Chr Hansen Holding A/S

CSE:CHR

Earnings Call Transcript 2018-Q3

[Operator]

Thank you for standing by, and welcome to the presentation of Chr. Hansen's results for Q3 2017/2018.[Operator Instructions] I must advise you this conference is being recorded.And I would now like to hand the conference over to your speaker today, Mauricio Graber. Please go ahead.

[Mauricio Graber, CEO, President & Member of Executive Board]

Thank you, operator. Good morning, everybody, and welcome to the call.My name is Mauricio Graber, and I'm the CEO of Chr. Hansen. With me on the call today is Søren Lonning, our CFO.Before we get into the results call, I think it's appropriate that I give you a brief comment after my 4 first few weeks as CEO of Chr. Hansen. As most of you know, I have joined Chr. Hansen on June 1, after spending the last 23 years of my career with Givaudan and the last 12 as president of the flavor division based in Switzerland. I could not be more excited about joining a company with such a strong heritage, performance culture and promising future. This is also what attracted me to Chr. Hansen, to build on the current high performance and accelerate our journey as a global bioscience leader that fully leverages its unique microbial platform.In my first few weeks since coming to Chr. Hansen, I have spent time getting to know a lot of our colleagues and learning more about our business. I have also been in visits to some of our key sites in the United States, Denmark and France. And very important for me, I visit one of our largest customers' manufacturing and innovation center to experience firsthand the unique customer engagement model and innovation of our company. I can tell you how proud I was to see the Chr. Hansen model working with our customers and creating share value. In the coming months, I plan to visit our colleagues and some of our customers and partners in China and Brazil.It's important for me in the call today to make it absolutely clear that I fully support the Nature's no. 1 strategy and financial ambitions that are attached to it. And we will get back to that later in these presentations, but my support of the strategy comes because of 3 things. The strategy of leveraging the unique microbial platform is unique to Chr. Hansen. It's differentiated from competition and it addresses the key market trends and opportunities. I have been impressed not only with the quality of the Nature's no. 1 strategy but also with the passion of execution of our teams as well as the caliber and engagement of our people. This strategy is supported by an impressive research and development team as well as by our fermentation scale-up and manufacturing knowledge. I think this company and the technology platform that we have offers a unique profitable growth opportunity for the future as we build further on our core and strong market position.Please turn to the next slide. As I mentioned in my introduction, I think Chr. Hansen has some unique competitive advantages. The first is the market position defined both in terms of technology and market share. To support our research and development platform, we're investing more, as far as we know, than any of our competitors. My full-day sessions with the R&D department demonstrated the strength of our innovation and commercialization pipeline that will continue to deliver product, process and cost innovation. And second is our customer-centric model. We have a very close relationship to our customers, especially in the core dairy business. We have an outstanding mapping of the dairy market, which allows us to identify [ continuously ] business opportunities and deploy resources prudently to create share value from those opportunities. And finally, we have the advantage in the scale of production in our fermentation capability. We are also very fortunate that multiple megatrends in the world favor our natural and sustainable technologies. The growing number of humans on the planet puts pressure on resources. And sustainable solutions need to be found for a range of problems like reducing food waste, reducing the use of pesticides in plants and reducing the amount of antibiotics used in animal farming. Our microbial technologies can help in all of those cases. Perhaps we can even help to create healthier and cheaper solutions for treating certain diseases or conditions in humans.And speaking about sustainability, I think it's fantastic that we have documented proof that the majority of our business, meaning 81% of our revenues, directly contributes to the UN sustainable development goals. Our 3 lighthouses are examples of business opportunities that we're actively pursuing. We were -- and we believe that each opportunity holds a potential to generate annual revenues of at least EUR 100 million per year.The leadership team presented an update of our Nature's no. 1 strategy at the Capital Markets Day in London. We also presented an update on the long-term financial targets until 2021/'22. Those targets are to grow our revenues 8% to 10% per year, with an average 7% to 8% contribution from Food Cultures & Enzymes; to increase EBIT margin before special item and acquisitions to above 30% and to deliver a CAGR of around 10% in free cash flow. And we defined targets for 2 of the lighthouses, namely bioprotection and plant health. In bioprotection, which is all about prolonging the shelf life for dairy and other food products while also removing chemical pesticides, we can grow to over EUR 200 million per year by 2025. In Q3, we saw both a record number of project inflows as well as a record number of project wins. These give me tangible confidence that our lighthouse is tracking to deliver on its promise. The -- on plant health, our new business in biological nematode control can grow to the EUR 100 million target per year also by 2025. Our growth continues to accelerate as we the -- as we see the second -- the 2 new products that we launched last summer grow ahead of expectation, and just customer feedback has been fantastic. We are just at the beginning of this journey, with much upside potential as we expand to grow new crops and new geographies with microbial solutions that can be applied both to soil or seeds.I have to be clear that to reach this EUR 100 million target requires us to have success in Latin America and also in other regions where we are currently awaiting product registrations.While we have not yet defined the financial target for the human microbiome, as this area is still too far in the future for us to put a specific target yet, but we do have some excellent news to share after Q3 which I am going to tell you about in the next slide. Please turn to the next slide. I want to talk briefly about 6 points of our Nature's no. 1 strategy that are highlights from my perspective.First, to emphasize a little bit more bioprotection, which grew 25% in Q3 and is around 35% for the first 9 months. The first generation of this technology, which is mainly selling in the developed world, is the main driver of our growth. And the second generation of the technology, which has been developed for countries where the cold chain is less reliable, typically in emerging markets, is beginning to sell well, particularly in Latin America. Second, I want to touch on capacity. In Food Cultures & Enzymes, the new capacity in Copenhagen is fully operational, and we're seeing the margin benefits as we have expected them. Third, growth markets. The focus on growth markets across the business continues, and we're strengthening our presence in a variety of markets. This includes, for example, more application labs and resources for Food Cultures & Enzymes. In Health & Nutrition, we are expanding our sales coverage, especially in EMEA and APAC. And in Natural Colors we also announced that we're going to expand and modernize one of our key development facilities in Europe.Fourth, getting to the human microbiome. We now have 2 significant scientific developments in Q3 which I would like to emphasize. First, we entered into a partnership with Prota Therapeutics to test our LGG strain in Phase III clinical trials to potentially develop a treatment for peanut allergy. Prota Therapeutics is pioneering a new form of oral immunotherapy treatment which combines Chr. Hansen's LGG probiotic strain with targeted doses of peanut protein. The treatment is designed to reprogram the immune system response to peanut and eventually develop tolerance. People who are allergic to peanuts can have life-threatening reactions, so this is indeed a promising potential treatment. The second development is the exciting result from a Chr. Hansen-led clinical trial that demonstrates how ingesting carefully -- a carefully selected probiotic strain can reduce certain side effects associated with the regular consumption of acetylicsalicylic acid, which is the active ingredient in aspirin. Regular ingestion of aspirin can be damaging for gastrointestinal health, and this is the damage we can hope to address. More clinical trials are needed, and the commercial opportunities have not been -- yet been fully assessed. But very exciting developments, as I mentioned, in Q3 for human microbiome.Moving on to plant health. The 2 new products that we launched, Quartzo and Presence, are selling well, even a little bit ahead of our expectations. The products are biological nematode-controlled products and have been launched at an opportune moment. The Brazilian authorities have recently banned some of the chemicals which our products may replace. Our products offer a natural solution with a performance that is similar to chemicals. In addition, we have extended our collaboration with FMC, which is our distribution partner in plant health. The extended agreement continues to leverage the resources and expertise for both companies while allowing for more flexibility to also collaborate with new partners.Finally, our work on Natural Colors. We continue to see strong interest from food companies to use natural colors, particularly in new product launches. Also, I should mention that we have found our new Executive Vice President for Natural Colors, and Klaus Bjerrum will be joining us from the food ingredient company CP Kelco in Denmark. We look forward to welcoming him and joining as of the beginning of August.With this introduction, I would like to give the word to Søren Lonning to take us through the financial highlights.Søren, please.

