Novonesis B Unsp/Adr

Welcome to the NovoScience conference call regarding the first half 2022 results. Throughout, all participants will be in listen-only mode, and afterward, there will be a question-and-answer session. Today, I am pleased to announce Tobias Cornelius Bocklund, Head of Investor Relations. Please begin your meeting.

Thank you, operator, and good morning, everyone, and welcome to Novozymes conference call for the first half of 2022. My name is Tobias Björklund, as mentioned. 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 and key events in the second quarter and for the first half year, as well as the outlook for the full year. Also attending today's call are Tina Ferner, EVP Agriculture and Industrial Biosolutions, Amy Byrick, EVP Strategy and Business Transformation, Anders Lund, EVP Consumer Biosolutions, and also Klaus Fuglsang, CSO and EVP of Research and Development. The entire call will take 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 involve risks and uncertainties that could cause actual results to differ materially from those described in any forward-looking statement. With that introduction, I now hand you over to our CEO, Esther Bache. Esther, please.

Thank you. Thank you, Tobias. And welcome, everyone. Please turn to slide number two. Thank you. The first six months started strong, and we delivered very satisfactory organic sales growth of 10% both for the half year as well as for the second quarter. Four of our five business areas grew by 10% or more, and both emerging and developed markets delivered growth of 10%. All business areas perform at least in line with expectations in the second quarter. with bioenergy and grain and tech processing coming in stronger. Turning to our financials, we delivered a solid EBIT margin, ROIC including goodwill, and free cash flow. The unprecedented effect of higher input and logistics costs is clearly visible, and in Q2 we started to see the effects of more positive pricing, coupled with continued positive effects from productivity improvements and operating leverage. Regarding innovation, we introduced six new products in the first half year, including four in the second quarter, covering yeast solutions in bioenergy, growth stimulators for broad acre crops in agriculture, and a solution for soap bars in household care, enabling further penetration in emerging markets, as the product allows for longer storage times. We continue to see good progress on our key activities across the venture portfolio. We have entered partnerships in the agricultural area, focusing on biocontrol and post-harvest solutions, and we clearly feel a growing need for our sustainable solutions in our various markets, as well as on the world scene, as we attended and discussed sustainability at the World Economic Forum in Davos. For the full year, we have increased our organic sales outlook to the upper end of the previous range of 4% to 8% to now 6% to 8%. Our well-diversified business and agile and flexible solution toolbox are the main enablers for the upper organic sales growth outlook. And bioenergy and grain and tech processing now look to the end of the year on a higher note than previously indicated. The indicators for the other areas are maintained. We had two non-recurring events after the interim period, and as a result, the EBIT margin and ROIC, including goodwill, are increased by around one percentage point each. Lars is going to tell you more about it later in the presentation, and how we capitalise additional value for our intangible assets. Our work on pricing continues in close collaboration with customers, and we expect these efforts to provide a stronger support as the year progresses, leading to a slightly positive effect for the full year. And with that overview, let's now look at each of the five business areas in more detail, starting with household care. Could you please turn to slide number three? Thank you. Household care delivered a solid first half in line with our expectations. Organic sales were flat and grew 4% in reported currencies. Emergent markets performance was solid, mainly driven by Latin America and Asia-Pacific. Developed markets declined slightly, as expected, and mainly due to the anticipated reduction in European market volumes. Sales in the second quarter grew 4% organically and 9% in reported Danish kroner. This was very much in line with our expectations and included a negative impact from the war in Ukraine. Similar to the first half development, sales in emerging markets performed well, driven by a strong performance in Latin America and Asia-Pacific. In developed markets, second quarter organic sales grew as the weakness in the European laundry market eased somewhat compared to the first quarter. The full georganic sales indication for household care is maintained at flat to 2% growth. As previously announced, this includes around 2 percentage point negative impact from the war in Ukraine. We expect performance to be driven by enzymatic penetration in emerging markets, the freshness platform, and including expectations of a roughly flat development in European laundry detergent volumes. Please turn to slide number four. Thank you. Food, beverages, and human health reported a strong first half at 10% organic growth. The performance was mainly driven by the food and beverages sub-areas, which benefited from favorable market conditions and high consumer demand. As also highlighted in the first quarter results, the performance was impacted by a positive timing effect. The growth in food was broad-braced across soup areas and supported by innovation, by ingredient substitution and raw material optimization. Beverages also delivered very solid numbers in the first half, especially in the low-calorie brewing segment. Human health performed well with strong underlying demand, and we are very excited about the opportunities that the recent acquisition of Synergia Life Science is bringing. Looking at the second quarter, food, beverages and human health grew 3% organically. The performance was in line with expectations and driven by growth in food and beverages. Human health performed well against a strong competitor from last year, with continued solid underlying demand for our solutions. For the full year, we maintain the indication of organic sales growth in the low teens, with food and human health being the key drivers. We expect solid double-digit growth in human health, driven by innovation, cross-selling, and regional expansion. In food and beverages, growth will be driven by healthy, focused solutions, while also benefiting from raw material optimization and ingredient substitution. Please turn into slide number five. Bioenergy sales grew 23% organically in the first half. The performance continued to be driven by multiple factors. According to EAA, US ethanol production was up by 6-7% in the first six months, partially driven by a recovery in ethanol volumes. In addition, there was a strong demand following solid producer margins and continued corn-based capacity expansion in Latin America. Our innovative and broad solution toolbox, such as Fibrex, continues to be well received by customers and penetrate markets where the demand for efficiency and higher value products is critical. Lastly, growth continues to be supported by market penetration with enzymatic solutions for biodiesel. The second quarter organic sales growth of 19% was driven by similar factors as those ones for the first quarter, and the EIA estimate for the U.S. ethanol production was up by 1-2% year-on-year. Looking at the full year, we expect growth to be supported by higher U.S. ethanol production approaching pre-COVID levels, continued capacity expansion in Latin America, innovation, and a strong focus on yield and optimization. As a result of the strong first half performance and continued favorable market conditions, coupled with an increased penetration enabled by innovation, we raised our full year organic sales growth indication to mid-teens. Could you please turn to slide number six? Thank you. Sales in grain and tech processing grew 13% organically in the first six months, with double-digit growth in both grain and tech. The strong performance was driven by higher demand for our broad and innovative toolbook solutions, especially in starch and vegetable oils, as well as the favourable market conditions where customers focus on yield and throughput-enhancing solutions. Technical processing grew very well across most subsegments and was further boosted by higher sales of diagnostic enzymes. Second quarter organic sales growth was 19%, with grain driven by similar factors as those for the first quarter. Sales in tech were driven by growth across most subsegments and boosted by the strong sales on diagnostic enzymes. Looking at the full year, we expect growth to be broad-based with good performance across multiple areas in growth in grain and tech. The performance after the first six months and the favourable market conditions, especially in grain, increases our full year sales growth indication for grain and tech processing to high single-digit growth. Please turn to slide number seven. Thank you. Agricultural animal health and nutrition sales grew 14% organically in the first half, led by double digit growth in both animal health and nutrition as well as agriculture. The strong growth in animal health and nutrition continued from innovation and end market driven demand. Additionally, the current market conditions with higher soft commodity prices supported demand for high yield optimising solutions. agricultural grew double-digit in the first six months as customers increasingly focused on innovation and yield. The second quarter organic sales growth was broad-based and in line with expectations on the backdrop of a relatively soft comparator from Q2 last year. For the full year, the indication is maintained at high single-digit to low teens, with double-digit growth in agricultural and solid growth in animal health and nutrition. Innovation and solid end market demand are key growth drivers, coupled with a more diversified commercial model in agriculture. And with that, I'll hand over to Lars for a review on the financial. Lars, please.

