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Welcome to the Novozymes conference call regarding the Inpelling Report for the first half year of the 2023. Throughout, all participants have been listened only mode, and afterwards there will be a question and answer session. Today, I am pleased to leave the words to Tobias Cornelius Björklund, Head of Investor Relations. Please begin your meeting.

Thank you, operator, and welcome everyone to Novozymes conference call for the first half of 2023. My name is, as mentioned, Tobias Björklund, and I'm the head of investor relations here at Novozymes. At this call, our CEO, Esther Barget, and our CFO, Lars Green, will review our performance and key events of the first six months of the year, as well as the outlook for the full year. Also attending today's call are Tina Feiner, EVP Agriculture and Industrial BioSolutions, Amy Byrick, EVP Strategy and Business Transformation, Anders Lund, EVP Consumer BioSolutions, and Klaus Fuglsang, 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 they involve risks and uncertainties that could cause actual results to differ materially from those described in any forward-looking statement. With that introduction, I'll now hand over to our CEO, Esther Bache. Esther, please.

Thank you. Thank you, Tobias, and welcome everyone. Please turn to slide number three. Overall, the first six months of the year were much in line with expectations, and we delivered organic sales growth of 3%. Reported volumes declined by 3%, while underlying volumes went down slightly less, and pricing was positive by roughly 6%. In the second quarter, organic sales growth stood at 2%, with pricing at a similar level as for the first half year. Pricing, both for the first half and the second quarter, was roughly similar across business areas. However, slightly less positive in household care. Household care and agricultural animal health and nutrition delivered according to expectations in the first half of the year. Bioenergy has clearly outperformed, whereas food, beverages and human health, and grain and tech processing both were more challenged. Consequently, we're adjusting the sales growth indication by business area for the year and narrow the fully organic sales growth outlook to 4-6%, following the stocking and lower consumer demand, mainly in the food-related parts of the businesses. As earnings are similar across business areas, we delivered a 25% EBIT margin before special items for the half year and 24% for the second quarter. This is in line with expectations and reflects the benefit from pricing initiatives. It offsets by higher input costs and reduced leverage on the higher fixed cost base. We are pleased to see the strength developing in the gross margin with sequential improvements since Q3 2022. And we maintain our view of a flat year-on-year gross margin for the full year. Price initiatives and our productivity improvements are key levers to enable this development, offsetting the higher input costs. We are in a good place when it comes to earnings and returns and maintain the full year outlook for both EBIT margin for special items at 25% to 26% and ROIC including goodwill before special items at 16% to 17%. As initially assumed, we continue to expect a stronger second half of the year driven by multiple factors, including the benefit from product launches, continued market penetration, as well as a softer comparator. We expect the stocking to level off in the second half. The stocking and lower consumer demand impacted especially the food-related part of our business in the first half of the year. Consequently, we're adjusting downward our organic sales growth indications for food, beverages, and human health, and for grain and tech processing. Whereas, we're raising the growth indication for bioenergy, following a very strong performance for the year to date. Net, and as mentioned, we expect solid 4% to 6% organic sales growth for the year. We have engaged in exciting new collaborations, and we highlight two of them here. The first project explores the possibility of producing food protein from captured carbon dioxide. We are doing this in collaboration with the Novo Nordisk Foundation, the Bill and Melinda Gates Foundation, as well as few other relevant industry players. This is a project where the two foundations inject the required capital, 200 million DKK for now, and Novozymes contributes its strong technology toolbox. Using CO2 to produce fruit protein is part of solving both the future food supply and environmental challenges, especially as the global population grows. Secondly, in advanced protein solutions, we have teamed up with Arla Food Ingredients to explore opportunities in precision fermentation of protein ingredients, with initial focus being on medical nutrition. both projects clearly signal the picture of what biotechnology, and with that Novozymes, has to offer in a world of increasing scarce resources, where consumer health solutions can be based on natural, cost-efficient fermentation technologies. As a final introductory remark, we're addressing the distribution of an interim dividend to owner Novozyme shareholders ahead of the closing of the combination with Christian Hansen, which is still expected to take place in Q4 2023 or in Q1 2024. With this, 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 four? Thank you. Household care delivered 1% organic growth, despite the negative impact from the war in Ukraine impacting the first quarter and industry volume softness in developed markets impacting the first half year. Softener consumer demand and down trading had a negative impact on our volumes. This was more than upset by innovation across geographies, including the freshness technology. In emerging markets, we see continued penetration of enzymatic solutions as the main growth driver, with the strongest growth in Latin America. and pricing had a positive impact. Organic sales growth in the second quarter was flat. We have seen the same trend since Q3 2022, with lower consumer demand in developed markets, as well as down trading having a negative impact on industry volumes and our sales, also here in the second quarter. Growth in emerging markets was driven by penetration of enzymatic solutions led by Latin America. The full-year organic sales indication for household care is maintained at low single-digit growth. We expect performance to be driven by enzymatic penetration in emerging markets, and we also expect the freshness platform to contribute to growth. The outlook includes the expectation of the consumer downtrend levelling off, as well as stable in-market volumes in developed markets in the second half of the year. Finally, we expect pricing to continue to contribute to the full-year