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- [00:00]
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This episode is brought to you by Portrait. It's the AI research system that I used to prepare for today's episode and for all business breakdowns episodes. Portrait was built by former buy side investors and they understand great investing isn't just about having more information from low quality sources. It's about having the right information organized the right way. And if you listen to the show, you appreciate Diligence consists of many things Diving into the history of a business, framing the nuanced competitive dynamics, tracking key signposts around your thesis. And historically that would take up material time that you do not have. But Portrait is basically like adding an army of analysts to your team. It's powered by an AI system specifically designed for investment research workflows so you get nuanced idea generation. Portrait assesses the same types of qualitative attributes that we discuss on this show and that can help identify businesses which fit your frameworks. Portrait also customizes research report generation and I used Portrait to generate a primer and lay out bold bear cases ahead of today's episode to help frame the conversation. And third, there's intelligent thesis monitoring and that's where Portrait assesses thousands of data points across value chains each day, extracting the insights driving the business again. All this work would typically take hours and hours and hours. It's at your fingertips now. Visit portraitresearch.com to start your free trial today.
- [01:46]
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This is Business Breakdowns. Business Breakdowns is a series of conversations within business investors and operators diving deep into a single business. For each business, we explore its history, its business model, its competitive advantages, and what makes it tick. We believe every business has lessons and secrets that investors and operators can learn from and we are here to bring them to you. To find more episodes of breakdowns, check out joincolasis.com all opinions expressed by hosts and podcast guests are solely their own opinions. Hosts, podcast guests, their employers or affiliates may maintain positions in the securities discussed in this podcast. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.
- [02:34]
A
This is Matt Russell and today we are covering the fragrance and flavor giant Givaudin. My guest is Jeremy Fasnacht, Fund Manager at Banque de Luxembourg Investments, and we walk through this unseen empire in scent and flavor and how the work that Jeevan Don does touches so much of our everyday life, how it acts as influential marketing and some of the interesting dynamics that go into this work how the industry structure has evolved over time and how given Don has been able to capture 25% market share over a hundred plus year history. So this is a fun one. Again, it's a large business that sits at an off the radar industry. Please enjoy this breakdown on Jivaudan. Jeremy, I'm excited we finally get to break down Jivaudan together. Excuse my pronunciation in advance, but this is a business. You present it in a very interesting way as a potential breakdown candidate. The more I researched it, the more interested I got. So maybe you can start with the simple introduction. How you would paint the picture of Givandan to our listener base.
- [03:50]
C
Thanks for having me, Matt. First I'd like to say that special and quite secret fascinating business. They are based in a city called Vernier by the Ligue Geneva. They have currently a market cap of 25 billion Swiss francs. A typical day for you or for lots of people. You wake up, you go to the bathroom. The floor is clean, smells lavender. You take a shower. You grab your favorite shampoo and gel that you use every day for years. And you brush your teeth with your favorite refreshing toothpaste. You put your organic deodorant while your partner maybe is putting this terribly attractive perfume, magic skin cream. You put your shirt to go to work. Smells the fresh scent of your laundry detergent. Then you grab this healthy beverage. You eat plant based yogurts that you take every morning on your way to work. Now you work a lot, so you're starving. You hesitate between this trendy veggie restaurant with delicious flavors or you with your regular fast food. Finally, you fall for this yummy burger with irresistible sauce and your favorite soda. And now the day is almost finished. You visit the supermarket and at the checkout, you can't resist the taste of this chocolate bar. All these products, tens of thousands of other products around the world. There is a high probability that Giordan is involved. They are everywhere. They create the magic ingredients, the fragrances, the flavors that's influencing the scents of humans. These are the main reasons why people love certain products and keep repurchasing them for years.
- [05:29]
A
I am always amazed at the power of scent and taste. Anything around the five senses tends to be a good focus area.
