Chief Executive Officer’s review
Starting our five-year strategy with a solid first year
Gilles Andrier, Chief Executive Officer, answers our shareholders’ questions about Givaudan’s performance in 2016, early achievements towards our 2020 strategy, and outlook on key priorities for 2017.
What were Givaudan’s major financial achievements in 2016?
Despite a continued volatile and challenging market environment in 2016, we made a solid start towards achieving our 2020 strategy. Our financial ambitions and roadmap for the five-year cycle seek to ensure responsible growth and shared success for shareholders, customers and all key stakeholders. Our topline growth is well on track, with sales of CHF 4,663 million showing an increase of 4.2% on a like-for-like basis1 and 6.1% in Swiss francs, and we achieved free cash flow of 12.8% of sales – both results are in line with the average financial targets we set for 2020. Finally, in 2016 we made strong operational progress in each of our strategic pillars – growing with our customers, delivering with excellence and partnering for shared success.
What did you accomplish in terms of growing with customers?
Customers are the very heart of our business and there are several ways in which we are growing with them.
The first way is to continue growing in high growth markets, where we further expanded our footprint in 2016. Beyond opening several new offices in Latin America and Africa, we became the first global flavours company to open laboratory and office facilities in Pakistan, enabling our customers to access Givaudan’s industry-leading capabilities locally. We also expanded our Flavour Innovation Centre (FIC) in Singapore, where our flavourists leverage the latest ingredients and technologies to develop holistic customer solutions that can go straight to market. In Fragrances, we continued to strengthen our manufacturing capacity for fragrance ingredients in high growth markets.
Another way of growing with our customers is to anticipate and develop consumer-preferred products. Consumer preferences are not only rapidly evolving but are very specific to each region. We support our customers’ growth by leveraging consumer insights and in-depth knowledge of local markets, and by harnessing our innovation and unique creative capabilities. Recent examples include new captive fragrances molecules, introduced in 2016, a new generation of encapsulated fragrances, a new delivery system for snacks offering authentic flavour profiles and ease of use in processing, as well as new dairy-free solutions.
Health and well-being is an area that offers us many opportunities to grow with customers in both flavours and fragrances. Givaudan’s active cosmetics business was rebranded in 2016 as ‘Active Beauty’, with the mission to bring beauty to the world. To further reinforce our innovation in the research, development and production of active cosmetics ingredients, we expanded our collaboration with the industrial bioscience company Amyris, Inc. In Flavours, we introduced several innovations to support consumer trends for health and well-being. Examples include a new ingredient that helps to enhance sweetness while reducing calories and a ‘non-dairy dairy’ solution for customers seeking to offer products with authentic dairy flavours while addressing allergens and vegetarian preferences. We also advanced the development of new solutions which provide more protein and functional food ingredients, help to mask bitterness, and continued to further strengthen our natural flavours platform.
What role did acquisitions play in supporting customer growth in 2016?
We continuously look at opportunities to grow our business both within and beyond our core fragrance and flavour capabilities, for example by expanding our offering in integrated solutions and Active Beauty.
The acquisition of Spicetec Flavors & Seasonings, completed in 2016, further supports our customers by offering integrated solutions. Combining our leading flavour expertise with Spicetec’s portfolio of products enables us to deliver a broader range of solutions to our customers in processed meat, savoury retail and foodservices. Furthermore, these additional capabilities help us strengthen the breadth of our industry-leading natural ingredients, flavour and taste solutions. This represents a significant opportunity to grow and expand our existing business. In terms of Fragrances, our earlier acquisitions of Induchem in 2015 and Soliance in 2014 are now combined into Givaudan’s Active Beauty business, offering a comprehensive range of innovative technologies and solutions in the area of anti-ageing, self-tanning, skin-soothing and moisturing to customers and consumers around the world.
Over the coming years, we will continue to build both businesses.
You announced the creation of Givaudan Business Solutions (GBS). How does this support your 2020 strategy?