developments. Please turn to slide number five. Thank you. Food, beverages, and human health had the soft first half and declined 6% organically. Organic sales were negatively impacted by roughly four percentage points as the first quarter comparator included sales of a specific enzyme solution, which is not expected to be sold this year. We saw a positive impact from pricing, partially offsetting the negative volumes. The underlying slightly negative growth was below expectations and driven by the stocking across the value chain in food and beverages in combination with weaker and market demand. Excluding the timing impact, food had the relatively strongest performance for the soup areas with good progress on customer activities. Human health was soft, as supply chain constraints impacted our ability to accommodate demand in the robust healthcare practitioner channel, and additionally, there was a general softness in North American demand for probiotic solutions. Looking at the second quarter, food, beverages and human health declined 3% organically. The performance was softer than expected and driven by the stocking in the value chain across sub-areas in combination with weaker end market demand. And this was partially offset by pricing. Innovation is key to drive growth, and we are very excited about our public launch of NovaMeal Best Bite in baking. The solution is based on a new molecule that enhances the eating experience and keeps bread much fresher for longer and additionally reduces the need for added sugar. We have seen a very positive response in the market with strong sales pipeline building up. Human health was soft as per the first half year. However, we did see an improvement in the North American probiotic market towards the end of the second quarter and going into the third quarter. Additionally, we now expect to have resolved the supply chain constraints that impacted our ability to accommodate demand in the first half. For the full year, we adjust our indication of organic sales growth to low single digits from previously high single digits following higher than expected stocking effects, the reduced end market as well as lower growth expectations in human health, where we now expect single digit growth following the soft developments of the first half of the year. We still expect a strong second half in human health as we will again be able to accommodate demand for our solutions now that the short-term supply chain constraints have been resolved and supported by the improving trend in the North American probiotic markets. Overall, for the business area, we also expect a stronger second half of the year as we expect the stocking to level off, increase market penetration with support from product launches and a positive impact from pricing. Excuse me. And could you please turn to slide number six? Thank you. Bioenergy sales grew 27% organically in the first half. The strong performance was supported by solid market fundamentals and driven by the continued penetration of innovation and geographical expansion. Growth was driven by innovation and strong penetration in North America, creating additional value for our customers. Ethanol production is estimated to have declined by 1%, according to the EIA. Growth also benefited from capacity expansion of corn-based ethanol in Latin America and biodiesel, and we saw a very strong growth of enzymes used for biomass conversion, commonly referred to as second-generation biofuels, although from a small base. Additionally, pricing had a positive impact. The second quarter organic sales growth of 26% was driven by factors similar to those for the first quarter and supported by solid market fundamentals. The EAA estimated the U.S. ethanol production was flat year on year. Looking at the full year, we now expect growth in the mid-teens following a stronger than expected year-to-day performance driven by a stronger market fundamentals and a faster penetration of recent innovations. We have a tougher competitor in the second half of the year, so we expect reduced growth relative to the first half. Growth for the year will be driven by pricing, market penetration enabled by innovation, capacity expansion in Latin America, and market penetration in biodiesel. Additionally, we expect growing sales from second-generation biodiesels. The outlook assumes flat to slightly declining U.S. ethanol production. Please turn to slide number seven. Sales in grain and tech processing declined 11% organically in the first six months, driven by the decline in tech. Tech was negatively impacted by significantly lower sales of enzymes for COVID-19 test kits, as expected, and a much softer than expected textile market. Performance in grain was driven by increased market penetration in vegetable oil processing and continues to be underpinned by innovative strength. This was offset by a softer grain market impacted by the stocking as demand is normalizing. Pricing had a positive impact in both grain and tech. Second quarter organic sales declined 14%, driven by factors similar to those of the first quarter, including a further softening of the textile market and this stocking impacting the food-related grain exposure. Looking at the full year, we now expect growth to decline by the low single digits from previously low to mid single digit growth. Performance is expected to be supported by pricing and growth in grain will be led by market penetration in vegetable oil processing. Tech is expected to decline. driven mainly by reduced sales of enzymes for COVID-19 test kits and a much softer than expected textile market following a slower recovery in the global textile production. Please turn to slide number eight. Thank you. Agricultural animal health and nutrition sales increased 7% organically in the first half, driven by animal health and nutrition and supported by pricing. Growth in animal health and nutrition continued from innovation with recent product launches doing well and higher end market driven demand. Performance in agricultural was soft, impacted by destocking and a volatile end market. The second quarter organic sales declined 7%, driven by a tough comp in agricultural and, as expected, a negative timing effect from Q1. The negative developments in agricultural, additionally impacted by destocking and a volatile end market, were only partially offset by positive pricing and a better-than-expected performance in animal health and nutrition. For the full year, we maintain the indication at mid to high single-digit growth, led by animal health and nutrition. Growth will be driven by pricing, innovation, end-market growth, and increasing demand for sustainable solutions. And with that, I'll hand over to Lars for a review of the financials. Lars, please.

