Novozymes A/S (NSISB) Earnings Call Transcript & Summary

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

Thank you, operator, and thank you all for calling in with the short notice. From Novozymes, I'm joined here today by the entire management team as well as the rest of the Investor Relations team. By now, everyone should have access to the company's trading update published earlier today. We have released this announcement ahead of schedule in accordance with the EU regulation, commonly referred to as the Market Abuse Regulation and because Novozymes has suspended its 2020 outlook. The announcement includes sales and organic sales growth for the first half year and the second quarter as well as a preliminary EBIT margin. We expect this call to take around 30 minutes, and we will have time for questions at the end. I also want to remind you that we are still scheduled to present our full first half financial results in August. Before we begin, please remember that the information presented at today's call is unaudited, and that management may make forward-looking statements. These statements are based on current expectations, and involve risks and uncertainties that could cause actual results to differ materially from those described. With this introduction, I will now hand you over to our CEO, Ester Baiget. Ester, please.

Thank you, Tobias, and thank you all for joining us today. Before discussing our first half results, I would like to give you a brief comment on the COVID-19 situation. As you know, this is a time of extraordinary challenges to all of us, which hopefully, we can emerge from with insights that make us stronger as communities and as a global society. During the last few months, our main priorities have been to ensure both the safety of our employees and their families and protecting the continuity of high-quality service to our customers and supply chain partners. Societies are carefully opening up across the world, but we believe it's too early to conclude that the pandemic is abating. Looking at the performance of the first half of the year, we delivered a solid set of numbers. Total sales growth -- total sales grew organically by 4% in the first 6 months of the year compared with the same period last year. Household Care grew organically by 11%, Food & Beverages by 7%, and Agriculture & Feed delivered 17% growth. Bioenergy and Technical & Pharma both declined by 15% and 22%, respectively. In the first half of the year, different positive elements of demand and customer stockpiling effects related to the COVID-19 pandemic had an impact on our business. This amplified sales on our Household and Care and Food & Beverages businesses, in particularly -- additionally, first half performance in Bioenergy reflected the sharp second quarter ethanol production decline in the U.S. as lockdown restrictions led to reduced mileage. Looking at the second performance. Overall, sales declined by 2% organically, which is solid, considering the severe headwinds in the U.S. ethanol market. Household and Care continued its very strong momentum, growing 11% in the second quarter. The COVID-19 related to stronger demand, continued into April with the stockpiling easing towards the end of the quarter. Growth was also driven by increased demand for higher-performance detergents and the continued rollout of our Freshness technology and increased enzymatic penetration, especially in the emerging markets. Food & Beverages' organic sales grew by 3% in the second quarter. Over the last few months, we have capitalized on changing consumer habits and increasing demand for our food solutions in particularly baking, whereas beverage, especially brewing, has been affected negatively. The impact of lower U.S. gasoline demand, caused by social distancing and stay-at-home restrictions, became visible from April [ and over ], leading to a 13% decline in organic sales for Bioenergy in the second quarter. The decline of Bioenergy eased somehow towards the end of the quarter as U.S. ethanol production started to improve from the lows in April and May. Organic sales growth in Agriculture & Feed was 27% in the second quarter, with both BioAg and Feed contributing positively. The Feed business performed well in the quarter, likely supported also by timing. Organic growth in the BioAg business was positively impacted by a one-off settlement related to the former BioAg setup. Adjusting for this, Agricultural & Feed would still have posted healthy double-digit organic sales growth in the quarter. Organic sales in Technical & Pharma declined by 34% as COVID lockdowns continue to impact the apparel and textile industries and consequently, our textile enzymes business. The preliminary EBIT is estimated around 27.5% for the first 6 months and around 26% for the second quarter. Two weeks ago, we announced the acquisition of PrecisionBiotics Group. This acquisition fits very well with our strategy, better business with biology, where human health is one of our key strategic focus areas. With this acquisition, we take an important step in accelerating our activities in human health. Lars will speak more about the details of the transaction. And with that, I'll hand it to our CFO, Lars.

