 60 creation centers around the world to adapt to local taste and culture, and 80 production centers. So they have costs around the world and very few in Switzerland. In terms of margin, as we said, you have the margin in fragrance and beauty, that's really improving to 27%. Even if they say that their sweet spot is 22, 24%, it's what they promise. You don't have to be too profitable. You have to invest for growth.