[Søren Westh Lonning, CFO, Executive VP & Member of Executive Board]

Thank you, Mauricio.Please turn to the next slide for the group results.Our organic growth rate was 9% in the first 9 months, but with the negative impact from currency, it corresponded to a 3% increase in reported revenue, ended at EUR 801 million. So adverse developments in currency had a negative 6% impact between organic growth and the reported euro growth, roughly as expected at the time of the Q2 announcement. Overall, growth was in line with our expectations, and many of the drivers from the first half of the year continued in Q3. We saw a strong performance in Food Cultures & Enzymes supported by bioprotection, whereas Health & Nutrition and Natural Colors grew at a lower level. Volume and mix accounted for 7% of the growth, with euro-based price increases of close to 2 percentage points accounting for the majority of the remainder.The EBIT margin before special items was 27.5%, up in the first 9 months, compared to 27.9% during the same period last year. Our margins are negatively impacted by currencies; and would have been almost a full percentage point higher if the currency, most importantly the U.S. dollar, had remained on the level of last year. The underlying performance of our business continues to be solid, and we are beginning to see benefits from the new capacity in Copenhagen. R&D expenditures amounted to EUR 60 million or 7.5% of sales compared with 7.0% last year. The increase was partly driven by strategic initiatives, including bioprotection and LGG, but currency also impact the relative spend as the majority of our spending is in euro, which has increased the relative share to sales this year.Profit for the period ended at EUR 158 million, on par with last year. And finally, the free cash flow before acquisition and special items was EUR 75 million, which is below last year. The key reasons for the decline are the changed Danish export credit scheme and timing of net working capital in Q3, which impacted working capital negatively. And finally, we also had negative currency impacting our EBIT.Please turn to the next slide. Organic growth in Food Cultures & Enzymes was 12%, with strong growth in cheese, fermented milk, enzymes and meat; and very strong growth in bioprotection, as Mauricio just explained. Organic growth in Health & Nutrition is 8% year-to-date, driven by animal health and plant health and with low growth in human health. We achieved the strongest growth in the emerging economies throughout the 3 areas in Health & Nutrition. Natural Colors has grown by 5% organically, with 2% from volume and 3% from prices. The higher growth from pricing is a combination of price increases driven by raw material cost which is passed onto customers, general price increases and euro-based pricing.Please turn to the next slide. Looking at our regions, we have grown 8% organically in the largest region of Europe, Middle East and Africa, which represents 45% of group revenue. The growth was driven by strong growth in animal health, enzymes and meat; and solid growth in cheese and probiotics for fermented milk. The growth in bioprotection continues to be very strong in this region, and as said before, it is almost exclusively driven by first-generation technologies so far. We also absorbed a slight decrease in human health due to inventory reductions with a key customer in infant formula. Organic growth in Q3 was 10%, effectively from the same drivers but also with a strong contribution from pricing driven by the euro pricing model.North America, which represents 25% of revenues, organic growth was 3%. We saw strong growth in cheese, probiotics for fermented milk, meat and animal health. And in North America, we also saw strong growth from bioprotection, and like EMEA, the growth is with the first generation. As we have discussed before, our dietary supplements business under human health has seen some volatility through the year, but we see signs of recovery and expect improvements when looking ahead. Meanwhile, the infant formula business in North America is growing strongly. Natural Colors revenue were on par with last year. In Q3, organic growth was 2%. Food Cultures & Enzymes grew solidly. Human health was flat, but our animal health business saw a decline. This was primarily caused by the dairy farmer segment in North America which is facing headwinds due to low milk prices. Milk prices are expected to improve over the coming quarters, and that should also lead to an improvement for us.Asia Pacific, which represents 17% of group revenues, grew 17% organically, driven by strong growth in fermented milk in China; human health, with both dietary supplements and infant formula growing strongly; animal health; and Natural Colors. Enzymes showed good growth, while revenues from cheese and probiotics for fermented milk declined slightly due to timing of orders. Organic growth in Q3 was 11% and again driven by many of the same drivers.And finally, Latin America, which represents 13% of our sales, grew 17% organically, driven by strong growth in cheese, fermented milk, enzymes and plant health. Animal health showed modest growth, while revenue from Natural Colors decreased slightly compared to last year. In Q3, organic growth was 20%, with similar growth drivers. Natural Colors decreased slightly compared to last year due to our focus on higher-value customer segments.Please turn to the next slide. In Food Cultures & Enzymes the 12% organic growth after the first 9 months was driven by 9% growth from volume and mix and 3% from prices. The volume growth was primarily supported by strong development in cheese, fermented milk, enzymes and meat cultures; as well as modest growth in probiotics. Bioprotective cultures delivered organic growth of approximately 35% year-to-date and around 25% in Q3. In Q3, organic growth was 11%, and the drivers in the business were basically the same but with the pricing element being 5%. A key reason for the higher contribution from pricing is the