Novonesis B Unsp/Adr

Welcome to the Novozymes first half 2021 conference call. Throughout the call, all participants will be on listen-only mode, so there's no need to meet during individual lines, and afterwards there'll be a question-and-answer session. Today, I am Peace% Tobias Cornelius Bjorklund, Head of Investor Relations. Please begin your meeting.

Thank you, Operator, and welcome, everyone. As stated, my name is Tobias Göklund, and I'm the head of investor relations here at Novozymes. At this call, our CEO, Esther Bajé, and our CFO, Lars Green, will review our performance for the first half of 2021, as well as the outlook for the full year. Also present at this call are Tina Feiner, EVP Agriculture and Industrial Supply Solutions, Amy Byrick, EVP Strategy and Business Transformation, Anders Lund, EVP Consumer Buy Solution, and Klaus Fuglsang, CISO EVP of Research and Development. The entire call will take about 60 minutes, including time for questions at the end. Before we begin, I would like to remind you that the information presented during the call is unaudited and that management may make forward-looking statements. These statements are based on current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in any forward-looking statements. By that, I'll now hand you over to our CEO, Esther Bacher. Esther, please.

Thank you. Thank you, Tobias, and thank you all for calling in. Please turn to slide number two. Before we dive into our first half performance, I would like to ask Amy and Lars to put a few words to the just recently announced and very exciting investment in advanced protein solutions. In addition to being a very strong business case, the deal is also an important milestone in the execution of Novozang's strategy, Better Business with Biology. Amy, please.

Thank you, Esther. The world faces an ever-increasing challenge of how to feed a growing population within the limitations of our risk boundaries. The increasing consumption of plant-based foods is the single biggest change in the food and beverage industry since the industrialization of food chains. At Nova Zymes, we established the Advanced Protein Solutions as a strategic opportunity area two years ago and have been working to develop business models and products which leverage our biotechnology capabilities to play a role in the alternative protein revolution. The global demand for protein is expected to double by 2050, with plant-based meat increasing from only 1% to between 2% and 5% penetration by volume already by 2025. This investment follows the agreement by Novozymes to enter into a long-term contract with an anchor customer and key player in the plant-based industry, and delivers on Novozymes' stated purpose of creating better lives in a growing world by feeding the world sustainably. Due to competitive reasons, we're unable to disclose the name of the customer or specific contract details, but I'm very excited about this opportunity and the milestone it marks as our first large-scale commercial agreement and investment on our strategic journey to be a leader in novel proteins. After this short introduction, I'll ask Lars to go over the financials of the investment.

Lars? Thank you, Amy, and hello to all of you. The long-term contract we have just entered is an attractive opportunity and a strong business case with excellent growth prospects and high returns, supporting the long-term shareholder value creation at Novoscience. In order to meet the growing demand for plant-based solutions, Novoscience has committed to invest 2 billion Danish kroner in a new state-of-the-art production line at our existing manufacturing site in Blair, Nebraska in the United States. The construction will start very soon, and we anticipate the facility to be completed before the end of 2023. While the majority of the investment activities are planned for 2022 and 2023, approximately 300 million kroner is expected in 2021. This has been reflected in our full-year expectations for net investments and the outlook for free cash flow before acquisitions. The investment is forecasted to support Novozyme's long-term growth ambitions from 2024 and onwards and is expected to be accretive to the EBIT margin, ROIC including goodwill and earnings per share from 2025. During the construction phase and ramp-up of the facility that takes place between 2022 and 2024, the investment is projected to have a modest negative impact on EBIT margin and a negative impact on both ROIC including goodwill and free cash flow due to the CAPEX investment. Within five years from commencing production, Novozyme's total strategic opportunity area of advanced protein solutions is expected to reach at least 1 billion kroner in annual revenue. With that, I'll hand back to Esther for a review of our first half performance. Esther, please.

