Business Breakdowns
· 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.
· Matt Reustle, Jeremie Fastnacht
[00:00:00] S0: You mentioned the operating leverage. Oftentimes that can work on the way up, but operating leverage on the way down can be painful. So my sense is that the organic growth historically has shown not much cyclicality, particularly to different macro environments, because since 2000 we've had actual recessions and down cycles. Have the margins shown more cyclicality than the revenue line? [00:00:00] S1: They're very good at maintaining margins. Something important for them is when you have inflation of raw materials, like 2011 or 2022, Givaudan has been pretty good, maybe best in class at negotiating – maybe thanks to their size, the value they bring – to pass the cost to the clients. Typically it's done in 12 months. The cash flows are very strong over time, even in difficult periods. You had an impact on cash flow, for example, in 2022 when you had the problem of supply chains and a spike in raw materials. So an impact on cash flow, but it's still very high cash generation during the recession. [00:00:00] S0: And I assume that the R&D is mostly shown on the income statement, so that's captured in the margins. It's not capitalized.
· Matt Reustle, Jeremie Fastnacht
[00:00:00] S0: And I assume that the R&D is mostly shown on the income statement, so that's captured in the margins. It's not capitalized. [00:00:00] S1: Yes. They do 7.5 billion Swiss francs. They have something like 4.2 cost of goods sold, mainly raw materials, which is the topic. The energy represents a small part of the input basket at 2 to 3%. You get a gross margin of 44%. R&D, it's – they put the highest R&D in the industry. They are at 8% of sales. Then they spend 13% on selling, marketing, distribution. A few admin expense and operating expense. And you still have a 18%, 19% operating margin. The cash generation is very strong. You have a cash flow margin at 18% of sales, so around 1.5 billion Swiss francs a year. The working capital is around 20% of sales and the G&A around 5%. You have CapEx, typically it's 300 million Swiss francs, just 3 or 4% of sales. It's split equally between maintenance, IT spending, and growth. And so you have free cash flow, it's above 1 billion. You have a target of 12% over the cycle. We like the very long term they have. They don't give yearly guidance. They have 5-year plan and for organic growth, and they talk about CAGR, and free cash flow margin must be above 12% of sales. So it's in line with net income, or half the time it's even above. [00:00:00] S0: You mentioned working capital's 20% of revenue. [00:00:00] S1: Yeah.