Thank you, Esther. Please turn to slide number nine for a review of our financial performance. Sales grew 3% organically and 2% in reported Danish kroner in the first half of the year. Currencies and divestments provided a 1 percentage point headwind during the period. For the second quarter, sales grew by 2% organically and declined 2% in Danish kroner as currencies and divestments had a 4 percentage point negative impact. We delivered a gross margin of 54.7% in the first half of the year. As expected, this was below last year's gross margin for the same period, mainly due to the high input and logistics costs and partly offset by continued progress in pricing and productivity improvements. The second quarter gross margin was 55.4% compared to 55.5% for the same period last year. The gross margin improved sequentially from the first quarter by 1.3 percentage points, emphasizing the solid progress we are making to offset higher input costs. The EBIT margin before special items for the first half of 2023 was 25.0%. This was 1 percentage point below the reported EBIT margin for the first half of last year. The decrease was mainly a result of the impact from the lower gross margin due to high input costs and reduced leverage in the higher fixed cost base as we continued to invest in the business. Currencies had a minor positive effect during the period. Moreover, the EBIT margin before special items for the first half included two one-offs from the first quarter. These were the positive effect of the divestment of selected wastewater treatment solutions and the negative effect of resource alignment in the commercial organization. The net positive effect of the two one-offs was approximately half a percentage point in the first six months of the year. The underlying EBIT margin before special items for the first half of the year was roughly 2.5 percentage points lower compared to that of 2022 and was driven primarily by a lower gross margin as well as lower operational leverage from a relatively higher fixed cost base as we continue to invest in our commercial footprint and future growth opportunities. Looking at the second quarter, the EBIT margin before special items was 24.0%, which was 1.9 percentage points lower than in the second quarter of last year. There were no significant one-offs to consider in the second quarter of 2023, and hence the underlying EBIT margin before special items in the second quarter was approximately 3 percentage points below the underlying second quarter EBIT margin before special items last year. The decrease was driven by the lower gross margin and reduced leverage on the fixed cost base due to the higher operating cost and lower reported sales in Danish kroner. The reported EBIT margin was 22.6% in the first half of the year, which included special items amounting to 212 million Danish kroner. For the second quarter, the reported EBIT margin was 20.5% and included special items of 146 million Danish kroner. In both periods, the special items were entirely due to costs related to the proposed combination with Christian Hansen. Net profit for the first half of the year amounted to 1,415,000,000 DKK, which was 15% less than in the same period of last year. For the second quarter, net profit amounted to 614,000,000 DKK, which was 25% less than in the second quarter of last year. The decrease was due to the lower profit before tax, higher special items cost and higher effective tax rate compared to 2022. ROIC, including Goodwill, before special items, ended at 17.0%, or around 0.5% lower than in the same period of last year, driven by lower operating profit in the period. Free cash flow excluding acquisitions with 417 million Danish kroner in the first half of the year and 583 million in the second quarter. The year-on-year decline in the first half was primarily driven by a reduced cash flow from operating activities, including higher net working capital, primarily driven by the timing of payables from the first quarter. In the second quarter, working capital improved following favorable developments mainly in receivables. Now, please turn to slide number 10 for an update on the 2023 outlook. We are narrowing the outlook for the organic sales growth, now with an expectation to grow by 4-6% in 2023. Sales in Danish kroner are expected to be around 3 percentage points lower. For the full year, we expect growth to be driven mainly by pricing, with a similar impact across most of the business areas. We reiterate our expectation of stronger growth in the second half of the year, driven by a combination of pricing as well as volume growth, which will be driven by innovation and increased market penetration. While we do not assume any major changes to the current state of the global economy in our outlook, we expect destocking to level off in the second half of the year, following the considerable impact on our food-related areas in the first half of the year. Turning to the gross margin, we expect to see a level similar to that of 2022. While we started to see an easing of certain input costs from the peak levels of last year, there was still a negative impact on the margin this year due to the delayed P&L effect some of these higher costs have. This delayed effect is also true for the remaining two quarters of the year, where we on average expect to deliver a gross margin similar to that of the first half of this year. The outlook for the EBIT margin before special items remains at a solid 25-26%. The margin will benefit from price increases, sales growth and productivity improvements, whereas continued investments in the business and considerably higher input costs are expected to have a negative year-on-year impact. The outlook for the return on invested 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 investment is unchanged and includes around 400 million kroner for the final year of construction of the Advanced Protein Solutions Facility in Blair, Nebraska. As described in the merger document and to honor existing shareholders, Novozymes is now planning to approve and pay out an interim dividend on October 17 for the period January 1 to August 31, 2023 of around 50% of the net profit for the period. October 12th will be the last trading day of Trading.com Dividends. To round off, and building on the results of the first half of the year, we are confident to deliver on our full-year sales and financial outlook, supported by the resilience of our diverse and unique portfolio, as well as our robust production setup. We are also confident that our strong operational setup, innovative pipeline, and sustained investments for future growth will drive the desired performance towards reaching the 2025 targets as set out in our strategy, Unlocking Growth, powered by biotech. With this, I'll now hand back to Esther for a wrap-up before we open up for questions. Esther, please.

