Novozymes A/S

CSE:NZYM B

Earnings Call Transcript 2018-Q2

[Peder Holk Nielsen, President & CEO]

Good morning, and welcome to the Novozymes' conference call. My name is Peder Holk Nielsen, and I'm the CEO of Novozymes. I am joined here today by the full executive leadership team and Investor Relations. Today, we'll review our performance for the first 6 month of 2018, as well as the outlook and strategic priorities for the year. Our presentation today should take a good 20 minutes, and after that, we'll take your questions.Please turn to Slide #2. Halfway into the year, our performance is satisfactory and sales have overall tracked with our expectations. We delivered 4% sales growth, with 5% in the second quarter. Our innovation pipeline is very strong, and we're executing well on our commercial plans. This includes more focus on the emerging markets. It is critical for our success to understand local needs and demands in these regions, and we're investing to capitalize.There's good momentum in the overall business, but there are also variations. We continued to see very strong performance in Bioenergy, where we are in a solid position with our strong technology offerings. BioAg also posted a strong second quarter, while our animal feed business was soft, mainly because of the Latin American market. Household Care came in below expectations, but with some reasons, we believe the weak performance is isolated to the second quarter. And we expect Household Care to grow for the full year, supported by the freshness and hygiene platform.We report an EBIT margin of 28.1%. This is in line with our expectations, and we're well on track to deliver on our full year EBIT guidance. Our innovation pipeline continues to look very healthy and is progressing according to plan. Today, we'll provide more insights on 2 upcoming launches later in the year, which we are very excited about. I'm also pleased to tell you that the first commercial detergent product, including our freshness and hygiene technology, is available on the shelves now.All in all, we maintain the full year guidance on all parameters. There's some industry variations and the uncertainties around the global trade conflicts and the agricultural markets in general are still high. With current insights, all segments are expected to grow organically, and we maintain our 4 to 6 organic sales growth guidance, with around 28% EBIT margin for the full year.Now let's look at the regional sales development before we move on to an update on our business segments. Please turn to Slide #3. We post 7% organic sales growth in the emerging markets. Both Asia-Pacific and Latin America showed strong performance. While Asia-Pacific has delivered solid growth over the last couple of years, it's really encouraging to see Latin America come back as a growth contributor. This is particularly driven by increased corn ethanol production in Brazil, but our food and beverage business also posted good growth. That's following a strong interest in our innovation for the food and grain segments in Latin America. Sales to the developed markets increased organically by a modest 2% for the first half. While we saw positive developments across most industries, sales in Household Care was challenged.With this, I now hand it over to Anders to go through Household Care and Technical & Pharma. Anders, please?

[Anders Lund]

Thank you, Peder. Please turn to Slide #4. Sales in Household Care declined organically by 2% in the second quarter, and ended down 1% for the first 6 months. This was a bit softer than expected, and mainly explained by 2 second quarter events. Firstly, the Brazilian truck strike impacted our Latin America business negatively, and secondly, one of our global customers experienced distribution issues in North America, which also impacted sales.Moving onto the more foreseen events. Our laundry segment continued to be impacted by cost optimization by some of our global customers. This development is in line with expectations also for the second quarter, but it puts growth in negative territory in the developed markets. On the positive side, we see good -- we see continued solid growth with our regional customers, particularly in the emerging market. Growth is supported by both innovation and increased commercial efforts. Markets, such as the Middle East and Africa and Southeast Asia delivered good growth in the second quarter. Also, our sales in China continues to progress as expected, supported by strong growth of liquid detergents. Our dish business also continued to deliver good solid growth, partly driven by a recent launch that removed on dried-on cereals and partly driven by an increased demand for phosphate-free automatic dish wash detergents. While performance in the first half of the year was soft, we have high expectations for the second half, as our -- as sales from our freshness and hygiene platform is ramping up. On the freshness and hygiene platform, I'm very pleased to tell you that the first detergent with our new technology is available on shelves in the Philippines. It's, of course, very exciting to see, and the launch is backed by strong advertising. We're tracking according to plan, and more markets will follow in the coming quarters.Moving onto Technical & Pharma, our organic sales development was flat in the second quarter, and down 6% for the first half. Timing is the main explanation for the decrease and related primarily to pharma. And with that, I hand it over to Andy. Andy, please?

[Andrew Fordyce, Executive Vice President of Food & Beverages]

Thanks, Anders. Please turn to Slide 5. In Food & Beverages, we're working to advance our business by focusing on our growth platforms and through higher penetration in emerging markets. Although we feel good about first half progress, our Q2 results present a mixed picture. We saw growth across multiple industries and geographies and further development in our grain milling and vegetable oil growth platforms. However, there was weakness in baking and starch that dragged down our growth. That meant we delivered 4% organic sales growth for both Q2 and overall for the first half. Geographically, growth was strong in most of our emerging markets, while our developed markets were softer. Food nutrition, vegetable oil processing and beverages grew strongly, while starch showed slow growth and baking was soft. Food nutrition was our strongest industry, with double-digit growth, both in the second quarter and the first half. The positive results come from development of our Saphera product for lactose reduction and further penetration within plant protein and specialties. The strong results in vegetable oil processing come from positive developments in multiple segments. Our customers see a step-up in market demand for trans-fat free foods where our enzyme solutions can help. Further, we see customers continuing to trial our palm oil extraction product, Palmora, with a solid outlook for expanding the trialing activities.In beverages, sales picked up in Q2 for both brewing and distilling, following softer sales to developed markets in the first quarter. For starch, although we're seeing solid growth in our new grain milling technology, commodity price movements in Asia have led to some headwinds in this large segment. In baking, we continued to absorb the impact of our glide path pricing strategy in North America, with some of the erosion being balanced by growth across our emerging market baking business. However, we've seen demand in the Middle East and Africa decrease in Q2 and some of these markets experienced economic distress and currency devaluation.Summing up, we see solid developments in the Food & Beverages business. Our growth platforms continued to progress as we target innovation in new segments like palm and grain milling. Also, our emerging market expansions are delivering growth. Currently, we're working through some headwinds in baking and starch, which, once resolved, will give stronger overall results from the business. This means we expect healthy growth for the full year. Tina, over to you.

