Givaudan SA

SIX:GIVN

Earnings Call Transcript 2022-Q2

[Operator]

Ladies and gentlemen, welcome to the Givaudan 2022 Half-Year Results Conference Call and Live Webcast. I am Alice, the Chrous Call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions] The conference must not be recorded for publication or broadcast.

At this time. It's my pleasure to hand over to Gilles Andrier, CEO. Please go ahead, sir.

[Gilles Andrier, Chief Executive Officer]

Thank you. Ladies and gentlemen, Welcome to our 2022 half year results conference call. I will be on this call with Tom Hallam, our CFO. We will take you through the presentation before answering your questions at the end. The Company's news on our half-year results 2022 was published on our website this morning. This is where you will also find the slides for today's presentation, along with the media release, you will find our 2022 half year result on our website.

I’d like now to start going through the presentation. I invite you to turn to Slide number 4 to go through our performance highlights. So I am very happy to share you – with you an excellent sales growth and a solid financial performance for the first half of 2022 in a highly challenging environment to favorite. Once more forecasts for 2022 were certainly difficult to make at the start of the year, notably due to tough comparables of 2021.

COVID-related concerns slowly phasing down, the continuous challenges with our supply chains, and then to add to this new geopolitical and economic uncertainties emerged at the early stage of the year making our environment even more difficult to predict and to operate in.

Our results for this first half demonstrates again, the resilience of our business supported by our natural hedges, within categories in types of customers off to the balanced geographic footprint and thanks as well to the unique quality of organization and the dedication of our employees whom I’d like to warmly thank.

Our sales continued to benefit from a robust demand. Overall, volumes improving further in the second quarter across all categories and especially the ones which had already strongly rebounded last year, notably Fine Fragrances.

These results were especially good in the strategic product categories we have chosen for the coming five years confirming our 2025 strategy makes perfect sense and to name a few of those categories, Health and Wellbeing, Naturals, Alternative Proteins, Active Beauty, similar to our strategic focus areas in terms of customers and geographies, local and regional clients have continued to outperform and now account for 56% of our Group sales.

I am equally glad to report that high growth markets have gathered pace notably in the second quarter and outperformed to gain mature markets. We have made, as well an excellent progress with the integration of our recent acquisitions over the last months albeit at a slow pace in order to focus the organization’s attention on protecting the present customer satisfaction in a very tight supply chain environment.

In the first half of 2022, we reached sales of CHF 3.6 billion, a growth of 6.2% on a like-for-like basis and 8.3% in Swiss francs. This was achieved across all markets, segments and customer categories, despite high comparables in 2021, supported notably by a balanced growth between mature markets, which are up 5.4% and high growth markets, which are up 7.4%, local and regional clients, which have been growing double the pace of global customers and our key strategic product categories, which are already named.

Our pricing actions to recover the absolute amount of input cost inflation are well underway with close to 40% of our 6.2% like-for-like growth being pricing, versus 60% volume growth in the first half overall. As I said earlier, Fine Fragrances continued to grow despite high comparables largely supported by the upturn in travel retain and the continued strong momentum of ecommerce.

The other part of COVID impacted business, food service, thanks to a good growth, is now fully back to the pre-pandemic levels.

We achieved a comparable EBITDA of CHF 820 million, it represents an underlying EBITDA margin of 22.5% compared to 24.2% in the first half of 2021. Free cash flow was minus CHF 147 million representing a minus 4% of our sales, driven by the higher working capital requirements, notably inventories and higher investments compared to 2021.

I am really pleased with the solid performance of our business with all parts contributing to this excellent financial results. We have shown our resilience, our focus on supporting our customers and our ability to capture opportunities.

Let’s now turn to Slide 5. On a like-for-like basis, our Fragrance and Beauty division grew 4.7% and our Taste & Wellbeing division grew 7.6% versus the same period of 2021. As I mentioned earlier, this performance was driven by further strength in Fine Fragrances, continuous recovery in food-service, as well as a good growth in most of the categories despite the tough first half 2021 comparables.

Once again, all our strategic focus areas complemented by acquisitions have contribute to our growth namely Health and Wellness, Naturals, local and regional customers, outperforming sales with our multinational customers, which also showed a very good momentum.

Finally, as I mentioned earlier, these numbers include pricing elements reflecting the ongoing recovery of our input cost inflation, which brings me to say that thanks to the collaboration with our customers. We are fully completed with our pricing actions to fully recover over a period of 18 months, those additional input cost by June 2023 as promised and guided for at the beginning of this year.

Let’s turn now to Slide 6. In the first half of 2022, high growth markets delivered a 7.4% growth gathering base notably in the second quarter after relatively slow start in 2022. This was achieved despite the pandemic still disrupting parts of both Southeast Asia and China. Despite high comparables in 2021, Latin America kept performing well, the Middle East contributed with strong growth levels as well and Asia Pacific remains a mix bag with below the usual average growth rates.

