Chr Hansen Holding A/S

CSE:CHR

Earnings Call Transcript 2022-Q3

[Operator]

Hello, and thank you for standing by, and welcome to the presentation of Chr. Hansen Interim Report and Conference Call Q3 2021 to 2022. [Operator Instructions]. I must advise you that this conference is being recorded.

I will now like to hand the conference over to your speaker today, Chr. Hansen's CEO, Mauricio Graber.

[Mauricio Graber, executive]

Thank you. Good morning. and welcome to the presentation of Chr. Hansen's Q3 results for the financial year '21/'22. I am here with our CFO, Lise Mortensen, and we will walk you through the highlights of our last quarter, as well as our outlook for the full year before we open up for Q&A. Before we move on, please take notice of the safe harbor statement. Thank you.

Let's turn to the next slide, Slide 3, please. In a challenging business environment, with increased geopolitical risk, high inflation and tight supply markets, Chr. Hansen continued its very solid track record in the third quarter, delivering 9% organic growth in Q3 corresponding to 13% euro growth. Food Cultures & Enzymes delivered solid growth, while Health & Nutrition grew strongly. However, volume growth slowed down as expected following the extraordinary growth in the first half of the year. Year-to-date organic growth was 11%.

The Q3 EBIT margin before special items was 26.7% minus 2.6 percentage points below last year. The decrease was mainly driven by the negative impact from high input costs and increased cost levels from initiatives to mitigate the challenges in the supply chain. This was only partly offset by pricing initiatives that have started to contribute positively, as well as production efficiencies and the positive impact from currencies. Overall, this brought the year-to-date EBIT margin before special items to 26.3%, 1 percentage point below last year. Free cash flow before acquisitions and special items amounted to EUR 30 million in Q3 and EUR 116 million year-to-date, which was down from last year due to higher taxes paid.

Let's turn to the next slide, Slide 4. Looking at the strategic and operational highlights of the quarter. We remain focused on commercial execution and securing supply for our customers while responding to increasing inflationary pressures. In Food Cultures & Enzymes, we continue to work with our customers on cost savings by leveraging our product portfolio on yield optimizing solutions and productivity concepts such as CHY-MAX Supreme and YoFlex Premium. We also launched new products in our fermented plant-based Lighthouse, in close collaboration with our industry partners and continue to advance our commercial pipeline in Bioprotection.

In Human Health, growth started to normalize in the third quarter according to expectations, but the team was very active driving forward its commercial agenda by presenting the depth and breadth of our strength to solution product offering with the additions from the acquisitions at several of the industry events and also discussing with customers the current status of the gold brain research.

In HMO, we continue to see strong interest from global and local infant formula companies, and we are tracking very well on our plans for the year. Looking further ahead, it was positive to see that the business received new regulatory approvals for 2FL in Australia and New Zealand and for 3FL, 3SL and L&T in Europe.

Dynamics in our agricultural business remained the same as in the first half of the year. While crop farmers have been benefiting from increased commodity prices, our customers in Animal Health have been increasingly under pressure to save costs, creating a more challenging selling environment for animal feed probiotics. In Plant Health, I am pleased to share that we've launched a very positive -- that we've launched our very first product with our partner, UPL, a biofertilizer for fruits and vegetables in India.

Looking at the Lighthouses combined, which accounted for approximately 10% of revenue. They delivered 29% organic growth in the third quarter while the core business delivered 7% organic growth. Year-to-date, the growth in the Lighthouses amounted to 25% while the core business was 9%. A key priority during the third quarter remained the implementation of price increases, in close collaboration with customers to address the accelerating inflationary pressure.

We have made good progress to date with the time lag between implementation and new orders and the need to find the right balance between protecting margins and securing volume. It will likely take us a bit longer than initially expected, until we fully recover the input cost increases.

I would like to emphasize that even for defensive industry like ours, the current macroeconomic environment especially inflationary pressure and lower purchasing power, but also customer focus on business continuity and cost out, presents a risk to short-term volume. And we can see that in the underlying market developments whether it's dairy, supplements or animal probiotics. It's a very challenging time for the industry and our customers, but we believe that with our offering, specifically our productivity solutions, we are well-positioned and can support our customers.

