Novozymes A/S

CSE:NZYM B

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, welcome to the Novozymes conference call. [Operator Instructions]. Just to remind you, this call is being recorded. I will start by handing over to Tobias Bjorklund, Head of Investor Relations. Please begin your meeting.

[Tobias Cornelius Bjorklund, Head of Investor Relations]

Thank you, operator. And thank you all for calling in with such a relatively short notice. From Novozymes, I'm joined by the entire management team as well as the Investor Relations team. And the purpose of today's call is to answer any immediate questions following the announcement released this morning. We expect the call to last around 30 minutes. Due to the current circumstances, we have a virtual internal and external setup to enable this call. This is, of course, a new way for all of us to run these meetings as we are placed in different locations. I hope we can execute the call without any technical difficulties. On today's call, CEO, Ester Baiget, will begin by providing comments; followed by CFO, Lars Green, who will speak to the numbers. There will be time for questions at the end. As a reminder, some of the matters we will be discussing on this call might be forward-looking. And I would like to advise you that these forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially but from those expressed or implied by such statements. By this introduction, I now hand you over to our CEO, Ester Baiget. Ester, please.

[Ester Baiget, President & CEO]

Thank you, Tobias. And thank you all for joining us today. My name is Ester Baiget, and I'm the CEO of Novozymes. I'll be happy to make a proper introduction of myself, but I would ask you, though, that we'll leave this for the Q1 conference call scheduled for the 29th of April. Before we get started on the Q&A, let us recap the main points of today's announcement. We delivered 10% organic sales growth in the first quarter. Household and Care, Food & Beverages and Bioenergy all posted 11% organic growth relative to last year. At 8% organic growth, Agriculture & Feed also delivered a solid quarter, where as Technical & Pharma declined 10%. The preliminary EBIT margin is estimated to be around 29%. The global implications following the COVID-19 outbreak has raised a high level of uncertainty, and the circumstances prevent us to sustain our 2020 outlook. While the uncertainty about the U.S. gasoline and ethanol demand is much higher, and therefore, it's impacting the Bioenergy business, we are more comfortable with the previous full year growth indications for Household and Care and Food & Beverages. This, however, implies no major logistical interruptions to Novozymes or its customers. On the earning side, quality is very high, and we have good cost control. With a solid balance sheet, we are also able to reconfirm the share buyback program totaling up to DKK 1.5 billion. The company's dividend policy and capital structure policy are also both unchanged. Our top priority is the health and safety of our employees. We follow or exceed the guidelines issued by the authorities in all of our locations worldwide. We have taken strong measurements at our plants, at our offices, at our laboratories to keep employees safe while staying operational to continue to accommodate all our customer needs. Our large manufacturing sites across the globe are fully operational, and our colleagues have done a tremendous job in securing continuity of production and logistics. Therefore, I'm very pleased to report that we are currently able to meet the demand and secure supply for our customers. I am proud of our organization and its ability to operate in these difficult times. We are not in the position to predict for how long the wide range locking -- lockdowns will go on and what kind of impact the situation will have on the global economy. Our focus is and will remain on securing the safety of our employees, the surrounding communities and towards our customers. I am confident we will get through these difficult times together. And I will now hand over to Lars, who will share additional details with you.

[Lars Green, Executive VP & CFO]