In mature markets, we grew a healthy 5.4%. The strong demand in Fine Fragrances and the further recovery of food service fueled the strong recovery in Europe as the economy there reopened later than most of the regions in the last few months.

North America reported a slight decline in sales due to the combination of high comparables and the supply chain ongoing challenges towards the first half of this year. The markets of Asia notably Japan and Australia remain affected by the pandemic. Our presence in high growth markets has always been a key driver for our growth and continues to be one of our key strategic for 2025.

Structural demographic trends, the ever growing middle class and the strong organization trends will continue to support the growth of these markets, especially in Asia where globalization and the middle class are still below average. Our market position and our operations footprint give us a unique exposure to this high growth markets in which we continue to invest both with additional talent and new facilities to service the wide diversity of our clients.

However, we have seen in the past months how critical our geographical balance is creating natural hedges against the crisis or economic downturns where the timing or the intensity of the recovery can be very different across geographies as seen over the last few quarters.

Please now turn to Slide 7. I’d like to highlight the sales development by region for the Group. As you can see, EAME, Europe, Middle East and Africa have delivered a very strong growth followed by Latin America. EAME grew a record 13.7% supported by the strong recovery of most product segments. It’s also worth mentioning that the Middle East has also enjoyed a very high growth rate within the region.

Sales in Latin America continue to perform well despite high comparables with a growth rate of 9% driven mainly by Argentina, Mexico and Chile. The growth in Asia Pacific was 2.7% with flat growth in China against the very high double-digit growth rates in 2021 seen in China. High-single-digit growth in some major markets including India and Indonesia and more subdued growth in other parts of Southeast Asia, notably, Vietnam, Thailand and the Philippines and then the mature markets like Japan and the Pacific area.

Finally, North America was – grew a negative 1.5% like-for-like against the high comparables over the first half of 2021, which experienced a strong and early rebound of the economy and consumer demand and equally some supply chain challenges still ongoing in 2022.

Let’s turn now to Slide 8. The Fragrance division grew 4.7% on a like-for-like basis against the strong comparable growth of 10.1% in 2021 and a growth of 5.3% in Swiss Franc for the first half of 2022. The good growth was driven by the double-digit growth in Fine Fragrances and in Fragrance Ingredients and consumer products returned to growth in the second quarter.

Fine Fragrances sales increased by 17.9% on a like-for-like basis already against a very strong first half in 2021 where sales in Fine Fragrances increased by 34.5%. Therefore the CAGR of three years - for the six months period is 10.2%. This performance is driven by new business wins, notably in the Prestige segment.

Consumer Product sales increased by 0.4% on a like-for-like basis against a prior year comparable of 4.1%. On a three years basis, the six months CAGR amounts grew 5.1%. This performance was driven by local and regional clients.

Sales of Fragrance Ingredients and Active Beauty grew by 8% on a like-for-like basis against a high sales growth of 14.4% in the prior year, particularly in Active Beauty. The performance in the first half 2022 reflects the continued strong demand for Fragrance Ingredients and Premium Actives in Active Beauty.

Now let’s turn to the next Slide number 9. Taste and Wellbeing sales were CHF 2 billion, an increase of 7.6% on a like-for-like basis and an increase of 10.9% in Swiss Francs. Whilst the sales performance was still affected by the impact of the COVID-19 pandemic across many countries, as well as supply chain challenges, a very good business momentum was seen and maintained across all regions.

On a regional basis, sales were driven by Europe, SAMEA and Latin America. In Europe, sales increased by 14% in South Asia, Africa and the Middle East sales increased by 16.9%. In Latin America, sales increased by 17.1% and in Asia Pacific sales increased by 5.1%.

In North America, sales decreased by 0.9% on a like-for-like basis against a relatively high comparable of 6.1% a year ago. The Food Service segment continued to experiment a strong recovery and is now back – almost back to pre-COVID levels, therefore the 2019 levels. In the key strategic focus area, sales increased double-digit in Plant-Based Proteins, Health and Wellness and a very solid single-digit growth in Naturals.

Finally, from a segment perspective, the positive sales performance was mainly driven in beverages, sweet and snacks. With this, I’d like to hand over now to Tom, who will give you more granularity on our financial performance. Tom, over to you.

[Tom Hallam, Chief Financial Officer]

Thank you, very much, Gilles. I would also like to welcome you all to our conference call. As always, Gilles has taken you through the main business performance of the Group and also the market and the regional developments. On the following slides, I would like to focus on the Group’s operating performance and those of the two divisions.

Let’s start with the performance highlights on Slide 11. So, as Gilles mentioned, the Group’s sales for the first half of 2022 were over CHF 3.6 billion, an increase of 6.2% on a like-for-like basis, which excludes the impact of acquisitions, as well as any currency impacts.