Returning to Q3 performance. Please turn to the next slide, Slide 5. Food Cultures & Enzymes delivered 6% organic growth in Q3, leading to 7% year-to-date, with solid growth in dairy supported by continued strong momentum in cheese and strong growth in food and beverages. Pricing contributed 2% for the division in Q3 as we started to see the impact from the various pricing initiatives. Health & Nutrition saw strong growth in Q3, with 13% organic growth, including 1% for pricing, leading to 17% growth year-to-date, driven by Human Health and HMO with very strong growth. As commented earlier, the growth in human normalized during the quarter as expected, after the first half of the year with high activity levels. Despite phasing of Plant Health orders and a more challenging selling environment for feed probiotics, Plant and Animal Health delivered good growth.

Please turn to Slide 6 for the regional performance. Solid progress in developed markets continued in the third quarter, while the business environment in emerging markets remain challenged, particularly in Latin America, Middle East and Africa and China. EMEA delivered 10% organic growth in Q3 and 11% year-to-date, driven by very strong performance in Health & Nutrition, supported by strong Human Health and HMO sales. Solid growth in Food Cultures & Enzymes was supported by pricing, including euro-based pricing.

North America continued a strong track record, delivering a 10% organic growth in Q3 and 11% year-to-date with strong growth in Health & Nutrition. HMO delivered strong sales growth despite the general supply issues with the broader infant formula market in the U.S., while the activity level in human health normalized following the very strong second quarter. In Food Cultures & Enzymes, solid momentum in cheese continued in North America.

Growth in Latin America was impacted by order timing in Plant Health, a negative impact from euro pricing related to the strengthening of the Brazilian real, leading to 1% organic growth in Q3 and 8% growth year-to-date. Lastly, our region, Asia Pacific grew 9% in Q3 and 10% year-to-date, with very strong growth in Human Health supported by new business wins in the Infant & Children segment and despite the renewed COVID-19 lockdowns in China. Growth in FC&E was seen outside China, especially in India while China declined compared to last year. While we had expected a decline in the second half for China, the lockdowns have had an additional negative impact, making it impossible to visit customers and advanced commercial projects.

Now for the financial review of the third quarter, I would like to hand over to Lise.

[Lise Mortensen, executive]

Thank you, Mauricio, and welcome, everyone. Please turn to Slide 7. Our Q3 group EBIT margin before special items came in at 26.7%, which is minus 2.6% below last year, driven by continuing higher input costs and increased cost levels to mitigate challenges in the supply chain, a general ramp-up of activities after COVID-19, the donation of the profit from Chr. Hansen LLC in Russia and nonrecurring costs related to an organizational change. This was partly offset by pricing and production efficiencies and positive contribution from currencies of around 1%.

Absolute EBIT before special items in Q3 amounted to EUR 85 million, up 3% compared to last year. The increase was driven by the strong sales development in Health & Nutrition, while EBIT in Food Cultures & Enzymes was below last year, mainly due to negative impact from higher input costs and increased cost levels to mitigate challenges in the supply chain.

Looking at year-to-date. EBIT before special items increased by EUR 21 million to EUR 234 million. The year-to-date EBIT margin before special items was 26.3% compared to 27.3% the year before. The drop was again due to higher raw materials and freight costs, increased cost levels to mitigate challenges in supply chain, a general ramp-up of activities and as mentioned in earlier quarters, the full inclusion of HMO. And this was only partly offset by the strong sales performance, pricing initiatives and a positive contribution from currencies.

Moving into the segment margins. As already mentioned, Food Cultures & Enzymes were significantly affected by higher raw material and freight costs, as well as increased cost levels to mitigate challenges in the supply chain and the general ramp-up activities as well as the before mentioned donation and the nonrecurring costs. This was only partly offset by pricing initiatives and a positive impact from currencies. And the Q3 EBIT margin before special items came in at 28.4% compared to 33% last year. Year-to-date, the division reported 29% EBIT margin before special items compared to 31.6% the year before.

In Health & Nutrition, the Q3 EBIT margin before special items reached 23.9% compared to 22.7% last year. The positive development was due to the scalability effects from the strong sales performance, acquisition synergies and currencies that more than offset the higher input costs and activity level. The year-to-date EBIT margin before special items for the division reached 21.9% compared to 19% last year.