euro price mechanism in certain countries, whereby a declining currency can support a high organic growth for Chr. Hansen.The EBIT margin for the first 9 months was 32.5%, which was 1.1 percentage point below last year as a result of adverse currency impacts and unfavorable product mix and the sales of a property in Argentina in Q1 last year. In Q3, the margin was 34.7%, which was 0.4 percentage point below last year. The decline was driven by currencies; however, partly offset by a positive contribution from the new capacity in Copenhagen facility, which has started to materialize and is tracking according to plan.Let us turn to the next slide. Health & Nutrition has delivered 8% organic growth after the first 9 months, all from volume and mix. Strong growth in animal health and very strong growth in plant health was partly offset by low growth in human health. As we have explained before, Health & Nutrition can be more volatile compared to Food Cultures & Enzymes due to a higher customer concentration and exposure to agricultural commodity prices. In Q3, organic growth was 7%. The situation with a customer's inventory reduction in North America in dietary supplements is improving, and we expect this business to return to growth mode over the coming quarters. Meanwhile, infant formula contributed suddenly to growth in most regions, and plant health grew strongly in Latin America. Animal health only grew slightly due to the mentioned softness in North America, primarily within the dairy segment, while growth in the other regions where we are investing in improved sales coverage was strong.The EBIT margin year-to-date has improved by 1.7 percentage points to 29.2%, driven by a positive mix in human health, reduced scraps, insourcing of NPC products and the absence of royalty payments for LGG. This more than offset a sizable negative impact from the weakened U.S. dollar. In Q3, the EBIT margin improved by 2.5 percentage points to 30.8%, mainly driven by a positive product mix in human health and favorable timing of production costs, which was only partly offset by adverse currencies.Please turn to the next slide. Natural Colors grew by 5% organically, with 2% from volume and mix and 3% from prices. The price increases reflected both increased raw material prices and general price increases. Coloring foodstuff is the largest driver in Natural Colors. And we generally see more growth in emerging markets and in the areas of prepared food and ice cream and confectionary. In Q3, organic growth was 6%, as both North America, EMEA and APAC grew well while Latin America declined. The decline in Latin America was due to our focus on higher-value customer segments. The EBIT margin improved in Q3 to 14.4%, up 0.3 percentage points to last year, driven by higher prices and the profitability focus that I mentioned just above.Please turn to the next slide.Looking at the currency impact of the declining U.S. dollars compared to the euro, the total adverse impact for the first 9 months has been around minus 10%. Q3 was slightly better than Q2. And in Q4, the impact from the U.S. dollar on our revenue is expected to be immaterial. As a rule of thumb, a 5% decline in the U.S. dollar will have a negative impact on our top line of around EUR 15 million and around half of that impact on our EBIT. The impact from all currencies on revenue in Q3 was minus 7%, and year-to-date, this impact has been minus 6%. The other currencies that are most relevant are the Chinese, Brazilian and Australian currencies.In terms of the EBIT margin, the currency impact was minus 0.8 percentage points in Q3 and minus 0.9 percentage points year-to-date. And this is primarily driven by the U.S. dollar.Please turn to the next slide. This slide shows the change in free cash flow after 9 months. We have had a slight improvement on the operating profit, which would have been much stronger if the U.S. dollar had not declined so much compared to the euro. The second major development in the free cash flow is the change in the regulation around the Danish export credit. This is a one-off impact and impacts our working capital negatively. This is the most significant impact on working capital. However, our net working capital was also affected by timing, partly driven by our sales being more back-end loaded in the quarter compared to last year. These drivers mean that our free cash flow year-to-date is EUR 75 million compared to EUR 98 million in the year before.Please turn to the next slide.As we communicated in our Q2 reporting, we would assess together with the Board of Directors the possibility of declaring an extraordinary dividend as part of the Q3 reporting. And given the performance and cash flow generation in the first 9 months, an extraordinary dividend totaling EUR 105 million, equal to DKK 5.94 per share, will be paid out on July 3, 2018. This is consistent with our capital allocation priorities, which we also confirmed at the Capital Market Day in April. Our priorities are, firstly, to invest in the organic growth through investment in innovation and capacity; secondly, to invest in bolt-on acquisition within our core business either by acquiring companies that have interesting technologies or that can increase our market presence in attractive markets. Thirdly, we pay out an ordinary dividend of 40% to 60% of net profit. And finally, we will distribute additional cash to shareholders from either extraordinary dividends or share buybacks, all while having a leverage which is consistent with a solid investment-grade profile.Please turn to the next page. Based on the solid performance after the first 9 months of the year, we are maintaining the guidance on all group parameters. This means that we still expect to see 8% to 10% organic growth and EBIT margin and free cash flow levels in line with last year. And with this confirmation, please move to the next slide.Please take a moment, at your convenience, to read through the safe harbor statement. And with this, I will now pass the word back to Mauricio.