In Swiss Francs, sales increased by 8.3%. The reported EBITDA increased CHF 816 million, compared to CHF 809 million in 2021 and the underlying EBITDA margin was strong at 22.5% despite higher input costs and inbound supply chain disruptions.

Net income was CHF 440 million or 12.1% of sales and as Gilles has mentioned, free cash flow as a percentage of sales was minus 4%, mostly driven by higher working capital requirements to support our supply chain and our customers in an extremely challenging operating environment. Net debt to EBITDA was 3.45 times, compared to 2.97 at the end of 2021.

In the following slides, we will cover the Group’s performance in further detail, as well as the operating performance of both divisions. If we turn to Slide 12, we can look at the exchange rate development. The global political environment and the economic uncertainties causes Swiss Franc to fluctuate against some of the major currencies in which the Group operates, particularly during the first few months of the year.

This had a significant impact on other operating expenses which I’ll comment on later. However, our operational and geographical spread has offset the up and down currency fluctuations and therefore continues to provide good natural hedges which protects our EBITDA margin.

Please turn to Slide 13, which shows the Group operating performance. In 2022, the Group’s gross margin decreased due to the gross margin dilution effect of the pricing actions, as well as the impact of higher raw materials, energy and freight costs. This resulted in a gross margin of 40% in 2022, compared to 43.9% in 2021.

As I mentioned, the EBITDA increased to CHF 816 million in the first six months of this year. In the period, the Group incurred CHF 4 million related to acquisition and restructuring cost compared to CHF 7 million in the previous period.

On an EBITDA level, we continued to maintain a tight cost control on operating expenses, which partially absorbed the impact of the lower gross margin. This resulted in an underlying EBITDA margin of 22.5%, compared to 24.2% in 2021.

On the next two slides, I’d like to spend a moment on the operating performance of our two divisions starting with Fragrance and Beauty. Fragrance and Beauty sales increased by 4.7% on a like-for-like basis and 5.3% in Swiss Francs to CHF 1.6 billion. The division recorded CHF 362 million of EBITDA in the first six months of the year, compared to CHF 375 million in 2021.

The EBITDA margin was 22% on a reported basis and 22.2% on an underlying basis. As commented by Gilles, the sales growth was driven by a strong volume increase in Fine Fragrance, as well as double-digit growth in Fragrance Ingredients. The margins however, have been impacted by higher cost inputs seen in the first half of 2022.

If you now turn to Slide 15, we will continue with Taste and Wellbeing. The Taste and Wellbeing division recorded a high sales increase of 7.6% on a like-for-like basis and 10.9% in Swiss Francs. The sales increased to over CHF 2 billion for the first time and in the first half of this year.

The reported EBITDA increased to CHF 454 million from CHF 434 million last year as a result of strong cost discipline to offset the inflation of higher raw materials and higher expenses due to supply chain issues. The reported EBITDA margin was 22.6% and the underlying EBITDA margin was 22.7%.

The income before tax decreased to CHF 512 million from CHF 566 million in 2021 caused by higher non-operating expenses compared to the prior year, namely CHF 119 million in 2022, compared to CHF 47 million in 2021.

Although financing cost remains stable, the Group incurred higher realized and unrealized losses on FX derivatives given the volatility of currencies and interest rates, particularly in the first few months of the year. In addition, there was a CHF 50 million non-cash shrink in the value of the company’s financial assets.

The net income was CHF 440 million or 12.1% of sales. The Group’s effective tax rate decreased to 14% in 2022, compared to 15% in June 2021. Basic EPS was CHF 47.74 in 2022, compared to CHF 52.19 in the first semester of 2021.

Please turn to the next slide, the cash flow performance. During the first half of 2022, Givaudan had a negative free cash flow of CHF 147 million or minus 4.4% of sales, compared to 5.5% of sales in 2021. The operating cash flow for the first six months of the year was CHF 131 million, compared to CHF 415 million in 2021.

The decrease in the operating cash flow is mostly driven by the higher cash investment in working capital driven by the need to manage the inbound supply chain disruptions that the Group has been facing in order to continue to deliver and satisfy to a high level the needs of our customers.

The Group also continued its investments to support the growth in our markets. As such, total net investments were CHF 164 million in the first half of the year and as a percentage of sales were 4.5% in 2022, compared to 3.6% in 2021.

Working capital increased to 29.6% of sales, compared to 28.3% in 2021 with higher accounts receivable and higher inventory levels related to the good sales growth and the supply chain challenges that I have already mentioned.

Please turn to Slide 18 to look at the amortization of intangible assets. At the end of 2021, we showed you the forecasted amortization of intangibles. The projection is now been updated as we’ve completed the purchase price allocation for the two last acquisitions we made in 2021, notably, Custom Essence and DDW and this table gives you a perspective of the future expected amortization.

Please turn to Slide 19 where we will cover the debt profile of the Group. The Group continues to have a well-balanced debt profile with a weighted average effective interest rate of 1.34%, which is a slight decrease from last year.