Please turn to the next slide, Slide 8, for the cash flow. Free cash flow before special items stood at EUR 116 million year-to-date compared to EUR 120 million last year, driven by lower cash flow from operating activities that offset reduced operational investing activities. The operational cash flow was below last year due to a meaningful increase in taxes paid. This, however, needs to be seen in the context of last year, which was positively impacted by onetime impact from acquisitions.

Return on invested capital, excluding goodwill, was 23.3% compared to 23.7% last year. The decrease was driven by Food Cultures & Enzymes, which was down compared to last year, due to the negative impact from higher input costs and general ramp-up activities while the return on invested capital in Health & Nutrition improved compared to last year due to the strong sales development.

Let's now move on to the outlook. Please turn to the next slide, Slide 9. Despite the macroeconomic challenges, we remain confident to deliver on our targets for the year. With the visibility we have after the first 9 months, we narrow our organic growth target from 7% to 11% to 8% to 10%. For Q4, we expect to see a slowdown in volumes, in part due to the comparable in SG&A from Q4 last year, timing of orders in Health & Nutrition and a potential impact from the geopolitical situation. This is expected to partly offset by a continued increase in pricing. However, given the delayed impact, the contribution from pricing for the full year is likely to be closer to 2%.

Moving on to profitability. The delayed impact we have seen from pricing combined with the continuing inflationary pressure and efforts to secure our supply chain had a negative impact on our EBIT margin before special items. However, at [ 27.3% ] for the quarter and 26.3% for the first 9 months, we remain on course to deliver within our guidance on both EBIT margin and free cash flow before special items. This means that the EBIT margin before special items is still expected to be in the range of 26% to 27%. And the free cash flow before special items is expected to be around EUR 140 million to EUR 170 million.

Finally, I would like to give an update on the effective tax. From this quarter onwards, our tax rate will increase from 23%, towards the range of 24% to 25%. The increase is mainly driven by our acquired businesses, which have changed the geographical balance of our tax payments.

With these comments, I would like to hand back to Mauricio.

[Mauricio Graber, executive]

Thank you, Lise. Despite the challenging business environment, Chr. Hansen grew solidly during the first 9 months of our fiscal year '21- '22, which provides us with a strong foundation to reach our narrow updated targets for the year that Lise has just presented. Fiscal year '22 remains a year of execution for Chr. Hansen. We will continue our journey in collaboration with our customers as a differentiated bioscience company focused on our microbial and fermentation [indiscernible] technology platforms while mitigating the ongoing supply chain constraints and managing our cost base tightly as a response to accelerated inflationary pressures.

Thank you all very much for your attention. Now let's open up for Q&A.

[Operator]

[Operator Instructions] Our first question comes from the line of Alex Sloane from Barclays.

[Alexander Sloane, analyst]

Maybe just the first one, just on the pricing outlook and bringing that down, maybe you could give a bit more context on why it's taking longer than you expected for the pricing to come through. And then just secondly, just in terms of the longer-term margin ambitions, over 30% reiterated, obviously, in the statement today. I guess a key driver of that is still expected to be the HMO business moving from losses to profits. Can you maybe give us an update on where you are in terms of the timeline for the in-sourcing of manufacture of HMOs in Denmark, please?

[Mauricio Graber, executive]

Thank you, Alex. I'll take a part of the question and then pass it on to Lise. I think just overall in pricing as I stated in the call, we're managing the collaboration with customers to adjust prices and volumes. I think overall, we started to see the benefits in Q3. I think we will see in Q4 more of prices given that the Wave 2 of pricing will come into Q4. But obviously, as stated, this is a challenging environment. Our plan is still in line to compensate all input costs with price increases, but it will take us a little bit longer. I think that's the color I can give to that.

On HMO, I think we continue to see some of the advances in science, as well as in the volumes of HMO that contributed to a strong performance in Q3. We're still developing our plans for the size and scope and timing of the in-sourcing of fermentation that we have said, we will face it as we get clarity on the market developments. So we haven't yet made a firm commitment to that time line we have continued to develop the volume, the design for our upstream and downstream fermentation processes.

Lise?

