Novozymes A/S

CSE:NZYM B

Earnings Call Transcript 2022-Q4

[Tobias Bjorklund, Head of Investor Relations]

Thank you, operator, and welcome, everyone, to Novozymes Full-Year 2022 Conference Call. My name is Tobias Bjorklund, and I'm the Head of Investor Relations here at Novozymes.

At this call, our CEO, Ester Baiget; and our CFO, Lars Green, will go through our performance and key events of 2022, as well as the outlook for 2023. Also present at this call are Tina Fanoe, EVP, Agriculture & Industrial Biosolutions; Amy Byrick, EVP, Strategy & Business Transformation; Anders Lund, EVP, Consumer Biosolutions; and Claus Fuglsang, CSO and EVP of Research and Development.

The entire call will take about one hour, including time for questions at the end. Before we begin, I would like to remind you that the information presented during the call is unaudited and that management may make forward-looking statements. These statements are based on current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in any forward-looking statement.

With that, I'll now hand you over to our CEO, Ester Baiget. Ester, please?

[Ester Baiget, President and CEO]

Thank you. Thank you, Tobias, and thank you all for calling in. Please turn to slide number two. I am very pleased with our performance in 2022. We delivered a strong sales growth, as well as solid earnings and returns. We also delivered on all, but one of our non-financial targets. We're executing on our strategic agenda and advancing our business, with a stronger emphasis on prioritization, accountability and increased focus on our commercial agenda. This allows us to accelerate growth from our well-diversified businesses.

Organic sales grew 9% after being up 6% in 2021, and three of our five business areas delivered double-digit growth. Household Care performed as initially expected when adjusted for the impact of the war in Ukraine. And Agriculture and Animal Health & Nutrition did very well, delivering 8% organic growth. Our investments in commercial activities, especially in emerging markets, are supporting our growth, and we delivered an impressive 9% improvement in both emerging and developed markets.

Earnings was solid, and the EBIT margin before special items reached 26.4%, despite the significant impact from higher input costs. We have gradually improving pricing through the year, mitigating part of the input cost pressure.

On our free cash flow, we are investing significantly in the business to support an accelerated growth trajectory. The facility in Blair, Nebraska is being built to produce advanced protein solutions, and it's progressing very well. We are fully on track to be ready by the end of the year. As for ROIC, including goodwill, before special items, we came in at a solid 17.9%.

Sustainability, it's part of who we are. And I'm very pleased with our newly launched ambitions, non-financial targets, including reducing CO2 emissions for Scope 1, 2 and 3. Novozymes is actually one of the first companies in the world to have its net-zero targets validated by the Science Based Targets initiative, something that we are very proud of.

Novozymes biosolutions are already having a positive impact on the world and a healthy planet. In 2022, 76% of our revenue was generated from products that contribute to lowering CO2 emissions. 32% was derived from products enabling healthier foods, and 8% of revenue was generated from products that enable better health.

From an innovation perspective, 2022 was one of the strongest years on record. Innovations are key to securing our future performance, and we launched impactful solutions across all our business areas, leading to a total of 26 product launches for the year, including 13 in the fourth quarter alone. Executing on our strategy remain our top priority in 2022. We took important steps in the integration of assets acquired from our BioHealth business. We're very pleased with the progress made, and we're increasingly harvesting the benefits of creating unique insights and approaches to the market based on well-documented benefits.

As I've noted before, it's full steam ahead for our investment in the new business area of advanced proteins, and we're also looking at additional opportunities in the protein space. On our ventures, we continue to see strong interest in carbon capture and plastic recycling, and we're pushing interesting collaborations in the field of agriculture, targeting yield enhancements and chemical replacement and enabling a more sustainable footprint for the sector. Thanks to the solid foundation of our strategy, we are set to deliver another good year in 2023.

We expect sales to grow by 4% to 7% organically, with growth across all business areas. Price is expected to make up more than half of the increase. And I'm very pleased with the results of the significant efforts already put in our commercial agenda. The EBIT margin before special items is expected at 25% to 26%. And we expect a stronger pricing to offset higher input costs.

ROIC, including goodwill and before special items, is expected at 16% to 17%, while the free cash flow before acquisitions is expected at DKK2.1 billion to DKK2.4 billion, with a lower CapEx level than last year.

Before we move into the individual business areas, I'd like to highlight the executive announcement we made on December 12, when we communicated the proposed combination with Chr. Hansen and create a leading global bio solutions partner. The next step in this process is the extraordinary general meeting here in the first half of 2023 and the closing of the deal in Q4 or in Q1 2024.

And with this introduction, let's now look at each of the five business areas in more detail, starting with Household Care. Could you please turn to slide number three? Thank you. Organic sales in Household Care grew 1% for the full-year. The performance was in line with our expectations from the start of the year when adjusted for the negative impact from the war in Ukraine. Emerging markets grew, driven mainly by Latin America and Asia Pacific, while the developed markets were flat, due to softness in the European laundry volumes.

Sales in the fourth quarter grew 4% organically and 7% in Danish kroner. This was in line with our expectations for a solid end to the year. Sales in developed markets performed well in the fourth quarter and despite the underlying softness in European detergent volumes. Novozymes laundry and cleaning solutions are present across a broad range of products and across range of formats. This gives resilience to our business even in volatile environments when consumers are facing high inflationary places.

Growing in emerging markets was broad-based in the fourth quarter, despite the negative impact from the war in Ukraine. The indication for 2023 organic sales growth in Household Care is low single-digits with the softest quarter, given that last year included sales to Russia and Ukraine.