Thank you. Thank you, Lars. Please turn to slide number 11. Let me summarize our main messages today. We've delivered growth and earnings in line with our overall expectations for the first half. Our diversified portfolio and end market exposure show strength. While the sales mix looks different compared to our initial expectations, as earnings profiles are similar across business areas, we maintain the profit outlook for the year. We've narrowed our sales growth forecast slightly as we are impacted by the stocking, especially in the foods-related exposure, as well as reduced consumer demand. On the positive side, we see increased demand for our broad toolbox of solutions in the bioenergy area. We continue to invest in our strategy and where it matters the most. Our continuous focus on short-term targets and the long-term potential of Novozymes is further exemplified by the two additional opportunities we've noted in this Q2 interim report. Food proteins from carbon dioxide and advanced especially proteins through fermentation used for medical nutrition. With our unique technology platform and fermentation insight, we can address both consumer and planetary needs as the population grows and puts more pressure on resources. Finally, the work to close the combination with Christian Hansen is progressing very well and according to plan. We have now filed applications in all main jurisdictions and we are in a good dialogue with relevant authorities. We continue to expect closing to take place in Q4 2023 or Q1 2024. Novozymes is uniquely placed to enable the transition towards a more sustainable world. Together with Christian Hansen, we can enable this transition faster and with greater impact to the benefit of consumers, customers, shareholders and the world we live in. And with those concluding remarks, we're 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 wishes to ask a question may press star followed by one on the touch-tone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you are using speaker equipment today, please lift the handset before making your selections. Anyone with a question may press star and 1 at this time. The first question comes from Alexander Jones from Bank of America. Please go ahead.

Great. Good morning. Thanks very much for taking my questions. Both on food and BEV, I guess the first one, if I take the guidance at face value, then you're going from minus 2 underlying in the first half to something like high single-digit growth in the second half. And you mentioned a few factors behind that, best by human health and less destocking. Can you talk about the relative importance of those three or other factors in driving the improvement? And perhaps whether you're seeing that significant acceleration already come through in July, August, or whether it's more of a sort of Q4 weighted improvement? And then the second question is specifically on human health. You called out weak-end market and the supply constraints, but those were also factors you called out at Q1. So could you tell us a little bit about what's gotten worse, and hence you've downgraded it from double-digit growth to single-digit growth for the full year? Thank you.