[Mauricio Graber, CEO, President & Member of Executive Board]

Thank you, Søren.Please turn to the next page. This concludes our presentation for today. Before we open up for the Q&A, I have a few final remarks to summarize our call.9 months into the year, we are on track to deliver on the targets we have set out, 8% to 10% organic growth with stable margins and cash flows despite some hard currency headwinds. Our strategy Nature's no. 1 is the right strategy for Chr. Hansen to pursue. Our technology platform and market positions are unique, and we can build on these strong points. Our sustainability profile speaks excellently into the long-term megatrends that we are playing into. 81% of our sales directly support the United Nations' sustainability development goals. And finally, I look forward to meeting many of you in the months to come and share my excitement on the promising future of Chr. Hansen.Operator, please open the line for questions.

[Operator]

[Operator Instructions] And your first question comes from the line of Hans Gregersen.

[Hans Gregersen]

A couple of questions. If we look on your comments on growth being more back-end loaded, what is the reason for that? Is any structural changes going on? And secondly, looking towards your cash flow guidance, what do you expect in terms of net working capital release in Q4 is the first question. Second question, bioprotection, can you give some further insights into the growth patterns across geographies as well as applications? And then finally, you mentioned milk prices declined in Q3. What is the reason, in your view? And why do you expect it to recover?

[Søren Westh Lonning, CFO, Executive VP & Member of Executive Board]

Thank you, Hans. Let me try to address that. The key reason for the timing in -- of net working capital and back-end loaded sales in Q3 related to the timing of -- number of invoicing days and the timing of Easter. So this is to a large extent we had -- compared to last year, we had a bit more invoicing days in April. And we are -- also didn't have the Easter. It was more -- it was only in April the year before. And when we have days outstanding which are close to 45 days, that means that whether the timing between March and April can actually influence the amount of dues that we have outstanding. So it's not a structural change, to your point. It is more of a simple timing thing that impacted us here. So that's a key point. And we also had a little bit of timing that -- we didn't mention that, a little bit of timing on our payables that were lower than normal at the end of the quarter, but there is nothing structurally changing to that point.

[Hans Gregersen]

Can I ask you just on your payables comments? Is that relating to the quarter ending on a weekend as well, or...

[Søren Westh Lonning, CFO, Executive VP & Member of Executive Board]

No. That's a minor part of it, but it's true that sometimes when we're ending at a weekend, it can delay some payments coming in, but the key driver is really related to timing between March and April sales this year. If you move on to your second question, regarding net working capital release in Q4: We will not make specific comments as to the net working capital development in Q4, but we do expect to see an improvement in line with the seasonality we have in the business. Bear in mind that we are building inventories for -- we have high seasons across our businesses in Q3 and Q4, and we are building inventories for that. That will come down. And we are also, of course, doing our utmost to optimize our collection at the year-end. So we will have some drivers that will help us bring net working capital way down from where we see now. So that will be an important driver in terms of delivering on the cash flow guidance that we are giving. To your question regarding bioprotection, it is really driven by all regions. And it's also driven by our 3 key process that we have today. So it's fermented milk. It's meat, and it's cheese. Fermented milk is the largest contributor, but all of these clusters are going well. And it's going well in all regions. In particular, we have seen very good progress in Latin America. And we are also -- I mean generation one remains the key driver, but we have quite good traction also on project progression in generation two, so that is also looking promising for the future. So we're already selling and have started sales, but it's not the key contributor but the pipeline looks really good. And as a -- as just an example, just alone in Q3 for the entire bioprotection, we won 60 projects with customers. So it's a quite solid ratio to have given the size of the business today.

[Hans Gregersen]

So just -- you mentioned that you've won 60 projects. Just to put that into perspective, how many projects, if I can say so, have you won as of now?

