Novonesis B Unsp/Adr

Welcome to the Novozymes conference call regarding the interim report for the first three months of 2023. Throughout, all participants will be in listen mode only, and afterwards, there will be a question and answer session. Today, I am pleased to leave the word to Tobias Cornelius Bjorklund, Head of Investor Relations. Please begin your meeting.

Thank you, operator, and welcome everyone to Novozymes conference call for the first quarter of 2023. My name is Tobias Björklund, and I am heading up the Investor Relations Department here at Novozymes. At this call, our CEO, Esther Barget, and our CFO, Lars Grain, will go through our performance and key events of the first quarter, as well as the outlook for 2023. Also present at this call are Tina Feiner, EVP Agriculture and Industrial Biosolutions, Amy Byrick, EVP Strategy and Business Transformation, Anders Lund, EVP Consumer Biosolutions, and Klaus Fuglsang, CSO and EVP of Research and Development. The entire call will take about 45 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 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 happy to hand you over to our CEO, Esther Bache. Esther, please.

Thank you. Thank you, Tobias, and welcome to our call. Please turn to slide number two. Thank you. We are off to a very good start in 2023. Our well-diversified portfolio and end market exposure is providing resilience and strength. And we grew 5% organically in the quarter, which is better than we initially expected. The end of the first quarter was very strong, with some benefit from timing of orders. And this was especially true for bioenergy and agricultural animal health and nutrition. Food, beverages, and human health declined based on a very demanding Q1 last year. Adjusting for the sales related to the large one-offs last year, growth in this business area was close to flat. And across the five business areas, we delivered solid price increases. This is very satisfactory, as our focus on commercial capabilities are showing good results. Underlying total volumes also increased. We reported a gross margin and EBIT margin in line with expectations. And while they're still down in Q1 year on year, we delivered sequential improvement from Q4 for both the gross and the EBIT margin. This is in line with our plans to reach our roughly flat year on year gross margin and EBIT margin between 25% and 26%. Additionally, free cash flow before acquisitions was negative by around 100 million kroner, mainly explained by lower trade payables. And also, ROIC including goodwill before special items was 17.7%, above the full year outlook of 16 to 17%. We are executing on our strategic plans across the full range of activities, with the shareholders' approval on March 30th at both Novozymes and Christian Hansen as important milestones. We continue the work on gaining regulatory approvals, and with the recent positive development in the US and with the filing in Europe, we follow the expected trajectory to close the combination in Q4 2023 or Q1 2024. On the innovation side, we launched three products this quarter. The publicly communicated launch is within consumer health, where we see an expansion of vitamin K2, a product that came with acquisition of Synergia. The new format allows for the inclusion of vitamin K2 also in foods and in beverages. We have a solid pipeline of new impactful product launches for the year across industries and across geographies, emphasizing our innovation leadership. After a solid start to the year, we maintain the outlook across key financial parameters and adjust the full year indication for bioenergy slightly upwards. We are confident to deliver our full year expectations, which still includes a softer start of the first half of the year following the timing effect here in Q1. And with this introduction, let's now look at each of the five business areas in more detail, starting with household care. If you could please turn to slide number three. Thank you. The first quarter performance in household care was solid, with an increase of 2% organically. This was despite the negative impact from the war in Ukraine, as well as industry volume softness in developed markets. Pricing had a positive impact on the growth in the quarter. Developed markets performed well despite the softness in industry volumes. Emerging markets were flat as growth in Latin America and Asia-Pacific were offset by the negative impact from the war in Ukraine. Additionally, the freshness technology performed in line with expectations. Turning for the full year, sales will be driven by enzymatic penetration in emerging markets and also expect the freshness platform to contribute to growth. The slightly better start to the year gives us increasing confidence in our indication of low single-digit organic growth for the year. Our growth indication includes expectations for contracting detergent volumes in developed markets as well as a certain degree of down-trading. Finally, we expect pricing to contribute to the