We expect enzymatic penetration in emerging markets to continue and the Freshness platform will contribute to growth. Our growth indication includes a continuity of the trends observed in 2022, with contracting European and North American laundry detergent volumes as well as a certain degree of downtrading.

Finally, rounding off our indication for Household Care, we expect pricing to play a stronger role in 2023 development. Thank you. Could you please turn to slide number four? Thank you. Food, Beverages & Human Health delivered a strong performance this year, reporting 10% organic growth. The performance was broad-based, with all areas performing very well and driven by well-diversified innovation, favorable market conditions and increasing customer needs for healthier and more sustainable food solutions.

Growth in Food was well diversified, supported by innovation and penetration in emerging markets with solutions for fresh keeping in bread, sugar reduction and plant-based protein extraction. Beverages also performed very well particularly in emerging markets, benefiting from favorable trends of raw material optimization, increased use of local raw materials in beer production and increased consumption of low-carb beers.

Human Health sales performed well, with strong underlying demand driven by cross-selling of our innovative solutions portfolio. In the fourth quarter, Food, Beverages & Human Health grew 16% organically. Growth was broad-based, driven by emerging markets as well as a strong double-digit growth in Human Health.

For 2023, organic sales in Food, Beverages & Human Health is indicated to grow in the high single digits, with all sub areas contributing to growth and pricing being a strong component. We assume a modest first quarter due to tough comparator and a timing effect from a large order impacting last year's sales. We expect to see further penetration of our solutions into 2023 supported by favorable underlying trends in Food. Additionally, Human Health is expected to contribute strongly, growing organically in the solid double-digits.

Please turn into slide number five. Thank you. Bioenergy sales grew 25% organically in 2022, with double-digit growth in both developed and emerging markets and well above market growth. Growth was led by strong penetration of innovation in North America, supported by a 2% increase in U.S. ethanol production, capacity expansion on corn-based ethanol in Latin America as well as biodiesel.

Novozymes' diversified and innovative toolbox of solutions allow our customers to gain market-leading yields, returns and additional value generation in animal feed, corn oil and fiber extraction. The fourth quarter organic sales growth of 22% was better-than-expected and came despite a decline of an estimated 5% in U.S. ethanol production. The growth drivers and a strong momentum from previous quarters continued, demonstrating our ability to respond to a volatile market. Sales of enzymes used for biomass conversion, commonly referred to as second-generation biofuels, did well and contributed also to growth.

For 2023, we indicate sales growth in the mid to high single-digits. The positive trajectory of our solutions is expected to continue in 2023. The main drivers being pricing, market penetration enabled by innovation, capacity expansion in Latin America and market penetration in biodiesel. Additionally, we expect growing sales from second-generation biofuels. The outlook assumes a flat to slightly declining U.S. ethanol production.

Please turn into slide number six. Thank you. Sales in Grain & Tech Processing grew 10% organically in 2022. The strong performance was led by double-digit growth in grain, with strong growth in both developed and emerging markets, driven by innovation and favorable market conditions. Tech processing was roughly flat as the decline in textile was offset by stronger sales in enzymes used for COVID-19 testing kits. In the fourth quarter, Grain & Tech Processing sales grew 5% organically. Performance in grain was broad-based, growing double-digit in both developed and in emerging markets. Sales in tech processing declined, mainly due to the unfavorable market conditions in textile.

Looking at 2023, we indicate organic sales growth in the low to mid-single-digits. Growth is expected to be supported by stronger pricing. Additionally, growth in grain is expected to be driven by increased market penetration in vegetable oil processing and innovation in starch. Tech is expected to decline, driven mainly by the reduced sales of enzymes for COVID-19 testing kits and a weak demand in textile.

Please, can you turn to slide number seven? Thank you. Agriculture, Animal Health & Nutrition sales grew 8% organically in 2022, led by strong growth in Animal Health & Nutrition, especially in developed markets. Innovation and favorable market conditions, partially linked to higher prices for soft commodities as well as a pull from more sustainable benefits, drove up demand for yield-enhancing solutions across the sub areas.

Fourth quarter sales indicated -- increased by 11% organically year-on-year. Growth was driven by agricultural, which performed strongly and in line with expectations. Animal Health & Nutrition grew moderately in the fourth quarter.

For 2023, organic sales is indicated to grow in the mid to high single-digits and to be broad-based with solid growth in both Agriculture and Animal Health & Nutrition. Growth will, primarily driven by pricing, by innovation and market growth and increasing demand for sustainable solutions.

And with that, I will hand over to Lars for a review of the financials. Lars, please?

[Lars Green, Executive Vice President and CFO]

Thank you, Ester. Please turn to slide number eight for a review of our financial performance. First, I'd like to recognize the performance of the entire Novozymes organization, which has put us in a position to deliver solid financial results, despite pressure from rising input costs.

Sales in 2022 grew 17% in reported Danish kroner and 9% organically. Currencies provided a 7% tailwind with another percent added from the acquisition of Synergia. For the fourth quarter, sales grew by 18% in Danish kroner, including 11% organic growth, 6% from currencies and 1% from Synergia.

The gross margin was 54.6% in 2022 and 53.5% in the fourth quarter. As expected, this was below last year's margins for the respective periods, mainly due to the higher input costs, energy and logistics costs, which were partly offset by productivity improvements, operating leverage and pricing.