[Tina Sejersgård Fanø]

Thank you, Andy. Now let's start by looking at Bioenergy on Slide 6. I'm very pleased to report that Bioenergy continues to deliver very good growth. 6 months into the year, organic growth was a satisfying 14%, and the second quarter posted a strong 20%. U.S. and global ethanol production saw a pickup in the second quarter, growing by an estimated 2% to 3% versus a flat performance in Q1. Inventories remain elevated and producer margins continued to be tight. Enzyme sales for conventional biofuels continues to benefit from the broad technology base we have and the innovative product portfolio. Our newly launched yeast product, Innova Drive, also contributed to growth in the second quarter, although from a modest base.Looking outside North America, we had strong performance in Latin America, where Brazilian producers has increasingly started to expand into corn-based ethanol production. A number of plants have started to operate, and more are expected to come onstream over the next few years. And finally, on the Bioenergy segment, we continue to follow the recent debate on U.S. biofuel policies, where current conditions for ethanol producers look set to support our expectations for the full year.Now let's turn to Slide 7 for an update on agriculture and feed. After a soft first quarter performance, sales in agriculture and feed picked up, and posted 13% organic sales growth in the second quarter. The first half came in at 3% organically.In BioAg, we saw a strong growth in the second quarter. After the regulatory approval of the new B-300, B-360 inoculants, we were able to produce and ship some volumes to our alliance partner already here in the second quarter. This was a bit earlier than expected, and allows the alliance to prepare even better for the 2019 planting season. Our sales to the animal feed industry continued to decline in the second quarter. The Latin American market in Brazil, in particular, was challenging in the quarter. Lastly, we saw a strong development within animal probiotics, and sales developed very well across all regions. As you all know, innovation driven growth is key to us, and we are about to launch 2 new exciting products in Animal Health and in BioAg. Thomas will provide more details on this during his R&D update.So to summarize the message for the first 6 months. Animal feed came in softer than expected due to Latin America, and BioAg posted strong growth in the second quarter, with some benefits from the B-300, B-360 combination product. And innovation will benefit the second half of the year in both animal feed and BioAg. Then for Bioenergy growth accelerated in the second quarter with a strong 20% organic growth, building on the strong momentum from mid-2017. And now I'll hand it over to you, Thomas.

[Thomas Videbaek]

Thank you, Tina. Please turn to Slide #8. I'm excited to tell you about 2 new solutions from our priority innovation platforms. These are expected to be solid growth contributors, both in the short and long term. The first solution is unique enzyme within the Animal Health & Nutrition area, with a completely new mode of action. This enzyme improves the digestion and gut health of animal, and has been registered for broiler chickens initially. Our scientists have, together with our alliance partner, DSM, found a solution for degrading the bacterial cell wall debris in the gut that impedes optimal nutritional digestion and absorption.We look forward to sharing further details with you, following the external launch later in the fall. The alliance believe that this new solution have the potential to achieve a yearly in-market sales of up to DKK 0.5 billion, and we plan for an in-market launch in the coming months. Another very exciting product currently being prepared for the spring planting season is our new Acceleron B-360. This product improves yields by promoting the symbiosis between microbes and corn plants to strengthen the root system, and increases plant access to nutrients. The product will be used in combination with Acceleron B-300 SAT. And combined, they are expected to reach at least twice as many acres next spring compared to the roughly 8 million corn acres that was reached in 2018.So to sum up. We have some very exciting news from our Ag-related pipeline that are expected to hit the market soon. Those products are example of how we can expand our offering and help farmers around the world to improve the health of animals and yield performance in plants.That's all for me, and I'll hand you over to Prisca.

[Prisca Havranek-Kosicek]