full-year development. Could you please turn to slide number four? Thank you. Organic sales in food, beverages, and human health declined 8% in the first quarter. The soft performance was roughly in line with expectations as the comparator, on top of the very strong sales across sub-areas, also included timing effect. over roughly 5 percentage points from a large sales order. Additionally, as there were no sales from this product here in the first quarter, the total impact is higher than 5 percentage points. Adjusting for this timing effect, the underlying growth was relatively flat. We saw a positive impact from pricing in the quarter and food has the strongest underlying performance with good progress on customer activities. Human health was softer than expected as supply chain issues impacted our ability to serve demand. Additionally, a general softness in North America demand for probiotic solutions was only partially offset by our exposure to the more robust health care practitioner channel. As the soft start to the year was much as expected, we maintained the growth indication for the full year of high single digits, with all sub-areas contributing to growth and pricing being a strong component. Human health is expected to grow double digit. In general, we see good progress on the recent launches and our innovation pipeline with customers, giving us confidence in the full year indication. Please turn to slide number five. Thank you. Bioenergy sales grew 28% organically in the first quarter. The very strong performance was partially driven by timing of orders, coupled with better than expected market fundamentals towards the end of the quarter. Growth continues to benefit from the same drivers as in previous quarters, demonstrating the resilience of our portfolio and geographical exposure. Our solutions allow customers to gain market-leading yields and additional value generation in animal feed, corn oil, and fiber extraction. Growth was led by a strong penetration of innovation in North America, where the ethanol production is estimated to have a decline by 2%, according to EA. Additionally, growth benefited from capacity expansion of corn-based ethanol in Latin America and biodiesel. Also, pricing had a positive impact in the quarter. Lastly, we saw a contribution from sales of enzymes used for biomass conversion, commonly referred to as second-generation biofuels. Looking at the full year, we now expect growth in the high single digits. Growth will be driven by pricing, will be driven by market penetration enabled by innovation, capacity expansion in Latin America, and market penetration in biodiesel. Additionally, we expect growing sales from second-generation biofuels. The outlook assumes a flat to slightly declining U.S. ethanol production. Could you please turn to slide number six? Thank you. Sales in grain and tech processing declined 9% organically in the first quarter, driven by a weak development in tech and only partly offset by growth in grain. Tech was negatively impacted by significantly lower sales of enzymes for COVID-19 test kits and a soft textile market. Favourable market conditions and solid demand, together with higher grain prices, benefited the performance in grain as our yield and optimising solutions become even more attractive for our customers. The growth in grain was driven by increased market penetration in vegetable oil processing and continues to be underpinned by our innovation. And pricing had a positive impact in both grain and tech. Looking at the full year expectations, we continue to expect growth in the low to mid single digits, supported by a positive impact from pricing. Performance in grain will be driven by increased market penetration and innovation in both vegetable oil processing and starch. Tech is expected to decline, driven mainly by reduced sales of enzymes for COVID-19 test kits and a soft textile market. Please turn into slide number seven. Thank you. Agricultural animal health and nutrition sales grew 19% organically in the first quarter, driven by animal health and nutrition. Overall, there was a positive impact on pricing. The strong growth in animal health and nutrition was supported by timing of orders as well as recent product launches and end market driven volume growth. Performance in agriculture was more muted, impacted by the volatile end market and some of the stocking effects. For the full year, we expect growth to be led by the animal nutrition and health businesses. Growth will be driven by pricing, by innovation and market growth and increasing demand for sustainable solutions. The positive timing effect we saw in the first quarter is expected to reverse in the second quarter, putting pressure on the growth rate for the second quarter as it's also facing a tough competitor. All in all, we are maintaining our full year indication of growth at a rate of mid to high single digits for the business area overall. And with that, I will hand over to Lars for a review on the financials. Lars, please.