- [05:35]
C
The studies show that this comes before advertising usefulness or packaging and price. It's really the main reason, the flavor and fragrance, why people are crazy about some products. Givaudan produce this and these fragrances and flavors. And what's important is that it's a tiny fraction of the client's cost. Their employees are artists. They are scientists. They are experts in nature, chemistry, human emotions. Humans have hundreds of receptors in the body dedicated to smell and taste. And these are linked to our memory, to the brain and to our emotions. So Givaudan's products, they have the critical role of creating, reinforcing the emotional bond between the brands that people love and the consumers. They are really the real innovators behind tons of decade long success. World famous branded products that are sold by the largest usual suspects, multinationals that everybody knows. In HPC you have for example PNG or Unilever, maybe Estee Lauder, l', Oreal, Colgate, Rekit in flavors. In food and beverage you have PepsiCo like Coke, Nestle, Starbucks, maybe Mondelez, Mars, Hershey and lots of famous fast food chains. So sequin industry, as I said, these companies don't really want us to know that the big innovation is coming from Givaudan. Givaudan does even more business with tons of local and regional leaders and disruptive startups, small indie brands around the world who are growing actually much faster. On average in the end, hundred millions if not billions of people are enjoying Givaudin's creations and every single day. But they don't know that, don't know this coming from Gironde. That's crazy. The business provide a strong visibility and growth, strong cash flows and stable cash flow and nice return on capital because thanks to the structure, the value they provide in the end markets, the industry is like a staples like, but better. It seems that most investors don't really know the name, but they are still a very nice business. Defensive, recurring growth, attractive cash flows. The industry is more diversified and you benefit from lots of trend. It just seems better by construction.
- [07:57]
A
I'd be curious to know. It's such a fascinating market and industry and it makes sense to me. I just even think about by me going onto a boardwalk and the odor of the funnel cake is its own attraction and stronger than any marketing that you could ever come up with in terms of packaging or visual esthetics. Can you get into both the history of Givaudin, their exposure to this particular industry and how much they pioneered it or disrupted it over time? I'd be curious to know how their story fits into that.
- [08:29]
C
So Givaudan was founded a long time ago, 1895 in Zurich by two brothers, Leon and Xavier Givaudan. And at the beginning he was a perfume factory. There is a small story a few years later the local bakery complained because the factory the fumes make the bread smell like violet. So they were first to move and they went to Vernier and They were really the pioneer to create synthetic perfume in large quantity. Because at the time it was only small boutiques craftsmen. They really got into synthetic. So it's funny because now it's exactly the opposite. Everybody is going into naturals. But at the time it was revolutionary. At the beginning it was a perfume. Then they moved with an acquisition another Swiss Company. In 1948. They bought Air Solco to get into flavor. And then in the 60s, the famous company Roche, the pharma company. They wanted to diversify. So they acquired Givaudan. But also another company, Rouh, a French company that is legendary in luxury perfumes and naturals. It was based in Grasse, the cradle of perfumery in Provence. Roche merged the two companies in the 90s. And then in 2000, Givernon was spun off, listed on the Swiss exchange. They really came the dominant player by acquiring Nestle Food Ingredients in the early 2000s. And then later Quest International. So big player in flavor and fragrances, which was part of Unilever. So this business were outsourcing this complex business. And now it's a bit funny also the opposite, because some of companies are now like Unilever or P and G. They are trying to get back by investing in fragrance capabilities. With all that and other Bolton acquisitions, they are today the leader of this industry. Now they are equally split revenue between flavor and fragrances.
- [10:26]
A
It makes sense to me. Obviously, fragrance has an impact on taste. Anytime you restrict your ability to smell and you taste something, there's overlap. But in terms of how these teams operate, you mentioned they moved into flavor with an acquisition. Do those teams and divisions operate very separately?