[Søren Westh Lonning, CFO, Executive VP & Member of Executive Board]

I mean we -- of course, we -- our model is that we win a lot of projects to drive growth in our Food Cultures & Enzymes business in general, reflecting also the market, the customer needs and the fragmentation in the market, but relative, the 60 wins in 1 quarter on bioprotection, relative to the size it has today, it's quite sizable, so -- although bioprotection, as expected, came down a bit in Q3 due to the annualization of some very large wins last year that happened -- that we won sort of midyear last year. Then -- when we look forward in terms of the activities, the pipeline and the wins we have, then it looks quite good. And we've had more than 200 project wins so far year-to-date in bioprotection. That's a lot. And when -- if I address your questions regarding the milk situation: We are seeing quite low milk prices in North America at the moment, and it's starting to impact the buying patterns of the dairy farmers. We also see in North America the prices on pork also being relatively low, so in general, the price in North America are to the low side. And it's starting to play into the dynamic that we see over there. We are expecting milk prices, that's the projection, to come up a bit in North America over the coming quarters, so we do expect it to be more of a blip than a structural change for a longer period of time. And then I would also emphasize that what creates a little bit more uncertainty in North America also -- at the moment is, of course, also all the discussions regarding trade restrictions. And U.S. export -- quite a lot of also agricultural products into China. And with the recent debate and foreign politics on this topic, it creates a little bit more uncertainty in that trade lane also. So just to say we are seeing a little bit more headwind on the macro parts in animal health right now, but as I mentioned is the need for replacing antibiotics and increasing the efficiency in faster production through healthy and natural means remains intact and solid.

[Operator]

And your next question comes from the line of Ben Gorman.

[Ben Gorman, Associate Analyst]

Just a few from me. First of all, in terms of the margin impact, specifically on the culture and enzymes division. You talked about 100 basis points of sort of FX impacts on the margin from a group perspective. Is that in line with Cultures & Enzymes? And you've talked in previous quarters about the impact of negative mix from strong enzymes growth. What -- can you quantify that, still around 0.5 percentage points? And then sort of what's the impact as well, sorry, just on the same question, from the leverage on the new capacity? You talked about the margin impact from this new capacity being in line with your expectations. And you've previously talked about 200 basis points of gains as this capacity is ramped up. How much of that 200 basis points have you got already? Sorry. That's a long first question. And then the second question is on the FX impact being bigger in food rather than health. Is that just a geographical mix? And what is that [indiscernible]?

[Søren Westh Lonning, CFO, Executive VP & Member of Executive Board]

Yes. Thank you, Ben, for the questions. Let me try to address it. If we look to your first question, regarding currency impact in Food Cultures & Enzymes, then the impact of almost 1 percentage point is slightly lower in Food Cultures & Enzymes than the average. And this is driven by the fact that the -- it is the -- how we say, the sales is more broadly anchored across all region, whereas Health & Nutrition is quite -- has a quite high share in North America. So this means that Health & Nutrition have the largest exposure to the U.S. dollar. And so when you'd look at year-to-date, it's -- if it's almost 1 percentage point or around 1 percentage point for the group, then it's slightly lower than that, but it's still above the 0.5 points. So it's somewhere in between 0.5 points and 1 percentage point, without being exacting this part here. If you move to your second question in the first question, was regarding the mix. And here we actually had a slight positive effect in -- of mix in Q3, but if you look at it year-to-date, it's slightly negative. It's less than 0.5 points now, but we are still seeing a slight negative impact from mix. And that is driven by the fact that enzymes and in particular some of our less-profitable enzymes, as an example, lactase solutions, have grown very strongly. So there's a high demand for taking and removing lactose from milk. So that's a good thing, but it has a slightly negative impact on the margins year-to-date. But it's clearly below 0.5 points. Then you ask regarding the leverage of our capacity. And I would say, if you look at it for the full year, then it's close to 0 because we started the ramp-up in the beginning of the year. We have started to fully depreciate on the equipment, the assets. And that meant that -- on a year-to-date basis that it's close to null, but what is important to note is that in Q3 we actually saw a positive effect from the production. The underlying scalability of utilizing this more capacity, that had a positive impact. So overall we are starting to see the progress, but on the year-to-date basis, it's still close. But it promises well for the future. We are expecting -- we all the time guided that second half, that's where we would start to see some benefit from that. And that is coming through. So if you look to the Q3 margin, very roughly speaking, you will have around 0.5 points negative from currency, a little more than 0.5 points but around 0.5 points negative from currency. We have made some investments in this quarter also into [ fuel and bio P&L ] strategic initiatives. That's also here. And then you have the production, which gives almost 0.5 points in positive contribution. And that together adds up to the minus 0.4% that you see. And then your final question, related to the FX impact in food, in food cultures, versus the rest of the business. And what -- important points to make here, that in Food Cultures & Enzymes the -- here we have the largest euro pricing mechanism. This is where we have been able to implement the euro-based pricing mechanism most because of our market position. And that gives -- and that adds to the currency when you look to top line between organic growth and euro growth. But if you look at it as a U.S. dollars exposure as I mentioned before, which is the largest exposure we have, then actually Health & Nutrition had the largest because of the large share of revenue in North America. And then you will see that natural color has the lowest exposure. It's close to flat because we are sourcing a lot of raw materials in here. So there are different dynamics into it, but the key reason on the top line, that is the euro-based pricing in Food Cultures & Enzymes.