Our pricing efforts have provided an increasingly stronger contribution to the gross margin as the year has progressed and with the strongest impact in the fourth quarter. The fourth quarter gross margin was soft, driven by negative volatility in input costs and some mix effects in Bioenergy as stronger demand led to higher ship volumes between continents, increasing our logistics costs.

The reported EBIT margin was 26.0%, which included special items of DKK68 million, split roughly evenly between Q3 and Q4. The special items consist entirely of costs related to the proposed combination with Chr. Hansen. The EBIT margin before special items was 26.4% or 0.4 of a percentage point below last year. The decrease was mainly due to the lower gross margin and included an improved OpEx-to-sales ratio, as well as a slight tailwind from currencies. The EBIT margin also included around DKK200 million contribution, impacting other operating income, which relates to the accounting gain from the 21st.BIO investment recognized in the third quarter.

The underlying EBIT margin before special items, when adjusting for non-recurring items in 2022, was roughly 1 percentage point below the reported EBIT margin before special items and roughly 1.5 percentage points below last year's underlying EBIT margin.

The fourth quarter EBIT margin before special items was 23.4% for a 2.4 percentage point increase over the fourth quarter of 2021. An improved OpEx-to-sales ratio, driven by lower sales and distribution costs and administrative expenses drove the improvement. This was partly offset by a lower gross margin. There were no non-recurring adjustments in the fourth quarter, meaning the underlying margin is similar to the reported margin before special items. It was approximately 1.5 percentage points above the underlying EBIT margin for the fourth quarter of 2021.

Net profit in 2022 was strong at roughly DKK3.7 billion, up 17% over last year, supported by an overall increase in EBIT, positive one-off financial gains, as well as a decrease in the effective tax rate. ROIC, including goodwill before special items, ended at 17.9%, around 1.4 percentage points lower than last year, mainly due to the Synergia acquisition and higher growth investments.

Free cash flow, excluding acquisitions was DKK1.1 billion in 2022 and negative DKK314 million in the fourth quarter. As expected, this was a decline from last year due to the increased investments for growth we are undertaking especially related to the state-of-the-art Advanced Protein Solutions production line at our site in Blair, Nebraska, which is progressing very well. The fourth quarter was impacted by a timing-related increase in net working capital and higher taxes paid.

Now please turn to slide number nine for an update on the 2023 outlook. Organic sales are expected to grow by 4% to 7% in 2023. And sales in Danish kroner are expected to be around 2 percentage points lower. Full-year growth is expected to be driven by a combination of stronger pricing and volume growth. Positive pricing across business areas is expected to contribute more than half of the organic sales growth whereas innovation and increased market penetration will be the main components of volume growth.

Additionally, the outlook assumes no major changes to the current state of the global economic situation. Growth is expected to be slower in the beginning of the year as the comparator from last year was positively impacted from timing of sales, particularly in Food, Beverages & Human Health. Additionally, the Q1 comparator from last year in Household Care includes sales to Russia and Ukraine prior to the start of the war.

Turning to the gross margin. We expect a similar level to 2022 as the positive impact from price increases and productivity improvements will be offset by the continued high level of input costs. The increased level from 2022 will carry over and impact the first half of 2023 due to the delayed inventory effects on the P&L.

The outlook for the EBIT margin before special items is for 25% to 26%. The margin will benefit from price increases, sales growth and productivity improvements, currencies, continued investments in the business as well as lower other operating income 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 for 16% to 17%.

And as a modeling assumption, the free cash flow before acquisitions is expected at DKK1.8 billion to DKK2.4 billion as the level of investments is expected to be lower than in 2022 and to include around DKK400 million for the final construction year of the Advanced Protein Solutions facility in Blair, Nebraska.

Subject to approval at the Annual Shareholders Meeting in March, the Board proposes a dividend payment of DKK6 per share for the 2022 financial year. This is 9% or 50 ore higher per share than the dividend paid for 2021 and corresponds to a payout ratio of 45% of the net profit generated in 2022. Adjusted for the non-recurring items with no cash flow impacts related to 21st.BIO and the Microbiome Labs earnout, the payout ratio is 50.9% and in line with our capital structure policy.

On a final note, I'd like to highlight that we continue to invest considerably for growth in order to drive long-term development and returns, and we remain focused on executing on our strategic agenda across the business. Given the current visibility, we feel very comfortable when it comes to delivering on our financial targets as set out in our strategy: Unlocking growth -- powered by biotech.

Now please turn to Slide number 10 for a look at our non-financial targets and commitments. Novozymes has always been committed to its non-financial metrics as part of its approach to the triple bottom line reporting. As we have concluded on our 2022 targets, we introduced new milestones for the period to 2025 on the journey towards our 2030 and 2050 commitments. We embrace our responsibility towards the environment, our employees and the society and believe that only by holding ourselves accountable to the highest ambitions we can succeed in reaching our full potential.

And with this, I'll now hand back to Ester for a couple of remarks relating to the exciting news on the proposed combination with Chr. Hansen as well as the wrap-up of the call before we open up for questions. Ester, please?

[Ester Baiget, President and CEO]

Thank you. Thank you, Lars. Please turn to slide number 11. Thank you. On December 12, we announced a very exciting proposal to combine with Chr. Hansen. The proposed combination is a significant step on our journey to become a leading biotech powerhouse, responding to all areas of our strategy.

The two companies are both driven by a shared purpose, a purpose to find biological answers to better lives. And the new company will drive a stronger growth while, at the same time, increase the positive impact on the world. The strategic rationale is strong, and the combination offers attractive returns for shareholders. We see two complementary businesses with complementary solutions and complementary markets.