Furthermore, on this slide you will find the maturities of our debt profile, as well as the respective average interest rates for each debt maturity. In June 2022, the Group refinanced its multibank committed credit facility for an amount of CHF 1.25 for a period of five years with two year extension options and the possibility to upsize the facility during its term. This renewed facility is also the first financing event completed under the Group’s sustainable linked financing framework.

Net debt compared to EBITDA was 3.4 times, compared to 2.9 times in December 2021 and 3.16 times in June 2021.

With this, I would like to conclude my part of the presentation and hand back to Gilles.

[Gilles Andrier, Chief Executive Officer]

Thank you, Tom. The company’s 2025 ambition is to deliver sustainable value creation for all stakeholders. Givaudan's 2025 strategy is fully in line with our purpose and places customers at the heart of our business supporting them to grow and create products that are loved by consumers.

Let me remind you the main foundations of our current strategic cycle. The 2025 strategy is focused around three growth drivers, first one, expand the portfolio, the second, extend customer reach and the last one focused market strategies and it is supported by four growth enablers which are aligned with the company’s process domains namely creations, nature, people and communities.

These three growth drivers and four enablers are all underpinned by the commitment to excellence, innovation and simplicity in everything that we do.

Let’s turn now to Slide 22 that reminds you the performance commitments of the 2025 strategy. We are actually in the second year of our five year strategic cycle and as I mentioned earlier, so far business trends, customer trends and consumer behavior in an environment impacted by the pandemic are confirming and reinforcing our strategic choices.

Ambitious targets are an integral part of Givaudan's 2025 strategy with the company aiming to achieve an organic sales growth of 4% to 5% on a like-for-like basis and a free cash flow of at least 12% both measured as an average over the five year period strategic cycle. In addition, the company aims to deliver on key non-financial targets around sustainability, diversity and safety linked to the Givaudan's purpose.

I am confident we are on the right path to deliver on those ambitions and now like to turn to Slide 23. Let me give you some facts about the coming months. We clearly remain focused on delivering on our pricing actions to compensate for input cost inflation and I can confirm today that overall raw material inflation in the P&L for 2022 will be around 9%.

Given the current challenges around energy supply, notably in Europe, we are planning for business continuity in order to ensure the right adaptability of our production set up. In operations, our focus lies on maintaining operations and supply chain performance at high levels to support our customers and on the continued cost discipline throughout the business.

The integration of acquired companies on to Givaudan's operating platform continues to make good progress and we are progressing further with the implementation of the 2025 strategy. Finally, we are making further progress on our broad based ESG agenda whilst effectively managing the current business priorities.

With this, ladies and gentlemen, many thanks for your attention. Tom and I are now looking forward to your questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Heidi Vesterinen with BNP Paribas. Please go ahead.

[Heidi Vesterinen, EXANE BNP Paribas]

Good afternoon, everyone. I have three questions. First, you talked about tight cost control in your speech. Should we expect items such as R&D and sales and marketing to be lower as a percentage of sales going forward or was there some phasing in the H1 results is that is what had helped your EBITDA margin?

Second question, could you talk about your expectation in terms of free cash flow and your leverage on a full year basis please as 3.5 times is on the high side for your company. And then a third related question, I wondered to what extent your leverage impacts you are thinking on further M&A. Can you remind us on what you are thinking, what kind of size you would be looking at? There has been deals in the sector recently. Does that change your thinking at all? Thanks a lot.

[Gilles Andrier, Chief Executive Officer]

Thank you and good afternoon, Heidi. So, yeah, the question on, are we cutting on R&D expenses? Absolutely not. This is the engine of Givaudan. In the first as I can confirm that the actual bridge pipeline that you know that we are measuring on a monthly basis across the whole Group is in very good shape. Also the amount of new wins and that we see going forward. So the fact that the ratio of operating expenses has been going down over the sales has a lot to do that.

Yes, we are tightening expenses, but for the discretionary expenses, we are maintaining obviously the – a bit of a headcount neutral but in no way are we cutting jobs in any way or slowing down the investment especially related to working on bridge with our clients and so forth.

And so the fact that the ratio is going down has a lot to do obviously with the fact that the sales growth is high and therefore, perhaps on the ratio and the fact that we also frugal on some – many items, which are not critical to servicing our clients.

Then I get – I hand over the question on free cash flow to Tom.

[Tom Hallam, Chief Financial Officer]

Yeah, thanks, Heidi for the question. And just to couple of additional comments on – particularly on the OpEx, of course, you will have seen in the half year report in the back up, we have a table which shows the amortization of intangibles, which is split between the various elements. We actually have about CHF 12 million of reduction in amortization of intangible expense year-on-year. So that’s also driving the reduction in absolute R&D expense and selling and marketing. And then of course, as I mentioned, there is a lot of volatility in currencies. We are naturally hedged on the EBITDA margin, but of course, we have currency swings throughout the P&L.