Thank you, Esther. Please turn to slide number eight for a review of our financial performance. We grew 5% organically and 6% in reported Danish kroner, including one percentage point positive effect from currency. The divestment of certain wastewater-related solutions had only a marginal negative impact on growth in Danish kroner. We delivered a gross margin of 54.1% in the first quarter, 1.4 percentage points below the same quarter last year, however with a sequential margin expansion of 60 basis points compared to the fourth quarter of 2022. The lower year-on-year gross margin was mainly due to higher raw material and transportation costs, partly offset by a solid progress on pricing and productivity improvements. Our pricing efforts evolved during 2022, with a growing and more meaningful contribution to the gross margin in the first quarter of 2023, which is also visible comparing to the fourth quarter of 2022. The EBIT margin before special items was 26.0% or 0.1 percentage points lower than in the first quarter of the previous year. The EBIT margin before special items included two one-offs this quarter. The first was a gain related to closing of the divestment of certain wastewater treatment solutions as announced back in the third quarter of 2022. The second was a one-off cost associated with resource alignment in the commercial organization. The net effect from the two one-offs was around one percentage point, resulting in an underlying EBIT margin before special items of close to 25%. This represents a decline of roughly two percentage points compared to the underlying EBIT margin before special items in the first quarter last year. The contraction was mainly an effect of the lower gross margin, as well as increasing operating costs in the first quarter. Looking at the sequential EBIT margin evolution and comparing to the fourth quarter of 2022, we saw the expected improvement in the underlying EBIT margin before special items, driven by a growing contribution from our pricing efforts, which is expected to continue throughout 2023. The reported EBIT margin was 24.5% and included special items amounting to 66 million Danish kroner. This was entirely related to transaction costs in regards to the proposed combination with Christian Hansen. Net profit in the first quarter was 801 million Danish kroner, which was 5% lower compared to the same period last year, due to a lower profit before tax and a higher effective tax rate. ROIC, including Goodwill before special items, ended at 17.7%, around 0.4% lower compared to the first quarter of last year, mainly due to invested capital. Free cash flow before acquisitions represented an outflow of 113 million Danish kroner in the first quarter of 2023. The decline was driven by higher networking capital, impacted mainly by a negative development in trade payables from CapEx timing. Now please turn to slide number 9 for an update on the 2023 outlook. We maintain our outlook for overall organic sales growth, reiterating an expectation to grow by 4-7% in 2023. sales in Danish kroner are expected to be around 3 percentage points lower. We still expect more modest growth in the first half of the year, with full year growth driven by a combination of stronger pricing as well as volume growth. Pricing is expected to contribute with more than half of the organic sales growth, while volume is expected to be predominantly driven by innovation and increased market penetration. Additionally, we don't assume any major changes to the current state of the global economy in our current outlook. Turning to the gross margin, we expect a similar level to that of 2022. The increased level of input costs during 2022 will continue to impact the margin negatively here in 2023, while price increases as well as productivity improvements will impact positively. the outlook for the AP margin before special items remains at a solid 25 to 26%. The margin will benefit from price increases, sales growth, and productivity improvements. Currencies, continued investments in the business, and considerably higher input costs are still expected to have a negative year-on-year impact. The outlook for the return on investor capital, including goodwill and before special items, is unchanged at 16 to 17%. For the modeling assumption, the free cash flow before acquisitions is maintained at 1.8 to 2.4 billion Danish kroner. The level of net investments is expected to be lower compared to that in 2022 and includes around 400 million kroner for the final construction year of the Advanced Protein Solution Facility in Blair, Nebraska. Given the current visibility and with the results of the first quarter, we feel confident to deliver on our financial targets for the year and the targets set out in our strategy, Unlocking Growth, powered by Biotech. Now please turn to slide number 10 for a recap of the timeline of the combination with Christian Hansen. The material events that have occurred in the period between the signing of the merger plan on December 12, 2022, and what we have said at the extraordinary regional meeting on March 30, are the following. On January 24, the Danish Tax Assessment Council confirmed in a binding ruling that the proposed combination meets the requirements to be completed as a tax-exempt merger. On January 26, Novozymes' audited annual report for the 2022 financial year was approved by the Board of Directors and published. On March 2, Keister Young was elected as the new chair of Novozymes' Board of Directors at Novozymes' annual shareholders' meeting. On March 8, we published an exemption document which covers the businesses of Novozymes and Christian Hansen with details and regulatory steps related to the proposed merger. This includes risk factors that are material to the merger. Certain risks may continue to be relevant to the combined company following completion of the merger. Also on March 8, we confirmed our financial outlook for 2023 and announced the proposed candidates for the board of directors of the combined company. On March 28, the US antitrust regulation waiting period expired, supporting the path to completion. And on March 30, we held the extraordinary general meeting, voting to resolve the proposed combination. We obtained a strong support from shareholders with 88% of the share capital voting in favor. And the support was also strong if we exclude the position from Novo Holdings, with 80% of the share capital voting in favor. Additionally, Christian Hansen also had a strong vote in favor of the combination. The shareholder approvals were important milestones towards day one of the new company, and we are now working diligently and in good dialogue with authorities, including our filing in Europe, towards the expected completion of the combination in either Q4-23 or Q1-24. And with this, I'll now hand back to Esther for a couple of concluding remarks.