Thank you, Thomas. Please turn to Slide 9. From a financial perspective, performance was satisfactory for the first half year. Overall, sales were roughly as expected. We continue to feel headwinds from currencies, in particular, the U.S. dollar, and we report a negative currency impact of sales of around 7%. The gross margin of 57.3% was in line with expectations. Productivity gains impacted the gross margin positively, whereas higher input costs, lowered deferred income, as well as currencies, all had a negative impact. At 28.1%, the reported EBIT margin came in as expected, and it was 1 percentage point higher than last year.Adjusted for the reorganization costs and the change to the leadership team last year, our EBIT margin ended down 0.4 percentage points. This is the result of negative currencies, higher input costs and lower deferred income. The effective tax rate was 19%, around 2 percentage points lower than last year. This relates to the transfer of IP assets from Switzerland to Denmark initiated at the end of 2017.Net profit came in 5% higher year-on-year. This is explained by a lower tax level and lower financial costs, as hedging losses were below than last year. Cash flow from operating activities was DKK 1.5 billion, roughly DKK 500 million lower than last year, which is mainly the result of an unfavorable development in working capital. This is, in turn, explained by timing in receivables and inventories, while payables ended lower due to less deferred income running through the P&L, as expected. CapEx stood at DKK 635 million for the first half year, which was roughly flat year-on-year. All in all, we delivered a solid set of financials. Now please turn to Slide #10 for the 2018 outlook. We maintain the 2018 outlook on all parameters. First half sales were overall roughly in line with our expectations, and we maintain our organic sales growth guidance of 4% to 6% for the full year. On reported sales and the spot rates as of yesterday, we now expect a 3% negative currency impact for the full year, down from a negative 5% after Q1.Looking at the different segments, then Bioenergy is performing very well, and we believe we could end the year on a better note than previously expected. However, remember that the second half in Bioenergy has tougher comps than what we saw in the first half.Whereas BioAg is expected to do well, animal feed looks a bit softer for the year after a more challenging second quarter than expected. And consequently, the growth for the year is likely a bit softer for the Ag and feed segment in total. In Household Care, the Brazilian and North American second quarter issues are not expected to be recovered, but we still expect to land the year on a positive note, as sales from the freshness and hygiene platform accelerates. For food and beverage and tech and pharma, our expectations for the full year are more or less intact. As communicated earlier, we will continue to invest in commercial presence to support future growth, and we expect an EBIT margin of around 28% for the full year. Currencies, especially the U.S. dollar, will continue to be a drag in reported terms at the current spot rates, but the negative currency impact will ease, as the U.S. dollar DKK rate has strengthened. As you can see from the announcement, we've hedged our 2018 exposure at DKK 6.18 to the dollar, which is well below the current spot rate and the average for 2017. CapEx is expected at DKK 1.3 billion to DKK 1.5 billion, and the outlook for free cash flow is between DKK 2.3 billion and DKK 2.6 billion. And now I will hand over to Peder for a wrap up. Peder, please.

[Peder Holk Nielsen, President & CEO]

Thank you, Prisca. Please turn to Slide 11. So let me summarize our presentation today. With 4% organic sales growth after the first 6 months, we are on track to deliver on our full year outlook of 4% to 6% organic growth. We expect all segments to deliver organic growth for the full year. But as Prisca highlighted, we see some adjustments to the industry growth mix, with some uncertainty to Household Care following the second quarter issues Anders described, and there are general uncertainties to global trade and agricultural markets. From a strategic point of view, we increased our emerging market activities. Over the last year, we have established new application development centers in India, in Turkey and in China, and we're opening new sales offices in Kenya, Thailand and in Indonesia. I also want to highlight the innovations we have up to deliver farmers around the world. Our new enzymes to address animal health, as well as our second-generation corn inoculant, are 2 great examples of how and why Novozymes is in a unique position to cater for a more sustainable future.Before we open up for questions, I would like to share the overall agenda for our Capital Markets Days on the 17th and 18th of September in Raleigh, North Carolina. The event will provide a unique opportunity to gain more insights on how we work with our broad-based innovation, as well as the commercial priorities of our different businesses. On the second day of the meeting, we'll focus in on BioAg and the significant opportunities we see here. We plan to have the full executive leadership team present, and we hope to have the opportunity to -- and we hope you have the opportunity to participate.This concludes today's presentation, and now we're ready to take your questions. Operator, please begin.

[Operator]

[Operator Instructions] And our first question comes from the line of Gunther Zechmann of Bernstein .

[Gunther Zechmann, Research Analyst]

If I can start with 2 questions, please. So the first one is on the margin development. The gross margin in the quarter and also for the first half was lower, but your operating margins improved. So how much of that lower cost, if I look at sales and distribution, down 11%; administrative costs, down 14%; R&D, down 7%, what's a sustainable level, please, on the operating cost side? Because the currency headwinds, I would expect to fade as we lap and annualize those. That's my first question. And the second one is on Household Care. Anders, if you could maybe highlight or give some numbers how much of your sales are to global customers in developed markets in Household Care, please?

[Peder Holk Nielsen, President & CEO]

Thanks for your questions. We'll let Prisca talk about margin development. Prisca, please?

[Prisca Havranek-Kosicek]

Yes. Yes, you are right. Our operating margin is better relative to our gross margin, but bear in mind that our gross margin in Q1 was a fairly good gross margin. I think we also pointed that out. And that the currency impact is significantly higher in that respect in the OpEx, yes. So what you'll see is, basically, an OpEx that has been impacted by currency even higher. This is why we see that the gross -- sorry, why we see that the difference. Now also bear in mind that if you look at the reported numbers, you have to factor in the reorganization from last year's reorganization. So we have to compare likes with likes, and with that, I would say if the operating -- the ratios for OpEx will roughly be in line with last year if you factor out the currency impact.

[Anders Lund]

And to the other question, in developed markets, we're talking about something to the tune of around half of our business is global customers. I also want to mention that it's not isolated to our global customers to developed markets. They're also quite present in the emerging markets.

[Operator]

Our next question comes from the line of Søren Samsøe of SEB.

[Søren Samsøe, Country Head of Denmark and Analyst]

First a question on the Bioenergy segment, where you had the 20% growth. Just if you could sort of give an indication of how much was price mix, and how much was [ market shipping ] and how much was volume. Also, if you could -- you keep talking about these high inventory levels, just say what's the real risk here if, let's say, that they disappear in one quarter, what would be the risk to you? And then finally, in Bioenergy, if you could give an update on the sort of the China. What's going on there? You've mentioned a couple times, and it looks like a quite an interesting potential. That was my first questions.