On the free cash flow and on the leverage, in any year, it’s really finding the right balance between supporting our customers on growth, investing in the future and you made the comment on R&D, but if you look at our CapEx, we have a significant increase in CapEx this year, which is a clear demonstration of our long-term commitment to invest.

And finally delivering on our long-term financial targets. The reason that we set five year financial targets is to take into account the volatility that occurs in at least once every five years as we have experienced and that’s certainly what we see this year. If you make the calculation between now and the end of the year and so, okay, what would be needed to be done to achieve a single year target, clearly, that would be reckless in terms of business support. That being said, we have a strong practice of paying the dividend to our shareholders and we are very clear that that requires a certain amount of free cash flow, which needs to be generated during 2022.

On leverage, and then I’ll hand back to Gilles really to talk about where we consider bolt-on acquisitions. But if you look historically, we’ve been up to 4 – 4.5 times net debt to EBITDA. Clearly, if I look at the pipeline today from an acquisition perspective, there is really nothing that drives up the net debt to EBITDA and anything that we would do would be bolt-on acquisitions and very similar size to what we’ve done in the past.

But maybe I just hand back to Gilles to comment on the areas of interest for us.

[Gilles Andrier, Chief Executive Officer]

Yeah, Heidi, as we have already stated, the – as well, we look for – I would say, companies to acquire and I would say to join the Givaudan family. It’s across multiple dimensions. It’s still above the core F&S that’s some small and mid size players out there. The second dimension has a lot to do with our 2025 strategy, which is very much around those adjacent spaces.

You know that if I just remind the fact that on the – basically the Food & Beverage related ingredient space, we operate in a market size, let’s say CHF 15 billion of flavors. But we are also – we also want to play in the adjacent spaces of Health Nutrition and anything that contributes in a positive way to a formulation in food & beverage and that amount to – as we – as a reminder to another CHF 14 billion, CHF 15 billion of market size.

So, you’ve seen the acquisition of DDW at the end of the last year. You’ve seen some of the – we did with Ungerer. That comes obviously after Naturex and they are clearly and today we have only a 5% in this CHF 15 billion. So clearly, they are assets out there, which are interesting. The question that you are asking is really about also availability, because we will remain opportunistic.

We have done 20 acquisitions in the last four years. We have a great, I think, name and reputation in the way we – in the way not only we make friends out of an acquisition but also the way we integrate companies and that has been very successful so far. So, the question is availability. Valuations of companies have gone down.

So, the question for the owners is, is that the right time I choose to sell my company, but yet we still remain very active and looking at that from a short term and also mid-term perspective building relationships and so forth. So now the next question maybe.

[Operator]

The next question comes from the line of Charles Eden with UBS. Please go ahead.

[Charles Eden, Union Bank of Switzerland]

Hi. Good afternoon. Thanks for taking my question. Just wanting comment on for me. Obviously, we’ve seen pricing step up in Q2 and volumes also remain as you accelerate. Can I just ask how you are thinking about the resilience of these volumes in the second half of the year?

I guess, we’ve already seen some US food companies support negative volumes of their quarter to the end of May in recent weeks and I appreciate the CPDs are only about half of your sales and the category over that for some of these customers were somewhat limited. Just appreciate your thoughts on the volume trajectory from here given they’ve remained very resilient in a continued price rise environment. Thank you.

[Gilles Andrier, Chief Executive Officer]

Yeah, that’s certainly – obviously, we increased prices, our clients increased prices because many of the categories that they actually acquired not just buy, not on these fragrance flavors and other ingredients increase. But yet, we have not seen on our side a slowdown in volumes. Obviously, and you said it’s a bit in your question you are only tracking, let’s say now 44% of our sales indirectly by tracking the big clients, our big clients which report that figures.

But you don’t see the other 56% of – and how they are doing. So that maybe also explains that at least 56% grow – are growing to a three times the rate of the large ones. So that’s also the natural hedge that we have there. So let’s see what’s the coming months are going to see in terms of volumes development. But today - and in any year actually it’s very – it’s always very, very difficult to have a precise number on where the volumes are going to go on the existing business.

The only thing that we control in our business is basically what we call the new wins and the new businesses that we win, which actually is the only way to gain market share by the way and on that side – and I can only concern that is very positive in both divisions continues to be positive and also explains why in many parts of the business we are clearly growing very fast. So, that’s what we can say about how volumes can develop. What’s interesting is that volumes have actually accelerated from Q1 to Q2. So, not being impacted by any pricing on the client side.

And obviously also something to specify in a way that when we increase prices that has actually no effect on the volume that we sell to our clients. There are no consequences of having increased prices to the volume that we sell to our clients.

[Operator]

The next question comes from the line of Lisa De Neve with Morgan Stanley. Please go ahead.