Thank you, Lars. Please turn to slide number 11. To summarize the performance here in the first quarter, we are off to a solid start with some benefit from timing of orders. We deliver solid pricing across the businesses and we deliver underlying volume growth. The gross margin and EBIT margin was in line with expectations and with sequential improvement compared to the fourth quarter of 2022. We maintain our expectations for the full year with the indication of slightly stronger growth in bioenergy. And finally, we are executing very well on our strategic agenda and portfolio of opportunities despite the continued high volatility in many of our end markets. And we're working diligently on combining with Christian Hansen creating a leading global biosolutions partner. And with those concluding remarks, we are now ready to an app for questions. Operator, please, if you could please begin.

Thank you, Madam. Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touchtone 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 selection. Anyone who has a question may press star followed by one at this time. The first question is from Gunther Zechmann of AB Bernstein.

Hi, good morning, everyone. Gunther Zechmann from Bernstein here. Two questions, please. The first one on pricing. So most, if not all, of the strong organic sales growth, the 5% in the quarter we're pricing, How does that tie in with your full-year guidance? So even if I take the high end of your 4% to 7% range, you say half of that or more than half of that is pricing, so that gets me to 3.5+. What assumptions are you making for volume, and how would you characterize that as part of the full-year guidance, please? And the second one is on the U.S. probiotics market. Could you tell us how much of your probiotics in the U.S. you sell via more traditional channels versus the practitioners, because so far I think you were quite shielded from the market decline in U.S. probiotics. So a mark-to-market on the split, how much of your probiotics sell in the U.S. via practitioners would be helpful, please.

Thank you, Gunter. I'll start maybe a little bit with your first question and then pass it to Lars and then let Amy build up on the probiotics split on the value chain. On pricing, as you commented, we're very pleased on the fruits of our efforts on pricing. This is a journey that we started together. A while ago, it's reflecting, we're starting to collect last year already the benefits of that fruit with sequential and continuously contribution of pricing in place. And now you see a strong contributor of this quarter. It is true also that excluding the one-offs, we see underlying volume growth projections. So the combination of the two, the continued momentum on pricing and then relative to the also growing performance of pricing on last year with the underlying momentum on volume growth, that makes us confident to deliver on our year guidance from 4 to 7. Klaas, I pass it to you.

If I could just jump in on the pricing, please. Is there any reason why you wouldn't have 5% pricing for the full year 23? Because pricing was... non-meaningful in 2022 from a comparable point of view, just thinking about lapping the comps, and you do 5% in Q1. So should we not assume that that runs at 5% for the remaining three quarters, therefore, as well, before it lapsed?

Pricing continued to improve the contribution last year, and it was there present in Q4, and you should see that as a relative also comparison for Q4, but I also will let Lars further elaborate on this aspect.

So that's exactly what I wanted to sort of underline, that as we sort of progressed during 2022, you will notice that we sort of increased our contribution from price. So the first quarter of last year was very little, I think flat, I think we said. And then as we progressed during the year, we ended up saying pricing actually had a positive contribution. And obviously, this means that the effect was stronger by the quarter. And that's also why even if we maintain current price levels, relatively speaking, this means that the pricing contribution in percentage terms will be lower as we progress during the year. And so, therefore, the five percentage point is, so to speak, of the first quarter will turn into a lower number for the year. And therefore, it actually fits with our guidance to say that we expect four to seven percent for the year, more than half to come from pricing and the residual from volume. And if we sort of look at the range here, It will sort of be changes in demands either upwards or downwards that will bring us to the either lower or upper end of the range. So that's how we look at the split between pricing and volume growth.