- [10:45]
C
They operate separately, but on the other hand, you have lots of things that are common. If you want to succeed in then the three. You have to get big. You need scale, you need global and local operations. You need tons of R and D&IP. You need trade secrets, deep pockets. You need lots of relationship and trust from the clients. You have to navigate a complex regulatory environment, different in each countries and region. You have to manage vast portfolio of thousands of raw materials and sophisticated global supply chains. This is the same for both business. The client issue what they call a brief. To explain the product they want to create, describe the brand, the identity, the positioning, the image, the colors. Maybe feelings they want to associate with the products. And they give a given price. So this is the same for both business. For example, hello, Givaudan, this is l'. Oreal. We want to create a new luxury creed perfume for women. We need a fragrance, something smooth and complex. With pineapple, jasmine and bergamot. And we need it for 150 USD per kilo or hello, I'm the founder of a startup, Madvita. I want create the best premium organic tea. I need a delicious hibiscus flavor which tastes fresh, natural, healthy. I want it for 5 USD per kilo. So it's a bit the same in both cases. What is special is that what you have is the core list. Most of the large and some meat, food and beverage and household personal care companies work with the core list systems. It's the list of their very few selected suppliers for several years, where you usually find the biggest FNF players like Givaudan. And they are guaranteed to be included in all the briefs. But then they are also in competition. So you have three or four companies maybe in the list. It's a very selective club. You have to pay thousands of dollars just to play buyers to entry in the industry, of course, very high. Now if you go back to the examples, the two creation examples, you have the perfumer, the nee, so it means a nose in French. Or the flavorist from the FNF company, who are the artists, but also scientists, because it's very complex. The companies, they have thousands of employees, but the big Companies have only 2000s of these star flavorists and perfumer. They are generously paid. And you have evolators that help them, you have chemists, you have food technologists that create a complete product so the clients can really imagine what it would be. And it's very complex because even for a simple flavor, for example apple, it must fit with the products, the specificities of the brief in terms of flavor, which variety of apple is it? Is it flavor of a fresh ripe apple? What forma is it? What do you need? Liquid powder. You have to be careful with chemical stability. It must fit with the brain, with the regulation tons of unique variation. Sometimes it must mask other ingredients. And you have to be careful because even if you change 1% of a formula, it can change a lot of stuff. Not only scent, but the texture or the stability.
- [13:58]
A
Certainly sounds like the chemistry is incredibly important on both sides of the business.
- [14:03]
C
You have deep integration, you have symbiotic relationship with the FNF companies and the clients. It's often a partnership, it's a cooperation process. So you have the product manager, the marketing guys of the client and you have tons of iterations between both. Sometimes for a simple small client it can last a few weeks or a few months. But for high end perfume, it can last two to three years. The big players have trusted relationships often built over decades. It's really secret. So they don't tell that a lot of innovation come from this company. They provide the creation as we've seen, but they also advise supports in pre creation. They can do internal testing for the client, they can do market and trend analysis, they have ton of data. They can do consumer panel testing. They can help on regulatory or marketing stuff. The company then will create a unique compound with a unique reference number for you for a unique client. It won't be used again with other clients. The IP on these products stay within the FNF company. You see, that is very far from commoditized. We heard from an industry expert that sometimes an FNF company cannot replicate the flavor or fragrance of a pear despite having the formula. So it's really complex. That's why you see that these FNF companies, they spend 7 or 8% of sales in R and D. I mean invest. If you look at the HPC and the food and beverage, it's only 2 to 3%. But it's also different by clients. For example, you have most of clients that don't have very big capabilities. But you have, for example, as I said, a png, they have some internal fragrance capabilities or maybe you have a Chanel, they have their own perfumer. So they will only buy the raw matte. The FNF companies for all the creation they are working for free. So that's why they keep the ip. They submit their creation, all the specificities and then the client in the end they will do testing with many end consumers. Then they will choose one of the submission from the FNF and they will award the business to one of them which will start the production and start making money. This is a bit like a royalty business where you have an upfront cost but then you have optionality on the successful products which might become a cash cow for many years.
- [16:27]
A
My assumption would be that once they win a proposal, so long as that product stays in service, let's assume they win an applesauce proposal for fnf. As long as that product stays on shelves and is selling, I assume that they continue to reap the benefits. You don't see any changes to the formula after that.
- [16:50]
C
That's another very critical point and nice point of the industry is that once you have for example a client like a very famous red soda or blue soda, selling for decades with the same taste everywhere, for decades in the world, selling billions, you have a special coffee from a Swiss company, you Have a wonderful ice cream that you get in your sofa every night. Once you have a cash cow, a billionaire, products like this, the switching costs are enormous. Because if you change 1%, you have no reward, no incentive to save a tiny fraction of your cost to change a formula. That's why you have cash cow business. And even if you look at small clients, Olipop or some smaller business with high growth, if you are relying on one or few products that are small but high growth. But for you, that's very important. Also you have no incentive. You don't take the risk to change because it's too risky. Even before you talk about brand perception, you have safety, health, failure when you go to a untrusted supplier. That's why it's a very sticky business. And something which is also important is that in the flavor business you have the cost of the flavor that the FNF company provides is just maybe 1% of the client's cost. Even on the Fragance business, it's just 5% of the client's cost. So you have no incentive to change. But on the other hand, you have the procurement team of the clients, which from what we heard from experts is they are constantly trying to get rebates on this. Sometimes you have contracts to maintain the price, sometimes you don't have contract. But when you are in terms of big raw materials inflation, the FNF company has to negotiate to try to pass it to the clients. That's another negotiation between them.