[Ben Gorman, Associate Analyst]

Great. Can I just follow up with one very quick one in terms of the impact of the euro-based pricing on Food Cultures & Enzymes? Can you quantify that? Because obviously it's very heavily sort of skewed, versus history, to be less volume growth. So I'm just sort of wondering what the organic number might have been if you take out the euro-based pricing.

[Søren Westh Lonning, CFO, Executive VP & Member of Executive Board]

But in the quarter, it's a sizable impact. So we reported 11% organic growth, of which 6% is volume and 5% is price. And here the majority of the price is euro-based pricing. So I'm not going to give you the exact number, but we are below 5% but we are...

[Mauricio Graber, CEO, President & Member of Executive Board]

Close...

[Søren Westh Lonning, CFO, Executive VP & Member of Executive Board]

Up in that range, right? So it's a quite sizable impact. It's driven a lot by Turkey, Russia, Brazil, Argentina, these economies where we've seen the currencies coming down and where we've been protected. And bear in mind there is a little bit more volatility in this mechanism, but it is a way of safeguarding that we don't have to go out and make price adjustments in the local economies reflecting the high inflation in these markets. So it's real. It replaces some price increases we would otherwise have to go out and manually discuss or, having said on an update, that's discussed with customers. We just build more automation in it, and that means that there can be more changes in that. On the full year, we have 3% from price increase, and here again, the majority is the euro-based pricing.

[Operator]

And your next question comes from the line of Fulvio Cazzol.

[Fulvio Cazzol, Equity Analyst]

I have two. The first one from me is on Food Cultures & Enzymes. I noted that the volume/mix growth within this division of 6% is the lowest that we have ever seen since you've started to disclose that in 2016. I know that 1 quarter doesn't make a trend, but how should we think about the growth going forward? Is this a more realistic level versus the 8% to 10% that we have seen over the past 2 years? And I understand the whole sort of mix impact from the lactose enzyme growth and the slowing growth within bioprotection, but I just wanted to hear your thoughts on how we should think about that particular line going forward. And then my other question was for Natural Colors. I was under the impression that you'll be refocusing more on top-line growth, as opposed to margins, but that doesn't seem to have come through in this latest quarter, so how should we think about that strategy for that particular division going forward? Is that still the plan? Or is the focus more on profitability perhaps than we would have imagined since your Capital Markets Day?

[Søren Westh Lonning, CFO, Executive VP & Member of Executive Board]

Okay, let me take your first questions, answer the first question. On Food Cultures & Enzymes we are -- as you may remember from our Capital Market Day, we are guiding 7% to 8% organic growth in this area. And if you remember our growth driver model, then pricing, we expect to be around 1 percentage point. So according to the -- to our long-term growth ambition for this business area, then we would expect subsequently 6% to 7% volume growth going forward. So that's our long-term guidance towards '22. Now we've been in a pause, and there are no changes to that part. Now we have had some quarters now with very strong volume growth. And some of them have been supported by factors like bioprotection that will continue also going forward, but we've also had some tailwind from China. It had grown at an abnormally high level for some years. And that is normalizing a bit more now also giving the high market share that we have in the market. And we are seeing also -- I mean we saw very high milk productions some years ago, with a lot of the milk flowing into cheese. And that is also at a more normal level now. So I think we are maintaining our long-term guidance and, based on that, volume growth of around 6% to 7%. That's what that entails. If you look to your comment or question regarding Natural Colors, I will say that we are not changing our strategy or plans here. We are constantly trying to fine-tune the balance between sales growth and getting the right profitability. You're also absolutely right that we were looking into whether we had taken too tough a stand on this, and we continue to monitor that. We have at this point in time not -- how can you say it? We have not brought in, in Latin America, Natural Colors. This -- particularly in Latin America, this is a topic for us. We have not seen an effect of the adjustments that we have made at this point in time, but we are constantly checking that balance. And really we have to deliver on both. We can't live with not seeing top line growth, of course. And at the same time, we also want to deliver an attractive multiple -- profit margin in this business. So not a lot of effect yet of the initiatives, but we are constantly balancing this. What I would like to emphasize is that we did see a pickup in momentum in Natural Colors. We did grow 6% in this quarter relative to the 4% in the first half, so we are starting to see a little bit more traction in the color area, which we, of course, are pleased about.

[Mauricio Graber, CEO, President & Member of Executive Board]

And Søren, I would add just to that, that we will also not make any change on the direction of the color business. The rate of what I would call profitable growth will vary as well with the raw material trends. And sometimes when we have increases in raw materials, we'll reflect those on pricing and you may see the pricing component. But overall, the transformation of our natural projects -- of our Natural Colors division is about driving to best-in-class growth and leading our EBIT to the mid-teens, as we have indicated.

[Operator]

And your next question comes from the line of Arthur Reeves.

[Arthur John Reeves, Equity Analyst]

My question is about animal health in North America. You say that the sales have slowed down because of the pressure that dairy farmers are there under. We did talk about this at the Capital Markets Day. Is there enough margin in that business with prices that farmers can afford for you to get the growth that you're looking for from animal health, please?