And maybe I can take the question on the U.S. probiotics market. As Esther said, we do see weakness in the overall market, but that is somewhat offset by our exposure to the healthcare practitioner channel. That represents, Gunter, to your question, more than half of our sales in the U.S., And so what we see, though, is that obviously we're targeting broad-based growth across both the HCP as well as other channels. Just to, I think Esther mentioned it as well, the weakness that we see, yes, is somewhat in terms of the market, but also in terms of some supply chain challenges that we have faced in the quarter.

And we're staying committed to our expectation for year-end, right, Amy? Absolutely. Next question, please.

The next question is from Alexander Jones of Bank of America.

Thanks very much for taking my questions. The first one, just on the order timing, I was wondering if you could quantify at all the sort of positive impact you think you've seen from order timing this quarter, or maybe to phrase that another way, what growth trends have you seen into April relative to Q1? And then the second question on bioenergy, I was wondering if you could expand a bit more on the by-product value capture opportunities that you mentioned. here via innovation, perhaps some examples, and how much further runway you see for your customers to keep increasing purchases of those enzymes or whether that's relatively well penetrated at this stage. Thank you.

Thank you for the question. I'll start and then let Tina build up also on the bioenergy. We've seen 5% growth in Q1, stronger than what we originally expected. And a main driver of that further growth, it is, as you so nicely mentioned, because of timing, particularly at the end of the quarter. And that was... Even more relevant in bioenergy and animal nutrition and health, two segments that they are highly volatile and that we saw that volatility in place. What I would like to invite you to see also, to read from the strength of higher numbers than originally forecasted, is again the resilience of the team. The value of a very diversified portfolio, the value of a diversified market, and then that even in a very volatile market, we're responding, we're delivering, and then we capture. We described last year that we'll have a softer first half of the year. Our rate of the year has not changed. We finished the first quarter a little bit higher than we expected, but we're not changing our look. on the first half of the year relative to the second half. And with that, April is consistent to your question on the trend that we're forecasting. So we're staying firmly committed on our path and trajectory to deliver on the year. And the strong start of the year makes it even more confident on that direction. Tina?

Yeah, and on the byproduct in bioenergy, so it is one of the examples of the decoupling, which we have been working on the last many years in order to decouple the bioenergy business from the, you could say, only ethanol production in the US. And this both goes in terms of the areas in which we play, so biodiesel, biomass conversion, as well as bioethanol, And then also in terms of geographies. And then last but not least, to your question, also on capturing value from alternative value streams than just the ethanol. And it is an area where we have launched a number of new products. For example, the fiber platform, we call it internally. So our fiber rigs, product range. And we do still see a significant growth coming from here. And that is something which we expect to continue to see. But I think that it's important that when you think about our bioenergy business, that you look holistically at it, not only in the US and in terms of what is it that we can do on product upgrades as such. But it's also a matter of looking at geographical expansion as well as the whole notion of the different value streams in terms of biodiesel biomass as well in this area.

Thank you.

The next question is from Lars Topholm of Carnegie Investment Bank.

Yes, congrats with another excellent quarter. Two questions from me, please. The first one is the supply chain issues you flag in human health. I just wonder if you can give a little bit more color on what is the nature of those supply chain issues and what is the estimated impact on the Q1 growth and how and when are you trying to solve them? And then a question on bioenergy, because if I look at your full year outlook, it implies a lower quarterly run rate of revenue than you had in Q1. But going back through the years, Q1 has actually tended to be less than 25% of full year sales. Revenue typically increases quarter by quarter over the year. And of course, I hear you saying there might be some phasing from Q2 to Q1. But can you try to quantify that? And can you try to explain why implicitly you now guide for different pattern over the year in bioenergy revenue than we usually see? Thank you.

Thank you, Lars, for your kind comments. And then I'll let Amy build up on the supply chain issues on human health. We started the year a little bit softer, but we have a solid plan on interventions on how to mitigate that and then deliver, include it on the path to deliver on year end. And then I will ask Tina to build up on your thoughts. You implicitly answer your question yourself because it's timing, the one that changes the pattern. And then again, it's our capability to respond with a very volatile market, the one that makes a different pattern. We are upgrading the guidance or lifting up the guidance on bioenergy, and we see the Q1 as a strong sign of our trajectory for year-end. But I'll let Tina build on that. Thank you.