[Lise Mortensen, executive]

Yes, just to add on that, on the impact on the long-term financial ambitions. Of course, there's an improvement of the profitability of the HMO business included in our calculations and expectations. However, do remember that in the overall scheme of things, it will still be a relatively small part of the business. So as you think about the margin expansion towards FY '25, it's not the largest component. And then if we talk about our long-term guidance because as you might have seen, we have added a little bit of wording around it in our announcement.

We maintain the ambition. To be industry-leading and profitable growth and with strong cash flow. We do, of course, take the opportunity to state the uplift, which is that the geopolitical environment, the inflationary pressures, the things that are a little bit outside of our control, we are highly sensitive, too, that this situation will normalize.

But we do maintain our plan. And if these things will happen that we can adjust our prices, as Mauricio talked to. If we see a normalization in the supply chain and then the macroeconomic environment. At this point in time, we don't see any reason to abort from our ambition.

[Operator]

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

[James Targett, analyst]

A couple of questions. So firstly, just on, I guess, the full year organic growth guidance. I mean we're in July, and I appreciate your comments on pricing, but it still implies a very wide range of outcomes for volumes in Q4. So I wonder if you could sort of drill down as to what exactly is giving you the extent of volume uncertainty for Q4 to give that still very wide range of implied in the guidance. And then secondly, just a couple of -- a bit of color on some of the profit moving parts in Q3. You mentioned the organizational change, nonrecurring costs, the Russia donation. Can you possibly size how big those were? Just so we know what that contribution was in Q3. And actually just remind us an update on what that organizational change was.

[Mauricio Graber, executive]

Thank you, James, for the questions. I think, Lise, I will mostly pass it on to you. But just commenting in general on the Q4 guidance. James, I would say, the major factor that you need to take into consideration is the disruption that we're seeing in the supply chain. This is a highly sensitive moment where there's a lot of challenges in making sure that we can deliver on time on full to our customers, and that's our main focus.

So if you look at some of the elements, you will have a high comparable for Food Cultures & Enzymes. And you will have, obviously -- we expect that continued normalization of the health and nutrition volume growth. For sure, we target to deliver a strong Q4. But I think given all the uncertainties, we keep sort of a larger range than usual in what could be the volume growth for Q4, given that we recognize that pricing will be a stronger component for the quarter.

[Lise Mortensen, executive]

Yes. And maybe building a little bit on what Mauricio says, please don't take Q4 as the picture for how we expect the future to go on. Q4 is impacted by the fact that Food Cultures & Enzymes had a quite solid volume growth in Q4 of last year, extraordinary high, and the points that Mauricio was maintaining. On the profitability on the nonrecurring items, it's about 1 percentage point impact on the margin in Q3.

[Operator]

And the next question comes from the line of Charles Eden from UBS.

[Charles Eden, analyst]

My first one, just following up on James' question. I just wanted to dig on the Russia comments and the contribution. I guess, the sales but also profit in the quarter, obviously, you donate it. But I'm trying to frame that EBIT contribution in the prior year to see what the sense was the drag on the margin from that not being in your EBIT for Q3 '22? And then secondly, just in the release, you talked about the timing of orders determining sort of the growth for the guidance change for this year. Can you just update us on that? Is that mainly human? And just maybe some color around that scope of timing of orders that you mentioned in the release?

[Lise Mortensen, executive]

Maybe I should start just with the EBIT comment. The donation for Russia in Q3 was included in the nonrecurring item I was referring to, which a couple of components amounted to around 1 percentage point in this quarter. And as earlier said, we expect the donation for this fiscal to be in the range of EUR 1 million to EUR 2 million in total.

[Mauricio Graber, executive]

And just rounding off on the comments on Russia during Q3. As you know, we have made our statement very clear that we condemn the Russian invasion of Ukraine. We have continued operations only on what we consider essential foods, mainly our Food Cultures & Enzymes and Human Health probiotics. There was slightly higher shipments in Q3 as there was inventory concerns but we expect that to normalize in Q4. I can also report that we have continued our operations in Ukraine where the risks are up and running and providing nutritious fresh dairy and cheese to the population. So that is also positive.