- [18:43]
A
Can you just give me a sense of the size of the FNF market? You mentioned they're the market leader. How big is this? I can probably back out math based on what percentage of F&B versus fragrance it is. But just some context. I'd be curious to know the general size of the market, how much it's either growing over time. Any type of trends to the market size would be interesting as well.
- [19:09]
C
The segments where Givolin is active, so they are mostly in customized and tailored products, not basic commodities. So in flavor, if you take all the market they are, it's roughly 30 billion Swiss francs. In fragrance, the market fragrance and beauty, it's around 25 billion Swiss franc. Again, all the clients we mentioned, plus local and regionals and indie brands. The market share, it's a big difference between fragrance and flavors. In fragrance, there is the big four. So you have Givaudent, another Swiss company, which is called Firmeniche, which was acquired by DSM a few years ago. And then you have US based iff, then a Bit smaller. You have the German Samris, these are the big four players. And then it goes much lower in terms of sales. And you have for example, two French companies. One is a private, it's called Manet. The two companies are based in Provence. You have another great listed business founded is 1850, it's called Robert. They have a very nice niche in a raw material. So these two are much smaller. And then you have lots of small players. But the big four player, they control something like two thirds of the market in fragrance. And it's very stable. So it's very stable for decades in flavors. It's more fragmented around the world. The bigger players, they have something like 10% market share. The players are almost the same for decades. And what is interesting is that the competition in general is more like a golf contest than a Krav Maga fight. For example, the players are rational. Sometimes they even sell some specific ingredients to each other. They are not competing crazy on price, they are really competing on innovation. Sometimes it forces you not to become complacent. Sometimes in some kind of industries a problem is when you have recurring growth, it's too easy and you stop innovating. So it's not the case in this industry. In terms of market growth, as you asked, the end markets are really mainly defensive, as we've seen, and high frequency repeatable small ticket transactions so stable. From all the figures that we found, the industry is estimated to grow constantly at 4 to 5% per year. If you dig into the IPO prospectus of Giraudan in the year 2000, you check the figure that the market was at the time, you calculate that the CAGR is really 5% per year up to today. Typically the FNF companies, they have a revenue churn. So the business you lose because the consumer tastes change or there is no product or there is competition. So it means you have 10% that disappear, roughly. So if you want to achieve 5% growth, it means that you have to create 15% new products, new creations every year. So it means, for example, Givaudan is selling tens of thousands of products in. You have to win briefs and create thousands of new products each year. So really an innovation machine. The churn rate is much higher on a trendy perfume or small startups where lots of them don't succeed. And the churn rate is higher than a billionaire ready to drink, for example. Logically, if you look at the growth rate this 4 or 5% below the surface, they are very different things to know because you have em countries that are growing on average four times faster than developed countries. So over the last decade it was around 2% for mature markets, roughly 8% for the high growth countries, the local and regional, they are growing on average three to four times faster. That's really driving the growth.
- [22:48]
A
Yes, I would imagine that population growth and general growth of consumption is a big piece of this. But what would you say are the underlying growth drivers of that broader number?
- [22:58]
C
You have tons of growth drivers in the industry in general. They benefit from population growth, more consumers, they benefit from urbanization, people who move in town and change the way they consume. You have the rising disposable income in em, you have lots of trends like natural, sustainable sourcing, better for you, the multiplication of indie brands. If you go in flavor, the people want less sugar, less fat, less salt. But they don't want to sacrifice, of course on the taste they love. They want healthier food and beverage, protein and dairy alternatives. You have to improve the aspect, you have to improve the taste, you have to mask ingredients, you have to improve the texture. There is the trend of in the US natural colors to replace artificial dyes. The market is expected to grow 10% in the next five year. If you go on fragrance and beauty people, it's a bit the same. People want less ingredients, better ingredients, but they want exactly the same effects and smell. You need to improve, for example the scent to carbon ratio. You need to improve the scent to volume ratio. There is a trend with people who want more juice in the bottle, so more fragrance concentration. You have young generation, they are more interesting in fragrance. They are trying lots of products. There is the impact of social network and TikTok influencers. That's driving growth. You have encapsulation technology. So it's the way that the fragrance is released, which must stay longer. It must be more biodegradable. You have premiumization, you have people that are more savvy, they want more active in their skin cream. You have population aging, they are more purchasing power, they consume more beauty maybe and health products. So you have tons of driver and I think it was Mark Twain during the gold rush. It's good time to be in the pick and travel business. The big and most diversified FNF companies, they can benefit with all these trends without being too exposed on one specific
- [24:58]
A
segment relative to the other three in the big four. What would you say is differentiated about Givaudan's approach?