Thank you, Esther. Please turn to slide number eight for a review of our financial performance. Despite the persistent high pressure from input and logistics costs, we continue to see solid financial performance. Sales in the first six months of the year grew 18% in reported Danish kroner and 10% organically. Currencies provided a 7 percentage point tailwind with another percentage point coming from the acquisition of Synergia. The gross margin was 55.5% in both the first half and the second quarter. As expected, this was below last year's margin, mainly due to the high input and logistics costs, partly offset by productivity improvements and operational leverage. In addition, the second quarter gross margin was negatively impacted by around one percentage point due to a provision for the potential scrapping of inventory related to agriculture and came on top of a high margin from last year. The reported EBIT margin was 26%, 2.6 percentage points below last year due to the lower gross margin and other operating income, and included a slightly improved OPEX to sales ratio as well as tailoring from currencies. The reported first half EBIT margin also included around a 1 percentage point negative impact from the mentioned inventory provision and the first quarter provision related to the war in Ukraine. The second quarter EBIT margin was 25.9%, 1.8% below the second quarter last year, including a tailwind from currencies. We expected a lower EBIT margin due to the lower gross margin, and there is also included a negative impact of around 1% for the inventory provision. Adjusted for the two provisions, the EBIT margin for the first half and in the second quarter was closer to 27%. Free cash flow excluding acquisitions was 1 billion Danish kroner in the first half and 600 million in the second quarter. As expected, this was below last year due to the investment in the state-of-the-art advanced protein solutions production line at our site in Blair, Nebraska. We also had somewhat higher inventories, mainly due to the higher input costs. ROIC, including Goodwill, ended at 17.5% and around 2% below last year, mainly due to the acquisition of Synergia and growth investments. And as you might already have seen, the 500 million stock buyback program was completed on June 27th. Now please turn to slide 9 for an update on the 2022 outlook. As Esther mentioned, we narrow the full-year organic sales growth outlook to 6-8%, following a strong first half with 10% organic sales growth and despite the volatile market environment. Sales reported in Danish kroner are expected to be around 8 percentage points higher than the organic sales growth rate. We increase the EBIT margin outlook to 26-27%. The increased outlook reflects an agreement to invest intellectual property in 21st Bio as a related party transaction together with Novo Holding. The intellectual property investment in 21st Bio and the initial consideration for this agreement was described in a press release from December last year. The agreement is expected to be completed in the second half of the year. and generate a non-recurring accounting gain of approximately 200 million Danish kroner, recognized under other operating income. The transaction has no cash flow impact, but a positive effect of around 1 percentage point on both the EBIT margin and ROIC, including Goodwill. Additionally, the effective tax rate for the year is expected to be affected by around 1 percentage point, as the transaction is tax exempt. Compared to last year, the EBIT margin will benefit from sales growth and productivity improvements, targeted price increases as well as a net positive currency effect. Significantly higher input cost and logistics cost and continued investments in the business are expected to have a negative year-on-year impact. Consequently, the gross margin is expected to decline by around 2 percentage points. And as a result of the 21st buyer agreement, we also increased the outlook for Roik, including Goodwill, to 17 to 18%. Free cash flow before acquisitions is maintained at 1.7 to 2.1 billion Danish kroner. Following the announced sale of Albumedix, Novoscience will divest its minority ownership in the company and record a tax-exempt financial income of approximately 250 million Danish kroner. Upon closing, the transaction will generate a cash payment from the sale of a financial asset. The transaction does not impact any outlook parameters and is subject to customary closing conditions. Following the two tax-exempt transactions with a combined two percentage points non-recurring effect, the effective tax rate for 2022 is now expected around 20%. And with this, I'll now hand it back to Esther for a wrap-up before we open up for questions. Esther, please.