Thank you. Thank you, Lars. A very exciting project indeed. And now let's go back to the first half and second quarter performance. We have had a very good start to the year with 6% organic sales growth in the first half and 9% in the second quarter. The good sales performance is also reflected on our earnings number. We delivered a strong EBIT margin, a strong ROIC, including goodwill, and a solid free cash flow. Sales in both the second quarter and in the first half as a whole were driven by double-digit growth in grain and tech and processing, bioenergy, and food and beverages, and human health. Sales in household care and in agricultural, animal health, and nutrition declined as expected as both businesses' areas faced difficult competitors. In light of the good first half results, We are narrowing the 2021 outlook for organic sales growth upwards to 4% to 6%, with all business areas expected to grow. The updated sales outlook remains subject to COVID-19 related and sustainability and assumes some destocking in the second half of the year. We are also updating the full year outlook for the EBIT margin and ROIC, including Goodwill. When it comes to innovation, we've launched six products so far this year, including three in the second quarter. of which two were in biofields and one was in human health. And with that, let's now review each of the five businesses' areas in more detail, and let's start with household care. Could you please turn into slide number three? Thank you. Sales in household care declined 2% organically in the first half, as expected. Growth from the rollout of the freshness platform and increased market penetration in emerging markets, they weren't enough. to overcome the high comparator following the last year COVID-19 and related shortages. Sales in the second quarter declined 6%. This was in line with expectations driven by the stocking and came on top of a high comparator from the second quarter last year. Our partnership with Jibodan is progressing well and has had a very good and productive start. In the second quarter, we filed for the first joint IP and we also celebrated multiple joint customer wins. Looking ahead for the year, we will continue to focus on penetrating the emerging markets. The freshness platform will continue to grow with a broad market launch just around the corner. And we will continue to enable home care solutions in collaboration with our customers and our partners. In summary, we maintain the full year expectation for low single-digit growth. Please turn to slide number four. Food, beverages, and human health performed very well and grew by 14% organically in the first half. The strong growth was broad-braced across sub-areas and regions, and it exceeded expectations, partly due to higher than expected consumer demand and also by stock building. Human health grew double-digit and performed well, which was in line with expectations, and we are very, very pleased with the good performance we see in this promising area. In the second quarter, performance was strong and sales grew 18% organically. Growth came on top of us after competitor and included also the positive timing effects. Performance was especially strong with our health-focused solutions in dairy and plant-based proteins. The integration of our recently acquired human health assets is going very well. And as an example of the combined R&D strength, we just launched a new product, Alphorex Immune. It's our first and launch into attractive immune stimulation segment. Looking ahead for the full year, following better than expected first half, the full year expectation for food, beverages, and human health is increased. We now estimate the business to grow organically in the high single digits, including a negative effect from the stocking in the second half. Growth is expected to be broad-based across sub-areas and across regions. In the food business, innovation and emerging market penetration, as well as an increased consumer health focus, remain the key drivers of growth. Beverages is expected to grow from a gradual recovery in brewing last year, which was severely affected by COVID-19 restrictions. And human health is estimated to grow organically in the double digits, driven by innovation and driven by cross-selling. Could you please turn into slide number five? Thank you. Organic sales in bioenergy grew 16% in the first half. Although still below the pre-pandemic levels, U.S. ethanol production continued to improve and ended significantly higher than last year. To recovering the U.S. production and continued capacity expansion in Latin America, these two were the two main growth drivers behind the strong start of the year. U.S. ethanol production in the second quarter grew significantly year-on-year, as production in the second quarter of last year was severely impacted by the first wave of COVID-19 restrictions. This rebound was naturally also as the main growth driver behind the 54% of sales growth in our bioenergy business in the second quarter. The very strong growth also benefited from positive developments outside the U.S., led by strong growth in Latin America. In the second quarter, we further strengthen our broad and market-leading offering to ethanol producers with two launches of new solutions, improving both ethanol and corn oil yields with better process robustness. For the full year, we expect sales in bioenergy to grow at mid-to-high single digits, driven by the gradual recovery in U.S. ethanol production, the continued capacity expansion of corn-based ethanol production in Latin America, and market penetration supported by innovation. Please turn into slide number six. Thank you. First half sales in grain and tech processing grew 17% organically. This was above expectations mainly due to customer stock building. The slung performance was driven by growth across most of areas led by starch processing, vegetable oil processing, as well as the recovery in textile and sales of diagnostic enzymes for COVID test kits. Sales grew 18% organically in the second quarter. The performance was amplified by stock building, but also driven by growth in textile and increased market penetration in vegetable oil processing. For the full year, we expect sales to grow at mid-single digits with growth across most areas. Growth in grain will be driven by innovation and market penetration. while the recovery in the global textile industry will be a key contributor to growth in text. Performance in the second half is expected to moderate as the competitor becomes more difficult, and we expect negative effect from this stocking. And please turn now into slide number seven. Agricultural, animal health, and nutrition sales declined 9% organically in the first half of 2021, The decline was expected and due to negative base effects from the roughly 60 million Danish kroner, one of related to the former BIAC setup in Q2 2020, also as well as a stockpiling in animal nutrition in the first half of last year. Innovations such as Valencia's and Prague 360 performed well in the market. Sales in the business area declined 19% organically in the second quarter, mainly due to the previously mentioned BIAC one-off, and sales in animal health and nutrition declined against a stockpiling inflated comparator. However, this decline was less than expected as in-market demand improved. Our outlook for 2021 has been upgraded slightly to low single-digit growth from previously to flat to low single-digit growth. Agricultural business is expected to be the main contributor to the full year growth performance. Adjusted for the 2021 off, we expect double digit growth in agricultural driven by expansion across crops and regions. Sales in animal health and nutrition is expected to grow slightly following somewhat better than expected performance in the first half of the year. And with that, I will now hand over to Lars for a look on the financials. Lars, please.