On the timing of orders, I think there's usually timing of orders always around the end of the year or the end of the quarter. And this is a year where it's very difficult to do any timing of orders because of the supply challenges that exists, Charles. So I think we're just being a little bit conservative. The challenges on the supply chain are both in transportation and logistics, as well as in direct and in materials, and you find the global supply chain that's quite challenging to operate. So you're right, there's largely driven by some parts of our business, but it affects only potentially human, but also Plant [indiscernible] and HMO.

[Operator]

And the next question comes from the line of Søren Samsøe.

[Soren Samsoe, analyst]

Søren from SEB. Two questions from my side. First of all, it seems like you have quite weak growth in Lat Am, minus 1% in Q3, which was much stronger in first half. Just if you can comment on what is actually going on there, and if that's something we should continue seeing in next year? Is there any negative effect from euro pricing here for example? And then the second question is on HMO. You see several encouraging regulatory approvals in some markets. If you could elaborate on what -- when does this when do you think this will start to give a commercial impact to you? And also, if there's any other regulatory approvals coming up in other markets that we should take notice of? Thank you.

[Mauricio Graber, executive]

Thank you, Søren. And Lise, I'll set a little bit with LATAM, and you can complement as well. So in LATAM, indeed, the volume growth was in line with the organic growth. So we saw a weaker performance in LATAM, I think I mentioned during the call that if you see the strength of our performance, Søren, and Lise has been benefited from a strong performance in developed markets. The strength of North America, I would highlight but Europe also performing quite well versus more challenged developing markets like China and in this case, Latin America.

For sure, there was a negative impact in Latin America from euro-based pricing. And that is a good thing, I believe, for you guys to see that when a currency like the Brazilian real strengthens, then we would see, let's say, a lower organic growth even though our euro growth has been quite strong overall. So I think that hopefully, that provides some color into Latin America.

I do expect Latin America, it has 8% growth year-to-date. I think Latin America, our productivity initiatives with customers -- CHY-MAX Supreme has been performing extremely well there. So I think Latin America will continue to do well, but developing markets are facing a more challenging environment. On HMO, I would just reiterate what we have said, Søren, and that we expect HMO to continue this track of growing above 20% on a year-over-year basis. We are in line to deliver that for this year, well online to deliver on that for this year. And I would also see that going forward with the additional approvals that we get some of the specifics HMO mentioned.

We have also said that from a stage gate, the approval in China will be an important approval in the future. But we cannot necessarily predict when that will happen, and I think probably '24 would be a reasonable expectation for that. Lise, anything on these that I haven't covered?

[Lise Mortensen, executive]

Well, maybe just 1 mention that. Of course, we also have price up efforts in LATAM, but this is more than offset by the euro-based pricing driven by the Brazilian real so.

[Operator]

The next question comes from the line of Lars Topholm from Carnegie.

[Lars Topholm, analyst]

Yes, I also have a couple of questions. Going back to the question about implied growth in Q4, I think to reach the middle of the organic growth guidance range you need to grow for 5%. And if we assume 4% comes from price for the quarter, that means very little volume mix. So I just wonder if you can pinpoint the areas where you see volume mix being softer in Q4. And then, Lise, you mentioned this doesn't necessarily imply anything about next year. So I just wonder how should we think about next year? And I'm not asking for a guidance here, but more which factors you see haunched in Q4, that does not apply to next year? And then the second question goes to what you're experiencing right now in terms of potential mix changes, in terms of consumers trading down. I guess, the risk particularly relates to yogurt and to dietary supplements. So I just wonder if you have some sort of up-to-date comments on what goes on in your markets.

[Mauricio Graber, executive]

Thank you, Lars. I will start with the mix changes, and Lise, I'll pass it on to you for Q4. So Lars, indeed, there's these concerns on what may happen with a more recessionary environment mix changes, consumer disposable income, I would say we are less concerned about dairy or even fresh dairy because just remember that there, we are quite well-hedged from being premium brands to private label to local customers, regional customers, large global customers. I think the only market where the down trading has historically affected us is really in China, where you have this chilled versus ambient, and China is already, let's say, at a low level of performance.

Your point on mix, I think is a good point on supplements. Will consumers that are, let's say, more pinched more disposable income sustain their level of consumption of dietary supplements that is, for sure, an area of concern. And I think we have also pointed out that with customers we are seeing from a mix more demand on productivity, yield improvement versus add-on projects like Bioprotection. And even though the Lighthouses continue to grow well, and we're building good pipeline, closing some of the projects on value-added products. It's been more challenging during this period. Lise, on Q4 and questions.