Thank you. Thank you, Lars. Please turn to slide number 10. Let me summarize our key messages today. We delivered a very satisfactory half year with 10% organic sales growth and solid financials. We see good traction with price increases being implemented across all business areas in close collaborations with our valued customers and partners. Following the strong first half performance and continued good momentum, the full year organic sales growth outlook has been lifted to 6% to 8%. We are in a very good place with our well-diversified portfolio, broad end market exposure, and a resilient, flexible global footprint, providing opportunities both for the short and for the longer term. We raise the outlook for the EBIT margin and ROIC, including goodwill, following the non-recurring accounting gain. As it has no cash impact, the outlook for free cash flow is maintained. We execute our strategy with key progress areas here in 2022 being well on track, namely achieving key milestones in the construction of the new production line for the advanced protein solutions at Blair, Nebraska. We are keeping the timeline and progressing very well on the construction. leveraging the recent acquisitions and deliver double-digit growth in human health, which will secude very well on. Continue to strengthen our commercial setup, including bringing in talents and capabilities and having selected locations for two of our customer co-creation centers that will enable closer interaction with customers. And finally, we maintain a diligent focus on prioritizing our core business, ensuring we deliver on our short and long-term commitments. With those concluding remarks, we are now ready to open up for questions. Operator, please begin.

Ladies and gentlemen, at this time we will begin the question and answer session. Anyone who wish to ask a question may press star followed by one on their touch-down telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you're using speaker equipment today, please lift the handset before making your selections. Anyone who has a question, may I press star followed by one at this time. One moment for the first question, please. The first question comes from the line of Alexander Jones from Bank of America. Please go ahead.

Great. Good morning. Thanks very much for taking my questions. Two, if I may. The first on bioenergy. There's quite a big disconnect between sales growth and what the EIA reported, especially in the second quarter where production only increased slightly in the U.S., Could you help us understand sort of how much of that is being driven by the increased ethanol margins and higher crop prices and therefore an incentive to maximize yield and how much is being driven more structurally by your innovation efforts and then market penetration gains? And then the second question just on energy costs are clearly seeing big increases. Could you outline for us your strategy on energy costs, your hedging policy and any impact that you expect going into next year from higher prices?