To succeed in a market that is daily becoming more competitive, dynamic and fast-moving, we must ensure that every customer interaction is excellent at every touch point. We must create a memorable experience that drives our customers’ desire to work with us. GBS is all about harnessing our expertise and talents in a more efficient, customer-focused and agile way, creating a platform for continuous improvement. The step-wise implementation of Givaudan Business Solutions will support the Company in delivering on this commitment by reducing internal complexity, offering best-in-class business processes to our customers, and solutions to both divisions and corporate functions, and driving excellence across the organisation.
Building a global platform with standardised processes and solutions will also allow us to apply and leverage automation and big data more consistently, while making it quicker and easier to integrate new acquisitions – all of which contributes to operating more efficiently and in a more agile way.
GBS will become the heart of our strategy pillar, ‘Delivering excellence.’
How important are partnerships to Givaudan and what did you achieve in this area?
Partnerships are crucial to driving responsible and sustainable growth over the next five years and that is why we have embedded becoming the ‘partner of choice’ in our 2020 ambition. We made good progress in building and expanding collaborations with all of our key stakeholder groups in 2016.
Innovation is an area where partnerships play a key role in fuelling growth. Beyond our commitment to invest significant resources in our own science and technology – approximately CHF 400 million annually – it is vital we continue expanding the collaborations with external partners who can speed our access to new technology and innovations. Following an intensive Innovation Trek that took all of the Executive Committee members to San Francisco, we signed an agreement with IndieBio, a leading biotechnology accelerator in the US. Givaudan also became a founding partner of MassChallenge, giving us access to hundreds of thoroughly evaluated and expertly accelerated start-ups. In fact, we are already collaborating with sensorwake, one of the 2016 winners. We are rethinking the future of food through our participation in the EIT Food Knowledge and Innovation Community, a powerful collaborative network to drive sustainable transformation towards a more consumer-centric and resource-efficient food sector, as well as RocketSpace, an accelerator for food and agriculture that harnesses the ideas of disruptive start-ups and progressive corporations.
We also announced the investment into building a new innovation centre for flavours and fragrances in Switzerland, which will open in 2019. Its innovative research areas will span from organic chemistry, naturals such as fermentation and biocatalysis, to flavour creation and application science, as well as delivery systems.
In 2016, we expanded our partnerships with suppliers focusing on some of our most vulnerable raw materials. We strengthened our footprint in Madagascar through two initiatives with our partner Henri Fraise Fils (HFF): NATEMA, our joint venture plant for processing clove leaf oil, will enable us to establish and grow our capacity to develop and process natural ingredients; a further agreement will allow us to leverage the local expertise and infrastructure of HFF to secure vanilla bean supply directly from Malagasy smallholder producers. Both examples demonstrate our commitment to establish direct sourcing models in countries of origin that offer the best ingredients to our customers and create value in our partner communities. In addition, we are actively pursuing supplier-enabled innovation, leveraging opportunities to collaborate with our suppliers on common innovation goals.
A strong, motivated workforce is among our most valuable assets. At Givaudan, we aim to foster a great place to work where every employee contributes to our success. Our second global employee engagement survey, conducted in September 2016, demonstrated an increase over 2013 with an industry-leading 81% engagement rate. We take pride in offering interesting career opportunities to employees and managers with knowledge and potential, and continue to prepare our future leaders with strong internal Learning & Development initiatives. The success of our Leadership Senses programme can be seen in the fact that many of our senior managers are recruited from within Givaudan.
Sustainability is increasingly important to your customers. How is this reflected in your strategy?
Givaudan is in the process of fully integrating sustainability into all key programmes of our 2020 strategy, and this is reflected throughout the business value chain. Consumers are demanding more transparency around the products they buy; they expect them to be more sustainable, and also expect companies to operate more responsibly. We want to help our customers offer brands that satisfy these consumer demands. There are three key areas in which we believe our progress is of high value to our customers: responsible sourcing, innovation, and environmental stewardship.
Responsible sourcing is essential for Givaudan: we buy more than 10,000 different natural and synthetic ingredients sourced from 2,000 suppliers in over 100 countries, and we want to make a positive impact on those communities while preserving the environment for future generations. To this end, we introduced a Responsible Sourcing policy in 2016, the first of its kind in the fragrance and flavour industry. We are working to ensure that all of our suppliers achieve compliance with this policy. Supplier audits of specific supply chains for key raw materials are part of this responsible sourcing programme.