[Lisa De Neve, Morgan Stanley]

Good afternoon, Gilles, and Tom. Thank you for taking my three questions. First, can I follow-up on the M&A question? So you talked about your perspective towards the markets. Can you also share some details on how active the M&A market is at the moment? And so, in terms of the willingness for companies to potentially divest and what the multiples in – for the private space looks like today given the sort of reduction we’ve seen, decline we see in the public markets?

And secondly, can you provide some detail on how your price conversations with your customers have and evolving through the first half? Some of your peers, as well as some news what we’ve seen are noting for a step up into the resistance to higher prices on the retail and or the customer – end customer, consumer end. So hence my question, what are you seeing on the customer front in terms of pricing and resistance? Thank you.

[Gilles Andrier, Chief Executive Officer]

Well, on the second question, and on price, obviously, I can’t disclose our pricing conversations with all our clients, because certainly they are very numerous. And two, I would say that the fact the answer is basically in my statement, I can only confirm that essentially we are fully covered in terms of all the pricing negotiations we have completed with all our clients to recover all the 9% of raw materials cost that we mentioned earlier.

So, that has been done with more or less difficulties and resistance that basically that I can confirm this is in the system going forward. So that means it’s concluded in the positive way. Pricing conversations are never easy. So, and the second thing, as it relates to the pricing up again of our clients to the retail side and so forth, yet we have not seen any slowdown in volumes to them, but which doesn’t mean that some of them have – are seeing that on an individual basis. So that’s really what we see today.

On the M&A side, obviously, I would say, as I mentioned, it’s true that there is a bit of a correlation between the number of – if you look at history, the number of transactions and M&A deals are usually a function of high valuations and the result is also true that when valuations slowdown, you have also slowing down in transactions. It doesn’t mean that there won’t be any M&A opportunities going forward.

What’s important in terms of valuation is really – we have a very – almost strict view on whether to make an acquisition or not, which is very much about two principles, one is to make sure that the multiple of buying something is lower than our own multiple and it’s a higher multiple. There must be very good reasons to do that of very big synergies and we have never been in this situation, because Givaudan has a very high multiple.

And the second principle is really to make sure that it’s not about earnings per share appreciation, it’s not about any of that. We look at value creation through synergies and especially, well, in the first place cost synergies that’s given, but also sales synergies. In every of the 20 acquisitions we’ve made, clearly we have looked at both sides and I can only confirm that we have created a lot of value with many of them simply by not only delivering on the cost synergies, but accelerating the growth rates of every one of those companies thinking there of and follow them essentially.

And basically going forward this discipline we will continue to have and this is very much driven by, I would say, very thorough disciplined thinking process to say that this really fits Givaudan not for more dimensions.

The portfolio that it makes sense for what we do. Do we really see the sales synergies as opposed to dreaming about cross-selling, for example. And so, this I think has been valuable for us to keep on being discipline when making an acquisition. So we will be remaining active, but again it takes two to dance.

[Lisa De Neve, Morgan Stanley]

It’s very helpful. Thank you.

[Operator]

The next question comes from the line of James Targett with Berenberg. Please go ahead.

[James Targett, Berenberg]

Hi, good afternoon, everyone. Yeah, couple of questions. Firstly, if I could turn to North America, I appreciate the comment you made on comps. But maybe if you could clarify firstly if the supply chain issues are still lingering into Q3, specific ones for North America and also whether or not you have seen any – what your shares are like in North America?

Are you seeing any change in the competitive environments, I was specifically thinking about the IFAS and for North America if you back in positive territory for the second half of the year clearing the comps still relatively demanding in H2 as well. That’s my first question on North America.

And then my second one, I guess, is really on the Fine Fragrances outlook. Clearly, you had a very strong couple of quarters. Again, obviously, you mentioned the recovery of travel retail, but just any visibility on the outlook for H2 for that unit? Thank you.

[Gilles Andrier, Chief Executive Officer]

So, for North America, yes, you mentioned comparables. I would say, when we mentioned – well, the – two sides to the story. The supply chain challenges are being – having ingredients and raw materials on time. So that you can actually make a fragrance or a flavor and deliver it on time to your clients. We’ve encountered a lot of challenges in terms of lead times in these supply chain delays.

It’s actually slightly improving and we have seen some slight improvements over the last recent weeks. The other culprit was the labor market. The labor market in North America is very, very tensed and that didn’t start 1st of January of this year, it’s already in the fourth quarter. So they are actually about – and it’s true for our industry, it’s true for many industries I believe.

And there it’s also why last year we have to use a lot of terms and had to incur additional production cuts in North America. But things are improving rapidly in our operations footprint. I don’t believe that it’s a question of losing market share to anybody, because I hear that the issues are a bit the same for everyone, because they are a bit external labor and supply chains. So, that’s a bit where we are today.