Thank you, Esther. Please turn to slide number eight. Sales in the first six months of the year grew 6% organically and by 3% in reported Danish kroner. This includes a 5 percentage point headwind from currencies and a 2 percentage point contribution from M&A. The cross margin in both the first half and in the second quarter was very strong. The margin expansions for both periods were mainly driven by higher production efficiency and productivity improvements but was also supported by timing effects and a minor benefit from acquisitions. Year-on-year currencies impacted both periods somewhat negatively. The reported EBIT margin was strong at 28.6%, 110 basis points above the margin in the first half of last year. The development was driven by a gross margin expansion and an increase in other operating income. This was partly offset by higher operating costs, currency headwinds, and the inclusion of the two human health acquisitions. The second quarter EBIT margin was also strong at 27.7%, corresponding to a 180 basis points increase compared to the last year, and mainly explained by the same factors as for the first half. Adjusted for one-offs, year-on-year currency developments, and M&A-related effects, the EBIT margin for the first half of 2021 was roughly 29%, and this was around 2 percentage points above the roughly 27% adjusted EBIT margin for the first half of 2020. The adjusted EBIT margin in the second quarter of 2021 was roughly 28%, around 3 percentage points above the adjusted EBIT margin or roughly 25% for the second quarter of 2020. The adjusted EBIT margin developments in the first half and in the second quarter were driven by an improved gross margin from operational leverage and timing effects. This was partly offset by higher operating costs. Free cash flow Excluding acquisitions was solid at 1.8 billion Danish kroner in the first half and 1.1 billion Danish kroner in the second quarter. This was slightly below last year, where the cash flow benefited from the one-off settlement related to the former BioVac setup and the COVID-19 related postponement of certain tax payments in Denmark. The return on invested capital, including goodwill, was 22.2% in the first half of 2021 and 20.3% in the second quarter. This was 2.9 and 3.1 percentage points higher, respectively, than in the same period of 2020. Both the first half and the second quarter improvements were due to higher net operating profit after tax, which more than offset an increase in average invested capital following the two human health acquisitions. Please turn to slide 9 for the 2021 outlook. Although uncertainty related to the pandemic remains, and we still expect to see some customer destocking in the second half. We are narrowing our outlook range for organic sales growth upwards to 4-6% and for the EBIT margin to around 26%. We also raise the outlook for ROIC including Goodwill to 19-20%. Organic sales are expected to grow by 4-6% in 2021 with all business areas contributing. Growth will be driven by innovation, a stronger commercial presence and execution, as well as continued recovery of COVID-19-affected markets. Sales in reported Danish kroner, net of currency and M&A-related effects are expected to be slightly less than 1% lower than the organic sales growth. The EBIT margin outlook of around 26% includes a negative year-on-year impact from currencies of roughly 1% and approximately a 1% negative impact from acquisitions. The M&A effect is attributable to amortization and integration costs, and the currency headwind is expected to derive mainly from the U.S. dollar. We expect second-half margins to benefit somewhat less from operation leverage, and we will run maintenance programs for selected production facilities. The margin will benefit from sales growth and productivity improvements, while higher raw material and freight costs in the second half, as well as continued commercial investments, will impact the margin negatively. Adjusted for year-on-year currency developments and M&A-related effects, the expected EBIT margin for 2021 is around 28%, supported by the net positive one-offs recognized in the first quarter. The outlook for the return on investor capital, including goodwill, is raised to between 19% and 20% and includes negative currency and M&A-related effects totaling roughly 2 percentage points year-on-year. The free cash flow before acquisitions is expected at 2.5 to 2.9 billion Danish kroner, supported by higher sales and an improved operating cash flow. While the underlying free cash flow outlook is increased, it now also includes the roughly 300 million kroner investment in the new production line in Blair. With this, I'll hand back to Esther for a wrap-up before we open up for questions. Esther, please.