Thank you. Thank you, Alexander. I will let Tina build up on the question, your question on bioenergy and guide you on the self-help with driving it to capture the momentum of the trends that we see in the market. And then Lars, if you could please follow up on the question on energy costs.

Yeah, so on the bioenergy question, there is, as you're right to say, multiple factors supporting the very strong performance, both in the quarter and in the half year. First of all, the favorable conditions mean something to the business. But I think the key here is that what our solutions is offering is an ability to crack the corn into different components. So it means you can get ethanol and that is more valuable, but you can also get more, for example, high protein feeds. And that evolution is going to be continuing and remain to be important. We do see also in the numbers a strong performance from Latin America as well. And I think the reason why you could say we are capable to benefit from that is due to innovation coupled with our customer closeness. We do have a very strong intimacy with customers and work very closely with them on optimizing their plans and also enabling them to diversify their no matter what process conditions they have and no matter what type of product they are going after.

And as it relates to our policies on energy costs, we are hedging our energy costs for a period into the future, a significant part of it, and looking something like 12 months out. But this also means that we are, of course, exposed to the increasing energy costs looking into 2023. because obviously our hedge from last year is what we benefit from today or what we account for today, and the energy costs we have today is what is then going to sort of impact our cost of goods sold in the future. So we have a policy where we are not speculating about the development of energy costs, but rather want to make sure that we have transparency into the costs that we have. And so this is our policy, and this is what we have been following also here in 2022. Great. Thank you.

The next question comes from the line of Martin O'Rourke from Nordea. Please go ahead.

Yeah, thanks a lot. Two questions from my side. First of all, to the price hikes that you're implementing. Are they sort of broad-based across the business areas, or are there any specific areas we should be in mind of when we try to sort of model your price hikes? And then the second thing, maybe you could just discuss how your portfolio within household care is sort of structured. Should we go into sort of a temporary recessionary environment globally in terms of how you expect to be faring in such a scenario with the composition of your current portfolio? Thanks a lot.

Thank you, Michael. I'll take your first question and then pass to Hannes for the building on household care. Regarding the efforts on price, first, the efforts we're driving on price are a continuum of an initiative that we have already started a while ago, and we're now starting to collect the fruits of the efforts, of the training and the discipline and the capabilities we have built in the sales force. We're coming from a heritage that you know of 1% to 2% price erosion year on year. where now we see a positive contribution on price. We are in a place on comfort, a place on comfort that we see sequential gross margin expansion, underlying gross margin expansion quarter of a quarter, where price is a contributor. A contributor to couple with the strong growth, the strong penetration and volume growth for our solutions and also with the efforts of the productivity. Then to your second part of the question on are they broad-based, yes, they are broad-based. We're very pleased with the constructive conversations with our customers where we seek for the prices conversations on ensuring we get our fair share of value in the current environment with a stronger commodity prices, with a stronger energy cost, with a stronger pool of sustainability solutions, and that we get the fair share of value that we deserve. And then we see also those ones to materialize as the contract sunset. And maybe that makes a little bit of a difference on the implementation from one business to the other. But the strong momentum is the same or consistent across the whole portfolio. Hannes, I'll pass it to you.

Thanks, Esther. And on resilience and household care, I actually think our household care business is a very resilient business from the perspective that consumers will still wash their clothes in any scenario. Now, the outlook that we sort of have in the next couple of quarters is that we believe volumes will remain fairly stable with the logic that people will still wash. There will probably be some down-tiering. We already see that now. Consumers trading down to lower-tier products and private label products. We expect pricing to be a positive contributor full year. And then, of course, we continue to expect positive momentum in emerging markets and also expect that our freshness platform will continue to deliver growth. So the guidance we have on household care we think looks right and quite solid with the 0% to 2% for the full year.

And you stay committed for the long-term guidance, correct?

Absolutely. Great. Thanks.

The next question comes from the line of Georgina Fraser from Goldman Sachs. Please go ahead.

Hi there. Good morning, everyone. Thank you for taking my question. I've got two, please. The first one I wanted to ask on ingredient substitution, which has been a strong trend since the pandemic in 2020. I was just wondering if you could give us an update how this is progressing. Have you seen any changes in buyer behavior as the supply chain has been normalizing? And then my second question is just about the volume drivers into the second half and into 2023. It's been an incredibly strong kind of volume performance in the first half. and your guidance implies somewhat of a slowdown going forward. So just wanted to know if there are any tangible reasons for that, or if some criticism given that cool backdrop. Thank you.