Thank you, Alex, for the questions. I will let Hannes build on the food and beverages and then Amy on human health. But maybe a remark from my side on the growth of the second half, a stronger growth of the second half of food and beverages, not only food and beverages, also the component of human health, a stronger human health with the constraints on supply chain behind us and then capturing the opportunities we see in the market. And with that, Hannes?

Yeah, so talk about the drivers for why we are taking the guidance down. If you look at what we've been sort of experiencing, we've been experiencing more downtrading that we had in our initial pan and also lower consumer demand. Part of our optimism for the second half relates to improvement on both. We are having good dialogues with customers and some of them are saying that destocking is coming to an end. Some are also saying that there's still something to burn through. We are seeing on consumer demand some of our largest customers are now reporting positive volume growth that is taken from negative volume growth earlier in the year. And again, there's also an indication that things are normalizing. And then a very important point, comps are also easier for the second half. That will make it a little bit easier for us to deliver the growth rates that we have in front of us. It's also, I think, important that here, five, six weeks into the third quarter, it confirms the guidance we have, and we believe it's the right ambitious plan for the segment. And again, it relates to improvements in the market overall. On emerging markets specifically, that's a long story, but we are seeing similar effects on destocking and also on consumer demand. And then specifically in Africa, a few related forex challenges that has also been sort of challenging our markets. Our growth numbers, again, the same drivers are here to improve in terms of destocking will level off and consumer demand is also looking to be coming back, maybe not to 21 and 22 levels, but just to normalized levels.

And maybe just to build on that, on the human health question, I think you rightly point out, Alexander, we talked about the weakness in North America and the supply chain constraints. I think what we've seen is that weakness starting to turn as we've exited the second quarter and entered Q3. And we've also now had the time to work through and pleased with all the actions that we've put in place in terms of addressing the supply chain constraints so that we put ourselves in the position to be able to realize the underlying demand. We also spoke about it last quarter. We do see some additional resilience in our healthcare practitioner channel in North America relative to the underlying broader probiotics market. So building on that and then also some of the innovative launches of cross-selling across some of the different acquisitions we've made in the past few years, which we've launched, we see that those innovation-driven growth accelerating into Q2. So we believe as we go through, we feel confident in the ability to start to really deliver on and realize the underlying demand for our solutions.

Thank you.

The next question comes from Lars Tomholm from Carnegie Investment. Please go ahead.

Yes, a couple of questions from me as well. One is on your pricing outlook. So you have 6% pricing in Q1 and Q2. And while I recognize organic growth comes will be somewhat easier in the second half of the year, can you comment on if pricing momentum will slow down or will stay around the 6% level? And then a second question, if I may. I just wonder, you point out specifically the lack of revenue from COVID test kits and also the supply chain constraints, which you just discussed. Is it possible to quantify the divisional impact for the quarter for those two, what we call them, one-off impacts? Thank you.

Thank you, Lars, for your questions. Always a pleasure hearing from you. I'll let Lars building out on the pricing outlook that you nicely mentioned. We see strong contribution of pricing in the first half. Pricing going to continue to be there, but it's the relative comparison relative to a long time effort that we have been working here. Maybe the one that's driving the lower impact. And then also volume coming in. Relative to the individual components of COVID testing. I'm not sure we're sharing that level of detail to that specifics. I will let Tina bring you the granularity, but not necessarily to the total impact on the division.

So Lars, if we start on pricing, you'll recall as we started to talk about our pricing efforts and also impact through 2022, we started to see pricing contribute positively as we entered the second half of the year. And therefore, you can say some of the pricing contributions that we benefited from in the 6% of contribution in the first half of the year were sort of already in the base now, in the second half as we enter that. So therefore, you can say our indication of price contribution now for the year is that the majority of our 4% to 6% growth will come from pricing and the residual from volume. So you can say, relatively speaking, it will be slightly less in the second half compared to the first half, because now we are entering a period where we already have some pricing built into the baseline.

And a bit more info on grain and tech and the performance there. So overall, in terms of size, then the performance in grain and tech in Q2 is driven to the vast majority by the tech part of grain and tech. And of the grain and tech part, textile or tech is roughly a third to a fourth of that segment. And I think you know that, Lars. And a little less than half of the tech segment is textile. And that was the case both in 22 and in 23. If we then zoom in specifically to the COVID-19 test kit and what we call the biocatalysis segment, that is the biggest driver of the decline in the tech segment. But as we also said, textile is also performing softer than we do had expected, but the biggest driver is the lack of COVID-19 test kits. It's roughly, and I think we have said that earlier, it is roughly 5% of the segment.

