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Morningstar | Givaudan Posts Stellar 1Q Growth Padded by Raw Material Pass-Through and Currency Devaluation

Wide-moat Givaudan burst out of the gate with like-for-like sales growth of 6.3% in the first quarter, well ahead of consensus and our expectations. We wouldn’t get too excited just yet, however, as this number captures the impact of rising raw material costs passed through to customers as well as currency devaluation in certain Latin American countries (hello Argentina!). Raw material inflation is expected to be 5%-6% in 2019 with a heavy emphasis on the oil-based fragrance side. In the first quarter, the fragrance side was the driver of like-for-like growth with an 8.7% increase over 2018 compared with consensus of 5.3%. Within flavours, like-for-like growth was 24% in Latin America. However, these contracts are priced in U.S. dollars before being converted to local currency. Consequently, while the dollar price may remain stable, a conversion-driven price increase in the local currency is included in like-for-like growth. We don’t expect to make a material change to our CHF 2,000 fair value estimate. At current levels, the shares look overvalued.

Like-for-like growth in the flavour division was 4.3% in the first quarter; we currently expect 5% for the full year. Ignoring the boost from Latin America, first-quarter growth was more modest, roughly 1.5%-3.5% amongst the other regions. Thus, we think the underlying growth was a bit soft. Growth was driven by local and regional customers. Double-digit growth was reported in health and well-being and single-digit growth was delivered in naturals.

We are impressed by the ongoing double-digit growth in fine fragrances, 10.3% in the first quarter. However, we continue to believe that increasingly tough comparisons will begin to weigh on growth later in 2019. Active beauty remained a strong performer with double-digit growth. Consumer fragrances were led by double-digit growth in home care.