So, hopefully, we get to better grounds in the coming months in North America, especially on the Fragrance, Consumer Products side, because Fine Fragrance is doing very well and some other parts of the taste and wellbeing is also doing very well.

Fine Fragrance, well, it’s a bit – I would say, it’s a bit magic of Fine Fragrances. To give you an outlook for the second half, I think that we have just to remind when we were right in the midst of COVID in 2020, all our clients were saying we are going to be back to the 2019 level in 2024, 2025, maybe and to everyone’s surprise, many Fine Fragrance clients now are including ourselves supplying them were already back to the 2019 level in August of 2021 given the formidable rebound that we have seen across the business.

And then, everybody thought, maybe that’s going to slowdown in 2022 and as you can see from the figures, it absolutely not slow down at least for us. I don’t know about our competitors. It obviously echoes a lot of our Fine Fragrance clients which are growing very strongly. So, will continue going forward? I don’t know.

The only thing I can say is that, again back to the thing that we control, the amount of new wins, new businesses is very strong in Fine Fragrances. We have a formidable momentum which explains last just it gives us also this year’s figures. So that’s basically what we can say about Fine Fragrances. We have also a very well hedged portfolio.

We are on both Prestige Fine Fragrances, as well as more what we call the mass market specialty retail fragrances, which is very strong in the US, as well as the SAMEA, Latin America. So there is a huge diversity of Fine Fragrances, which also helps us navigating those times and really capturing all growth opportunities.

[James Targett, Berenberg]

Thank you.

[Operator]

The next question comes from the line of Matthew Yates with Bank of America. Please go ahead.

[Matthew Yates, Bank of America]

Hey. The first question was around the continuity planning you alluded to early into the presentation. I am not sure, so if I mean, you can talk more about the event at the end of August. But just curious if you had any early thoughts there on where you see the risks of the bottlenecks around the gas crisis. Is that with your own production sites or rather your suppliers, particularly in synthetics in Germany?

I know that’s somewhat related another question about M&A. BFS today put some assets out for sale around Food and Health performance ingredients. I think these are things occur emulsifiers and fat powders. Would that conceptually fit with your strategy of going into adjacent markets or these technologies that are perhaps more commoditized and the area Givaudan typically wants to play at?

[Gilles Andrier, Chief Executive Officer]

Okay. So, maybe I start by your last question. Essentially, we don’t have so much appetite if I may say so for commodities. This is not our business model. As you know, we are – there are two or three – let’s say, almost criteria attributes to our business model or the company we want to be which is any ingredients, any contribution to a formula which delivers a very clear benefit to the consumer that customers can actually build upon to build clients, to advertise and to be proud about.

And that’s obviously - it starts with fragrance flavors, but then you go Active Beauty and so the many things that we have added in our portfolio follows this first rule. The second rule is that, those ingredients needs to be not only contributing to something very positive that clients and friends can claim, but also, backed by innovation, highly specialized, requiring expertise.

And then, obviously, things which can help clients to differentiate and make their brands or their products bespoke obviously, yes, that’s part of fragrance and flavors but it’s the same way, the more you are innovative with ingredients, the more clients and brands can actually have them develop specifically for them and then that’s when we start to talk about solutions and things which are bespoke which is basically the essence of what we do.

And so, that’s why that – at the end of the day, that translates into high levels of pricing, profitability and so far that it’s a consequence. And so commodities by definition don’t fall in many of those attributes I just mentioned. This is why we’ve been quite discriminating in terms of the acquisitions we could have made over the recent past if you look at the landscape which has changed around that. So, that’s basically one. The second one, the second question you are asking, may be Tom answer that.

[Tom Hallam, Chief Financial Officer]

Yeah, Matthew. So on the BCP and, maybe you – of course you picked on a couple of items you mentioned the gas in Europe and we are looking at a number of things that we can do, but clearly we are a very small portion of the supply chain and as always, we are highly reliant on our suppliers. What we also – what you also need to really remember and if you look even at the lockdowns in China in the first six months of this year, we have a geographical spread of our footprint.

That has protected us. That clearly was a significant advantage during COVID and when we talk about BCP, it’s also the ability to produce different ingredients in different facilities and this is really part of the BCP and the BCP that we talk about. So, we are taking measures, but clearly, we are a very small COG in a very, very long chain. But we have many, many facilities and we think about how we can balance and supply from each of them.

[Matthew Yates, Bank of America]

I guess, Tom, we all remember the citron crisis a couple of years ago, but are there particular material products that you are somewhat dependent on Germany to provide to you any context as across your 10,000 raw material imports, you are dependent on synthetics in Germany?

[Gilles Andrier, Chief Executive Officer]

Well, you named it. Well, we are highly dependent in Germany, you named it already. So the reality is absolutely, but in Germany they are no other that I know. So the dependency, the 14,000 already spread across many, many different countries.

[Matthew Yates, Bank of America]

Alright. Thanks guys.

