Organic revenue growth
For 2019/20, organic revenue growth is expected to be 4-8%, with a neutral impact from EUR pricing. The group guidance for the full year is below the long-term ambition of 8-10%, primarily due to an expected weak Q1 and a negative development in natural color raw material prices.
In Q1, the organic growth for the group is expected to be flat to low-single digit due to the challenges from the macroeconomic volatility in emerging markets that have impacted the business in the second half of 2018/19, order timing in Health & Nutrition, and an expected normalization of inventory levels in the distribution chain for Food Cultures & Enzymes as a result of the lower end-market demand.
For the remainder of the year Food Cultures & Enzymes and Health & Nutrition in combination are expected to grow 7-10%, in-line with the group long-term ambition of 8-10% organic growth given the absence of a positive EUR pricing impact. There are several points that underpin this growth expectation: the actions that have been taken to improve execution in several areas, the positive view of the commercial pipeline in Food Cultures & Enzymes, new product launches in Human Health, a continued improvement in Animal Health and strong growth expected in Plant Health. Natural Colors is expected to grow organically at low to mid-single digit in the same period, driven primarily by continued growth in FRUITMAX® but partly offset by lower raw material prices leading to lower sales prices.
EBIT margin before special items
The EBIT margin b.s.i. is expected to be around 29.5%. Increased utilization of production capacity in Food Cultures & Enzymes will have a positive impact on the margin, which is expected to be offset by investments into the lighthouse projects and other strategic priorities.
Free cash flow
Free cash flow before acquisitions and special items is expected to be around EUR 190 million. Cash flow used for operational investment activities is expected to be higher than the EUR 139 million realized in 2018/19 (excluding the proceeds from the sale-and-lease-back), primarily related to investment phasing from 2018/19 to 2019/20.
The outlook is based on constant currencies and stable raw material prices and assumes no acquisitions. The outlook is also based on the current political and economic environment. Any deterioration in the political and economic climate might impact the outlook negatively. This includes, but is not limited to, the economic climate in several emerging markets, such as China, Turkey, Brazil and Argentina; the risk of a global economic recession; the overall situation in the Middle East, including any potential sanctions; a deepening of the US-China trade tension; an escalation of the US-EU tariff situation; and a no-deal Brexit scenario.
Chr. Hansen is a global company serving more than 140 countries through subsidiaries in more than 30 countries. The most significant currency exposure relates to USD, which accounts for around 30% of revenue, while exposure to other currencies is more modest. A 5% decrease in the EUR/USD exchange rate would impact revenue measured in EUR negatively by around EUR 15-20 million.
Organic revenue growth is sensitive to exchange rate fluctuations in currencies for which Chr. Hansen applies a EUR-based pricing model, and to changes in raw material prices for Natural Colors as some contracts are adjusted for movements in raw material prices.
The EBIT margin is also sensitive to exchange rate fluctuations and to changes in raw material prices for Natural Colors. Production in the US and sourcing in USD only partly offset the impact on revenue from changes in the EUR/USD exchange rate. Therefore, the relative EBIT exposure is higher than the revenue exposure. A 5% decrease in the EUR/USD exchange rate would impact EBIT negatively by roughly half of the revenue impact.
The sensitivity to currency also applies to free cash flow.
The use of currency hedging of balance sheet exposures and future cash flows is described in note 4.3 to the Consolidated Financial Statements 2018/19.