So, Lars, if I start with the supply chain challenges in the U.S., these are largely linked to our contract manufacturing network for finished format products. And I think that hits us in two ways. It hits us in terms of actually delivering on the finished formats for existing business. But it is also a constraint in terms of getting access to a CMO time to develop new products and get the new product launches out the door. And so that's really where we are today. taking action on both fronts. And so as Esther mentioned, we've got a lot of actions in place. We feel like we're on top of the situation, but we are still trying to liberate additional CMO capacity to be able to get back to growth. So my expectation in terms of timing is that we will see continued challenges in Q2 with a really strong rebound in the second half, which gives us the confidence to get back into double-digit growth for the full year.

And then on bioenergy. Can you estimate the impact on Q1, Amy?

I think it's tough to put a number on it, Lars, but clearly our expectations and the underlying demand that we see is higher than what we're able to deliver on. And again, that continues to be the biggest frustration of not being able to deliver to the full expectations of the demand that we see in the market.

That's fair. Thanks. And on the bioenergy, Lars, as Esther also said, we are lifting our expectation for the segment. And as you know very well, the segment also consists of biodiesel and especially the lumpy biomass sales. And if you take that and then correct for the timing, And I would say roughly half of the timing indications for the cooperation, half of that goes to bioenergy and roughly half go to agriculture and animal health and nutrition. So if you subtract that and then look at what we did in Q1 and say we do the absolute same amount throughout the year and subtract the timing, then you get roughly to the level what we are expecting for the segment. You are also right that if we, for example, look at last year, that we saw a significant pickup throughout the quarters towards the end of the year, and therefore also the comparisons become tougher. But you also have to factor in here that A, it is volatile, and B, we talked about pricing earlier also in the call, and bioenergy is an area where we also benefited from pricing throughout 2022, and that also means that You could say the comparator becomes more difficult. So all that together lead us to that we believe that high single digit is a good indication for the segment. And it is volatile. But what I'm also very pleased with is to see that here towards the end of the quarter Q1, we saw margins pick up significantly and we were capable to deliver to it. And that agility in the team, I think, is very, very good. So let's leave it there with a high single digit, a lift. It is a volatile business area, but you are right. Typically, we see the absolute levels increasing quarter by quarter, and that's why we also increase the expectation.

Thank you, Tina.

Next question, please.

The next question is from Nicola Tang of BNP Paribas Exxon.

Thanks. Hi, everyone. First question, I was wondering if we could get an update on the Advanced Protein Solutions Facility in terms of the investment progress there and also discussions with customers beyond the core customer that you have. And then the second question, a change of topic, I just wanted to ask on the deal. I see you've announced the Board of Directors. I was wondering when you would look to announce management appointments beyond CEO and CFO for NUCO. Thank you.

Thank you, Nicola. I'll take both your questions. We're moving diligently, firmly, on budget, on time, safely across all aspects. You've seen also in the balance sheet from the cash flow on payments, also on the construction on our plant in Blair. We're expecting to start up as we originally forecasted before the end of the year, and that's moving extremely smoothly. It's a great job that the one that the team is doing. We continue also our conversations with our Anchor customer and they're progressing very well. We continue to see the pull and the sickness from consumers increasing. for solutions on plant-based alternatives that they fulfill their needs, meaning that fulfill the experience of taste, fulfill the experience of nutrition, fulfill the experience of health, and also bring a flavor of sustainability and competitiveness. And we're contributing on all those parameters. So it is true that in the market there is some maybe non-repeat trends, but not in the spaces where all those parameters get in click, where we continue to see the growth. And I'm also inviting you to see this asset that we're building and that we're going to start up by the year end as a one dot more with our overall asset footprint. As we do with all our facilities, it is integrated with our network and will be a contributor and an enabler of the sustainable growth for Novozymes. Then regarding your second question on the combination with Christian Hansen, you heard Lars going through the listing of a long list of events and activities. We're moving firmly towards closure by Q4 and all Q1 next year. Across all fronts, the solid and extraordinary support we got from our shareholders, it gives a high level of confidence, pride also, that we're starting and moving in the right direction. The board is announced. We're working digitally also internally on getting us ready for Q1. And that includes the steering committee and streams launched across all the areas. Operating model and organization, it is one of them, and we're working on that area, as we're doing on creating the culture, the brand, getting ready for financials, the IT systems across all the spaces. I'm choosing not to answer your question exactly on when we will be announcing. I'm answering the question and that we are working on getting ready and getting closed by Q4 or Q1 next year, being, of course, the organisation and the next layer are an important parameter that we will announce when it's in place.