Thank you, Ester. The COVID-19 outbreak is affecting people around the world, and it is increasingly having an impact on the global economy. As Ester already mentioned, our primary focus is to keep our employees safe and our operations running to secure supply to our customers and protect our business. In the first quarter, Novozymes sales grew organically by 10% and by 9% in Danish kroner. Performance was particularly strong in Household Care, Food & Beverages and Bioenergy, all posting double-digit growth rates. And the preliminary EBIT margin for the quarter is strong at around 29%. At this stage, it is unclear to what extent the demand increase in the staples-related businesses of Household Care and Food & Beverages is due to a combination of additional end user consumption and all short-term customer and consumer stockpiling. We would assume there will be a recalibration of demand in the coming quarters, offsetting some of the strong performance in the first quarter where both Household Care and Food & Beverages grew organically by 11%. In the Food & Beverages-related areas, sales of baking enzymes performed very strong, whereas enzyme sales to juice and wine industries declined double digits. First quarter sales in Bioenergy were up by 11%, benefiting from positive developments in the U.S. ethanol industry as well as Latin America and China. In the first quarter, U.S.-produced ethanol volumes are, as estimated by the Energy Information Administration, up by some 2% to 3% year-on-year, including a double-digit decline in the last week of March. Now as the COVID-19 restrictions lead to fewer miles driven, demand for both gasoline and ethanol is declining. How much it will drop for the full year is very difficult to predict as there is a very uncertain time component to the social distancing and stay-at-home orders. Furthermore, the recent drop in the price of oil adds another layer of uncertainty. In the sales outlook from January 23, Novozymes expected U.S. ethanol production for 2020 to be roughly flat compared to 2019, which no longer seems to be valid. Based on current insights, our Ag & Feed business has not been significantly impacted by COVID-19 in the first quarter, but other uncertainties related to challenged farm economics and crop demand continue to prevail for the year, especially in the Ag part of the business. Technical and Pharma reported a negative development for the first quarter. This is a relatively small part of the Novozymes Group, but with the continuation of last year's decline in Chinese textile production and adding the uncertainty of the COVID 19 impact, we saw a decline here in the first quarter. With the assumption that logistics continue to function relatively normal, both for Novozymes and our customers, full year sales growth indications for Household Care and Food & Beverages remain largely intact, but with higher volatility. But the uncertainty to U.S. gasoline and ethanol demand caused by the social distancing makes it very difficult to estimate full year performance for the Bioenergy business. Novozymes Bioenergy business represented 18% of revenue in 2019 and is dependent on the performance of the U.S. ethanol industry, including produced ethanol volumes. As a result of the increased uncertainty, especially to the Bioenergy business, Novozymes has decided to suspend its 2020 outlook. Considering COVID-19 and the uncertainty and impact it has to the global economy, Novozyme is actively controlling its costs, including the headcount investments that were part of the January 23 outlook, which are now delayed. With a solid balance sheet, the share buyback program totaling up to DKK 1.5 billion will continue as planned, and the company's dividend policy and its capital structure policy are unchanged. To summarize our message here today, despite the strong top line performance in the first quarter and even though many of our solutions are part of staples like products, we need to acknowledge the high volatility and uncertainty we currently have in our business exposure, in particular, for Bioenergy. The situation develops rapidly and remains uncertain, and we will provide updates as the situation evolves. We will come back with more detail soon as our first quarter interim report is scheduled for release on April 29. Following this short recap of the announcement, we are now ready to take your questions. Operator, please begin.

[Operator]

[Operator Instructions] And our first question is from Michael Novod from Nordea Markets.

[Michael Novod]

Just one question regarding the different business areas. Is it possible for you to quantify a bit more around how much was actually potential sort of hoarding or stock building at the consumer level, sort of from the lockdown, especially in terms of the detergent side. Maybe just so we can get a better understanding because I guess Q1 should already have been a stronger quarter, relatively speaking, in terms of growth given the weakness in Q1 in 2019. So just to get a better feeling of what was actually real consumer stockpiling in the quarter.

[Ester Baiget, President & CEO]

So Q1 -- thank you, Michael, for the question. Q1 was a very strong quarter. We started the year strongly, which is a strong also sign of the effective and solid implementation of the -- our strategy, a better business with biology and the momentum in place. We capital -- and we capitalize the advantage of the imprint of that. It is true that we have seen through the quarter several impacts also as -- across the different geographies of the impact of COVID-19, and in some areas like in Household and Care and Food & Beverages been an accelerated -- further accelerated of growth. This increased demand is the combination of both higher demand, consumer demand because of the increased need of cleaning the clothes or the quality of that cleaning agents being used, but also pre-stocking either at the consumer or at our customers building up inventories. How much is coming from intrinsic or sustained demand increase versus the pre-inventory buildup, it's an area which is -- it's probably hard to predict and difficult to digest. At the same time, what is important for us is that we have reacted to that increased demand when it took place. We have captured it, and it's materialized in our books. I will leave it also to Lars, maybe to give you a little bit more granularity on the details behind that and how we foresee it coming.

[Lars Green, Executive VP & CFO]

Yes. Thanks, Ester. Now I think at this stage, it is a very difficult question to answer. So we just know that there are components of both in there, stronger demand and stockpiling. And then I think, I just want to remind everyone also that last year, we had a weak first quarter at minus 4% for the group. So therefore, the strong quarter this year should also be seen in that context. But exactly how much is in which category, unfortunately, we cannot tell at this point in time.