- [25:08]
C
If anything, they are the leader in fragrances. Globally they have around 25% global market share. In fine fragrances, they are Very strong in prestige and haute parfumerie. They have also increased their market share because over the last few years they have really strong growth organically. They have doubled their business in fine fragrances since 2019. So very strong. They are also very strong global payer in consumer fragrances. So shampoo, soap, floor cleaner, laundry detergent, they have roughly 20% market share worldwide. They're really the leader on that part. They are smaller. They are also active in active beauty. They are smaller. They have low exposure to commoditized fragrance ingredients. It's a low single digit. They are the leader. They are the one which is closer with what we mentioned is firmenish. And then you have IFF and Samurai's on the other division, the taste and well being. So the flavor, they're also the top layer, but it's more fragranted. They have maybe 10, 15% market share in the flavor market. So the most customized, not in the very basic businesses, low margin business. They are really a leader of innovation. They own tons of IP and they spend 3 billion Swiss franc over the last few years in Ind. It's 8% of sales more than the competition. They own the 5,000 patents. They have 60 research and creation centers worldwide in Brazil, Mexico, Eastern Europe, in South Africa. So they have local data on consumers. They have insight. They can anticipate where everything is going on in terms of consumer trends. They have a big team that is chasing and screening hundreds of startups. They are the pioneer to open perfume School in 1946. Most of the best perfumer went in the school. They have tons of PhD. They have 200 noses. They have some stars. For example Callis Baker. She created the iconic J' Adore de Dior and she's now head of the performing school. They have also very nice, very interesting innovations. They have partnership with academic partners. They make crazy stuff in encapsulation. The way to release fragrance, for example, it's different in Mexico. If you're putting your laundry to dry in the sun, the fragrance must be released thanks to the impact of the sun. It's different. If you are in uk, it's rainy, you put your laundry inside. The fragrance must be released differently. You have blue color for example, which is very hard to find in nature. So they make it from spirulina. They are very strong in plant based meat, in sausage and burger. What's also important is that they have a very strong global footprint. They are in 80 production sites worldwide. They were pioneer 100 years ago in France or US they went in Latam eight decades ago, India maybe 50 years and China several decades. You need in the industry to have scale production. You need to be able to produce big quantities locally and reliably. A critical point is the raw mat access. To have nice creations of your flavorist and perfumers, you need to be able to have lots of molecules. They have a big library in their innovation center in Zurich. They have long lasting relationships to have access to scarcer raw materials. On the other hand, you need to manage tons of raw materials. They have 3,000 suppliers. You need a big know how. They have a very dominant position.
- [28:46]
A
Is it right to think about fragrance and beauty and taste and wellbeing as having some overlap in terms of customer base? You mentioned that proposal before which would have included both angles of fragrance and flavor. Is it right to think that with some of these they might have some overlap in terms of customer base and when they make proposals they're winning the deal for both businesses.
- [29:12]
C
I think if you take a company like Unilever, now they are splitting their food business, but over decades they were both in foods and hpc so there is a high probability that they are clients on both.
- [29:27]
A
For example, you mentioned some of the margin differences that exist, but just at a high level. Fragrance and beauty versus taste and well being. Is there a drastic difference in the margin profile of those two businesses?
- [29:41]
C
The decade before COVID the EBITDA margin was around 22% in both divisions. But now you have the taste and well being that is stable, roughly 22%. But the fragrance in beauty is improving to 27% and it's very likely due to operating leverage and mix due to the strong growth of fine fragrances over the last few years and operating leverage on margins. I don't disclose this, but from the info you get from experts it seems that the highest margins are in fine fragrances and then you have consumer then ingredients. The taste and well being, they don't publish that. But from the info we found the margins are higher in beverage than food. Another difference in terms of input, the natural raw materials are much higher in the taste and well being. It's like 70% of inputs and roughly 30% of fragrance and beauty. Of course you put more natural raw materials in what you eat and drink and there is not really a financial logic to put high end, high quality, expensive lavender extract on your floor cleaner for example.