[Peder Holk Nielsen, President & CEO]

That was a -- some very good questions for Tina. Tina, please.

[Tina Sejersgård Fanø]

Yes. So first, the growth, so we grew the 20% in Q2 in the Bioenergy segment. There are 2 things, Søren, which I think is the most pronounced. We see in Latin America as a nice contributor. It's -- given their renewable bio legislation which they got into play, that's a good growth driver for us. We have some FX from share and mix and trading up and so forth, and then we have the yeast adding in. Because you have to remember, it's a global number we're reporting on. It's not only the U.S.A., so that's why Latin America is also in the picture. Then you asked about China. So yes, you're right that the China -- it is an interesting opportunity. If they are to reach the 10%, they need to get to 5 billion gallon, and currently, there are less than 1 billion gallon. However, so far, they still need to put the specific legislation into place in the different provinces. We see some move in the various areas on extra utilization rate, some distilling capacity and so forth, but it's still the early days.

[Peder Holk Nielsen, President & CEO]

And inventory levels, Tina, in the U.S. Bioenergy business?

[Tina Sejersgård Fanø]

So inventory levels in the Bioenergy business for -- that is for ethanol producers, and they are high, and they have been that for quite some time now.

[Søren Samsøe, Country Head of Denmark and Analyst]

But what happens if they disappear in one quarter, what would be the impact to you, do you think?

[Tina Sejersgård Fanø]

That will have to -- so you could say if they start -- so your question is what if they start selling only from inventory instead of buying from us?

[Søren Samsøe, Country Head of Denmark and Analyst]

Correct.

[Tina Sejersgård Fanø]

Is that the question, Søren?

[Søren Samsøe, Country Head of Denmark and Analyst]

Yes, yes. That's the question.

[Tina Sejersgård Fanø]

Yes, okay. That will have to -- the inventories are above 40 days now, and they have been that for the last more than a half year.

[Peder Holk Nielsen, President & CEO]

I think the risk on -- which I assume you're getting at on the U.S. bioethanol business is a mix of a lot of things. We're calling out the high inventory levels, but as Tina points out, that's actually been pretty sustainable for a long period of time, and I think it would -- personally, I think it would be wrong to model that, that would change dramatically. But of course, in a business where you have high inventories, you could see that come out over time.

[Søren Samsøe, Country Head of Denmark and Analyst]

Okay. And then just one quick question on feed enzymes. DSM mentioned at the Capital Markets Day that you are launching this enzyme for poultry in Q4, and that it has a sales potential of between EUR 60 million and EUR 80 million per year. First of all, if you could just say what would sort of be the timing before you reach that level? How long would it take? And also, just confirm that it's the normal 50-50 split with the average group margin, which we should sort of assume that you will receive from this potential.

[Peder Holk Nielsen, President & CEO]

We'll let Thomas take that question. Thomas, please?

[Thomas Videbaek]

Thank you. When you look at this exciting enzyme, I said it's a completely new mode of action. We are launching in the coming months. And as with all these things, we would like to see it move a lot faster than it probably does. We do expect to see this penetration over, you would say, something like a 5-year period is probably realistic. So as mentioned, it's something that will contribute in the short term because we do expect to see a pickup on a short-term basis. But it's going to be in the long term we really reach the potential. And this is part of the alliance, as with any other products we have in that alliance.

[Søren Samsøe, Country Head of Denmark and Analyst]

And can you -- do you think it will work for other animals than poultry? That will be my last question.

[Thomas Videbaek]

We're looking at using this enzyme also in other species, and of course, are excited to see the results of that.

[Operator]

Our next question comes from the line of Jonas Guldborg of Danske Bank.

[Jonas Guldborg Hansen, Analyst]

Two questions from my side. First of all, you are talking about some sales of B-360 being moved to Q2. Should we see this as a sign of a stronger demand than expected? Or is it just moving some revenue from second half to second quarter? And then the second question is to the gross profit, where Prisca mentioned that there were some positive efficiency impacts here. Is it possible to kind of give a number on that?

[Tina Sejersgård Fanø]

Yes. So on the B-360, we do see a good demand. We expect to see good demand for the solution. The benefit is related to supply chain optimization, both for us, because we can utilize our production equipment broader, and then it's also from Monsanto because they need to get it on the seed.

[Prisca Havranek-Kosicek]

On the gross profit, I think you are fully right. Positive efficiencies are very important to a company like us, and we are fully on track with our plans there. However, if you try to explain the delta, I can't give you an exact number. We don't split it out that way. But if you look at the gross margin development compared to last quarter -- for -- so for Quarter 2 2017, you'll see there's a mix between a minor part of it of the delta is deferred income, and the rest, I would say, is roughly spread evenly between input costs, which are then mitigated by productivity improvements, and FX. So there's a couple of moving parts in this equation.

[Operator]

And our next question comes from the line of Lars Topholm of Carnegie.

[Lars Topholm, Co]

A couple of questions from me. Just on the hygiene platform, and you now launched it in the Philippines and ramping up. I just wonder how much in terms of organic growth do you think this isolated, so you can move the needle in the second half of the year? And then continuing on Søren's questions about the new enzymes to be launched with DSM, just to be absolutely clear, this does not cannibalize any existing enzyme revenue, right? And then a third question. For some reason, you don't give a Q2 cash flow statement. You only gave for the first 6 months. Is it correctly understood that the free cash flow in Q2 was DKK 407 million, which is down by 30%? And what will you do actively to manage your net working capital? And how much should we expect working capital to come down in the coming quarters?