[Operator]

And our next question is from Theodora Lee Joseph from Goldman Sachs.

[Theodora Lee Joseph, Equity Analyst]

Just if I may. I'm just curious because it's very strong growth. And I'm wondering if you are seeing any differences in terms of a different kind of outlook for Jan and Feb versus are there an acceleration or deceleration in March? And how is the exit rate looking for each of the subdivisions? And the other question as well pertains to Household Care is, under this quite uncertain environment, are you seeing any changes in terms of your end customer rolling out, your new kind of freshness enzyme platform?

[Ester Baiget, President & CEO]

So can you take this one? And then, Anders, if you could follow-up on the bit on the -- the question and the follow-up on the detergent.

[Lars Green, Executive VP & CFO]

Yes. So let me take the first question on how we saw our sales over the quarter. So we did see a strong, solid start to the year, carrying in the momentum of the last couple of quarters in 2019 into 2020. We have also seen an acceleration of some of the sales, in particular, in Household Care and Food & Beverages as we approach the end of the quarter. Thereby also indicating that some of that demand is estimated to be stockpiling at some or other parts of the supply chain. So therefore, I think it is fair to assume that some of that we will see come back in the rest of the year. But again, it is really, really difficult to assess how much is true underlying demand and how much is inventory fluctuations in the supply chain. So Anders, Household Care?

[Anders Lund]

On freshness, what we see is we are exactly on the plan as we expected as we entered the year. I also think that looking out through the rest of 2020, we expect to be on the plan. So no deviation to that. Maybe a comment longer term, I think this whole corona situation clearly indicates that the need for Hygiene Solution -- Hygiene solutions have accentuated, and that also goes for laundry. So I think longer term, not in 2020, but longer term, this is just clear sign that this part of focusing on freshness and hygiene solution matters to consumers, it will probably also increase in the years to come.

[Lars Green, Executive VP & CFO]

And then I just want to add one comment also to maybe Bioenergy on the first question. So we have seen a solid increase in Bioenergy by 11% in the first quarter. And that includes also a solid business and sales in the U.S. We saw the actual production were up by 2% to 3% in the majority of the quarter. But I also think -- and we also remind you that at the end of the quarter, in the last week of March, we saw the first very tangible signs of a decline in demand based on lower miles driven in the U.S. So as we exited the quarter, that's when we started to see the first signs of lower demand in Bioenergy, but that did not impact the numbers for us in the first quarter.

[Operator]

And our next question is from Jonas Guldborg from Danske Bank.

[Jonas Guldborg Hansen, Analyst]

First of all, just returning to Bioenergy. You have previously stated that there is some discrepancy between what the EIA is publishing and what you're seeing in the market. So if you could just maybe put some words on what kind of declines are you seeing right now in the U.S. ethanol market? And then on Food & Beverages, if you could put some more words on what has driven growth because I don't assume that it's the baking that is driving all 11% of organic growth in Food & Beverages.

[Ester Baiget, President & CEO]

So I'll leave it to Tina and then Andy will bring the question on Food & Beverage, please.

[Tina Sejersgård Fanø]

So you're right, Jonas, that we do see a discrepancy between the EIA numbers and how our customers are performing. We can see that a number of -- we have insight into it that number of the customers have started shutting down. Some of it is also public and also people are slowing down rates. So overall, we would say that in the last week of March, we saw a decline of 16% in the last week of March. Ethanol production was down 16% year-on-year. And depending on how deep it goes into April and May and so forth and how long it's going to last, that is what is going to decide how it is -- how does that, let's say, the full year is going to end. You also have to, and I know you know that, but ethanol inventories are quite elevated, so there is almost 2 months of inventory of ethanol in the U.S., which also is buffering out the changes in demand and can mean something for when is it that the industry is starting up again.

[Jonas Guldborg Hansen, Analyst]

Yes. Just a follow-on, Tina. So you are seeing accelerating declines right now then?

[Tina Sejersgård Fanø]

Yes.

[Ester Baiget, President & CEO]

Yes. That's correct. Yes.

[Anders Lund]

And on to the Food & Beverage question. You have to remember that Q1 last year was a bit of a weak quarter. So when we anticipated growth, broad-based in the Food & Beverage businesses, we saw that broad-based growth. And therefore, there was a sort of good development across the industry areas, but especially baking was positively impacted near the end of Q1 as March really started to see acceleration of home-eating patterns and longer shelf life of baked goods.