Thank you. Thank you, Lars. Please turn to slide 10. We delivered a very satisfactory set of results for the first half of the year, with solid organic sales growth and a strong financial performance. We've also announced a very exciting long-term value-created investment in advanced protein solutions. We are upgrading our full-year outlook for organic sales to 4% to 6%, debit margin to around 26%, ROIC, including Goodwill, to 19% to 20%. and free cash flow before acquisitions to 2.5 to 2.9. Some of you might recall that after the full year conference call, we mentioned four progress areas for 2021 to allow you to follow our strategy execution from a different angle. One of those deliverables was to engage in at least three large commercial or R&D collaborations during 2021. Through the long-term agreement with a key leader in the plant-based industry and the previously announced partnership with FMC, we have already reached two of the three engagements we set to achieve during the year as a whole. The second lot deliverable was on innovation, which is fundamental to who we are. Halfway into the year, more than 30% of our sales have come through solutions launched during the last five years, which is in line with what we are aiming for. The third deliverable regards digitalization as an indicator of our progress to reach more customers. We have generated more than 50% of our sales leads digitally so far this year. This is also well aligned with the 50% ambition we set at the beginning of the year. And finally, the world is in dire need for sustainable solutions. This was highlighted mostly recently in the United Nations report on climate change. And we want to be a strong voice of the global stage. And we have pushed this agenda at several events, including the World Economic Forum and at the UN Global Compact Leaders. Finally, before we move to the Q&A session, I want to remind everybody about our coming Capital Markets Day on September 28. We wanted to meet in person, but unfortunately, the recent resurgence of the pandemic and continued travel restrictions around the world has not made that possible. The vent will instead be run fully virtual out here from here, from Denmark. Novozymes has a stronger foundation today thanks to better business with biology strategy. We have implemented a strict portfolio logic across the business, focus on our R&D pipeline and streamline the organization to get even closer to our customers. And we look forward to further outline our next steps and strategic priorities on how we continue to drive profitable and sustainable growth at the Capital Markets Day on September 28th. Let that be the final words before we start the Q&A. Operator, please begin.

Thank you. We have a few questions in the queue. The first is from the line of Michael Novot at Nordea Markets. Please go ahead. Your line is open.

Yeah, thanks a lot. And a few questions. So, first of all, to Advanced Protein Solutions participants, When you sort of start to produce, how do you expect sales to ramp towards the billion and potentially more than a billion? Is that sort of a gradual sales or with this anchor on board, do you then expect it to be a more swift ramp towards the five billion, the one billion? And then secondly, on COVID testing, can you try to quantify how much it actually makes up of your second quarter numbers? And then lastly, on the household care business, you did see some destocking in the quarter. How do you see this going forward with the big soapers? Are they sort of done in adjusting their inventories? And do you have any signs that they are either more bullish on the future or more bearish on the future in terms of return to normal pre-pandemic levels around the cleaning, hygiene, focus, et cetera? Thanks a lot.

Thank you. I would ask Lars to give guidance on the ramp-up of the cells and proteins. And then, Tina, if you could take the question on COVID testing. And please, Hannes, on the impact of this talking on household care. Thank you.

Yes, thanks, Michael, for that question. So, you know, standing here in 2021, it's a little too early to give very precise guidance on how that potential is going to ramp up over that period. So what we wanted to give you some clarity on is that once we have completed the construction of this facility, then we believe that within those first five years of operations, we can generate, in the area of advanced protein solutions, sales of at least one billion. So I think this is as precise as we can be at this stage, but we wanted to give you comfort that there was also a return waiting after investing 2 billion over the next couple of years. So that's the level of detail that we can provide at this stage.

Okay, and on the COVID testing, so it's reported under the grain and tech processing segment. And in the grain and tech processing, roughly two-thirds is in grain and a third is in the tech part. And the biggest, biggest part of the tech part is in textile. So it is a minor number you're looking at, Michael. Less than what? You want it? It's way less than 10%. I was about to say something. It's way less than 10%.

Just a few perspectives on household care. Q1 was stronger than expected, and we called out that we expected some destocking in the second quarter that has happened. We believe that we are through with most of the destocking we have in household care. We are on our plan. I think that's important to stress, and we also maintain the guidance we have in household care. But it's also clear to say that there is volatility in the business, and that means that the full range from one to three is in play. I think if I look at the largest risk areas, then there is still supply chain challenges in the market. We see chemical prices there going up, and that is a short-term risk, and then, of course, What we can speculate in terms of what's happening on the COVID agenda is also going to put at least some volatility to the business. In terms of destocking, again, I think not only are we done with the last ones, I think that goes for everyone, but we did see elevated cleaning levels in 2020. Those have come down, and you also see that in our numbers in the first half. But we expect that that will sort of probably normalize to more closer to 19 levels as we go forward.