[Peder Holk Nielsen, President & CEO]

I'll take the DSM piece. It's running under the same model as we have on the other enzymes. And there's no reason to believe that, at least, product-wise, that you'll see cannibalization. So we think this is largely going to be additive business, but we are very excited about it. And I think the technology will, at least, we hope, it will prove to be a game-changing technology. The same is the case for hygiene and freshness, and I'll let Anders talk about how that ramps up.

[Anders Lund]

So when we talk about the full year, and I guess that's what you're asking to them. For Household Care, we believe we will get back into positive territory in terms of growth. And from that perspective, hygiene and freshness is going to be a big contributor to realizing that ambition. And I think I can also say that our launch plans are quite solid, and we have very high confidence in the partner rollout. So everything is looking according to plan, and then we are scaling up as we anticipate it.

[Lars Topholm, Co]

That's very clear.

[Peder Holk Nielsen, President & CEO]

Prisca, on net working capital and cash flow, please?

[Prisca Havranek-Kosicek]

Yes. I think the first one was on free cash flow. So you'll find the free cash flow number on the second page of the announcement. It's for the quarter, DKK 487 million, which is DKK 100 million below previous year. This is driven by working capital, as CapEx is on last year. And to your question on net working capital, this is mainly a timing issue, as I pointed out earlier. So what you've seen -- also, if you go back over the last couple of years, we do have a certain seasonality pattern in our working capital, and we see a more accentuated pattern here. Currency will also do their thing there. We are, of course, managing working capital quite actively, as many companies do. So I think that would be expected, and we'll keep continuing managing net working capital. You'll see quarterly fluctuations in working capital, as we go forward as this reflects our seasonal manufacturing pattern.

[Lars Topholm, Co]

But for the year, we shouldn't expect that you end with a higher working capital intensity than by the end of last year, for example?

[Prisca Havranek-Kosicek]

So what -- we're not guiding, as you know, on working capital as a percentage. We're guiding on free cash flow, and we stick to our free cash flow guidance as we have put them -- outlook that we put in -- with the announcement in February, so nothing has changed from that perspective.

[Operator]

Our next question comes from Annette Lykke of Handelsbanken.

[Annette Lykke, Medtech Analyst]

First, a follow-up question on the inventories within bioethanol in the States. What do you see to be the reasons behind having higher inventories? So you are, at the same time, saying that the margins are tight for this industry. So why would you expect them to continue to have these additional costs in terms of very high inventory levels? Are there any sort of delivery risks or something we should be aware of to take into consideration? Then also, on your launch of the Acceleron B-360 ST, can you say anything about pricing of this product compared to the first generation? And also, thereby, the commercial potential for you? And I understand the number of acres, but I would like to hear a little bit on the pricing, if possible. I'll stay with that for now.

[Peder Holk Nielsen, President & CEO]

Thank you. Those are, I think, good questions for Tina. Tina, please?

[Tina Sejersgård Fanø]

Yes. So on the inventories, as I've said, the inventories, and as well as the margins have, in fact, for quite some time been -- yes, inventories have been high and margins have been tight in the U.S. ethanol industry. The reason why we call it out is to show that there is a caution on it. But if I look at how we operate and how things are going, things are going very well. So it's not something -- it's a -- you could say something we are calling out as an uncertainty, nothing more than that. For sure, as part of the U.S., they have had -- or they have a significant part of their productions going for exports. Right now, there's no exports to China, but Brazil seems to take up most of the exports. So that's what I'll say on that. On the pricing on B-360, we have an alliance with Monsanto where we do have a profit split model. We do expect to price the B-360 based on the benefit it delivers in the market. I'm sure you remember some comments from Monsanto on the benefits it is delivering. So it's a quite nice benefit, which we expect to come from that, and this is one of the -- it's a main drivers for -- that we throughout the year have talked about, good growth in the BioAg segment in 2018.

[Annette Lykke, Medtech Analyst]

So the price increase are these like 30% or so? Or I mean -- or is it not possible for you to say anything about that?

[Peder Holk Nielsen, President & CEO]

I don't think we can say anything firm about it. As Monsanto has indicated, the yield is quite a bit higher with this new inoculant, at least, based on the last 2 years of field trials. On top of that, we think we're also getting into a territory -- or Monsanto think we're getting into a territory, where yield will be easily noticeable by farmers. That also gives a better pricing position. But having said all this, we need to see the field trials of 2018 come in. They will be reported in the late fall, and then we and Monsanto will decide on the exact pricing for the sales in 2019.

[Annette Lykke, Medtech Analyst]

Okay. Then a last question on Household Care. You have, for the past 3 years, experienced some market difficulties of different reasons and quarters. And you also tend to see those effect as isolated for the market or for a few quarters, like the one you are seeing right now for Household Care. However, over the last 2 to 3 years, you have only delivered around organic growth close to 1%. And isn't it fair to say that you are actually now seeing a structural softer market for detergent enzymes? And as such, I then, again, ask as I have asked before, how do you see the acceptance of your new innovations? Is there a risk that there will be a cannibalization of other enzymes simply for the detergents producers to keep costs down?