[Operator]

And our next question is from Sebastian Bray from Berenberg Bank.

[Sebastian Christian Bray, Analyst]

I would have 2, please. The first is on the relative size of category exposures in Food & Beverages. My own impression is that this business is about 30% starch, 20% bakery, 25% food and nutrition and 25% beverage, is this roughly right? And if that's the case, am I right in saying that bakery was growing 25% to 30% or of that order of magnitude in Q1? My second question is on BioAg. Why is this business performing quite well against the backdrop of a weak environment for soft commodity prices, corn and soybean? Is it just because of the impact of floods on Q1 2019 and a swing back or is something changing there? Are farmers more open to innovation?

[Ester Baiget, President & CEO]

I'll -- thank you, Sebastian, and I'll answer the first part of the question and then give it to Lars. We see -- we have seen through the whole quarter, a broad range of varying dynamics, starting with China, where we responded to the volatility and the impact of COVID. And then as it has slowly evolving across the rest of the year. As Andy mentioned before, the baseline for the reference of growth was mainly -- a big portion of the driver was the soft Q1 that we had last year, but then also a lot of self-help from our side on effectively and moving ahead on the actions and the areas that we had laid out to deliver growth across the whole segment. And the results are showing that we have delivered use assessment of how it's split, it's as good as we can bring in, and it shows a good reflection of the areas that we are allocating energy. We're capitalizing also the increased demand that we're seeing -- strong increased amount of bread that it's because of the change of the consumer trends. We're capitalizing that with and understanding also the diligence, the utility and the power of our footprint and our global presence is that we are reacting, responding to our customers and ensuring that we deliver the material that they need, which enables to fulfill a need for the society, too.

[Lars Green, Executive VP & CFO]

And so on the BioAg, I just want to remind you that we changed the setup in BioAg last year where the acquisition of Monsanto by Bayer was finally completed. And so in some areas, we changed the way that we go to market. And so I would suggest you don't put too much attention on the quarterly numbers in BioAg because sometimes, there will be some inventory fluctuations also in the, you can say, in our partner side of things, in particular as we now implement our new commercial go-to-market strategy. So what I can say is that we got off to a good start in the year, more or less according to plan. So I think that's what you should focus on rather than the specific quarterly number.

[Operator]

And our next question is from Nicola Tang from Exane BNP Paribas.

[Nicola Tang, Analyst]

Mine are more on the profitability side. I was wondering if you could remind us whether the mix of the performance of different segments can have much effect on the margin. And whether that had an impact on what happened in Q1 with the 29% margin? And then thinking longer term, I see that you are delaying some of the headcount investments which are part of the portfolio reallocation plan. Does this have any longer-term implications on your ability to, I guess, reignite growth in the mid-term?

[Ester Baiget, President & CEO]

So I'll make a comment on the long-term growth and on our investments and our commitment to our strategy, and I will leave Lars to give the what we recognize on the drivers of the margin. But something very important method to reinforce them to make sure it's very clear is, we are staying firm on our long-term trajectory, and we're staying firm on that investment and the actions to move towards those one and to capture the growth opportunities once we -- the world moves out of corona or -- there is a future after corona. And we are smoothly, slowly, effectively investing towards that direction. And the -- staying firm on making sure we are the partner of growth for our customers in that environment. Having said that, we also realigning to the situation that we have today. There are constraints that, in some cases, it might imply. And then we are also responding accordingly by doubling up our investments in digital to respond and to capitalize the new way of working and making sure that we are equipped and we deliver, and we create the right environment to work on with our customers by equipping the commercial organization in the way that it's required in this environment. And then at the same time, aligning the hiring of employees with that embracing the volatility that we have and also the constraint that some of this environment might trigger for the effective not only hiring but also accelerating and implementation and smooth integration once they come into Novozymes.