[Lise Mortensen, executive]

Yes. And thank you, Lars, for the question. It is just important to highlight that if you look at the volume growth in FC&E in Q4 of last year, it was extraordinary. And we have an unchanged ambition to outgrow the underlying markets. That is the ambition for -- going forward, which means that a very soft volume in FC&E in Q4. That's not what we are expecting going forward. And when it comes to Health & Nutrition, this is a business where order timing throughout the year has some impact. We have also said in previous quarters that Q4, for example, for Plant Health and HMO will be up to negative simply because of the order timing and the sizes of the business. And then further normalization of the Human Health business, I would like to call out also. But remain -- you can remain safe in your expectations that our ambition is to outgrow the underlying markets, that we are, of course, to some extent, impacted by.

[Lars Topholm, analyst]

My question is also if part of the soft Q4 is because the underlying market grows a little bit less. And then, of course, I fully respect you are seeing you growing faster than the underlying market. But it's more to put things in the right bucket. How much of a softer Q4 is market related and how much is Chr. Hansen specific -- because I would think if we had a Q4 conversation after Q2, you would have been aiming for more than 4%, 5% organic growth. But maybe I'm wrong.

[Mauricio Graber, executive]

Well, there are specific areas like the supplement market in the U.S. has been slowing, and we can see also that in the data. You have China that I don't think in Q4 will recover from the opening from the lockdowns. And basically, I think what I would just reiterate is our long-term financial ambitions to grow between mid- to high single digits. We have consistently delivered on that. Our variation in quarters like we are expecting a slower Q4. But if you look at the context of the year overall, the 8% to 10% will be, let's say, on the upper end of our long-term financial ambition. And I think it's great that even in such a challenging year, we're able to deliver that.

[Lars Topholm, analyst]

I don't question that at all, Mauricio. In fact, I think it's quite convincing. My only problem is still that if part of the softer Q4 is your end market slowing down, why wouldn't that be an indication that -- or what you say, a slower exit rate out of this year means a slower entry rate into next year. I just didn't understand the comment that we couldn't make that conclusion.

[Mauricio Graber, executive]

Yes, and I think what we are basically telling you, Lars, is we have faced more challenging underlying markets in several quarters or several years. And overall, throughout the years, we have been able to outgrow the markets. So I think we were transparent that it's a more challenging environment, both from a growth and from our supply chain perspective. But the specifics of making Q4 more challenging from a volume perspective is really the comparables to last year and the specific one-offs that we have mentioned for order phasing in Plant Health and HMO. So I would honestly not read too much into that other than the clear transparent information we're giving you.

[Operator]

And the next question comes from the line of Faham Baig from Credit Suisse.

[Mirza Faham Baig, analyst]

Could I ask 2 follow-ups on the macro side of your commentary as well as a separate question? So firstly on the macro side in dietary supplements, to what extent is the slowdown related to a very tough comparative over the last couple of years as we've been in a health crisis? And to what extent are you actually seeing consumers exit this category, particularly because I know you're highlighting down trading in this category. But post the UAS acquisition, I wouldn't expect that to be a big negative for you because of the business you've bought and the ability to supply at the lower end as well. So that will be my question on that.

And then secondly, on the macro front, you mentioned dairy, you're less worried about. But historically, we've seen consumers down-trade from higher value-added products to lower value-added products, which might not have probiotic strains in the yogurt. And correct me if I'm wrong, your probiotics sales seems like turned negative in Q3. So why are you less worried about that side of the business?

And the final question I have is on Lighthouses. Lighthouses business grew in Q2 around 12%, but stepped up pretty remarkably in Q3. I don't believe there was a tough or easy comparative in Bioprotection. And at the same time, you highlight growth in plant and HMO normalized in Q3. So I just want to understand what drove that sequential acceleration in Q3.