Thanks, Georgina. I'll cover your both questions a little bit and then I'll let Anders come with the further deep dive on the examples and tangible proof points of the ingredient substitution. First and foremost, we are in a good place, in a very good place with 10% growth year to date and 10% growth in the second quarter. Then we also are in a place of comfort that allows us to upgrade or to put, to increase or to narrow upwards our guidance to 6% to 8%. We're aiming to the high end of our guidance. And also the range that we are bringing in, it shows the uncertainties. It covers the uncertainties of the market that we live in, including disruptions in supply chain. So we feel comfortable on the demand, the strong penetration of our solutions, the pull for sustainable solutions, the pull from our customers for solutions that they lead to, yes, healthiest, more sustainable, lower energy consumption and higher yield, and the strong pull from our solutions and penetration in emerging geographies coupled with innovation. That happened in the first half, and we continue to foresee that trend stay firm in the second half of the year. And with that, Hannes, I'll pass it to you.

Thanks. And on ingredient substitution, if you take the two segments and look at food and beverages, to a very large extent, ingredient substitution was driven by two factors. One was shortage of raw materials, so a very immediate need, and the other one was pricing. We actually see, also looking ahead, that that will continue to be contributing to growth. We continue to see a lot of customers, they're moving away from ascorbic acid to our solutions, wheat gluten to our solutions. On household care, the drivers have been a little bit different, but very much driven by price. Here we have very good conversations with customers, but the transition has been a little bit slower because the need has been a little bit less immediate than it has been in the food and beverage area.

That's great insight. Thank you both.

The next question comes from the line of Shetan Ureshi from JV Morgan. Please go ahead.

Hi, morning. Can I ask on the one percentage impact on gross margin from inventory scrapping? Can you maybe give us more color on what exactly happened and is that something you expect to continue in second half or is that really a one-off? The other question was, it's interesting to see that the organic sales growth is 10% yet for first half as a whole. R&D expenses are down 7%. Maybe I'm just curious here, is this more an indication that there is really behind the scenes work going on in terms of you know, rationalizing the R&D to some extent to make sure that, you know, it's contributing to, you know, growth of the company rather than just being spent on some projects which may not be economically viable. Just any color on R&D will be useful. Thank you.

Thank you, Chetan. Good morning. And yes, you can make the question. I will let Lars both answer the gross margin and the efforts on R&D. And let me reassure you, our commitment to R&D, we are a science-based company. We continue to invest in R&D. And R&D and science continues to be the pillar of the fundamentals of long-term growth.

So thanks for the questions. And on the provision, you know, this is something we do consider a one-off. We have simply reviewed our inventory in ag like we do across our businesses at regular intervals and made a provision for goods that we may not be able to sell. We believe this is a prudent accounting, and time will then show if this provision turns into a write-down so that our provision was real. or if we will have the opportunity to sell some of it. It doesn't change our outlook for BioAg, still double digit as part of the animal health and nutrition and ag business area. And so this is sort of a one-off and not something we consider to be structural or to continue. So when it comes to our R&D cost relative to sales, so it's true we have had organic sales growth of 10%. When you look at our R&D cost, remember that we last year in the first half included a cost where we were reorganizing our R&D efforts in global centers. And therefore, when you look at the underlying R&D costs, in absolute terms, we are maintaining our investments. So we are not sort of consciously reducing our efforts in R&D. We are maintaining it in absolute level. And at the moment, we just see our organic sales growth very, very high at 10%. And therefore, obviously, we will have a ratio between the two that is going down from R&D. But it's not because we are actually reducing it. It's simply because we see very strong organic sales growth.

Thank you.

The next question comes from the line of Sebastian Bray from Barenburg. Please go ahead.

Hello, good morning, and thank you for taking my questions. I would have two, please. The first is on the 21Bio revaluation impact. I haven't understood what this is yet. Am I right in saying that Novozymes at the time of the investment by Novo Nordisk at the end of 2021 invested IP that has now been positively revalued upwards, but is not an equity partner in this company? That's my first question. My second one is on the Nebraska plant-based facility. Are you willing to give any guidance on when exactly in 2023 this ramps up, if it's at the very end of the year? And related to that, there are quite a few lawsuits going on at the moment related to consumable proteins in plant-based meat. If your undisclosed anchor customer loses the right to have exclusivity around the proteins that it's producing or Novozymes is involved in, is Novozymes not bound by any type of exclusivity and can go and sell to competitors? Thank you.

Thank you, Sebastian. I'll let Klaus bring color on how we're sweating out and extracting the value of intangible assets. And then... Amy, to build up on our progress on protein and also the progress on our Nebraska plan.