[Anders Lund]

So to your first question on whether it's structural or not, I actually think if you look at the challenges we have had, they come from quite a number of different sources. One is relates to some of our customers have run cost savings programs. Some of our customers have changed strategy in terms of what the enzymes they wanted to claim on their packaging. Some have -- had in these recent quarters, supply chain disruptions. So we do not -- I would not call it as a structural challenge. The reasons are actually quite different. In terms of your other questions on risk with the freshness and hygiene platform, I will repeat what I've said before. There is no reason to believe that enzyme should be any more exposed than any other technology. But what's also clear is that our customers will typically have to do some kind of reformulation when they use very, very new and groundbreaking technology, and they'll need to find a way to price that into the market and that could either formulation changes or it can be from them pricing it up in the market. I'm sure we'll see all of those scenarios play out.

[Peder Holk Nielsen, President & CEO]

So maybe just to add, I think what you're seeing and at least now with these first rollouts is that there's no cannibalization of other enzyme technologies. I would also like to add on the general weather. I mean, the general business that, over time, you start seeing that the emerging markets matters a lot more, and we have really, really solid growth in the emerging markets, and an incredibly strong position in the emerging markets. And I think with all the new resources we are putting into detergent design centers in India and [indiscernible] in China, we're in a really good position to help customers introduce technologies with these markets. So over time, you will see the emerging markets play a much larger role.

[Operator]

Our next question comes from Fulvio Cazzol of Goldman Sachs.

[Fulvio Cazzol, Equity Analyst]

My first one is on Household Care. I was wondering if you can quantify what the drag was from the Brazilian trucker strike, please, in the quarter. And I know that you also highlighted that one of your customers had a disruption in the U.S. But I would have thought that this would have been offset by other customers growing share. So can you just also highlight what I may be missing here, i.e., whether you over-index in a particular customer in the U.S., please? And then I have other questions on the other businesses.

[Peder Holk Nielsen, President & CEO]

Okay, we'll start with your household care questions. Anders, please?

[Anders Lund]

So the 2 issues we highlight for the second quarter are equal in size, and maybe one way of putting it into perspective, had these not -- had we not experienced those 2 issues, we would actually have been posting modest growth for the quarter. To the latter question on North America, we are, in this specific case, indexed higher with this specific customers and -- customer and from that perspective, we're not capable of fully compensating for the challenge we have experienced in North America.

[Fulvio Cazzol, Equity Analyst]

Great. And then my second question is on the gross margins. Just I know someone has already asked this, but I was just wondering if you can give us some color on how we should expect to develop the gross margin headwinds, I mean, in the second quarter to the rest of the year. I know a lot of that was currency related. Others was input cost related. Can you maybe just give us some color on whether input costs will continue to be a drag in the second half? Or whether you're going to start to lap in the comparables to the inflation at some point?

[Prisca Havranek-Kosicek]

Yes. I'll try this one. So overall, you see we had 57.8% for Q1. We're at 56.8% for Q2. So you do see a variation. And like I just pointed out, it is a mix. You will see -- continue to see quarter variations. We do not guide on gross margin in particular, but what I can tell you is that we saw, I would say, a particular high relative to Q1, impact of input cost. I think we also called that out in Q1, when we had, I would say, higher than expected gross margins, that this will come down, and that's why also, it comes in line within our expectations. So while you will see some fluctuations in the quarters in Q2 compared to Q1, you saw a relatively high impact of input cost impact. I hope that clarifies it a bit.

[Fulvio Cazzol, Equity Analyst]

But were there sort of one-offs in that? Or is this now tend to be -- continue to be an issue in the coming quarters? Was there a step-up in inflation, I guess, which could remain, I guess, is what I'm trying to get to.

[Prisca Havranek-Kosicek]

Yes. No, I would also not -- it's not -- it's a perfectly normal quarterly fluctuations. We are in a wide range of industries with wide mix and variable input costs that drives that. And as we basically capitalize our -- the cost and inflation and related to the P&L, you will always see fluctuations. There are so many factors driving gross margin. So it -- maybe what I can do is, as I've also stressed earlier, it is perfectly in line with our expectation. So there's nothing that came in unexpected around the gross margin level for Q2. And actually, we tried to point that out already in Q1.

[Fulvio Cazzol, Equity Analyst]

Okay, great. And then my last and very quick question is on the hygiene technology, can you tell us which product it is in the Philippines that has your technology?

[Anders Lund]

I'll be more than happy to do that. It's the leading brand, Ariel, in the Philippines. And then -- for those who are interested, I would actually suggest that you go on and watch some of the videos. They are very, very good indications of what this technology can deliver.

[Operator]

And our next question comes from the line of Hans Gregersen of Nordea.

[Hans Gregersen]

First, for Anders, the hygienic freshness platform, how much sales have that contributed in Q2? I guess you'll probably not give numbers, but just a slight indication. And next question, to Household Care, what do you actually see is needed in order to have the developed market returning to growth? Then over to Tina, on BioAg, in the past, I know that you have been looking on developing bacteria strains that can address drought. Where are you on this project? And then, finally, on Bayer and Monsanto integration, what has the dialogue been with Bayer about the future corporation?

[Anders Lund]

So to your questions on -- it's been rather modest, the sales we have had in Q2 for the freshness and hygiene platform, but it has been exactly as expected, and we're running according to plan. To your other question on what will it take to get developed markets back to growth, obviously, innovation is a big piece of that and the fact that we will be also rolling out the freshness and hygiene platform into the developed market throughout '19 will, of course, contribute to that. I think the other thing that's worth mentioning is that we are also seeing an increased interest from our customers in talking about reformulation opportunities as a consequence of oil. And of course, if we can get to a point with sustainably high oil prices, I do think that there is a good opportunity for us to drive that agenda harder than what we've done over the last few years.