- [30:51]
A
If we take it down into the financials a little bit, you mentioned that market growth rate around 4 to 5% which has been the trend line since the IPO and for the Outlook, I would say that's what it hints at as well. Does the business differ drastically from the market growth? Are they growing above that as they grow market share? Talk a little bit about the revenue line and how that tends to trend the organic growth.
- [31:19]
C
Two decades before COVID it was 5% and now post Covid. If you include Covid, it's like 6% a bit higher. The last few years they have been doing a bit better than most competitors. In a typical year, if you break down the growth, it's typically 4% volume and 1% pricing. Pricing is used to offset the raw materials by passing to clients. But it's not really a way to grow. They want to grow with innovation and volumes. What's interesting is that since the IPO, they didn't have a single year of negative organic growth. 0809 or 2020. They were positive. So very attractive. If you look at the financial, you also have to be careful because you have to keep in mind that the Swiss franc has been strengthening constantly for decades. So that has an impact. There is also a bit of a natural hedge because they have lots of costs that are local. I think they have 60 creation center around the world to adapt to local taste culture and 80 production centers. So they have cost a bit around the world and very few in Switzerland. In terms of margin, as we said, you have the margin in fragrance and beauty that's really improving to 27%. Even if they say that their sweet spot is 22, 24%, it's what they promise. You don't have to be too profitable. You have to invest for growth.
- [32:42]
A
You mentioned the operating leverage. Oftentimes that can work on the way up, but operating leverage on the way down can be painful. So my sense is that the organic growth historically has shown not much cyclicality, particularly to different macro environments. Because since 2000 we've had actual recessions and down cycles. Have the margins shown more cyclicality than the revenue line?
- [33:07]
C
They are very good at maintaining margins. Something important for them is when you have inflation of raw material like 2011 or 2022. Givaudan has been pretty good. Maybe best in class at negotiating. Maybe thanks to their size, the value they bring to pass the cost to the clients. Typically it's done in 12 months. The cash flow are very strong over time. Even in the difficult period you had an impact on cash flow. For example in 2022 when you had problem of supply chain and spike in raw materials, or an impact on cash flow, but it's still very high. Cash generation during the recession.
- [33:45]
A
And I assume that the R and D is mostly shown on the income statement. So that's captured in the margins. It's not capitalized.
- [33:53]
C
Yes, they do 7.5 billion Swiss franc. They have something like 4, 2 cost of goods sold, mainly raw materials, which is the topic. The energy represents a small part of the input basket. At 2 to 3% you get a gross margin of 44%. R&D they put the highest R and D in the industry. They are at 8% of sales. Then they spend 13% on selling, marketing, distribution, a few admin expense and operating expense and you still have 18% 19% operating margin. The cash generation is very strong. You have a cash flow margin at 18% of sales. So around 1.5 billion Swiss franc a year. The working capital is around 20% of sales and the DNA around 5%. You have a capex, typically 300 million Swiss francs. Just 3 or 4% of sales is split equally between maintenance, IT spending and growth. And so you have the free cash flow, it's above 1 billion. You have a target of 12% over the cycle. We like the very long term they have. They don't give a yearly guidance. They have five year plan and for organic growth. And they talk about CAGR and the free cash flow margin must be above 12% of sales. So it's in line with net income of the time. It's even both.
- [35:18]
A
You mentioned working capital is 20% of revenue. Yeah, I can understand why fairly high number. But it's an interesting data point on the cash generation. What do they do with the excess cash? Talk a little bit about their framework. I know they've historically had some acquisitions. It's a very long history. So it's hard to say. M and A is a huge piece of it. But how do you frame their capital allocation and using that excess cash whether it's for shareholder returns or whatever it
- [35:49]
C
might be the big acquisitions actually a long time ago now they are doing more bolt on acquisitions. So they are spending a few hundred millions a year on Bolton acquisitions. So they are going in trying to get adjacent growth opportunities. New technology, new raw material access, new clients. They are not doing a big transformative acquisition. They are spending half of the free cash flow on dividends. They have a good track record of increasing the dividend steadily, whatever the environment. Over the last few years they paid down their debts and they are now at two to three times the ebitda. The dividends is two times covered.