So it's a little bit complicated, Sebastian, but let me try to explain. So as you rightly said, last year it was announced, the formation of 21st Bio, with an investment of a related party, New Holding. And now we are actually merging the IP on which this is built into the company. And with that, NovoScience will also have a shared ownership with our related party. So this is why we now have to realize the value, as Lars was explaining. And that's pretty much the simple story.

Great, thanks. And just regarding your questions on the advanced proteins investment, yes, so the investment in Blair is exciting to see on track and on time, which would be for coming online at the end of 2023. So we still have quite a bit of a way to go in terms of commissioning that, but it's really coming along well. In terms of obviously we can't comment on specifics related to our anchor customer or specific lawsuits, I think what we see is we remain really confident about our anchor customers positioning both in the market and their ability to commercialize and bring the products that we're developing forward. to the market. And I think, you know, as we see the developments in the alternative protein market, particularly in the US, what we see is the increasing need for improved products, improved taste and texture. Those are the products which are winning and I think really aligned. with the value proposition of the work that we're doing in the protein space. So we remain really excited both in terms of where the project is tracking, also in terms of our anchor customers' performance and the relevance of the product portfolio.

Thank you for taking my questions.

It's helpful. The next question comes from the line of Charles Bentley from DraftWiz. Please go ahead.

Thanks very much for taking my questions. So I've got two, please. So one is on margins. So if I take the 26% margins in H1, assume 27% underlying in H2, and then the kind of 100 bps one-off benefit, I get to kind of 27.5%. Is there anything that we should be considering as a kind of margin headwind or offset to get to the margin guidance for the full year? And then secondly, I mean, food, beverage and human health had a pretty meaningful slowdown in Q2. But the guidance would imply kind of an acceleration in the second half. Can you just kind of give us the kind of context around why you expect this to improve through the second half and what was kind of holding the division back in Q2? Thanks very much.

Thanks to you, Charles. Lars, if you can take the question on margins and then Hannes on food.

Yes, happy to do so. So when you look at the development of our costs and in particular the cost of goods sold over the year, because of the time lag between procuring the raw materials and selling the products and therefore recognizing the cost in our cost of goods sold, we are seeing a continued increase in our cost of goods sold per unit between first and half year. And that is why we sort of consider the 26% to 27% margin, including the 1% non-recurring from the accounting gain, also appropriate for the full year. So we see an increasing cost of goods sold, but also a positive contribution from price in the second half. And therefore, we believe that the full year outlook is very well aligned with those underlying developments.

And on food and beverages, yes, you're right. We came from a very, very high growth level in Q1 of 18% down to 3%. Now, I actually think there are some pretty good reasons behind that. First of all, we called out a significant sales of one product. Also, our comps are quite different. So we came out of a 21 comps of Q2 of 18%. So that also made it a little bit difficult. If you look at run rates, they're fairly equal between the two quarters if you discount the one off we have and if that brings any comfort we are actually a little bit ahead of our plan in the segment totally for the half year so we remain quite confident that the guidance we have for the segment is realistic and is the right one it's driven by health and of course also raw material substitution as we have sort of expected all along for the year so all in all I think we remain quite confident

Okay, thanks very much.

The next question comes from the line of Charles Eden from UBS. Please go ahead.

Hi, good morning. Thanks for taking my questions. First one is on the price increase, as you mentioned. Can you quantify the contribution in Q2, if I remember? It was broadly flat in Q1. And then if you could comment on how much you expect pricing to contribute to the 6% to 8% organic sales growth in the full year, that would be helpful. And then the second one is just a follow-up on the household care and your comments on downtrading. Is Novozyme's enzyme content in lower tier and private label products similar to the premium tier one brands, or would it be lower? I'm just trying to understand whether there'd be any impact that downtrading would have on mix or not. Thank you very much.

Thanks to you, Charles. I'll cover your first question and then pass it to Hannes. We see year-to-date a slight positive contribution on price on our results. And as mentioned before, price is a contributor of the sequentially underlying gross margin expansion, but one contributor. coupled with the strong volume growth and coupled with the productivity improvements and the mixed efforts that we're driving. We're very confident and we're very comfortable on the conversations with our customers, and we're expecting and aiming the contribution on pricing to continue to fruit, to continue to materialize and see more tangible results. as the year progress, and we're aiming for also a slight positive contribution on pricing on to the year end. This is an improvement or a shift on the trajectory that we used to have on the past of 1% to 2% decline on price. And it's the simple collection of the fruits of the work done in these last years, and then coupled, yes, with an environment of a strong commodity prices that – accelerates or encourages or gives even more momentum on ongoing conversations with our customers.