All right, thanks. If I can follow up on the first question, could you just clarify in terms of once the plant ramps up at the end of the year or is ready by the end of the year, In terms of revenue contribution, would that be mainly with your anchor customer at the start or could we see sales with other customers from the get-go?

If you remind, Nicola, when we made the announcement, we communicated a billion DKK within the next five years, and that was including the whole pipeline of advanced proteins in place. Being the anchor customer, a contributor of that, but the revenue, the projections that we made, it is including for the whole space of advanced proteins and functionalization, mainly in food and in nutritional health aspects.

All right. Thank you. The next question is from Chetan Udeshi of JP Morgan.

Yeah. Hi. Thanks. I have two questions. First one, just on bioenergy, you know, it used to be a pretty lumpy business, and you yourself are referring to some lumpiness there. But we've seen, like, a very high sustained growth in the business now for the last year. you know, few quarters. So it feels like there is a sort of element of structural change within the business. So I'm just curious if you can talk about how much is the exposure these days to the, you know, the pure ethanol market in the U.S. versus all the other bits and bobs that you guys are adding to that business. And the second question was, and apologies if this is a bit of a straight question, but, you know, Esther, I wanted to challenge your comment regarding the progress on commercial pricing, because if I look at Q1, the gross margins are down, EBIT margins are down. I mean, it's tough to see the progress on commercial pricing in the sense like, you know, if you can't raise prices enough to cover the cost inflation, despite like four quarters of cost inflation, I think We can't yet see that progress on commercial traction to price for innovation at Novozymes, but maybe any clarification there would be helpful.

Thank you, Chetan, and thank you for the challenges also. We like them. On your first question by energy, I will let Tina answer on that. I will go into your nice comments on pricing. We see progress by the sequential gross margin and EBIT expansion. By progress, we mean growth. sequential and gradual from one quarter and the other. We saw contribution, increasing contribution on pricing last year from the beginning of the year till the end. And we see the sequential gross margin expansion versus last year. It is true that gross margin and EBIT margin are compact during versus relative to Q1 last year. And also that we're aiming to a flat gross margin for the year end. We're pricing on value. We're not pricing on cost. And the pricing efforts will continue to have an impact and continue to be an enabler of recovering the gross margin and putting us into the aim of flat gross margin versus last year. The way that we define progress is on a momentum. We are not pricing on cost. We're pricing on value. And we always explicitly say that we will see the contribution on pricing as also contracts expire. We have extraordinary conversations with our customers where we talk about value. We are seeing the momentum. We're seeing the impact. We saw it last year. We saw it this year, gradually growing, aiming for a flat gross margin at the year end where pricing will continue to be an enabler of that. And then you're going to see pricing as a contributor moving also forward long-term for Novozymes. And Tina, I will pass it to you to drive and build on bioenergy. We are taking... This is a strategic layout change, the one that Tina is making. And as you mentioned, a diversified portfolio. But Tina, please build on this.

Yeah, so 10 years ago, it was 100% linked to the ethanol production. Today, I would say it's roughly half. So that's a very short answer to your question.

I think you are. You are making it very simple, Tina. The work that you guys have done on changing and shifting what it was a bioethanol, enzymes for bioethanol for North America to now being a bioenergy industry, bio tools for bioenergy. That means enzymes. That means yeast. That means value creation for the customers, not only bioethanol. It's also the value of the byproducts. That means geographical expansion, which also brings Latin America. That means biomass. That means biodiesel. You're very, very humble on your answer, Tina.

Thank you.

The next question comes from Soren Samso of SEB.

Yes. Hello, all, and congrats on the result. Just a question on the margin. I was just wondering if you're seeing any positive impact of the low energy prices, or is that not until the second half you see that as, I guess, you're selling products that were produced on the old energy price level still? Thank you.

Lars, could you please take Søren's question?