Thank you, Ester. Let me start by providing a few comments to our recent acquisition of the Irish-based company, PrecisionBiotics Group. At our Capital Markets Day last summer, we introduced human oral and gut health as a new strategic opportunity area. A strategic opportunity area is a key investment, adding attractive growth most likely beyond the strategy period. Human health is adjacent to our existing business, and combines Novozymes' one-of-a-kind enzyme and microbial technology platforms. This combination will allow for strong differentiation and a unique solutions in a space that is expected to grow by high single-digit percentages for the foreseeable future. We're already very active in the space of selling microbial solutions across a broad array of industries, and the acquisition of Organobalance back in 2016, established our already existing pipeline and commercial presence in human health. PrecisionBiotics is specialized in probiotics for consumer health for the 2019 revenue of roughly DKK 100 million, a solid gross margin and positive free cash flow. The expected annualized effects of the transaction on the EBITDA margin is neutral, while the annualized negative effect on ROIC, including goodwill and EBIT margin, is roughly 1.5 percentage points, respectively. The negative impact on EBIT margin and ROIC is due to higher depreciation and amortization charges on intangible assets. The acquisition has no impact on Novozymes' dividend policy or buybacks and the revenue will be recognized in the Food & Beverages business. Returning to the first half performance. Novozymes achieved solid results. Second quarter sales and preliminary earnings should be seen in the light of a very challenged U.S. ethanol industry. While we continue to actively manage and align costs and capital expenditures to ensure efficient use of our resources, we remain committed to investing in long-term growth. The preliminary EBIT margin was around 26% in the second quarter. Excluding one-offs, the underlying EBIT margin in the second quarter was roughly on par with a 25% underlying EBIT margin in the second quarter of last year. This was despite the negative impact from the organic sales decline, while the postponement of reinvestments -- of reinvesting resources to supportive margins. We plan to continue the stock buyback program, totaling up to DKK 1.5 billion, and the dividend policy and capital structure policy remains unchanged. As seen in today's announcement, our 2020 outlook remains suspended due to high uncertainty related to the COVID-19 pandemic, and this relates especially to the Bioenergy business. Looking beyond 2020. We have seen good progress in the implementation of our strategy, better business [ evology ], and we're working hard to drive sustainable and profitable growth. With this, I'll pass the word to Ester again, for some final remarks.

Thank you, Lars. Thank you, Lars. Let me summarize our message here today. We continue to operate under difficult COVID-19 conditions with limited customer and end market visibility. However, with a solid start to the year in both sales and earnings, we continue to showcase Novozymes' strengths and what we can achieve together. This quarter was a proof point of the strength of our portfolio and the power of focusing on what we're good at. We are there for our customers and make sure we supply the solutions that enable them to respond to society's most pressing needs, regardless of industry or geography. I am very proud of the commitment and dedication from our employees. I mean thank you to all of you. And following this short recap of announcement, we are now ready to take your questions. Operator, yes, please begin.

[Operator Instructions] Our first question comes from the line of Jonas Hansen from Danske Bank.

Yes. A couple of questions from me then. On Household Care, first, I acknowledge that it's difficult for you to estimate the stockpiling effect from COVID-19, but you could help us a lot if you could give us the impact you then see from your rollout of Freshness -- about the Freshness platform? And also the increase in schematic penetration of detergents in emerging markets? And as a follow-up, I would also like your views on where we should expect Household Care to deliver -- what kind of organic growth rates we should expect the Household Care to deliver in the second half? And then my second question would be on Bioenergy. You had organic revenue growth of minus 37%, and the market in the U.S. is down 35%. So the explanation for the underperformance here, where is that stemming from? Is it a loss of market shares? Is it the Brazilian market that is also collapsing? Or what is the reason here?

Anders and Tina, could you, please?

