Novonesis B Unsp/Adr

Thank you very much, operator, and welcome everyone to Novozymes' first quarter 2022 conference call. My name is Tobias Björklund, and I'm the head of investor relations here at Novozymes. At this call, our CEO, Esther Bache, and our CFO, Lars Grain, will review our performance and key events in the first quarter, as well as the outlook for the full year. Also attending today's call are Tina Feiner, EVP Agriculture and Industrial Biosolutions, Amy Byrick, EVP Strategy and Business Transformation, Anders Lund, EVP Consumer Biosolutions, and Klaus Fuglsang, CISO, EVP of Research and Development. The entire call will last for about 45 minutes, including time for questions at the end. As always, 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 they involve risks and uncertainties that could cause actual results to differ materially from those described in any forward-looking statement. With that, I'm now pleased to hand you over to our CEO, Esther Bache. Esther, please.

Thank you. Thank you, Tobias. And welcome, everyone, to our first quarter conference call. Could you please turn to slide number two? Normally, I would go straight to the quarterly highlights and the outlook of the year. And despite being a very satisfactory quarter, we set net about the deeply unsettling situation and the consequences of the war in Ukraine. Our thoughts are with the people who have become victims of the invasion. Under these conditions of war, and as previously announced, Novozymes is not accepting orders from our Russian and Belarusian customers. And in addition to the situation, has made it very difficult and unsafe to ship products to Ukraine. Novozymes' overall exposure to the markets in Russia, Belarus and Ukraine was limited to around 1.5% of group sales in 2021, most of which concerns household care in Russia. Now, let's turn to the first quarter performance and our increased full-year outlook. The year started strong, and we delivered a very satisfactory organic sales growth of 10%, with double-digit growth in three of our five business areas. The main growth drivers were food, beverages, and human health, which was partially benefited from timing, and bioenergy. This was followed by a very satisfactory performance in agricultural, animal health and nutrition, and grain and tech processing. The performance in household care was soft compared to the rest of the businesses. However, it was much in line with our expectations on the back of a high competitor from Q1 last year and the fact that the war in Ukraine started to impact our numbers towards the end of the quarter. The performance was strong across the regions, with 10% growth in developed markets and 8% growth in emerging markets. Turning to our financials, we delivered a solid EBIT margin, ROIC and free cash flow. The fact from higher input and logistic costs was substantial and we saw a neutral impact from pricing on the top line. Regarding innovation, we introduced two new products. Together with our partner of DSM, we launched Iforius, a phytosolution for poultry in animal nutrition. And in addition, we had a smaller launch in baking, targeting healthy pulse-braised bread with higher protein and fibre content. Across our ventures, The path to commercialize a solution for enzymatic carbon capture and sustainable plastics are making good progress together with our partners. For the full year, we have increased our organic sales growth outlook from previously 3% to 7% to now 4% to 8%, whilst maintaining expectations for the EBIT margin, ROIC and free cash flow, despite higher input and logistic costs. The main reason for the increased organic sales growth outlook is better underlying demand. coupled also with the expectation that pricing will be slightly positive for the year. We continue to work on pricing in close collaboration with our customers, and we expect these efforts to provide as strong a support as the year progresses. The outlook also includes a negative sales impact to the world in Ukraine of slightly more than one percentage point, mainly impacting household care. With that overview, let's now look at each of the five business areas in more detail. Let's start with household care. Could you please turn to slide number three? Thank you. The first quarter performance in household care was soft, with a decline of 4% organically. Nonetheless, this was much in line with our expectations given a high absoluter comparator from Q1 last year and with the war in Ukraine impacting sales towards the end of the quarter. Latin America and Asia deliver solid performance, whereas sales in Europe was impacted by reduced market volumes. Additionally, the freshness technology performed in line with our expectations. Turning to the full year, sales will be driven by increased enzymatic penetration in emerging markets, with somehow somewhat softer performance in developed markets, including flat European detergent volumes. Additionally, freshness and applications outside of laundry are expected to grow. As a direct consequence of the war in Ukraine, we have adjusted the 2022 organic sales growth indication for household care to between 0% to 2%, from previously 2% to 4%. Could you please turn to slide number four? Thank you. Organic sales in food, beverages, and human health grew 