Yeah, and it's actually a bit more complicated than that, because you can say in 2022, we started the year with sort of the typical hedging levels of, say, 80% or so of our electricity consumption, which means that actually in 2022, we produced at energy costs that were prevailing at the beginning of the year. And so the increase in energy costs only happened during the year, and only the non-hedged part of our production last year was then at the elevated energy cost levels we had. So as we then spoke to last year, we postponed a bit our typical pickup of hedging for 2023 because of the spikes we saw in energy costs over the summer. And so now we are at the typical peak hedging levels for 2023, but those costs are higher than the hedging rates we had for 2022. So in 2023, we are producing at higher energy costs than in 2022, but we are seeing energy prices come down now, so that looking forward and assuming that we can hedge at current levels for 2024, then obviously we will see a benefit there. Plus, we see a benefit on the unhedged portion of our manufacturing goods here in 2023. So it is not only the spot price that matters. It is also our hedging policies and the way we execute on that. And so we are seeing from here on an improvement going forward. But in 2023, our energy cost will actually be higher than in 2022. And that's why we speak to this higher raw materials cost hitting our cost of goods sold also in our comments to the accounts.

Thanks, that's helpful. And then secondly, just a comment on your bio-ac business statement. When can we start to see an acceleration of that? I guess the environment for that should be quite good.

So what we have said for the full year in BioAg is that we have communicated solid growth in Q4. We'll have to see the progress towards the end of Q2 in order to see how it performs. As you have seen here in Q1, we have seen some muted, some decline in performance. So we'll have to see as the year progresses.

One last question, Operator. Maybe not the last question then. That was the last question, Sharon. I know.

I apologize. I'm positive. One moment, please. The next question is from Charles Eden of UBS.

Hi. Good morning. Thanks for squeezing me in. I'll have two if I can, but I promise they're quick. Is there any major variance in the pricing across the divisions? I sort of guessed 4% to 5% pricing at the group, but is there any major variance by division? And if so, maybe you could talk about the areas where you're seeing the most pricing and which divisions have taken pricing below the group average. And then my second question, just on the food, beverage, and human health division, as you mentioned, broadly flat organic sales growth for Q1, adjusted for the order timing in Q1 in the prior year. Can you help me understand what gives confidence for the high single-digit organic sales growth for this division for the full year, I get the comments around the human health recovery, but on top of this, is it really just the more favorable prior year comps, maybe a little bit of incremental pricing, just the building blocks to the sort of sequential improvement in that underlying growth for that division? Thank you.

Thank you, Charles. I'll start with your first question and then pass it to Hannes also to build up on pricing and then the trajectory to year-end for food and beverages. The major differences within our portfolio, the different segments on price, it's particularly on the timing, on where we see that pricing impacting. It is the conversations with the customers are the same, pricing on value. The value that we bring in, it is higher, and therefore the impact on pricing is there across all segments. But then the timing, it makes the difference on where are we seeing it reflected in our balance sheet. And that's strongly dependent on the market. Some segments we have higher, longer contracts, like in household care, and then we see that timing effect or the pricing efforts also being delayed. Some segments, they are much more agile, ductile. And as Tina mentioned, we saw already, in bioenergy, some impact, some stronger positive impact from pricing than in other areas. So I would say the momentum on pricing, it's consistent across all the divisions, across all segments. We capture the value that we deserve and that a fair share of value that our solutions bring in. And then being timing, the one that will drive, be the main driver of When do we see it or how do you see it reflected as a contributor of growth? You talk in your question implicitly about food and beverages and the timing effects that makes excluding those ones close to flat volume growth. And then the demand and the confidence of us to deliver the high single digit growth solution for the revenue growth for the future. But, Hannes, please, if you could build on that.

Yes, so what gives us confidence, three things. As you mentioned, I think we actually covered a couple of them today, comps will be substantially easier as we get into the second half of the year. We still expect human health to deliver the double digits. And then we have seen and we did expect some destocking here in the first half of the year in food and beverages. We see the market being negative on volumes, at least the large markets in North America. And Europe, we expect that to reverse during the year and actually become a solid contributor. Those three things in combination makes us confident on the high single-digit guidance.

Thank you very much.

Thank you all very much for joining us today. Looking forward to continue the conversations in these next coming days. And thank you for your participation. Wishing you a nice day. Bye.