[Operator]

The next question comes from the line of Isha Sharma with Stifel Europe. Please go ahead.

[Isha Sharma, Stifel Europe]

Good afternoon. I have one next please. I appreciate your comments on the net working capital shrink to secure supply chain. Based on that, are you still confident of delivering at least 12% of sales after the minus 4% in the first half?

[Gilles Andrier, Chief Executive Officer]

So, Isha, as I said, I mean, to achieve 12% this year would – if you look at the numbers, it’s unachievable. I mean, that’s why we said five year targets and that’s why we have this 12% over five years. And again, all I can say is, it’s really balancing between delivering to our customers, investing.

We have a catch up in CapEx after really two years of not making significant investments because of the COVID pandemic and delivering on our long-term financial targets. Again I can only repeat, we have a strong practice of paying the dividends to our shareholders and this requires a certain amount of free cash flow in any particular year.

[Isha Sharma, Stifel Europe]

Understood. Thanks a lot. Maybe just one follow-up on the margin. Typically, seasonally, you have 100 BPS lower margin in the second half. Would that still hold true for this year which would actually mean a step up year-over-year from the second half of 2021?

[Gilles Andrier, Chief Executive Officer]

Well, Isha, I think we have told you where we are in terms of raw materials inflation. You know what we need to do in terms of price increase. We’ve said we will fully compensate. Clearly, you’ll see the acceleration in price even from Q1 to Q2 and that will also be in Q3 and Q4. So, I think, we’ve given you all of the elements that allow you to make your projections.

[Isha Sharma, Stifel Europe]

Thank you very much.

[Gilles Andrier, Chief Executive Officer]

Okay. I think we are leaving now to the last question operator?

[Operator]

Today’s last question comes from the line of Ranulf Orr with Citi. Please go ahead.

[Ranulf Orr, Citi]

Hey, afternoon, everyone. And it’s the right term it’s three last ones, not just one last one. Firstly, on the cost savings, I am just wondering how much of this is – could be continuing into next year? Should we hit another year of high inflation? And how much of the cost savings would need to come to them before irreparable damage sort of – is done to the business?

Secondly, I know we focused on M&A already, but just one more here. I am just curious to understand whether you think the evolving supply chain environment is leading you to think more about a move upstream as well?

And then thirdly, just on the pricing gains that we’ve seen this year-to-date. Is this all just offsetting raw material inflation or is there any, sort of, kind of mix or underlying pricing power in the business at the moment? That’s all. Thank you.

[Gilles Andrier, Chief Executive Officer]

Can you restate the third question, because I didn’t understand it clearly? You say what?

[Ranulf Orr, Citi]

Yeah, just curious to understand if there is any underlying pricing power in the business at the moment or whether the pricing increases are just purely, entirely offsetting raw material increases?

[Gilles Andrier, Chief Executive Officer]

Yeah, so, they are there to actually entirely offset the raw material increase and the pricing is obviously a function of actually on both sides. When you look at raw mats, we give an indication but that’s based on actually what we actually buy.

And therefore the mix of raw mat can influence the actually – and increase and this is also true on the pricing to our clients. It all depends on which types of products and which products are going to picked up and that actually translates into a pricing which can actually have some minor fluctuation. So it’s not an exact client.

As it relates to pricing power, I would not like to – us taking of pricing power, it’s true that however you read it, I can only reconfirm we are fully – all our pricing negotiations are fully complete to be able to recover that in a successful way. And then the first question…

[Tom Hallam, Chief Financial Officer]

Maybe I can take it. Just Gilles, thanks. So, on the cost savings, look, I think at the end of last year, we were very clear we said we had CHF 30 million of cost incurred in 2021 related to COVID, which we felt that we would be able to get out during this year and you see and we’ve demonstrated our ability to get that cost out. Just again to reiterate what Gilles mentioned, we are not cutting muscle, we are cutting bone. We are not cutting on R&D and selling and marketing from a fundamental business perspective.

And then, just on the M&A, on backward integration, again, as Gilles has mentioned, we buy 14,000 raw materials to try and pick the right one to be back with integrated is extremely difficult and to do even a handful is – becomes almost impossible. So, we have our clear areas of focus in terms of M&A, not backward integrating. We like the flexibility and the optionality in terms of having multiple sources of supply and that’s very much in line with our M&A strategy.

[Ranulf Orr, Citi]

Great. Thank you.

[Gilles Andrier, Chief Executive Officer]

Well, thank you very much for your questions. This ends now our call. I’d like to remind you that we hold on August 30th our traditional half year conference in Zurich. The theme of this conference will be dedicated to Plant Based Food and Alternative Proteins co-creating safety, healthy and nutritious food extensive for all. I hope, not only you will enjoy what we’ll tell you, but also as well, how we’ll feed you. Thank you very much and looking forward to see you at this event.

[Operator]

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you for participating in the conference. You may now disconnect your lines. Goodbye.