[Mauricio Graber, executive]

On the Lighthouses, I think we did not say that, that growth in HMO normalized. Actually, HMO had a strong growth in Q3. And that contribute obviously strong to the Lighthouses. We also saw that fermented beverages had a strong performance. So overall, the lighthouses performed well in Q3. As we just mentioned, despite the challenges of value of this being, let's say, in some cases, value on, so I'm happy to see that customers are valuing the innovation, and that we continue to see good tracking in the Lighthouses as let's say, accelerated growth initiatives. Your question on dairy is a fair one, and you know when I said I'm not that concerned, there's obviously a level of concern, right? We would rather see customers up-trading in higher disposable income.

But basically what we have seen through other crises is that our dairy business has not been that affected by down trading. Remember that you are correct that some of the brands that would have probiotics -- something, is an upselling opportunity. But you should also remember that in some of the global, let's say, markets and I mean excluding there China, if you have sometimes a lower price point, fresh dairy, for example, it may have more of Chr. Hansen solutions, for example, to have less dairy protein and a very strong culture that still provide a very good texture and a very good flavor for the finished product.

So our ability to support great tasting, fresh dairy across the different price points, holds very true. And that's why I said it's not that I'm not worried, I just said I'm less worried about the down trading in dairy. Was there any other part of the questions we should answer? Yes, I think good question on dietary supplement.

It's true that we -- as mentioned in the call, we have a larger breadth and depth of dietary supplements and a larger reach through the different channels. Omnichannel, online, traditional retail, et cetera. And we should be better diversified. But I think the question, to what extent will consumers either continue to access the category or remain in the category. I think it's safe to think that it will be more challenging on the more economic conditions.

[Operator]

And the next question comes from the line of André Thormann from Danske Bank.

[André Thormann, analyst]

So my first question is in terms of order timing in Health & Nutrition, I wonder whether you can help us quantifying with how much of the Q3 growth in Health & Nutrition came from order timing. I think you did quantify it in Q1. So I wonder whether you can help us with that again. And then the second thing is in terms of -- is a follow-up on the down trading theme that you have been talking about. Can you maybe elaborate a bit on how this risk affect your ability to keep on raising prices on -- especially dietary supplements.

[Mauricio Graber, executive]

Thank you, Andre. So Lise, I'm sure you wanted to talk about the timing of orders. But in Q1, it was something that's more specific, there's nothing in Q3 to sort of quantify, right?

[Lise Mortensen, executive]

No, and it's important for our Health and Nutrition business really to say, look at it on a full year basis because we do have these fluctuations driven by order timing.

[Mauricio Graber, executive]

Then on the second part of your question about prices. So I would say, price negotiations with customers are always challenging. And we got to take them in the point of long-term, let's say, rewarding negotiations with customers. I don't think the element of down-trading affects the negotiations with customers because we're passing price increases to all customers based on the input costs that we have and that we are seeing. And that basically applies across all the customers based on their portfolio.

So obviously, whether you see a down trading in the market, the customers will have a price increase across all segments and across all categories. And if I want to provide a little bit more light on pricing, I would say, customers are being receptive to price increases. The negotiations are not easy, but were concluded successfully. And then customers as they go to market, have separate several tools on how they're going to absorb those price increases with packaging and volume and sizes and the whole mix that they have. So it's been a journey where our commercial organization has spent a lot of the diligent time with customers to pass the price increases across all business areas and across all geographies.

[André Thormann, analyst]

Can I just come with one follow-up just on pricing? I mean, now you're talking about 2% instead of 2% to 3%. Just to be sure, in which business segment is it that you have seen a delay here? Has there a been more in Health & Nutrition or Food Cultures & Enzymes?

[Lise Mortensen, executive]

I would say it's both places, but it it's Food Cultures & Enzymes that's more impacted by the input cost inflation. And if you think about the nature of our Health & Nutrition business, the order lead times are quite long, which in itself has an in-built delay to a price up.

[Operator]

The next question comes from the line of Rickard Anderkrans from Handelsbanken.

[Rickard Anderkrans, analyst]

Rickard Anderkrans from Handelsbanken here. So first one on China. Can you provide any quantification of the negative impact from China here in the quarter, and perhaps also sort of a current trading or at least an outlook on your assumptions into Q4? And finally, you also mentioned in the report looking at U.S. sort of traditional retail channels are slowing down a bit. Can you talk a little bit about that dynamic? And if there's anything you can do to sort of mitigate or offset that slowdown in the traditional U.S. retail channels?