[Søren Westh Lonning, CFO, Executive VP & Member of Executive Board]

I think there is. We're convinced there is. And I would also say, if we look at it internally, it is an area where we have quite attractive gross margins that are above the group average. So we -- it's not an area you can say for -- from a Chr. Hansen perspective where we have any reasons to not be pleased about the margins that we get out of it, but I think we need to -- we have to admit that in this business we will see a bit more volatility both from drivers, macro drivers and commodity prices et cetera, but also from the fact that, farmers and the veterinarians, they will constantly try out new products. And we need to be out there proving and convincing that our products are the best on the market. So that's the -- another dynamic that will also create a little bit more, how do you say, the fundamental volatility in the business than what you -- what we have in Food Cultures & Enzymes, where we had very little attrition when we -- than we are seeing there. So I think there is nothing here we -- in what we are seeing right now that we -- that is very abnormal and not something that we can't handle. And I don't think it means that -- for sure, it doesn't mean that the margin that we can command at the price point that we are selling at in the market would make it anything but attractive.

[Mauricio Graber, CEO, President & Member of Executive Board]

I think, Søren, that's a very good point. If I may add, I was personally with some farmers in the U.S. last month. And you see a strong conviction that better nutrition leads to better yield and performance for them. So I think our products will definitely command the margin entitlement that we expect. And it's more about a little bit of volatility that Søren talked about, what they can afford as they work with their nutritionists on the best solutions for their animals.

[Operator]

And your next question comes from the line of Jonas Guldborg.

[Jonas Guldborg Hansen, Analyst]

Mauricio, Søren, 2 questions from my side. First, regarding the North American dietary supplement market, you're talking about it bottoming out here in Q3 and also talking about the category growing solidly. Could you maybe put some numbers on these trends to kind of build your case here? And then just a clarification on bioprotection: As you say, it grew around 35% year-to-date and 25% in Q3. You are also guiding towards lower growth in Q4. Is it lower than the 25%, or lower than the 35%?

[Søren Westh Lonning, CFO, Executive VP & Member of Executive Board]

Yes, if I take your last question, first, I mean, we are not guiding specifically on this segment here, but we are -- what we are trying to say is that we had an extraordinarily strong first half of the year. And that means -- our year-to-date growth rate of 35%, giving that we have had this 1-year anniversary of some very large wins, that means that we expect less than the 35% also in Q4 and for the second half. But otherwise, I will not give specific guidance to [ defend ] this level here. And as I said, the activity level, the number of wins that we are seeing, we are seeing no reason why we shouldn't continue to report strong growth in the area. Then if we look to the North American dietary supplement market, then I think it's important to say that the market has been -- dietary supplements with probiotics have continued as a category for growth throughout this period here. The 2 factors that have impacted us is, first, that there have been more players coming in and more players coming in without the -- trying to sell their products at -- in a different way, claiming the number of bacteria as opposed to the quality and the impact of the bacteria. And that has created some confusion in the market. And secondly, there has been a move from the physical sales channels to the online sales channels, and that has also had an impact. And so that dynamic is still holding true, but the key customers that we are serving, remember we are working through partners here, they have been traditionally very strong in the physical retail part. They are building strength in the online, and you will see several of the players. You will find also on the top-selling brands on Amazon. So they are getting better and better all the time. So they are also growing in their end markets. So the market is more challenging, but it is growing. The thing that has hit us very hard this year is a customer that had built a lot of inventory which had brought that down and that's been a significant impact in this year here. And that is the reason why we are in negative territory for this year. That being said, that's a temporary effect. And we do expect, when we have closed this year, to be back in solid growth mode in North America dietary supplements.

[Jonas Guldborg Hansen, Analyst]

Okay, so just to understand fully. This one customer, is the inventory adjustment done now, or will there also be a negative impact in Q4?

[Søren Westh Lonning, CFO, Executive VP & Member of Executive Board]

It's -- the majority of it is done. And we -- and there will also be a negative impact in Q4 but to a smaller extent, but what -- we get 12-month forecasts from several of our customers here. And here we can see that these support a nice recovery when we start entering into financial year '19.

[Operator]

And your next question comes from the line of Heidi Vesterinen.

[Heidi Maria Vesterinen, Financial Analyst]

So a couple, please. So on margins, you're guiding to flat year-on-year. And I think, a few quarters ago, you had said that this guidance applies to all 3 divisions. Are you still happy with this assumption? And then secondly, just to clarify on animal health in North America: So are you already seeing a recovery in that business? Or are you hoping or assuming that it will come back because you think that milk price forecasts that are out there in the market are suggesting that commodity prices will come back? And then lastly, on colors, I think previously we had talked a bit about some customers shifting back into synthetic colors, especially in the emerging markets. Is this something that you are currently seeing?

[Søren Westh Lonning, CFO, Executive VP & Member of Executive Board]

Yes, Heidi, let me try to answer your questions. And can -- Mauricio can chip in. But at the Capital Market Day, we removed the guidance on the divisional level for EBIT, so it's not part of our guidance anymore for those regions. What I would say is that we have said, around -- earlier for the year, and it is also directionally correct, we have seen it's -- I think it's we -- if you look to Health & Nutrition, that will definitely pull more. And we'll see a nice improvement here. We will -- also, when it comes to Food Cultures & Enzymes and Natural Colors, we expect to see some good progress in Q4, but we will not -- it's not on the digit that we will hit the level of last year, but we expect to see improvement in those 2 areas also in Q4. And that's driven by, when you look to Food Cultures & Enzymes, we continue to expect some positive momentum in -- with the Copenhagen expansion. And in Natural Colors the profitability initiative continues to impact positively. And then, in addition, one of the things that has been killing us so far this year has been the massive effect from the U.S. dollar. As -- and we discussed earlier on the call that will be very limited based on the latest outlook on currency. So all that will help impact margins across our businesses. So to answer your question: We will see more -- we will see EBIT margin expansion in Health & Nutrition. And what we guide on that, it also means that some of the others will not fully be on par with last year, but we do expect to see improvements in both of these areas in Q4. Then you had a question regarding Natural Colors and whether we are seeing the reversal to synthetic color as a dominant trend. And that's not the case. We have seen it in certain markets, in a few incidents, but it's not a trend that we see happened in a very strong fashion and in a very broad geography context. So that's not the case, although there have been individual examples of that. And then you had a second question regarding...