Brands with purpose need to harness innovation to stand out from competitors, and our aspiration is to support our customers in their sustainability goals with innovative tools and approaches. Examples of areas we are exploring include green chemistry or cleaner processes that generate less waste, resource recovery that transforms low-value materials into high-value products, circular economy practices that avoid pollution by design, and new ways to address the future food and health needs of a growing world population.
Givaudan is industry-leading in our eco-efficiency performance. In 2015, after successfully delivering against our original targets ahead of time, we set even more ambitious eco-efficiency targets for 2020. The new targets reflect our ambition to stabilise environmental impact while increasing production volumes. We fully support CDP’s new scoring system, introduced in 2016 to encourage companies to be more ambitious in their response to climate change. Givaudan achieved an overall ranking of A- at the Leadership level and were named a country leader for Switzerland in 2016.
What challenges did you encounter in 2016 and how did you master them?
In 2016, we were able to compensate for continued weak sales in the European region with very solid growth in North America. Our sales in Asia and Latin America continued overall to be very strong, while certain high growth markets declined compared to the relatively high growth rates seen in previous years. Our broad exposure to diverse markets, currencies, customers and segments allowed us to improve our growth and performance throughout the year, demonstrating the resilience of our business.
Consumer desires, market trends and customer needs are evolving faster than ever before. How do you address these changes?
Givaudan has several key strengths that make us well positioned to adapt to the rapid pace of change in today’s evolving landscape.
We put the customer at the heart of our business and, collaborating closely with them, customise our offers to their specific and evolving needs. For our customers, partnering with Givaudan must continue to mean something out of the ordinary – a choice that removes complexity and risk for them and gives them confidence that working with us means a greater likelihood of product success. We strive to earn their trust every day with a mindset of delivering a superior customer experience.
We appreciate that consumer preferences vary from region to region and evolve quickly, often inspired and influenced by local culture, fashion or food trends. To anticipate and develop consumer-preferred flavours and fragrances, our teams closely follow these trends as well as product offerings in key markets, and we invest in market research and consumer understanding. We use these insights not only to develop fragrances and flavours that meet evolving consumer desires, but also to advise our customers on these trends and how to use them in the development of their brands.
Our approach of being close to consumers, customers and markets is backed by a solid strategy that gives us a clear roadmap, while preserving our agility and nimbleness to adapt to market changes. We also have the financial means to drive growth, by investing in innovation, infrastructure, partnerships and acquisitions. Most importantly, we have a highly dedicated team with a mindset that is truly committed to serving our customers, delivering a superior experience and helping them to make their brands desirable and successful.
The past two years have seen several changes in the Executive Committee. What impact does this have on the 2020 strategy?
Leading Givaudan on our journey to 2020 and beyond will be challenging, but as CEO I am confident that we are firmly supported by our dynamic and experienced executive team. Over the past two years, Givaudan’s leadership team has grown and evolved to include new members from areas not historically represented at the Executive Committee level. Thanks to this expansion, we now have a voice at the highest level of our Company for innovation, procurement and most recently, GBS. We are especially fortunate to have effective succession planning that has enabled us to appoint strong and very experienced leaders from within Givaudan. This allows us to address the challenging market environment, and ensure that we are able to successfully execute our 2020 strategy.
What are the priorities for the business in 2017?
The year ahead will be marked by ongoing change in the market and our response to it. While continuing along the path of executing our 2020 strategy, we will remain attuned to the market environment and adapt our business approach. As we pursue opportunities to acquire companies to further build our Active Beauty business and offering in Integrated Solutions, we will actively embrace change, striving to best integrate the value and agility these companies have to offer. We will welcome the step-wise implementation of GBS, Givaudan’s new organisation delivering best-in-class processes, services and solutions, to internal and external customers.
Finally, we will focus on further embedding a mindset to deliver a truly superior customer experience, and in doing so drive our competitive advantage beyond the high quality of our products and services. Our top priority for 2017 will be excelling in the way we engage with each and every one of our customers.
I look forward to an exciting year for Givaudan and am confident that we will continue on our growth path as we pursue our strategy of ‘Responsible Growth, Shared Success’ in 2017.