That's very clear. And then I'll just applaud that you are now disclosing the volume mix growth. That's very much appreciated. Thank you very much for taking my questions.

We take your applaud charmingly. Thank you, Lars.

The next question comes from Chetan Udeshi from JP Morgan. Please go ahead.

Yeah, hi, morning. I think the first question I had was to just follow up on Alex's comment or question, and I wasn't very sure of the response. Are you saying that for the first few weeks of 3Q, you've already seen an improvement in F&B growth momentum, or is it more to come in the remainder of the year? That's just the first question. The second question was, I'm just looking at your inventory. It seems it has ballooned significantly in Q2. I would have thought in this environment, you would have been a bit more proactive in managing the inventory levels, but it seems it just went up even in Q2 versus Q1. I'm just curious, how are you thinking about that inventory management through the year? Are you going to cut production to bring that under control, and what does that imply for the gross margin as we think about the remainder of the year? Thank you.

Thank you.

What I heard Hannah saying is that with a few weeks within Q3, everything we're seeing is fully in alignment with expectations and the guidance that we're putting in place. And that's not only true for the food segment. That's across the whole divisions. We live in a volatile environment. We continue to show the resilience and the robustness of our offering. And here I'm extremely pleased of the continuous improvement of the gross margin expansion. that sequential expansion that shows that be the demand in bioenergy, be the demand in food, be the demand in animal, we're capturing it and we continue to deliver growth and then also sequential gross margin expansion. Lars, I'll pass it to you for the working capital.

Yes, thank you. And you are right that the balance sheet is showing an increase in our inventories over time. And what you have to keep in mind here is that there is a certain delay in the effect between the spot prices of the raw materials and energy that we procure and use in our production and the time that it hits our first inventory and therefore balance sheet and later on the P&L. And that's really because we are diligently managing our input cost in the first place by having certain contracts and hedging in place, which means that we are sort of mitigating the effect of the, let's say, day-to-day volatility of those. But of course, over time, when there is a marked shift in the level of raw materials, hedging and contract prices will eventually expire and run out and we will also see the effect on our inventories. So the effect you see on our balance sheet is entirely related to the increased input costs and not related to volumes that are sort of not supporting our future outlook. So therefore, when you look forward, we are managing our input cost and also our inventories in a way that volume-wise supports the future forecast we see on our business and where we, as spot prices of raw materials and energy start to come down, we will also over time see that benefit both on our inventories and on our cost of goods sold and therefore gross margin. So we're very confident that over time, We will be able, with our mitigating actions on price and with a diligent management of our procurement, we will be able to bring our working capital levels down here driven by the inventories and therefore support our long-term target for EBIT margin for profitability in line with our target in 25 of 26%. So you just have to sort of bear in mind that sort of sequence of events coming from diligently really managing

I'll give you the very short answer and I'll let Lars build up.

The short answer is no.

And you can say the little longer answer is that we have provided guidance on what we expect in terms of transaction and integration costs. So, of course, those are one-time costs that cash-wise have to be paid. So there is a very strong correlation between the integration cost and transaction cost that we have guided on and the cash flow effect. And I would not expect anything over and above that effect from basically realizing and completing the transaction.

That's great. Thank you.

The next question comes from Søren Samse from SEB. Please go ahead.

Yes. Good morning, everyone. Just two questions from my side. One is on bioenergy, where you show very strong growth, 26%. Given that there seems to be no growth in the ethanol production, could you maybe break down this growth into its components, both in terms of price mix and volume, but also break down the mix component into maybe product mix and country mix and segment mix? That would be great. Thank you.

And the other question, sorry, I think you mentioned two questions.

Yeah, just a short follow-up on Lars' question, just whether you could indicate whether the grain growth was positive or negative. Thank you.