Thanks a lot. Thank you. Our next question comes from the line of Søren Samsell of SVP. Please go ahead. Your line is open.

Thank you. Hello, everyone. I hope you can hear me. I had a question regarding the EBIT margin for the second half. In the first half, you have a margin above 28%. Guidance indicates that it should be below 24% in the second half. You mentioned, as I can see, five reasons, higher raw material prices, higher fight costs, M&A effect, currency effect, and then reinvestment. Those five reasons, could you try to quantify the effect in the second half for each of them, please?

Lars, could you please answer?

Yes. So first of all, just reminding you that the first half EBIT margin was also impacted by one-offs that we realized in the first quarter. So that's a small percent that we have of contribution in the first half year. So as you point out, to get to around 26% on average for the year, that gives us a second half that is just below 24%. And what will bring us there is that the gross margin in the first half year was first of all supported by very strong leverage from the sales growth. We see a bit less sales growth in the second half and a bit less leverage on the gross margin from that effect. The input cost and the freight cost that started to increase in the beginning of the year they are now attached, so to speak, to the products we start selling here in the second half. So we will see the gross margin also being negatively impacted by those. And maybe that's 2% to 3% in total on the gross margin that we expect second half will be lower than first half. And then operational expenses is the residual 1% to 2%. I think if you look at the first half, we have... We are executing on the investment plan that we have sort of put forward. But unfortunately, the world has not yet allowed us to sort of fully travel and entertain customers and engagements with customers. So we do see an increase in activity level also in the second half. And then finally, I'll just remind you also that looking at quarters and not the full year, that is associated with some volatility And so I would encourage you to sort of focus more on the full year margin developments because by quarter, both the numerator and denominator is exposed to, you can say, just small variations can have sort of a sizable impact. But those are the factors that will bring the EBIT margin below 26 in the second half and to a 26% on average for the year.

Okay, that's helpful, but some follow-ups on that. First of all, you mentioned new products or other products you will sell in the second half that will have a negative impact across the market. Maybe you can elaborate what products are we talking about. Secondly, can you tell us whether there will be more PPA effects from acquisitions in the second half versus the first half, and if yes, how much is that? And finally, if you can indicate what is the You normally talk about the effect from productivity improvements every year. Is it still around mid-single digits? Is that the level we are talking about? That's what you're talking about in part, I guess, when you're growing mid-single digits. Thank you.

I don't think I mentioned new products. I think what I said is that the total leverage from our total sales will be less in the second half than it was in the first half. It's not related to any particular product, but rather the overall... leverage from our total volumes so on PPA I mean once we have sort of closed the acquisition we do a purchase price allocation as you say and that involves an amortization of intangible assets that's a linear amortization so that will be the same quarter by quarter so there is no difference in that contribution there I think maybe just a little nuance as we also said the The gross margin in the first quarter was to a little extent also impacted by the acquired businesses. So actually we have solid gross margins from products coming with the acquired entities. So that's of course also continuing in the second half and built into this. So just a little flavor on that. And then finally, yes, we are still seeing the same level of productivity improvements in our facilities. So there is no change in that speed, and we foresee also that we're going forward. We'll be able to continue to deliver productivity improvements in our facilities year by year.

Okay. Thank you very much.

Okay. Our next question comes from the line of Nicola Tang at Exxon BNP Paribas. Please go ahead. Your line is open.

Hi, everyone. Thanks for taking my questions. The first was on food and beds and just sort of shorter term. Is there any way to kind of either quantify the stocking impact that you saw in Q2 or just talk a little bit about how you expect those sort of destocking to play out in the second half? And I think you mentioned this customer raw material optimization. Can you just explain a bit what was going on and is that something that was just in Q2 or will we see that for the rest of the year? And then the second sort of set of questions, I guess, were on the advanced protein side. And the first one is just a basic question. You know, can you explain a bit what your offering is here? Is it, you know, more for the cultured meat side or is it for plant-based? And, you know, a lot of players have talked about the benefits of – in alternative proteins, the benefits of having an integrated solutions approach, which is a bit different from what you're offering. Right. Can you explain a little bit, you know, your unique position and your product offering? And then just the final one, is the agreement with the anchor customer, is this an exclusive relationship? So, you know, when we think about that sort of 1 billion Danish kroner sales target on a five-year view, is that mainly focused with your anchor customer or is that assuming sort of other wins as well? Thanks a lot.