The combination will not only be able to accelerate short-term growth by cross-fertilizing solutions across industries, across geographies, but even more so in the longer-term by creating new solutions, derisking innovation and improving our ability to address new market trends. This will increase our likelihood of success and bring even more sustainable bio solutions to existing and to new customers. As you might have seen in the last two days ago, we received the binding tax ruling from the Danish tax authorities that the proposed combination can be completed as a tax-exempt transaction. This is one step towards the expected closing of the transaction.

Now please turn to slide number 13. Thank you. We are confident on our ability to generate the communicated synergies. We expect cost synergies of EUR80 million to EUR90 million over the years after close and EUR200 million in revenue synergies over the four years after close, generating an additional EUR80 million to EUR90 million in EBIT synergies over the same time period. The revenue synergies are mainly built around enabling new connections from existing solutions. These are drop-in opportunities from cross-selling complementary solutions to customers or two geographies that are underserved by the other party. This may add to the majority of the revenue synergies.

Let me give you -- let me share with you a couple of examples. In dietary supplements, we will be able to sell Chr. Hansen solutions through Novozymes B2C and health care practitioners’ channels and Novozymes solutions through Chr. Hansen network. In the food and beverage industries, we will be able to expand bio protection beyond dairy in segments like baking and meat. We will be able to cross-sell enzymes and cultures across customers, geographies and channels. This includes, for example, plant-based foods, processed meats and fermented beverages. We will cross-sell probiotics, microbes and enzymes as complementary solutions in selected segments such as Animal Health and plant health. As an example, in plant health space is to combine the complementary bio yield and bio protection portfolios of both Novozymes and Chr. Hansen, utilizing existing commercial channels as well as accessing new markets and new customers.

These are examples of cross-selling that will lead to the majority of the growth synergies in the short-term. But what we are even more excited about is the growth acceleration will be unlocked as we bring the innovation and biotechnology capabilities of the two companies together. Combining complementary innovation and application strengths after closing the deal will enable additional short-term synergies. We will start to work on these opportunities on day one. And we'll start to see the impact in year three and in year four, but even more importantly, they will build the foundation for stepping up growth beyond the synergy period.

Let me share with you a few examples. We will be able to develop food and beverage solutions with enhanced functionality. This includes a broad and differentiation solution offering, including HMO, including enzymes and proteins for high-nutrient contents. We will be better equipped to develop [Indiscernible] solutions with enhanced taste, texture and safety by leveraging the combined innovation pipeline, capabilities and the customer access. And we expect further expansion in the health platform for the combination of enzymes, microbes and proteins in dietary supplements and in the health space.

Combining the biotech capabilities of the two companies will uniquely position NewCo to provide the answers to the solutions of the present and the solutions of the future, increasing the likelihood of success, both in the areas where we're currently playing, as well as in the unknown white spaces. The list of opportunities is long, and prioritization will continue to be a key parameter in the NewCo strategy. The combined innovation muscle of Novozymes and Chr. Hansen, its broad market presence and reach, coupled with an even further enhanced capability to bring solutions to scale, would set NewCo as a unique biotech partner for our customers.

With this, now please turn to the next slide for a summary of our main messages from today's call. I am very, very pleased with the strong delivery of both financial and non-financial results in 2022. We grew our sales 9% organically with double-digit growth in three of the five business areas. We delivered solid earnings despite high pressure from input costs. We delivered positive pricing, and we continue to invest significantly in our business.

We met all, but one of our non-financial targets, and we have set new ambitious milestones for 2025 on our journey towards our 2023 -- 2030 and 2050 ambitions. We expect continued solid performance in 2023, and we are guiding for 4% to 7% organic sales growth, with a solid EBIT margin before special items of 25% to 26%, despite the continued impact from higher input costs, especially from energy and a negative currency impact.

ROIC and cash flow are expected to be solid, and both are impacted by increased investments and acquisitions to secure growth of the business. For the business overall, we expect volume growth, and pricing is expected to make up more than half of the organic sales growth.

Key priorities here in 2023, of course, delivering on our expectations, including the completion of the Advanced Protein Solutions facility in Blair, Nebraska. We're devoting all the efforts required in preparing for next four and executing on the combination with Chr. Hansen. We're making comforting steps in that direction, such as receiving the binding tax ruling that the proposed margin can become completed as tax-exempt combination. We plan to hold an extraordinary general meeting in the first half of 2023, and we expect to close the deal in Q4 2023 or in Q1 2024.

This opportunity opens up a biotechnology play that is second to none, enabling us to provide even more and better biological solutions to a world in significant need of it while, at the same time, creating a strong shareholder value and returns. Novozymes is a unique position to drive change towards a healthier planet. And as a company, we have a responsibility to make this happen. And together with Chr. Hansen, we can do so even more.

And with those concluding remarks, now we are ready to open for questions. Operator, if you could please begin.

[Operator]

Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] The first question is coming from Alexander Jones from BofA. Please go ahead.

[Alexander Jones, BofA]

Great. Good morning. Thank for taking my questions. Two, if I may. The first on the Bioenergy outlook. This time last year, you guided to low to mid-single-digit organic growth and ended up doing an impressive 25%. So could you give us some color on how much visibility you have for the guidance you've given for 2023 and how much the eventual growth rate in that division this year will depend on the evolution of the external commodity price environment?

And then a second question on Microbiome Labs. As you alluded to, you've reduced the earnout by over DKK200 million, compared to a year ago, which you say is due to lower expected sales. Can you give us a bit more color on what's driven the disappointment on sales in MBL versus your expectations a year ago and any quantification, if possible, and how that affects your long-term expectations for both MBL and the Human Health business?