Tina? Yes. So we don't disclose price mix on the individual reporting segments. We do that at a corporate level. But what I can give you is the elements and what it is I'm most excited about in bioenergy. So, as you know, Søren, the bioenergy segment consists of both bioethanol, as well as biodiesel, as well as enzymes for second generation biomass. And in the area of ethanol, which is a key driver, and in terms of numbers, the biggest part of all of this, It is both the enzymes for traditional ethanol production and then it's also enzymes for yeast and fiber and allowing our customers to pivot towards more fiber or more protein-rich solutions. And what we have seen over the time is that our innovations and our closeness to our customers have allowed us to outgrow the North American market. And it is due to these new innovations that has enabled that growth. And as an example, we also in this quarter is launching another yeast product, the Innova Apex Dry or ADY. And that's one of the examples of what it is we do. But on top of that, we do also see strong growth in Latin America. In Latin America today, there is more than a billion gallons of ethanol being produced, and that is growing with solid double digit. So that is also a good driver of the growth. Biodiesel is also a good component of the growth. And then second generation biomass. But as we have talked to, second generation biomass is more lumpy and it is from a smaller base. But especially in Q2, that is something. It is about securing that we keep evolving what it is that you get out of a biorefinery and allow customers to pivot towards more low carbon intensity ethanol or towards more protein rich solutions. And then over time, new solutions will also evolve like the sustainable aviation fuel or chemicals or whatever it can be. So that's as much as I would say on the bioethanol business. Then on grain and tech?

So if I just, quick question on that. Would it then be, I mean, is it unrealistic to think that, you know, that ethanol as part of the bioenergy division will be less than 50% in a few years? I mean, given that it sounds like the growth is becoming a lot more broad-based.

So that ethanol is less, well, that has to be some years out in time, I would say. It is still the vast majority of what it is we do.

maybe from a value perspective, right, Tina? If you think about the value that our customers generate already today, 30% of the value is by byproducts. So from that perspective, maybe that's a way of looking at the question of the value that we enable for our customers in that direction.

And then maybe also to add a bit more, you could say we have talked about the 50% coming from traditional ethanol. So from that perspective, you're right. But that's from the perspective of how much is North America, and that is where we have the EIA data. and then how much is the traditional enzymes, and that's correct, that is roughly 50%. Then the second question on grain, there I would say grain is roughly flat, and then the decline comes from tech.

Thanks very much.

The next question comes from Nicola Tang from BNP Paribas. Please go ahead.

Hi, everyone. The first question was on household care. I think we talked a lot about sort of general destocking, mainly on the food and beverage side. But I think you also mentioned that in your second half outlook, you're assuming that down trading and household care will stabilize. So could you just talk a little bit about what gives you that confidence in that in the second half? And then the second question is for Lars. I hear what you're saying in terms of the delay of a lower input cost onto your P&L and your balance sheet. But Could you maybe talk a little bit about what you're seeing in terms of spot input costs, whether it's walls or energy? Thanks.

Thank you, Nicola. Hannes, if you could take the first question and then pass it to Lars.

So thanks. I think it's important to stress that destocking is not a significant thing in household care. That is actually something we saw last year. The negative driver in household care has been sort of downtrading among consumers and And also a few cases, sort of changes between some of the large brands that have been losing volumes and then it's being picked up by locals and private labels. I think the very strong position of Novozymes is the resilience where we serve basically the entire industry. So what we lose one place, we pick up somewhere else. And that is actually what keeps the business growing. delivering to our expectations. So while there is rather significant changes in market shares among our customers, then we pick it up somewhere else. It's also important to stress that we are seeing good pricing dialogues with our customers and good pricing performance. So while There is volume decline. We do actually compensate by pricing. And then in addition, continued, I think, very, very strong dialogue with our customers around the innovation agenda, both when it comes to freshness, but also when it comes to biological detergents, it does support our growth.

And maybe the penetration or merging geographies?

Yeah, I think I mentioned that.

As well as probably what is important is that the pricing on household care, it is slightly slower than the rest of the divisions. So we're seeing pricing, but we're seeing it's a little bit softer than the rest, mainly by the length of the contract. So we see the impact, but we will continue to see that moving ahead in the future.

And on the input cost, I think we can say that we have seen sort of the peak behind us compared to where we are now. So certain of our chemicals input cost have come down compared to the peak. We're also seeing the spot rate of energy coming down. Here you just have to remember that we do have a certain level of hedging, which means that we have hedged some of our consumption of energy here in 2023 at levels that were significantly below the peak of last year. but slightly above the spot rate that we see right now, and therefore this sort of holds further promise of improvement as we look into 2024. So I would say the peak in terms of spot rates are still behind us, but we are, with these delay factors, still going to see an impact on our gross margin this year, and therefore we expect a gross margin for the second half, as I said in the script, in line with the average of the first half.

Thank you.

One more question. Thank you, Nicola. One last question, operator.

The last question comes from Sebastian Bray from Bernberg. Please go ahead.