Thank you, Nicola. I will let Hannes go deeper and elaborate on the question regarding food and beverages. And then please, Amy, if we can bring a color and perspective on advanced proteins. Thank you.

So when we call out the shocking effect that we expect that will happen in the second half of this year, then it relates to basically all our businesses performing really, really well. So baking continues to be strong. beverages is of course growing on a soft base and then food and protein also delivering very very high growth and when we then compare to how our customers and the demand in the market then we are seeing that our performance is substantially higher and also when we compare to other food companies then again we are coming out we are coming out stronger and that means that when also when we talk to customers they are saying that they are building higher stock levels and from that perspective we have called out that we expect some of that to level off in in the second half of this year. So we'll see some leveling. It's difficult to say how much. We expect half of the growth that we have in food and beverage to be sort of sustainable and good performance. And the other half is probably something where we do expect a significant part of that relates to stocking effects, but also to the effects that you called out on commodity prices. Small segments in our food and beverage businesses can be replaced by chemistry. more vitamins versus enzymes, and we see that in some pockets that, especially on our baking business, where we can replace vitamin C, and when vitamin C prices are very high, we see sort of a higher growth rate in that segment. We have a number of those, and if you want more details around it, we can take you through, and all of them are sort of relatively small, but of course when you total it all up, it actually starts to become meaningful.

Sure, and then, Nicola, on your question on the plant-based focus. I mean, the focus of our advanced protein solutions is really to apply our expertise in manufacturing fermentation-derived proteins and really expanding that more in the application area into the protein-based food ingredients, so making sure we're really leveraging our core competence and expanding that into a new area. We have a portfolio of product development initiatives within this advanced protein solutions SOA, You talked about the question on integrated solutions versus ingredients. Our focus, again, is really trying to stay true to the core of our biotech capabilities and expanding that into the space. So our focus is on protein-based food ingredients made by fermentation, but then applying that into areas where we can bring sensorial, nutritional, health benefits, as well as potentially into novel solutions for our customers where we combine ingredients some of our food and beverage enzymes with a broader pipeline of protein products. So really trying to stay true to that core and leveraging our biotechnology from a strategic perspective. In terms of your question on the specific customer relationship, obviously we can't give details on the contract. But again, the numbers that we've disclosed in here are linked to our SOA, including sort of this relationship as well as our SOA pipeline of product development in the future. That's great.

Thanks so much.

Thank you. Our next question comes from the line of Alexander Jones back from America. Please go ahead. Your line is open.

Great. Thanks very much. Good morning. Three questions, please. The first on grain and tech, if you could just talk a little bit about the sort of second half outlook there. I think the implied guidance is negative. So if there's anything there apart from stock building that you're expecting, that would be helpful. The second one is a wider question on stock building, whether you've started to see any reversal of that so far in the third quarter or whether it's still something that you're waiting customers to show in their behavior. And then the final one, just following up on the protein point, could you give us a bit more color around the one billion Danish kroner number in terms of what market growth or market size that's expecting by sort of the end of this decade? That would be great. Thank you.

Thank you. The question of the stock building at corporate level, so let me maybe elaborate on that. If you recall, we mentioned and we described in our previous quarter that we were seeing stock build up as one of the drivers of the growth that we saw in the first quarter. And we have seen some destocking in household care as expected, and that's part of the driver of the results that we have seen during the quarter. We have not seen that destocking happening yet. in the food space. And that's probably one of the reasons why we are outgrowing at the market. It's a lot of self-help in food and beverages, a lot of the penetration of our innovation, the growth in emerging markets, and also the recovery of some segments that we saw easing last year because of COVID. So self-help, market, but also stock build-up that we're expecting the downside or the destocking at the second half of the year. With that, I will ask Tina to follow up on the outlook on grain and tech, and then Amy, if you can build up on plant-based proteins again. Thank you.