[Ester Baiget, President and CEO]

Thank you, Alexander. I will let Tina first answer the question on -- building the question on Bioenergy and then on Amy -- Lars and Amy on MBL. Maybe one -- a comment I would like to bring in on the accelerated sales beyond expectations. This is another proof of our capability to respond to a very volatile market and, once more, show the resilience of our offering.

[Tina Sejersgard Fano]

Yes. So building on that for 2022, we saw a very strong performance. We have seen new innovations be a key contributor to that. I think it's important to remember in Bioenergy that depending on how you calculate it, but roughly 70% of our sales come from North America. But if you look at an ethanol plant, ethanol is only one element of what it is that -- of the revenue stream you have in an ethanol plant. So therefore, the diversification of our businesses, both in terms of geographies with 70% in the U.S., Latin America being the second biggest area, but also other geographies contributing. And then also that only roughly 70% of the outcome of an ethanol plant is coming from ethanol is leading to diversification.

And that is also enabling up new innovation spaces for us. As an example, we have launched a number of both yeast and fiber solutions, which has been very strong contributors of growth. Also, I think that it's important to remember that Bioenergy is more than just ethanol. Bioenergy is also a first-generation ethanol. Bioenergy is also a second-generation ethanol as well as biodiesel. And there as well, that diversification has, I could say, been driving the growth, which we have seen in 2022.

We have also taken a bit of share in the U.S. market, but most of it is that diversification we have done across outputs, across geographies and across, you could say, energy sources. And there is more to come. As you remember, we talk about corn cracking, and we expect that area to continue to develop. So in our outlook for next year, we are giving an, you could say, an indication of mid to high-single-digit. And that is including flattish developments in the U.S. ethanol market. It's also including pricing and growth in our volumes.

[Lars Green, Executive Vice President and CFO]

And so for the earnout adjustment, when we closed the deal with Microbiome Labs now more than two years ago, we included very ambitious targets for the earnout in the purchase price agreement. And so now as the earnout period expired at the end of 2022 was the time to then record the difference between the realized results and those very ambitious targets set out in the purchase price agreement. So overall, this is not changing our overall outlook and value of this business. So Amy, maybe you can add a few words on that.

[Amy Byrick]

Yes, absolutely, Lars. Thanks. Yes. So I think just to echo what Lars said, we're actually very pleased with the underlying performance of the Human Health business and Microbiome Labs as well. And the actual performance is well within our business case ranges, just not to the max upper end of the aggressive accrual. Overall, we're actually really pleased to see that the health care practitioner channel, which is represented by Microbiome Labs, is actually delivering greater than market growth in the channel and continues to be a strong driver as we look forward and one of the key drivers of why we're confident about the strong double-digit growth as we go into 2023.

[Alexander Jones, BofA]

Thank you.

[Operator]

The next question is coming from Lars Topholm from Carnegie Investment Bank. Please go ahead.

[Lars Topholm, Carnegie Investment Bank]

Yes. Hello, congrats with a strong Q4. I have a question around your organic growth outlook of 4% to 7%. So you say, more than half of that is price. So I wonder if more than half of the growth is also price if you reach the high-end of that guidance, because that would imply at least 4% price. And in that respect, I wonder if you can give some color on the magnitude of pricing within the different business areas and maybe also comment on the outlook for underlying volume growth in the different business areas, because it would appear to me that implicitly, you are guiding for volume contraction in Household Care, for example. So if you can comment on that

And then a long-term question, Ester. In your introduction, you mentioned biochemicals, biopolymers. I just wonder how many years are we from may be seeing some revenue in that? Are we talking five years plus? Or is it sort of within the next three to five years, we could see some announcement of revenue coming from those areas?

[Ester Baiget, President and CEO]

Thank you, Lars, for your, first, kind words and then elaborated questions. Let me maybe start taking the -- bringing color and then have Anders, particularly follow-up on the Household Care area. And then the same with the second question, I'll start with this one, but then, Claus, please feel free to chip in on further details.

So to your comment on price as a contributor of growth, we're very pleased of the trajectory of -- and the work done by the team and how we see the impact of price as a contributor of growth, as one contributor of growth. You see this is a journey that we have been working for a while. It's -- we move -- coming from a heritage past that price used to be an erosion of revenue of 1% to 2%. Two years ago, it was close to neutral. This year, we have continued to see that [Indiscernible] being pricing strongly contributing as the quarters above and then finishing the year with price as a positive contributor, and that trend continues to stay strong.

As the contracts expired, as the conversations of the customers have been completed, we feel very comfortable, with the majority of that pricing already confirmed for the year. But then we are also growing on volume. We are a growing company in a world of needs for our solutions, and the pull and the demand of our solutions continues to be there. It is true that in Household Care, in developed markets, we see some softness, and Anders is going to build there.

But we see continued momentum in Household Care in emerging geographies. It is true that we see some softness in textile where the market is growing -- or slowing in a rapid way. And we are very pleased to see that lower demand from our sales for COVID testing. Although it's negatively impacting the revenue, we like the world with lower demand for COVID testing. We continue to see a strong pull and demand from our solutions, leading to a better and more sustainable biofuels in biodiesel, in bioenergy, the broad penetration, also in biomass as Tina alluded. Also the pull from our solutions in Bioenergy bringing also diversified alternatives like feedstocks for animal. You heard Amy talking about the strong pull-on health, strong momentum on cleaner solutions, lower sugar, strong momentum on grain. There is a strong demand from our solutions, and we're going to continue to deliver both price and volume growth. Then...