[Hans Gregersen]

But Anders, could one argue that if consumers have a perception of clothes are clean, whether they are or not, it's an entirely different question, that they're not -- there's not really any demand for this extra new technology. Isn't that a challenge you have to overcome?

[Anders Lund]

I think -- of course, it's always a challenge to see whether consumers are interested. But the consumer research actually shows that there is change in perception of what's needed, and actually, freshness and hygiene solutions, or odor solutions, are very, very high on the agenda of consumers. And actually, it's come to a point where they have taken over from stain removal as the most pronounced consumer need. So I think we are hitting a sweet spot of a trend that we're seeing in the market, especially also considering the lifestyle of people doing more exercise and using synthetic fabrics. I think we are seeing consumers having a clear demand for this.

[Peder Holk Nielsen, President & CEO]

And just to add a bit of a technical edge to it, I can assure you that -- Hans, that clothes are not clean. There's still so much left on clothes, and that's partly why you have an odor problem and that's what we're trying to solve with this technology. Then let's move onto BioAg. Tina, please? Drought resistance.

[Tina Sejersgård Fanø]

Yes. So drought resistance is one of the areas, for sure, we are looking into. I think at the Capital Markets Day, you'll be able to see a lot of the things we're doing on our BioAg side. In general, we are working on securing that plant health becomes better, and thereby, also stronger drought resistance. On the Bayer-Monsanto...

[Hans Gregersen]

Sorry, Tina, but you have working this [indiscernible] was initial to the cover about 6, 7 years back. Have you made any real progress on it?

[Tina Sejersgård Fanø]

Well, 6, 7 years back is before my time, so I think let's Thomas answer that one.

[Thomas Videbaek]

Hans, drought resistance is part of what happens when you are looking at the complex setup between microbes and roots or plants. So what happens is that, often, the microbes helps the plants develop bigger roots, stronger roots, and thereby, also have resistant to drought. This is something we continue to look at. It's not something we have taken out as a very specific target in itself. But as part of helping the plants take up the nutrients in a more efficient way, it also leads to more drought resistance in certain cases, and we are certainly pursuing that, and we continue to pursue that.

[Tina Sejersgård Fanø]

And then on Bayer Monsanto, so despite the transaction is closed, Bayer still operates -- or is not allowed to operate the assets they have acquired. So Monsanto has an interim management team in place, and the alliance are plowing ahead with delivering on the sales expectations for the full year. We have, for sure, as I'm sure you know -- have nice talks with Bayer, but it's still too early to go into detailed talks with them, given that they are not allowed to operate the assets yet.[Technical Difficulty]

[Operator]

Our next question comes from the line of Sebastian Bray -- apologies, our next question comes from the line of Michael Rasmussen of ABG Sundal Collier.

[Michael K. Vitfell-Rasmussen]

A couple of questions from my side also. In Bioenergy, you mentioned a little bit some upcoming innovation. Could you talk a little bit more of that? i.e., when it's going to be launched? Which products are you looking for, and anything on penetration and peak sales? On Household Care, in terms of the hygiene product, I think that you mentioned that you would move to other emerging markets during Q3 or in the second half. Which markets are we talking about, and when will you launch them? And then also, if you could add a little bit more on the potential for the higher oil price to -- for the globals to change the blends a little bit more towards enzymes, that's interesting.

[Peder Holk Nielsen, President & CEO]

Thank you. We'll start with Tina on Bioenergy. Tina, please?

[Tina Sejersgård Fanø]

Yes. So you asked about the upcoming launches in Bioenergy. So we look at the innovations, both in the yeast space, as well as on the enzymes space. On yeast, the yeast we have launched now called Innova Drive, that is targeting a -- it's particularly good in one segment of the market, and we're looking into other solutions in the yeast space. On the enzymes side, we are looking into both getting yield and throughput, but then also saving on other chemicals and so forth, and we are also looking into that. I cannot talk specifically about a ramp up time, and the penetration and so forth. What I can say is that the performance you're seeing right now is benefiting from a number of the innovations we have done earlier, earlier enzyme launches, as we have been talking about, as well as the yeast launch.

[Peder Holk Nielsen, President & CEO]

And then Anders, on the rollout of hygiene and the impact of oil prices, please.

[Anders Lund]

So what we can say on the rollout is in emerging markets, as you also have seen, and the reason why we're not more specific is because we're doing this rollout, of course, with a partner, and they are quite keen on preserving sort of the ability to surprise the markets. So we cannot give more details. But of course, we will let you know as soon as they hit the market. On the oil price, it's not an exact science saying that, at this oil price, you will see sort of a breakthrough. But it's clear that in an oil price scenario of $70, $80 a barrel, then we are in scope for improved conversations on reformulation. And that's clearly something we see a larger interest of, and it's clear that it's very different from an oil price of $40 a barrel.

[Michael K. Vitfell-Rasmussen]

But can you confirm whether you have moved into a second market right now as we speak or that has still to come on the hygiene launch?

[Peder Holk Nielsen, President & CEO]

I can confirm as a similar story, as we also saw in the Philippines, it takes trade some months before it sort of stacks up on all the shelves, so we are in other markets, and then give it a couple of months and then you will also see advertising being rolled out in these markets.

[Operator]

Just before we move to the next question, we'd just like to apologize for the audio issues we experienced with the last caller asking questions. We'll now move to our next question, which is from the line of Sebastian Bray of Berenberg Bank.