And on private label, private label for us and in the household category is to a very large extent a European phenomenon and a little bit in the U.S., and generally we see penetration being very good and our position being very strong in that segment. We also see that private label penetrations are often higher than mid- and low-tier detergents, so a transition from those to private label, will actually benefit our business. We also see that there are some very high-end brands that has a slightly higher penetration. So it depends on where you take and who will win. But net-net, we should be benefiting from higher private label penetration.

That's great. Thank you. And just to follow up on the pricing, when you talk about slight contribution, is that in absolute terms or is that net of your assumption on the impact on volumes? I think with Q1 you talked about it being sort of net of, implied volume elasticity. So I just wanted to get a sense of whether that slight contribution for the full year is including an assumption of a negative drag on volume.

Thank you. The contribution on price, slight contribution on price, is on price. And then overall, we're aiming to the high end of our guidance on 6% to 8%, where volume is going to be the strongest contributor of that growth.

Very clear. Thank you very much.

The next question is from the line of Søren Samse from SED. Please go ahead.

Yes, good morning, Esther and the team. First, a follow-up question on the question regarding plant-based. I was just wondering who actually owns the IP rights for the protein you're producing for this undisclosed customer? Is it the customer or is it Nozams?

Amy, do you want to take that one?

Sure. I mean, again, we can't comment on the specifics. I mean, I think what you can assume is sort of a shared IP development where we have been contributing particularly both on the background IP, jointly developed foreground IP, and then also very much on the know-how. So, you know, this is really a joint venture, but obviously a lot of the IP resides within Novozymes.

But if the customer cannot no longer sell this protein product, What would you have left to sell, basically, is my question.

I think that we get into the details of contracts, but I think we feel very confident that what we are building is the plant that is based on Novozyme's know-how and capabilities. You know, again, this is an anchor customer. It's an important contract, but it's not fundamental. We bring a lot to the table as well and other products as well.

Okay, thank you. And then a different question regarding your impressive organic growth. I was just wondering how much of the 10% organic growth you had in the first half is related to countries with hyperinflation like Turkey and Argentina. If you exclude those countries, what would the growth have been then?

Lars? Yes, thanks. I can take that question. So we invoice many of our customers in those regions in some form of hard currency, be that U.S. dollar, Danish kroner, or euro. So there is a very limited impact, if any, from hyperinflation in those numbers.

Okay, great. Thank you. And then finally... the guidance implies quite a disarray and growth, which it doesn't seem, it sounds like the momentum into Q3 is quite strong. So what is the reasons, aside from, of course, the topic comparison in the second half, what is the reasons for the disarray, you think?

We take this as your final, final question, Lars.

Yeah, I can take that. So as Esther said, we are upgrading or narrowing the range to six to eight. And like we have said all along, our aim is to arrive at the upper end of that range. I think as you also realize we are standing in a world that is looking at some risks both from a macroeconomic and geopolitical perspective, but we feel confident that our business will continue to grow despite those circumstances, but we have included risks in our outlook in that 6% to 8% range so that we can cope with what we believe and what we can see at the moment. So you can say we have called out a small timing effect in the food, the human health business area from Q1. That's a little component. But other than that, it is the comparators of in particular bioenergy which were very different between first and second half. That sort of makes, I would say, the numbers add up and sort of reflect that continuation of our trend from the first half, resulting in a 6% to 8% for the full year.

Okay, thanks for taking my questions.

The next question is from the line of last Tom Holt. Tom Carnegie, please go ahead.

Yes, congrats with another very strong quote. I also have a couple of questions and one of them goes a little bit also to guidance. So when I look at Q1 and Q2, clearly some of your businesses benefit from higher soft commodity prices because you offer yield improvement so your customers trade up. So I wonder what the effect of that has been and what you can do to maintain customers on those higher yield solutions. And of course, implicitly leading to the question, what the assumption is for defending the current mix in your guidance and maybe also what the exit rate of the quarter has been. And then a very small second question. So your share buyback is finalized now. You're hopefully getting $250 million in cash from the Albumetics sale. Are you going to send that back to shareholders, or are you just going to consolidate? Thanks.