[Mauricio Graber, executive]

Sure. So for China, we have said the year all along that we expect that even though if the overall fresh dairy market in China declined, that we would be flat to slightly positive. I think with the lockdowns, we are seeing that we will be slightly negative for the year.

So nothing significantly, I would say that a material change other than China turning slightly more negative to our expectations because of the lockdowns. And as I mentioned before in the call, the lockdowns have really affected 2 things. One is the consumption because fresh dairy is consumed usually on-the-go, also for gifting. And the other thing that it has affected, it has affected our ability to push the pipeline and close projects as we did not see customers during 8 to 10 weeks between the phases of those lockdowns.

On the U.S. retail and the traditional channel. I would just say other than cheese where we have a play in foodservice, most of our products would to retail. Obviously, on the dietary supplements, we now have a larger presence online. But there's nothing -- there's not a lot of tools that we have when retail sees a slowdown. I think it's logical to see that we will see a slowdown as well in our volumes, and that's why we have been a little bit mentioning the more challenging operating environment.

[Operator]

And the next question comes from the line of Georgina Fraser from Goldman Sachs.

[Georgina Iwamoto, analyst]

So you're facing your own kind of supply chain challenges at the moment. I was just wondering if any of your customers are starting to worry about the ability to secure raw materials in light of risks around Russian gas flow into Europe? And if you could remind us if you have any particular exposure to natural gas in your European operations.

[Mauricio Graber, executive]

Thank you, Georgina. I'll talk about the supply chain challenges and Lise, I'll pass it on to you, if you want to talk about gas. So Georgina, as a focused microbial implementation technology platform company, I think our supply chain is relatively narrow, right? Then we still face challenges. So obviously, our customers that have a much broader supply chain, they are facing challenges. Probably, our challenges are a fraction of the overall challenges, if you are in business -- in a business-to-consumer environment.

So obviously, what we try to do is to identify risk, flag risk, have alternative suppliers, have alternative sources of suppliers. What you end up finding is that in several cases in this in the economy that was highly globalized, even if you have different suppliers, they may go back 1, 2 or 3 steps down the supply chain to the original supplier or to the original same material that would be -- that might be in shortfall due to the supply challenges that we are facing. So that's the overall challenge with the, let's say, fragile supply chain as it relates today. Lise, you want to cover our natural gas sales?

[Lise Mortensen, executive]

Georgina, gas is not a large part of our energy consumption. However, our fermentation is dependent on gas in Europe, in Denmark and in Germany. At this point in time, we still see ourselves on the list of critical food suppliers. So not as much as risk as other industries might be. But of course, we've taken our mitigating actions so that we will be able to operate should we lose our access to gas, and it will be a less green solution, but that's how it is.

[Operator]

We have a follow-up from Søren Samsøe from SEB.

[Soren Samsoe, analyst]

Yes, just a question regarding the margin. Maybe you can quantify the negative effect on the margin from higher logistics costs and random costs that you expect in Q4. And then just if you could tell us in which quarter we will stop seeing ramp-up costs being a headwind year-over-year on the margin.

[Lise Mortensen, executive]

I think the way to put it, Søren, is that it is the input cost inflation and whatever extra cost we carry to kind of safeguard our supply chain. That's the largest part of our drawdown on the margin. The ramp-up of activity should normalize when we go into next year.

[Mauricio Graber, executive]

And we expect pricing in Q4 to have a larger component as it relates to margin.

[Lise Mortensen, executive]

Yes. So when you think about EBIT margin in Q4, the pricing impact will be more on the positive there.

[Soren Samsoe, analyst]

And that, I guess, will be mostly in Food Cultures & Enzymes and not so much Health & Nutrition.

[Lise Mortensen, executive]

Both businesses, but we are pricing more in Food Cultures & Enzymes, you're right.

[Mauricio Graber, executive]

Thank you, Søren. On that note, this concludes today's conference call and Q&A session. Thank you all for joining this morning, and we very much look forward to continue the dialogue with you in person or through the virtual meetings over the next coming weeks. Thank you all.

[Operator]

This concludes the conference call. Thank you all for attending. You may now disconnect your lines.