[Lars Topholm, Carnegie Investment Bank]

Ester, sorry, but given that and set with all respect, then how do you make up the low end of your guidance range of 4%? Because if for this half of this -- if price is half of the 7%, mathematically, price needs to be 4%. And that means there's no volume growth if you reach the low end of your guidance. But you're telling me you are seeing volume growth. So I just want to understand the dynamics behind the 4%.

[Ester Baiget, President and CEO]

We -- as you know, last -- the world is not so black and white. And now we also live in a world with uncertainty, with volatility, with inflationary pressures. And that's the way that we read the world is with the guidance that we're putting in place from 4% to 7%. And we read -- and the way we read the world is also with pricing being a strong contributor of that growth with more than the half and then so -- and then also, as mentioned, across the whole portfolio, with some areas that we see softness and declining on volume as the one I indicated. Before I pass it, I'll give it to you, and then I'll build up on the second question, and then we will go ahead, Anders.

[Anders Lund, Executive Vice President, Consumer Biosolutions]

Thanks, Ester. On Household Care, the makeup of low single-digit guidance we have is that we look at a developed market being in decline on volumes. We see contraction among some of our largest customers that is actually quite substantial. And then we also see some destocking in the segment. At the same time, we see volume growth in emerging markets, and then of course, as we also allude to, we see positive pricing in Household Care. We see positive contribution from innovation, particularly from Freshness and then continued strong market growth in emerging markets.

[Lars Topholm, Carnegie Investment Bank]

So Anders, on a net basis, do you see volume growth?

[Anders Lund, Executive Vice President, Consumer Biosolutions]

Yes, so we don't look at it like that. We try to segment the two markets in two, and then we give you guidance on how we separate those two.

[Lars Topholm, Carnegie Investment Bank]

My question is on the net, not on what you say. And if you don't want to comment on it, it's fair. But the question is really, if you net it because we -- you don't disclose numbers by geography…

[Anders Lund, Executive Vice President, Consumer Biosolutions]

So net-net, there will be a small -- there will most likely be a small decline. But I also want to stress quite clearly that we are looking at a world that is fairly volatile. The declines we see right now in developed markets are quite significant. We believe that, that will actually improve over the year. Of course, we need to see that improvement. But please also bear in mind that we are trying to forecast a world that is relatively uncertain. But if you want a very specific number, then small volume decline in Household Care.

[Ester Baiget, President and CEO]

Thank you, Anders. And then building on your other comment on biocatalysts, we see -- I mean we're very pleased with that question that you're bringing in. And we see at this moment the majority of the efforts and the -- for sales in the aspect of bringing further functionalization and being in biotechnology. I believe you mean from our -- my intro on plastics recycling and with the collaboration here with Carbios and also the carbon capture, where we see enzymatic functionalization as an enabler of bringing even stronger and more sustainable carbon capture. Biocatalysts, it's a space for the future, and we don't have it yet in our sales plan.

But Claus, please build on it.

[Claus Fuglsang, CSO and EVP-Research & Development]

I'm sure Lars remembers also that we've had previous engagements in the biochemical space. But to elaborate on Ester's comments here on carbon capture and plastic recycling and also bioplastic degradation, so we expect a smaller contribution. We actually had a launch that we have not stipulated as one of the public ones that we hope will contribute on the plastic degradation next year. But it's still small. It's in its infancy. You remember these are ventures for the future. Now is there demand for these types of solution that goes beyond? Yes, we are seeing that. And we're also seeing customers willing to pay the premium for renewable solutions. So for the future, yes, it will be coming, I'm sure.

[Lars Topholm, Carnegie Investment Bank]

And Claus, just to be clear, if this leads to revenue, that would be incremental revenue, i.e., not cannibalize ascent from any of your current business areas. Is that correct?

[Claus Fuglsang, CSO and EVP-Research & Development]

Correct.

[Lars Topholm, Carnegie Investment Bank]

Thank you. Thanks for taking my questions.

[Ester Baiget, President and CEO]

Most welcome, Lars.

[Operator]

The next question is coming from Chetan Udeshi from JPMorgan. Please go ahead.

[Chetan Udeshi, JPMorgan]

Yes. Hi, thank you. Just following up on -- clearly, I think the volume growth in Q4 also looks pretty good and pricing is coming through. And I think I heard Lars talking about the contribution from pricing on margin being highest in Q4. But I'm still surprised that there is no leverage on gross margin. Gross margin is still flat versus Q3, and it's down actually year-on-year, more than what probably was the guidance previously. So I'm just curious what is going on, on gross margin? And what are you thinking about in terms of the trajectory into 2023 on gross margin?

And the second question was, you referred to soft guidance for Q1. Is there a chance that we might actually see a negative organic sales development in Q1? Or do you think it's more likely to be more low single digit positive and not a negative number? Thanks.

[Ester Baiget, President and CEO]

Thank you. Lars, could you please answer?

[Lars Green, Executive Vice President and CFO]

Yes. So on the gross margin, you're right that the fourth quarter was slightly lower than what we had indicated in the third quarter release. And the key reason for that is really the increased sales we had in Bioenergy. So while normally we would have leverage from increased sales, then the extra sales had to be fulfilled with production that had to be transported across the big ocean and, therefore, had higher freight costs associated with it.