Yeah, with pleasure. So if we look at the grain and tech, then we saw hardly any destocking here so far, so that means that all destocking, which we expect, will come in the second half. So that's clearly an element, as you also are stating in the question. But also we see some textile volatility, as we talked about before with the question from Michael. This is a quite diverse segment consisting both of grain and tech and also including textile. And we are seeing that our performance is surpassing that what we hear from the big retailers like H&M and so forth. So there are some stocking in the supply chain and that's also why we expect some textile volatility. Also, we talked about the COVID testings. So COVID testings are going down, which also leads to less. So that's also an element of that segment. And last but not least, you have to remember the comparisons. So in first half of 20, we grew minus 3%, if you can say it that way, minus 3% in first half 20, while in second half it was plus 2. So therefore, the comparisons will be tougher for the second half. So these are the elements leading to the performance in green and tech. And over to you, Amy.

Super, thanks. Regarding the overall market size, and I'll just watch me, I'm only speaking in dollars here rather than krona. If we look at, if we start with plant-based meat, the actual meat industry today globally is about a trillion U.S. dollar industry. So if we look at sort of the current penetration of about 1%, that leads us, you know, it's a roughly 10 billion U.S. dollar business today. That's been growing in about 46% growth rate. It was the single highest growth category in the U.S. in the last year and is expected to continue to grow 30% plus in the years to come. And so that's where, you know, where we've seen increasing the penetration of the trillion dollar global meat market with plant-based increasing 2% to 5% already by 2025. Okay. And then broader, the plant-based dairy market, which is even more mature than the plant-based meat, where we already have about a 10% penetration, or not we, sort of the plant-based has a 10% penetration of the dairy market today. And that's estimated to be about a global market size of about $20 billion. Okay.

And maybe building on your specific question on Q3, as you know, we don't comment on the Q3 results so far. So you'll have to wait until we go to the earnings release of that.

Great. Thank you. Thank you. Our next question comes from the line of Sebastian Bray at Berenberg Bank. Please go ahead. Your line is open.

Hello, good morning, and thank you for taking my questions. I would have two, please. I'd like to come back to this point on advanced protein solutions. If on a $2 billion DKK investment, there is going to be no ROIC dilution to the group level of around 20%, it would imply that this facility needs to generate $400 million or so of EBIT, which on a billion or slightly more of sales would be close to 40% EBIT margins. What exactly is it that Novozymes is doing which is so sophisticated here that it is able to achieve this margin? Is it just taking soy and pea protein and processing it into a more palatable form? Is there something special going on with heme? Could you give us a sense of, number one, if this reasoning is correct, and number two, what exactly Novozymes is doing here? Is it just taking plant protein and making it more palatable or something else? My second question is a technical one on the upper operating income. Could you remind me if the pharma-related royalty income is recurring in the sense that we'll see it in 2022, 2023, and so on, or if this is just a series of payments that terminate at some stage? Thank you.

Thank you. I'll cover a little bit the first part of your question, and then I'll pass it to Lars. We don't call ourselves a sophisticated company. We call ourselves a science-based company who brings biological solutions to answer society needs. And plant-based proteins, it is a key pressing need for the society. A growing world with a growing population, when nutrition and how to fill the world sustainably It's one of the most pressing challenges we're facing today. We're covering that through many different angles, through bio-ac, through animal feed, and health, through food and beverages. And now with this step ahead, we're making advanced proteins. We're also bringing in our toolbox fermented novel proteins for the plant-based segment. As Amy said, we're not covering the specifics, contract details of a customer. We've never done that, and we're going to continue honoring what is in the confidentiality agreement. And Lars, I'll pass it to you. Thank you.

Yeah, so I'll just refer to the guidance that we have given on the financial implications of this agreement here in our announcement of this morning, and And so we do see this business opportunity be accretive to our EBIT margin, so above our current levels of 26 for this year. So that's, of course, how we arrive at the opportunity to also become accretive to our ROIC when we are fully up and running. And so that's how the mathematics work. So we cannot disclose, you can say, the details of where we are in this supply chain and how this works specifically for this particular contract. But your sort of inferred calculations are obviously sort of also what is behind our guidance for the financials once up and running. I guess there was a question also. I'm just reminded here by my colleagues, sorry, on the other ordinary income. And so the farmer-related royalty income we had in the first quarter, that was a one-off. So it is not recurring, and you should not expect it to be repeated in 2022.

Let's go into our last question, please.

Thank you. That comes from the line of Lars Topholm of Carnegie. Please go ahead. Your line is open.

Thank you. Congratulations. Great results. And thank you very much for a quarterly cash flow statement. First time in 20 years. Really went on. One question goes to your probiotic acquisitions because a couple of your peers have struggled a bit to grow in probiotics for humans. So I just wonder if you can put some comments on the performance of of those two companies. Thanks.