[Mauricio Graber, CEO, President & Member of Executive Board]

I'll just comment a little bit, Søren, on the color, which is, Heidi, I think as I mentioned in my remarks, what you see is consumer demand for naturals is continuing at the very high level. How the customers are responding to that, I would say mostly by all of the new launches being with natural colors, the conversions continue. And it has been just a very few selected categories, cereal as an example, where there have been some shift back to artificial or keeping the natural and the artificial, but overall the trend continues toward the conversion and the launch of natural-color products.

[Søren Westh Lonning, CFO, Executive VP & Member of Executive Board]

And then you had a question regarding, Heidi, animal health and the milk and what the impact would be for the -- maybe the longer-term growth assessment of this business. And we don't see these things to be changing our long-term ambition for the division of being plus 10%. We are not guiding specifically for '19 at this point in time. And we're not going to do it here either, but we are seeing -- we expect to see some improvement in this over the coming quarters in North America. And we also expect outside of North America. Remember this is where we invest in building a stronger sales and technical support presence, and here we expect to see continued strong growth in the coming quarters. So we do expect animal health to improve in Q4. And we also expect that the fluctuation in milk and pork prices that we see right now is also more -- is something that [ we'll also recall when we ] create a better foundation in North America. So it's not changing our long-term guidance, and we expect to come back over the coming quarters. And then I think we have time for one more question.

[Operator]

And the next question comes from the line of James Targett.

[James Targett, Analyst]

Just 2 final ones from me then. Just a -- I want to follow up on, also check out a couple of the areas where you did say sales declined in the third quarter which you haven't talked about, which is, I guess, cheese in APAC; human health in EMEA; and I think, Natural Colors in North America and Latin America. Just in terms of what -- where you see the trajectory for those particular areas over the next couple of quarters. And then secondly and maybe a question for Mauricio, just your kind of view on Chr. Hansen's portfolio. A few of your -- I guess the wider peers have been moving into more adjacent categories to sort of increase their offering to customers, including I guess where you come from, so I just wonder what your thought was about Chr. Hansen's much more narrowed focus and whether you think there is room for broadening out the scope a little bit.

[Søren Westh Lonning, CFO, Executive VP & Member of Executive Board]

Then maybe let me address your first question, James. If you look to the areas of the sales decline, then in cheese APAC, do bear in mind that it's a quite small market and a very large part of that is in Australia and New Zealand because there is a relatively low cheese consumption in Asia in general. So this very much -- the weakness here very much relates to Australia, and we have seen milk production coming down in Australia. And that's the general trend simply because of the changing climate conditions also as one element, so don't read too much into it. It's one country, and it's a relatively small segment in Asia Pacific. And it's not having a large impact on our overall, say, cheese growth. That being said, Australia is challenging at the moment because of lower milk production generally. That also flows into cheese. Your second point was related to human health in EMEA, and here maybe 2 points. One is that we have some decline right now due to a few very specific customer events. One was a customer who made a large launch last year. And there are some -- how do we say it, some timing of that also on their inventory, which impacts our sales negatively this year. And another one, there has been some merger activity also which creates a little bit of a defocus with one of our customers on this. So we aren't going much into details. There are some specific customer things right now that is impacting us. That being said, human health in EMEA is an area that -- where we expect growth going forward, but also it's the area where we have the -- a relatively high maturation in some of the markets that we are serving. So it's not the high-growth market of human health. That will be more North America. We've been here for a while and we continue to see growth here, but it's an emerging market that will be a very important growth driver also going forward here. And then you had a last question, and I'm...

[Mauricio Graber, CEO, President & Member of Executive Board]

I will take that on. I think the last question was, James, about some of the Chr. Hansen portfolio and my early reads into that. And a great question. Thank you for that. So I would say there's probably very few companies in the world that have a growth opportunity of 8% to 10% and improving margins, and I think that's one of the things that makes Chr. Hansen so unique. And coming up -- out of the -- I will say, the equity years, the focused execution of this platform and the Nature's no. 1 strategy, I think, is a very strong pillar for us to continue to be focused on. So the way I see the portfolio of Chr. Hansen today is we have a very strong base in food culture and enzymes, our growth engines in Health & Nutrition and colors. So 3 legs for a company performing very strongly. And when I see the execution at the customer level, we bring a lot of value by selling, take a dairy example, food cultures and enzymes into a dairy product, where we are now adding bioprotection and we can add probiotics. So I think the portfolio is very strong. And our best direction will be continue to be as a focused company executing strongly against the Nature's no. 1 strategy.And that concluded the Q&A session.

[Søren Westh Lonning, CFO, Executive VP & Member of Executive Board]

Thank you, everybody, for joining.

[Operator]

That does conclude our conference for today. Thank you for participating. You may all disconnect.