And also, as we pointed out, Bioenergy was also driven by biomass sales. And here in this early low-volume phases, that also has a product mix effect. So those were sort of the key reasons. And therefore, it's not something that sort of makes us cautious or nervous about the outlook for the gross margin in 2023.

But what you have to realize is that going into ’23, the current spot prices for raw materials and energy costs are actually still higher than the average cost we procured at during 2022. So therefore, the -- we still have a need to continue to make sure that we capture our fair share of the value that our products generate for our customers. And that's also why it's been really important that we have now anchored price increases, which are now contributing to our sales growth, but also to protect the -- both gross margin and EBIT margin in 2023.

So the fact that we have now secured the majority of those price increases at this point in time give us the confidence that we can counter the input cost and energy cost levels and, therefore, makes us comfortable we can deliver a gross margin in line with 2022 and an EBIT margin in line with our long-term guidance of 25% to 26%.

So -- and on the Q1 question -- sorry, on the Q1 question. So what we are indicating here is that there is a very strong comparator for -- from last year. And therefore, we are sort of indicating a softer start to the year. We are not providing any specific guidance on exactly what that number is, but I would not expect it to be negative.

[Chetan Udeshi, JPMorgan]

That’s clear. Thank you.

[Operator]

The next question is coming from Soren Samsoe from SEB. Please go ahead.

[Soren Samsoe, SEB]

Yes. Good morning. Soren from SEB. A couple of questions. First of all, if you can remind us when you start to book the first sales from the production from the new facility in the U.S. for alternative proteins and also how that -- the phasing of that sales will be over the coming years. As I remember, you were targeting above DKK1 billion in sales over time.

And secondly, if you could indicate when the recent drop in energy prices will start to be a tailwind for Novozymes during 2023 on the gross margin.

[Ester Baiget, President and CEO]

Thank you, Soren. I'll answer on the first question. Then please, Amy, build up and then, Lars, on the contribution on pricing and energy. We will -- we have full on blast, on time, on target to deliver and to have the startup of the plant by the end of the year. That's what we committed to, and that's what we are totally on track, safely, on budget and on time.

Of course, starting up, it doesn't mean immediately into meaningful sales. So you should be able to start seeing the sales -- first sales next year and then gradually ramping up until the DKK1 billion. Don't forget also that what we put as a target or the expectation was also, it's broader than this -- only from this plant. It's also a protein platform that we are also exploring and bringing other alternatives that we're moving ahead, and we see very good traction of the broader space beyond plant's functionalization on proteins that we're working on.

And Lars, if you can maybe build on the second question.

[Lars Green, Executive Vice President and CFO]

Yes. So on energy and electricity costs, remember that we are usually hedged for the majority of our electricity consumption when we sort of go into a year. And therefore, we realized the majority of our production in 2022 with the hedging contracts we had in place when we started the year. And so even if electricity costs here in the last few weeks and couple of months have come down versus the peak levels that we saw in late summer and Q3, those costs are still significantly higher than the hedging rates we had secured at the beginning of 2022.

So therefore, we have, over the last couple of months, been building our hedging position so that we, at this point in time, have hedged our energy cost more or less to the same level as we would normally do, at lower levels than what we had at the peak rates in Q3, but significantly higher than in 2022. So specifically on electricity costs, we would have higher electricity costs in our production throughout 2023, compared to 2022. And then, of course, it's sort of the future spot rates and forward rates that will determine, when will electricity costs then improve or whatever they -- wherever they will go. But that's the situation we're in. And so we were benefiting from those hedging positions throughout 2022.

[Soren Samsoe, SEB]

That's clear. And then just finally, on Household Care. Just wondering if you're starting to see -- I mean some of your big customers has some quite ambitious targets now on being carbon-neutral, et cetera. Are you starting to see them buying enzymes that will sort of, you can say, make them come closer to that target at some point already now? Or is that more sort of in the coming years?

[Ester Baiget, President and CEO]

Anders, please?

[Anders Lund, Executive Vice President, Consumer Biosolutions]

Yes. So I think it's fair to say that most of our customers have been quite challenged with the raw material challenge. I think that just occupied them for the most part here last year. But clearly, in conversations with customers, there's a lot of interest in going this way. And when you sort of look at the stack of different raw materials, we are clearly positioned as a very, very superior ingredient when it comes to both biodegradability but also being a renewable raw material.

So clearly, we are positioned strongly. Where we do see some movement here and where we also see it in our numbers is in emerging markets, where more customers are dialing down on chemicals and dialing up of -- on enzymes. But in the developed market, we still sort of see -- need to see the development take off.

[Soren Samsoe, SEB]

Thank you, very much.

[Operator]

The next question is coming from Andre Thormann from Danske Bank. Please go ahead.

[Andre Thormann, Danske Bank]

Yes. Thank you for taking my question. And hello, everyone. I have a question regarding free cash flow, where you come out on the full year with DKK1.1 billion. You guided DKK1.3 billion to DKK1.7 billion. I wonder if you can give any comments around why you missed so much on this compared to your Q3 guidance.

And the next question is if there was any additional spend on the Blair than what you indicated in Q3, how much have you reduced the spend in your guidance for 2023? Thank you.

[Ester Baiget, President and CEO]

Lars, please?

[Lars Green, Executive Vice President and CFO]

Yes. So you're absolutely right. We came out a bit below the range that we had indicated in Q3. And a couple of reasons for that: one is we had costs, both special items, but also financing costs for our credit facility we have put in place in relation to the combination with Chr. Hansen. So that all together was roughly DKK100 million in cash flow. We also had a timing in terms of the payment of tax and then also a timing effect on our net working capital. So those were the key reasons.