[Sebastian Christian August Bray, Analyst]

I would have 2, please. The first is on Bioenergy. I'm just thinking about the sustainability of the current growth rate that you are reporting. If the -- so excluding the Chinese opportunity, although I don't know to what extent you've put this in your own numbers, what is the midterm organic growth rate that you are comfortable with for this business? I assume it's less than 20%. And as a follow-up to this, how do you feel about the demand for ethanol globally in a world that turns EV? Is there a price point at which the ethanol could potentially be used as a feedstock for the chemicals industry? Or are you comfortable with global transport fuel demand continuing to [ glow ]? My second question is on the timing of BioAg. Does the preparation for the 2019 season, and I'm referring in particular to corn products, mean that the usual H2 weighted-ness is going to be slightly less pronounced this year?

[Peder Holk Nielsen, President & CEO]

Thank you. There are questions for Tina on Bioenergy. Tina, please?

[Tina Sejersgård Fanø]

Yes. So you are right. 20% is quite a growth rate. As Prisca was alluding to, the comparisons become tougher in the second half of the year. Last year, we grew already 14% and 16% in the 2 last quarters, so you have to take that into consideration. So yes, it's probably not 20% for the coming quarters. You asked about the global price point chemicals, EVs and so forth. EVs is also here to stay. However, it will take quite some years until it is, you could say the dominant transport form. So in our models, we have spent quite some time looking into it. We need to be years, many, many years out in time, and we talk decades until half of the global fleet is on EV. It's an important part of making sustainable driving, but so is biofuel, and we do see quite strong demand coming from a number of different geographies. There's the RFS in the U.S. There's China. There's also the renewable bio legislation in Brazil, and even Europe is now moving forward also with the RED II and so is India. Chemicals is also an option, but I do expect the transport sector to be a bigger driver in the next many years for us. Then the last question was relating to BioAg and timing. You are right that we had originally expected that it would be solely a second half history or whatever we should say with the B-360. We got something of it in -- here in Q2, but we still expect a full year good performance in BioAg.

[Operator]

And our next question comes from the line of Ian Wood at Redburn.

[Ian Michael Wood, Research Analyst]

If I could start off with the food and beverage division. We have seen a bit of a deceleration. I know you've highlighted some commodity price changes in Asia. I wonder if you could talk about whether you think this is just a return to the normal business growth rate at food and beverages, or whether it could reaccelerate. Second question, quickly on BioAg, I heard you mention earlier that you're expecting the new products to at least double the acreage for the prior year. I wonder how you're planning about that and what you're thinking about the potential to go over that doubling and how you determine your production level. And then, finally, just quickly on the guidance for the full year on Household Care, could you still talk about whether you're expecting an acceleration in the second half?

[Peder Holk Nielsen, President & CEO]

Thank you. So finally, a question for Andy. Andy, please?

[Andrew Fordyce, Executive Vice President of Food & Beverages]

Yes. The issue in Asia is related to commodity pricing for carbohydrates, where there's a bit of an advantage right now to use sugar where you can. And since that's a relatively big segment for us, when that happens, it creates some headwinds. As I mentioned in sort of our prepared comments, we're working through that. We see that as something that is quite a normal fluctuation, and we're pushing pretty hard, I think, to get food and beverage growth rates up kind of on average. And that's based on the fact that we're investing more in the emerging markets, where there's latent demand for our existing portfolio and our new growth platforms around things like lactose reduction, grain milling and palm oil, which are areas of high potential growth and relatively unpenetrated. So that's what we push for.

[Tina Sejersgård Fanø]

And on BioAg, yes, it's correct. We are looking into a doubling of the acreage. We had around 8 million acres this year, and we are looking at more than a doubling for next year, and we are in a good position in order to be able to supply these acreage.

[Peder Holk Nielsen, President & CEO]

I'll just add on BioAg maybe. It's not like we know exactly how much is going to be sold in 2019. We talked about it before that the pricing will only be determined at the end of the year, maybe at the beginning of next year. So -- and of course, our partner will start building models for volume assumptions in the marketplace as we get closer to the end of 2019. So we do not have a very firm number in front of us in terms of acreage nor pricing for 2019 at this point in time. I think the earlier sales in Q2 is more of a supply chain thing, and it enables us to take care of larger volumes into 2019 if our partner should so desire.

[Anders Lund]

And lastly on Household Care, we posted a negative 1% for the half year and we expect to land the year in positive territory. So obviously that will imply an acceleration in the Household Care business.

[Operator]

And our next question comes from the line of Ben Gorman at UBS.

[Ben Gorman, Associate Analyst]

Just 2 quick ones for me still. In terms of the Frontia products you talked about in grain milling, can you quantify your run rate at the moment? You've talked about 500 million over the next 5 to 10 years. I'm just wondering how much of a contribution that's been so far this year. And then, secondly, just back on the sort of cash flow and payment terms. Can you quantify how much of this is due to the late payments in LatAm and Argentina? Some of the bigger players in China have been sort of complaining about weak payment terms in those areas. I'm just wondering whether that's particularly the issue for you guys.

[Andrew Fordyce, Executive Vice President of Food & Beverages]

Grain milling, a very small business right now. We expect it will take time to ramp up to that full potential, so it's not a big amount in our current run rates.

[Prisca Havranek-Kosicek]

And there is no impact, whatsoever, from LatAm, so we are all good there. So no impact on our payments line.

[Peder Holk Nielsen, President & CEO]

Thanks. We're running out of time, and I think this has to be the last question. I want to thank you for all your questions and for the interest in Novozymes. And then I hope we'll see most of you at our Capital Markets Day on the 17th and 18th of September in Raleigh. Thank you so much.