- [36:28]
A
So attractive taking it down into just general framework on Valuation, not necessarily looking for a price target or anything, but how you would say the market tends to value this business, whether it's an earnings multiple, free cash flow multiple. Do you have any general sense of that framework used by the market and anything you would add to it?
- [36:50]
C
If you look at EV to free cash flow, Givaudan has trading most of the time as 30 times or even more thanks to the quality and it was a premium compared to the global equity index. And even if you compare to defensive sectors like their end markets like HPC or food products, they were above. But today you have quite an interesting situation where despite a strong quality recurring growth, they are now trading something like 23 times free cash flow. So you have a 4.3 free cash flow yield, which is close to the two sectors. It's well below the global index. Now what we like to do is to do a reverse dcf. You try to have an idea of what implied in the market in terms of free cash flow growth. Currently it's only around 3% implied growth of the free cash flow. So it's clearly below what I think the business is able to produce. So a lot of people look at the dividend yield on this company. Currently you have trapped 3%. It did not happen for a decade. It's well covered by the free cash flow as we've seen. And it's also well above the global index. If you look very simply in terms
- [37:59]
A
of risks, I can imagine some of them, you will have competition over time. There could be particular EM market trends. But what would you point to as the key risks for this business?
- [38:10]
C
You now have a bit of change. You have a new management team following the retirement of Gilles Andre, iconic CEO for two decades. And you also had Tom Hallam, the CFO for many years, left a few years ago. They both did a great job investing for growth for the long term, not doing M and A for the sake of doing M and A and getting bigger. Very transparent long term view. So there is a new CEO CFO that comes two years ago, but he has 15 years of experience in finance. At Givaudan, beginning of March, you have a new CEO. He has experience at Unilever, P&G, two decades at Danone with several management positions, but that's the main risk. My father taught me something when I was young. It's something from his mechanics course. The teacher used to say, you should never touch an engine that's running smoothly and perfectly. That's a problem for a lot of quality companies. They are new management. They don't understand. It's a wonderful business already and you have to invest to not be complacent. But don't change everything to change something. The ex CEO Gilles Andre, that stays as chairman and still owns lots of shares. So we hope that everything stay the same. Otherwise. A few Years ago, in 2023, I think there was a antitrust investigation against several players from the fragrance industry. Givaudan said they were collaborating and they've made no provision. So let's see if something comes out. You have some Chinese price competition really on the more commoditized fragrance ingredients part. But it's only 6, 7% of group sales, I think, and very different, as we've seen earlier from the rest of the business of a deeply tailored compounding with huge bias to entry and competitive advantages. Of course, maybe more short term. I mean, I hope the effects of the Middle east war. The total region is maybe around 7, 8% of group sales, but was a good growth driver over the last few years in fragrances in general, the fine fragrances is more volatile than the other very stable end markets. And it's now 11% of group sales. Maybe finally, if you're a bit paranoid, a more remote risk would be AI chips implanted in your brain which could simulate taste and scent. We never know. But personally, I will never trade the experience of my favorite ice cream or drink with Girond flavors for a cheap inflight brain.
- [40:38]
A
I think you shared a good lesson in that last answer, but we always close out these conversations. But the lessons you could take away. This is a unique business, but what would you say at a high level is a broad takeaway that you might be able to take from whatever classification or framework you would put around this business and potentially apply elsewhere.
- [40:58]
C
If you look at why this business is very attractive, the reason is the business model of selling something very critical to the clients, which represent a tiny portion of their clients costs. So you have nice margin recurring business, they don't want to change. You have visibility and I think if you look this way, it helps you find a lot of good companies in other industries. If you look at this industry, you realize that there are lots of companies that have been growing and thriving for decades, sometimes over a century. If you look at in industry where you see that kind of business, profitable, stable, very lasting, they have gone through many war, through many crises, and they are still there. You can find other companies in other industries. For example, if you look at for example food, you have Mars and Ferrero that are very big companies and they are able to stay private and still be very important. You have a Chanel or Rolex in luxuries. It helps you find another maybe attractive listed opportunities.
- [41:59]
A
I love that. It's a lesson we love and we've seen in a few different industries that look very different than this, but with the same general concept. Jeremy, this has been a pleasure. You taught me a lot about a market I knew very little about. So thank you for sharing the knowledge with us.
- [42:16]
C
Thank you very much.
- [42:17]
B
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