And I don't have any concerns in our sort of underlying ability to generate cash from the business. And so I consider this variance a timing effect between Q4 and Q1. In terms of the facility in Blair, we had the progress of the facility like we expected when we announced Q3 of last year. And so the CapEx that we have recorded in 2022 was in line with that expectation.

[Andre Thormann, Danske Bank]

Can I just come with one follow-up regarding the Blair? Because you did, what, DKK2.86 billion in CapEx for 2022, and you guided DKK3 billion to DKK3.3 billion. So it actually seems that you spent quite a bit lower than what you indicated in Q3. And therefore, these other effects should be much higher if you missed by what midpoint, DKK450 million for the full year. So I'm still struggling to understand why you spent less in CapEx for ‘22 than what you guided at Q3.

[Lars Green, Executive Vice President and CFO]

So two factors behind that. One is that we also saw a declining U.S. dollar rate. So that was part of the reason that the actual reported CapEx came out lower. And then it was more in the, let's say, the overall portfolio next to Blair -- the Blair facility. That was where we had the variance versus our expectations at Q3 release.

[Andre Thormann, Danske Bank]

Thanks, Lars.

[Ester Baiget, President and CEO]

One last question, operator.

[Operator]

The last question is coming from Nicola Tang from BNP Paribas. Please go ahead.

[Nicola Tang, BNP Paribas]

Hi, everyone. Thanks for squeezing me in. I wanted to just come back a little bit on pricing. I think from the outside, it's quite hard to understand how much of the pricing initiatives that you've put in place and that you're planning to put in place, how much of that is due to sort of short-term initiatives to sort of recoup input inflation, as Lars referred to, versus some of the longer-term strategic initiatives on pricing.

So I was wondering if you could, I guess, help us to understand the split a little bit better and also to understand that if we see input deflation, does that mean -- or would you expect to have to give any pricing back with your customers or renegotiate with your customers? Or do you expect to hold on to this price going forward?

And then the second question, if you don't mind, I know we're running out of time, but no one's really asked anything about the deal. And I was wondering if you could just spend a few minutes talking about feedback that you've had both from employees and also from your customers so far since you announced the deal. Thanks.

[Ester Baiget, President and CEO]

Thank you, Nicola. I'll build on price. Lars, free to chip in and then delighted to comment with you on the feedback we're getting on the announcement that we made on December 12. Price is a component of revenue growth, and it's a component that we have been working on the last years to make it stronger contributor for Novozymes. We started that journey a few years ago in a strong way, training the organization, giving the tools, the capabilities and also the value propositions and the ammunition on how to trigger the conversations with the customers on how to get our fair share of value.

We price by value. We don't price by raw materials. We price by the value we bring in. And I hope with that I'm answering your question on the deflation, because the value that our solutions bring in, it is not linked to the cost of the raw materials. We bring value from CO2 emission reduction. We bring value from enabling clean label. We bring value from bringing diversification from the ethanol on other streams on food. We bring value by reducing waste, by reducing energy consumption. That's the value that we bring in to the customers, and that's the way that we're pricing our solutions.

Then this is a journey that we've been working strongly. We saw the impact with a marginal flat price in 2021. We've seen the impact in 2022 with a positive contribution. We're going to see a stronger impact in 2023. But price is going to stay as a contributor of growth for the future in Novozymes, as it is productivity, as it is mix for value generation and, for sure, as it is volume growth. We are a biotech company that provides solutions that enable our world a better place. And now as demand from our solutions will continue to stay.

Do you want to add any further comments, Lars?

[Lars Green, Executive Vice President and CFO]

No. I think you covered that very well, Ester.

[Ester Baiget, President and CEO]

Very good. Thank you, Lars. So then regarding the deal. We're getting a very positive feedback from our customers and also very positive feedback from our employees. We feel in a place of extreme comfort, even better comfort, if possible, than when we announced the deal with positive signals across all areas.

The conversations with our customers give us even more strength of the assumptions that we put and the synergies. The conversations within our teams, of course, through the help of external legal advisers, while preparing the data for filing gives us very, very high level of comfort on the milestones that we put in place for both -- for the antitrust, but also of the strength again on the synergies. We get -- we got a very good feedback from the employees.

There is excitement on the company that we're creating, a company that it's better than any of the two companies individually. We are -- we -- of course, there is the response once the -- after the excitement of wow, this is the place I want to be part. This is the place I want to contribute. That is the personal component on what does this mean for me. And we've gone through that reaction with the organization.

But then we take very consciously of the responsibility to communicate, to communicate, to communicate and to bring the post to the organization and to bring the excitement of the company that we're creating together and then communicate on the milestones as we're getting the EGM; the milestone that we just communicated on the feedback from the tax authorities, as we're getting ready for the filing in the countries like U.S., Europe, China, Brazil, South Korea, Turkey, slowly one after the other; the milestones that we bring in, continue to bring in the feedback that gives the comfort to the organization that we're moving and we're getting close to closing.

There is a very clear message also passed to the organization on what we need to do is deliver, deliver in 2023, deliver on our targets, deliver on the expectations and then hold the excitement of the company that we're moving in and that we're all going to contribute of -- and that we're going to contribute on bringing better solutions and unleashing the power of biotechnology.

And with that, I would like to -- if that answers your questions, Nicola, I would like to close the call. Thank you very much for your questions, and very much looking forward seeing you in the road in these forthcoming days.