Yes. So thanks, Jonas, for the questions. We don't give the sort of specific guidance on what questions in emerging markets specifically did deliver. But what we can say is that it's right on our plan. So the Freshness is delivering as we expected. And it actually starts to become material and meaningful in our numbers. When we look at emerging markets, like developed markets, they're performing quite well. The spread, and it's a little bit different than we had anticipated when going into the year, but overall, they're performing quite well, again to the expectations that we expect for the year. When we look at the second half. Of course, we do not give guidance and one of the reasons is that the visibility is low. I think we have to consider that there will be some reversal of inventories that has been built up in Q1 and 2. There might also be a negative impact of a recession -- a coming recession that we also could not anticipate and have a clear line of sight to. And then, of course, there is a question mark to will be added or additional washes that consumers have been doing in the first couple of quarters, will they continue. All of those are uncertainties that we basically have. And it's one of the reasons why we are not giving guidance for full year.

And then I can continue. So on Bioenergy, I can maybe start by saying this because I think that's where you have most of your interest is that it's not -- the difference is not due to share loss in the U.S. We do see, as you know, as well, the EIA numbers does not always match up exactly with how our sales, you could say, are behaving and therefore, how our customers are behaving. If you just go back to Q1, you saw a quite significant difference between the EIA numbers and our sales numbers. And if you look at a half year setup, they're roughly in line, if you were to believe the EIA. So don't take the direct correlation between EIA to business that is happening in our customer base so -- because there is some timing effects, and there are some small effects from price/mix and [ those ] reductions. But most of it is due to the difference in timing and that you shouldn't correlate directly between EIA and our performance.

Alright. Tina, could you just put a few words on the Brazilian market then?

Yes. What we see in the Brazilian market is that we see a small amount of growth still but way, way less than what we have seen before. We can see that COVID-19 is also starting to have a dent on the Brazilian market.

And then one more comment on the Household Care. I think you should also remember that we maybe have a bit more easy comps in the first half, when you sort of try to make your assessment of what second half would look like.

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

Yes. Good afternoon, everyone. Søren here. Just a couple of questions. Firstly, Jonas asked the Ag & Feed division. If you could quantify the one-off settlement and talk about -- and if the effect is the same on revenue and margin -- sorry, revenue and EBIT? And then also, if you could quantify the timing effect in Feed, that would be nice. And secondly, I mean you have quite strong growth actually in Q2 here, but your margin is only 25%, which is the lowest we've seen in a long, long time. Is this sort of the level we should look for going forward and also in the second half? Or is this due to -- you can say that some divisions like Bioenergy, which maybe is higher margin, is growing -- has negative growth and that Ag & Feed has stronger growth. Or how should we sort of look at that margin going forward?

Lars?

Yes. So I can speak a bit to the one-off. So as we point out, we had this one-off impact in the second quarter in our BioAg space. We grew in Ag & Feed, 27% in the quarter and say that we still have double-digit growth, but when we adjust for it. So we are talking sort of roughly 15 percentage points or so of impact from this adjustment. And that adjustment -- or that's the one-off goes all the way to the EBIT line. We have had some one-off costs in the quarter also, and that's why we say that the underlying EBIT margin is roughly 1 percentage point lower from the recorded one. When we talk about the 25% and how that stack up against sort of ongoing rate. You should remember also the very strong margin we had in the first quarter, with very high sales. So there is a strong correlation between the top line and you can say, the scale in the top line and the underlying margin. So the gross margin were supported substantially in the first quarter and we see, with a lower second quarter, we see that scale sort of play against us in the second quarter. That's why we would have lower margins. It is still very early days. So we are still analyzing also all of our own numbers. So we will come back with more details on how the cost all stacks up in August. But if the scale on the top line, that's the most significant explanation for the difference in margins between first and second quarter.

And on timing in Feed? Sorry? Go on, Soren.

Yes, that was it. Yes. The timing of it.

Then on -- yes. Then on timing in Feed. So what we're seeing there is it's, in fact, a bit difficult to predict how much is the in-market performance and how much is the stocking up. We do expect that a significant part of it -- of the performance in Feed is coming from stocking up. There is, you could say -- as you also, I'm sure, have seen, there has been to a number of the processing plants in the U.S., there have been issues with COVID-19. So it is, we would say, some volatility and some uncertainty in the meat processing industry. In terms of how much of the 27%, which is coming from the Feed, and I can say that from Feed, then the biggest part of the growth is coming from the Ag side.

The next question comes from the line of Nicola Tang from Exane.