[Lars Green, Executive VP & CFO]

Yes. And so building on what Ester said, then I would say that the 29% margin in the first quarter has not so much to do with the product mix. You can say, most of our businesses were in a healthy growth mode, growing more or less the same. So we didn't see a significant change in mix in that quarter. And so that doesn't really matter so much for our margin of the quarter. What matters is that towards the end of the quarter, we had, for natural reasons, a slowdown in our travel expenses and also some of the hiring processes have become more difficult to execute and, honestly speaking, also more difficult to benefit from. Because onboarding becomes difficult when we get people on board, it's difficult to go see customers. So we are adjusting our spend to where our cost matters. And so therefore, there was an element of that saving also in the first quarter margin. So instead of maybe that investment in headcount, which we, from the beginning of the year, thought would be the most effective way to support our long-term growth, we are channelizing some of that saving to then work with, for instance, accelerating digital tools and digital ways of reaching our customers. And so therefore, again, trying to get the best out of our costs. And I would say those are the factors behind the 29% margin in the first quarter. Mind you also from a high growth rate, thereby sort of taking advantage of, you can say, the scale of the top line.

[Operator]

And our next question is from Søren Samsøe from SEB.

[Søren Samsøe, Country Head of Denmark and Analyst]

Welcome to you, Ester. Two questions from my side. First of all, if you could say that in this growth in Q1 is your new pricing strategy already helping you here? And my second question is in regards to -- I remember last year, there was a negative impact from the Middle East that you quantified. But could you please remember -- please remind us what -- how big was the effect last year from the Middle East?

[Ester Baiget, President & CEO]

Yes. Thank you, Søren, for your warm welcome, and I'll -- the immediate answer to your question on the impact on pricing is that every drop counts. And the 10% growth that we have delivered in Q1, it's the sum of the collective efforts across many areas. It's the sum of our implementation or acceleration of innovation. Yes, of course, pricing, it is a driver. It's the sum of having a very robust logistic infrastructure that -- and also to keep our plant running in times of volatility that enabled to capture increased opportunities when they raise up. It's the sum of being close with our customers and being their partner of growth. And it's that -- if anything, the collective sum of a very good work that the team has done, and also it shows that in an environment that we know and that we can predict, we deliver, and we live up to our commitments. So it's not one single item that I could particularly align to the holistic number. It's the sum of a lot of efforts that we're going to continue moving on and investing through the year and the future. Lars, back to you on the Middle East?

[Lars Green, Executive VP & CFO]

Yes. So thanks for that question, Søren. So the impact last year from Middle East was approximately a couple of percent on the group level, mainly from Household Care and Food & Beverages. And without having had a lot of time to digest all the numbers for Q1, then at least we can say we have solid growth rates now in Middle East. So some of that is coming back, but we will provide more flavor and detail when we announce the first quarter sort of full package in a couple of weeks from now.

[Operator]

And our next question is from Andrew Stott from UBS.

[Andrew Gregory Stott, Managing Director and Research Analyst]

Yes. And also best wishes, Ester, on the new role. Just thinking about those exit rates that I don't really want to hold this weekly data, but these are unprecedented times, and we'll take all help we can get. On ethanol and beer and wine, which I guess are the most vulnerable at the moment thinking about Q2. I mean I've seen traffic data down anywhere between 70% and 85% in Europe. I saw Chinese beer volumes, maybe one category only, obviously, down 40% in Q1. But are these the sort of numbers you're already seeing in the last 2 or 3 weeks in those relevant categories?

[Ester Baiget, President & CEO]

So thank you, Andrew, for your warm welcome and I'm looking forward to meet you soon in person, hopefully. Yes, we're living a unprecedented time, yes, they are volatile. And the situation has been evolving across the quarter in across many areas. I will leave -- I see -- I'll leave it then to Anders -- and last 2 for Lars.

[Lars Green, Executive VP & CFO]

Yes. So we also try to read all the reports and intelligence we can from the different markets. And I think you have as much info on that as we do. These are the reasons why we see the high level of uncertainty, and so the reason also why we come out with this announcement today that it is simply too difficult for us to guide you on what we believe for the future. So unfortunately, we don't hold the crystal ball. We are trying to assess all the same sources as you do plus whatever we can find. And as we become wiser and more clear about the future, we will return to you with our best estimate for the year. But I think that's the best we can give you as of today.

[Andrew Gregory Stott, Managing Director and Research Analyst]

Okay. But can I just follow-up? I guess you're not going to be in a position to do that at the end of April, right? I assume the suspension is for a good period of time.

[Lars Green, Executive VP & CFO]

That is probably very unlikely.

[Anders Lund]

Yes.

[Ester Baiget, President & CEO]

Yes. Thank you very much. Thank you, Alexander, for guiding us through the questions. Thank you all for participating in today's call and looking forward to 29th of April Q1 results call. Thank you.