18% in the first quarter, with food especially doing very, very well. Part of the very strong performance was due to timing, and adjusting for this, the underlying growth for the business area was roughly 13%. Beverages did well and delivered a strong growth, particularly in the brewing segment. Both food and beverages benefited from innovation, favorable market conditions, and supportive consumer demand. Human health, performing in line with our expectations in the first quarter, of a back of a strong first quarter last year. The business is doing an excellent job integrating Synergia, the recently acquired probiotics and vitamin K27 manufacturer, which create a lot of excitement. Following the strong start of the year and the good momentum, we have raised the fully organic sales growth indicator for food, beverages and human health and now expect the business area to grow organically in the low teens from previously high single digits. All three sub-segments are expected to grow. Performance in food and beverages will be driven by market penetration and the health-focused solutions as well as raw material optimization and ingredient substitution. In human health, we expect solid double-digit growth driven by innovation, cross-selling and regional expansion. Could you please turn to slide number five? Bioenergy sales grew 27% organically in the first quarter. The very strong performance was driven by multiple factors. First of all, U.S. ethanol production in the first quarter of last year was subdued by lower demand due to COVID-19 restrictions and industry supply challenges due to the Texas freeze. According to estimates from the Energy Information Administration, U.S. ethanol production was up around 12 to 13% in the first quarter of 2022 compared to the same period last year. Additionally, we are seeing increased demand following for high production margins and the continued corn-based capacity expansion in Latin America. Growth was also supported by innovative solutions in yeast and fiber, For example, Fibrex solution launched last year is beginning to penetrate both the North and the Latin American markets. Lastly, growth was supported by continued market penetration with enzymatic solutions for biodiesel production. Looking at the full year, we expect growth to be supported by U.S. ethanol production recovery from COVID-19 and continued capacity expansion in Latin America. However, we do not expect U.S. ethanol production growth to be as strong as in the first quarter as the comparators are also becoming more normalized. This is also supported by EIA full year estimates, which remains in the 3% to 4% range. As a result of the favorable market conditions and market penetration enabled by innovation, we raise our full year growth indication from previously low to mid single digit to now high single digit. Could you please turn into slide number six? Sales in grain and tech processing grew 8% organically in the first quarter, led by strong growth in grain. Favorable market conditions and solid demand, together with higher grain prices, boosted the performance in grain as our yield and throughput optimizing solutions become even more attractive for customers. Combined with increased market penetration in vegetable oil processing and innovation, this resulted in growth across all grain sub-areas. Tech sales declined in the face of a tough comparison from last year and due to lower sales of diagnostic enzymes for COVID-19 test kits. Looking at our full year expectation, we expect growth to be broad-based with good performance across most sub-areas in both grain and tech. The good performance in the first quarter and more favourable market conditions, especially in grain, increases our full year indication for grain and tech processing. From previously flat to low single digit to now low single to mid single digit growth. Could you please turn to slide number seven? Agricultural animal health and nutrition sales grew 12% organically in the first quarter, led by a strong performance in the animal business, as well as growth in agricultural, despite a tough competitor. The strong growth in animal health and nutrition was driven by innovation and end-market-driven volume growth. As expected, favourable market conditions with higher soft commodity prices supported demand for yield-optimising solutions, especially in animal health and nutrition. In the first quarter, we launched iFORIOS in collaboration with DSM. This new solution raises the market standards for phytase technology, delivering consistent improvements in phosphorus utilization and thereby helping the farmers achieve sustainable and profitable animal protein production. For the full year, we expect growth to be led by double-digit growth in agricultural and solid growth in the animal nutrition and health businesses. Innovation and a more diversified commercial model are the key enablers of the strong developments expected in agricultural. Innovation will also be a key growth driver in animal nutrition business alongside end market driven volume growth. All in all, we are maintaining our full year indication of growth at a rate of the high single digit to low teens for the business area overall. And with that, I'll hand over to Lars, excuse me, for a review of the financials. Lars, please.