Hans, could you take this one? Thanks, Lars. So the performance we have on probiotics remains intact and they're strong and we're delivering good double digits. Maybe one thing to think about is that our business is actually set up in a slightly different way. So a lot of our growth is coming through sort of a different channel, which is healthcare practitioners. And here we are seeing that we're not as impacted as some of the other players in the industry that are sort of more broad-based with bigger brands. So I think from that perspective, that's probably the major difference between what you see in our strong numbers and what you see in sort of the broad market.

And then I have an additional question, which really goes to the product mix, because the different business areas contribute significantly slightly different to sales compared to what the picture usually is. So I just wonder if you can put some words on, for example, being very strong in food, beverage, et cetera, drags margins up, or if all that is largely neutral. Thanks.

Yeah, so the margins we have on our different industries are more... similar than maybe one should assume. So I don't think there is a significant impact or there is no significant impact from the product mix we have in this half year. And it's basically related to the fact that our facilities that produce our enzymes and microbes, they are sort of fully fledged. They produce for different industries. So it's the same facilities across So for that reason, we also have similar sort of productivity for different product lines. So no significant difference following the product mix we have in this quarter.

We have a little bit more time. Thank you very much. Thank you. Thank you, Lars. Do we have time for one more last question, please?

That's from the line of Gunther Sackmann of Bernstein. Please go ahead. Your line is open.

Hi, good morning. Thanks for squeezing me in. Just one overarching question on the destocking that you expect. Could you help us disentangle how much of the growth you expect in the second half on relatively easy comparables is underlying? And if you could rank order the divisional destocking. There's hardly any division you don't talk about destocking. So you've given us a good idea already about the timing of it and how much you already have seen, but could you rank order the divisions of how much we should expect in the second half because the guidance at the midpoint looks relatively low given the comparables from last year. And then on the bioethanol business, that's one area where you have outgrown the end market very strongly in Q2. more than 10 percentage points. So is that sustainable? Is that more customer mix? Is that biodiesel? Is that yeast? If you could give some more color, how much of that we should expect going forward, please.

Thank you. I'll briefly cover a little bit. I'll pass it to Laz and then also let Tina build on bioethanol. As you mentioned, we have seen stocking build up in the first half of the year, particularly in the first quarter. across almost all segments, which was triggered by the uncertainties of the supply chain. We have seen a destocking already through Q2 in household care. We have not seen that one in food and beverages. We have not seen it either in grain and tech, as Tina mentioned. Also, we look for a comparison. The first half last year, we had a high level also of inventories in our animal health and nutrition, which will be easing. And then leading to the final expectations that we're bringing of growth for the segment in this area. So, yes, moving parts that we also don't have a crystal ball. What we can tell you that we do is we're staying very close to our customers. And then we're ensuring that we meet every single order that is there. We did that in Q1. We did it in Q2. And our guidance, the 4% to 6% range, encompasses the full spectrum of, yes, the expectation that this stocking is going to take place. And then we will continue to be there, continue to close to our customers and continue to make sure that when the market grows, as it has done in bioethanol, and Tina is going to be talking about that, in U.S. and recovers, we're sitting there. And when it grows in Latin America, as we penetrate, also we make it happen despite all the challenges and constraints we see in supply chain. Do you want to build up, Laz? No? So I'll just pass it directly to Tina. Thank you.

Yeah, so thanks for the question on bioenergy. So as you rightly say, bioenergy consists of both the bioethanol and the biodiesel and even a bit of biomass sales. The way, way, way biggest part of it is the bioethanol. If you look at – it's 95-ish percent if you look at the half-year, so it's a significant number – And of that, we have the biggest part of our business is in North America still. As we have talked about before, North America is the main area. In the first half, it's roughly, I would say, 70%. And then Latin America is a fast-growing follow-up for the, you could say, in the 30%. So that's a significant part of that. Not many years ago, it was in fact Europe, which was the second biggest, but now it is Latin America in our numbers. So it is, you could say, a mixture of both geographies as well as businesses, but it is still very much a North American bioethanol-based business. In terms of outlook for the year, what we are looking at, is that, as you know, last year was such a roller coaster, if I can call it that. So there are differences in the comparison. And given the very, very, very low Q2 last year, we have some quite nice numbers this year. But overall, we are looking at expecting to end the year at mid to high single digit, which is unchanged from where we were before. Thank you, Dina. Thank you.

And that would be the closing words for the session today. Thank you very much for all your questions. Looking forward to continued conversations with many of you the following days. And then especially looking forward to our session in September and further aligning the steps to continue to build on our strategy. Thank you.