Thank you, Lars. I will let Lars answer your second question. And then on your first one, thank you for your nice words. And yes, we are aiming to make a trend here on our trajectory to sustainable growth. We are having a little tiny dot with this quarter, and we feel very pleased of that. Building on your own question, how are we going to make that sustainable and how much of that is the tailwind? Yes, there are tailwinds of higher commodity pricing. Yes, there are tailwinds of a strong pull for sustainability and solutions that enable a healthier planet, lower CO2 emissions and healthier foods. we capitalise on those tailwinds with a lot of self-help. We capitalise on those tailwinds with, A, a strong innovation, a very robust and resilient asset footprint that enables us to flex, that enables us to swing, that enables us to capture the growth where it is and bring solutions close to our customers And then with a very strong team that once more has proven that can dance, that can deliver in a very volatile market. It is also true that when we are coming in and we're capitalizing on the tailwinds we're seeing from the market, we're leapfrogging the penetration of more sustainable solutions. I'll give you a small example. I think that Hannah's also mentioned ascorbic acid. Part of that growth that we have seen maybe has been catalyzed by the strong commodity prices or by the shortage of supply. But then when we are in and we qualify our solutions, then our customers move to clean label bread, to clean label solutions, and we're there for good. And that solution, those products continue to be a strong contribution of the future growth. It's that concept, the one that we see, coupled with a diversified portfolio, coupled with our diversified market, and the capability to respond to the volatility, the ones that make us very confident that we're going to continue to be growing. And then we continue to invest for the future. We continue to invest on capabilities. We're moving ahead on plan for Blair. We're moving ahead with investments on customer co-creations. And those will be the pillars also for future growth.

But Esther, it's probably just me being silly here, but implicitly you guide 2% to 6% organic growth for the rest of the year. And I understand you all aim at reaching the high end of that, of course. But on this call, you're also telling us this will mainly be volume-driven. There will be some positive pricing. But I would also assume your mix right now is a lot better than your mix was this time last year. So how on earth do you get down to 2% to 6%? Do you have an assumption and then just deduct a buffer because of uncertainty, which would make sense or what sort of the math behind the 2% to 6% for the second half of the year, given you have better mix, given you're saying you have good volumes and then given you have pricing?

I really love your question, Lars, and it does show that you do seek and understand our numbers and you read very, very well behind on what we do. We have provided the guidance of the individual segments where we show our expectations of where we aiming to growth. We have a share that we're aiming to the high end. And also you heard Lars, me and Tina and Hannes mentioning about the range of the guidance today. It covers the uncertainties of the world that we live in, including further disruptions on supply chain. We, with all of them, we're confident on the guidance that we're putting in and we're also confident of a continued trajectory of growth.

Okay. And then the 250 million...

Yes, on the 250 million, Lars, as you know, we have a capital structure strategy where we are looking to have a ratio between our net debt and EBITDA of around one. On that background, we started the 500 million share buyback program because that represented the excess cash we would generate during the year in our plans. So obviously, 250 million when arriving would come on top of that. It's not enough to sort of start a new share buyback program in its own right. But when we look at our future capital structure, this will be part of the considerations. And of course, it will be cash on our account. And therefore, we would consider future return of cash in that context.

Okay. Thank you, guys. Thanks for answering my questions.

One last question. Last question, please.

The last question comes from the line of Andrew Torrent from CNI. Please go ahead.

Yes, thanks a lot and good morning everyone. So my first question is in terms of agriculture and animal health. You had 14% organic growth in the first half and still doesn't upgrade your guidance in this segment. Can you explain a bit what you see in the second half for this business? That's my first question. Yeah, let's just take that one, I guess.

So first of two questions, Tina, please.

Yes. So in this segment, we are maintaining the guidance at high single digit to low teens. We upgraded it earlier in the year and already back then we were having, you could say, a view on how it is the rest of the year would pan out. And that is what we are sticking to. So we do see strong performance in both segments. We expect double-digit growth in the agriculture side and solid growth in the animal health and nutrition side. So we are comfortable with the indications we are having here.

All right. Thanks a lot. And then my second question is in terms of the currency impact on your EBIT margin guidance. So can you maybe give an indication of how much in percentage points the currency tailwind that you get is benefiting your EBIT margin guidance?

Lars, please. Yeah, I can do that. So in particular, due to the appreciating U.S. dollar relative to Danish kroner, we are having a currency tailwind also sort of for the full year. It is a marginal positive contribution and not enough to sort of change the overall guidance that was sort of underlying 25 to 26. And then there's 1% accounting gain on top of that.

But I think you mentioned previously half a percentage point, so are we talking one percentage point now or still half a percentage point?

So, of course, it all relates to what the starting point is. The change since last guidance is a marginal positive contribution. Okay, thanks.

Thank you, Lars. Yeah, we thank you for later also with this concluding the call. Thank you very much for all your questions. Looking forward to continuing the conversations with many of you in the next four coming days. And I wish you a beautiful rest of the day. Thank you.