Hello, good morning, and thank you for taking my questions. Can I start with bioethanol, please? The California low-carbon biofuel standard has been around for a while, as has the desire to extract more protein from corn. Why exactly is now the time at which customers start upgrading and buying higher value solutions from Novozymes as opposed to two to three years ago? And what stops the organic growth from this segment being minus 10% in 2024 if the trends reverse? My second question is on the sales and distribution costs. These are up quite heavily in Q2. What is the reason on a year-on-year basis? What is the reason for this given that freight seems to have declined? And just thirdly, on the protein solution facility, the growth in plant-based meat categories has been quite negative for some time now. What type of visibility does Novozymes have on the ramp-up of this facility, such that it's not left with high fixed costs without the organic growth to support it in 24? Thank you.

Thank you, Sebastian, for the broad range of questions. Let me tiptoe across all of them and then let Tina, Lars, and Amy also build up. Bioenergy, we're extremely pleased with the diversity of the portfolio and the slow and effective and swift implementation of our strategy, which is diversification from products, diversification from value, diversification from geographies, diversification also in technologies, with biodiesel, with biomass. It is a broad range of toolbox, the ones that we're bringing in, and this takes time, but we're slowly capitalizing on the value that we bring in, but also the pull that we see from the market. On investments for the foundation of growth, they're not linear, they're not backwater. We're investing for the future and we're continuing to move safely. And it's true that in Q2 you'll see an increase, but that's a plan of the investments of the long term. which they are not at the quarterly basis. We look at them at the yearly basis and we are full on track on our aim of investments and also on the delivery and expectations for the EBIT margin for not only this year, but also the expectations of 2025. And then on plant-based, yes, a volatile market, but we continue to see the pull of the solutions that we bring in. And actually the collaboration with Arla Food Ingredients is one sign more of the strength of our robustness and the value that we bring in. So with that, I'll pass the word to you, Tina.

Yeah, and thank you for the two questions on biofuel. So first of all, why it is that we see a significant growth right now. I think the key driver has been innovation, because it's true the Californian low-carbon fuel standard has been around for quite a while, but it is a lot driven by innovation, the Fibrex platform, which we have talked about a couple of times, and that is a significant contributor for growth. But on top of that, I also think it's important to think, and also I would say many quarters have been the proof that we have moved away from a sole reliancy and a direct coupling to the ethanol-produced volume in the Novozymes numbers. Yes, they do influence, and that's also why we quote them, and also because you like the EIA data quite a bit. So therefore, we like referencing them so that you see how it is that part of the market is, is performing. However, our business is so much more than linked to the US ethanol volumes as Esther just alluded to. Then in terms of 2024, it is a bit, we don't guide yet on our 2024 numbers, so I'll refrain from that. But in terms of market, both EIA and HBC are already out with some indications for how it is they look at the market for 2024. And that is a flattish, maybe a few, one or two percent growth, but roughly flattish. But I think the key for 2024 is also, and longer term, is the discussions on E15 and the continued focus on exactly low carbon fuels, but then also for our business on the diversification. And that's as much as we can say now, Sebastian, but we can talk more later on. But then also, longer term, it's also a matter of sustainable aviation fuel production. chemicals and all the other things. So over to Lars.

Just a couple of points of color. In essence, Esther said the overall sort of answer, namely that we are investing in the continued growth of our business. A couple of examples of that is we are sort of building competencies for our customer co-creation centers. So we have recruited competencies and people that sort of hit the sales and distribution line. So that's an example of an investment we are making for future growth. And then also in the quarter, our distribution costs were slightly up because of the rates. So that sort of is another factor in our sales and distribution costs. But in essence, we are continuing to invest to support our future growth.

And then, Sebastian, just your question on the commissioning of the Blair facility. I mean, first and foremost, just to say that the project continues to run on track, and we are on track to commission the plant for first sales in Q1 of 2024 per the commitment. I think in terms of the plant-based meat market, I think what we see and gives us confidence in the ability to deliver the sales growth that we've committed to is that the winning – companies in the plant-based meat market continue to be defined by superior products, superior eating experience based on taste, texture, and nutrition. And that's exactly the focus of our entire advanced protein solutions pipeline is really to use precision fermentation towards those high-end, high-value products and new protein molecules. And so I think, as Esther said, that we continue to develop our pipeline. And, of course, we have our anchor customer contract, which gives us visibility towards the ramp-up.

That's helpful. Thank you for taking my questions.

Thanks to you, Sebastian. And with that, let's close the call today. Thank you all for your participation. Thank you for the good questions. And then looking forward for the dialogue with many of you in the next couple of days. Thank you. Bye.