Thank you, Esther. Please turn to slide number eight for a review of our financial performance. We've had a very satisfactory start to the year, with sales in the first quarter growing 10% organically and 16% in reported Danish kroner. This included a 5% positive effect from currency and 1% positive effect from M&A following the recent acquisition of Synergia Life Sciences. We delivered a gross margin of 55.5% in the first quarter, in line with expectations. This was 2.7 percentage points below the same quarter last year, as gains from productivity improvements, operating leverage and neutral sales prices were not enough to counter the severe headwinds from higher input and logistics costs. The EBIT margin ended at 26.1% for the first quarter, which was 3.5 percentage points lower than in the first quarter of the previous year. The EBIT margin for the first quarter of last year included three one-offs in total. Two one-offs gains in the other operating income were a contingent income from a divested farmer-related royalty and the proceeds of the sale of a non-core administrative building. The third one-off was a negative effect of costs related to the consolidation of certain R&D activities. The net effect of the three one-offs was positive at 1.5% for the quarter, equating to an underlying EBIT margin adjusted for one-offs of roughly 28%. The contraction in the year-on-year EBIT margin was impacted by the decline in the gross margin, which I have just explained, as well as a negative effect of close to 1% from a one-off provision we have taken this year in relation to uncertain receivables from customers in Russia. Adjusted for the one-off provision, the underlying EBIT margin for the first quarter of 2022 ended at roughly 27%, and consequently, the underlying EBIT margin declined by roughly 1% between the two periods, mainly due to higher input and logistics costs. The return on invested capital, including goodwill. was 18.1% in the first quarter of 2022. This was 0.7 percentage points lower than in the first quarter of last year. While higher net operating profit after tax had a positive effect on ROIC, it was not enough to offset the negative effect from higher invested capital that mainly resulted from the recent acquisition of Synergia Life Sciences. Free cash flow before acquisitions with 386 million Danish kroner in the first quarter. This was a decrease of 318 million kroner mainly due to higher net investments, which increased due to the ongoing construction of our new production line for advanced protein solutions in the US. Also, net working capital was affected negatively by higher inventories, mainly as an effect of higher input costs. Now please turn to slide 9 for the 2022 outlook. The year has started very well, with strong sales growth and solid financials. Although the war in Ukraine will have a bigger effect on group sales in the coming quarters, we are experiencing good overall momentum and raise our organic sales growth outlook from previously 3-7% to now 4-8%. The primary reasons for the upgrade are the strong start to the year, the good momentum and the supportive market environment. Additionally, our dialogues with customers about prices are progressing well, and we now expect a slightly positive full-year effect after a roughly neutral effect in the first quarter. Our sales growth range remains relatively broad because of uncertainties associated with volatile market conditions, the pandemic, the war in Ukraine, and global supply chain constraints. Sales in reported Danish kroner are expected to end around six percentage points higher than organic sales, and this includes an M&A effect of roughly one percentage point related to the Synergia acquisition. We maintain our outlook for the EBIT margin at a solid 25 to 26% for 2022. The EBIT margin for 2022 will benefit from operating leverage, productivity improvements, as well as a slightly positive effect from both pricing and currencies. Logistics and input costs have risen significantly, and we expect the gross margin to decline by around 2 percentage points in 2022 compared to 2021. This includes mitigating efforts from price increases that are expected to have a slightly positive effect for the year after a roughly neutral impact in the first quarter. Going back to the outlook for 2022, we maintain our expectations for ROIC, including Goodwill, at 16 to 17%. Compared to 2021, the development is going to be negatively affected by mainly higher invested capital, including acquisitions. And finally, the outlook for free cash flow before acquisitions is also maintained at 1.7 to 2.1 billion Danish kroner. This accounts for significantly higher net investments compared to last year, mainly due to the roughly 1 billion Danish kroner we expect to invest in 2022 alone on the ongoing construction at the new production line for advanced protein solutions in the US. On a final note, we continue to invest in the business in accordance with our strategic direction in unlocking growth powered by biotech from last year. This is the key to release the full potential of novel science and securing our long-term ambitions and targets. With this, I'll now hand back to Esther for a wrap-up before we open up for questions. Esther, please.