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

Good morning, everyone, and welcome to Novozymes Full Year 2020 Conference Call. My name is Tobias Bjorklund, and I'm the Head of Investor Relations here at Novozymes. At this call, Ester Baiget, our CEO; and Lars Green, our CFO, will review the performance for 2020, including the fourth quarter and the outlook for 2021. The rest of the executive team is also present. We expect the presentation to take roughly 30 minutes. After which, we'll open up for questions. 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 statements. With this, I'll now hand you over to our CEO, Ester Baiget. Ester, please.

Thank you, Tobias, and thank you all for calling in. I hope that everyone has had a good and productive start of the new year. Since we last met in October, we have had a lot of exciting and important achievements through the organization. And I'd like to take this opportunity to mention a few of them. We have structured our business and reporting according to the new organization setup. We have hired Amy Byrick from DuPont as our new Head of Strategy & Business Transformation; and Morten Rasmussen from Vestas to head up People, Sustainability & Brand. They will both join us in April. We have entered into exciting partnership with Givaudan that will focus on providing integrated food and cleaning solutions. Also, as announced this week, we have entered into the area of enzymatic biocontrol for agricultural via long-term partnership with a U.S.-based company, FMC. We have made a second exciting acquisition in human health to accelerate our North American presence and strengthening our commercial capabilities. We had a strong fourth quarter from an innovation point of view, launching 11 new solutions in the quarter alone and reaching a total of 18 launches for the full year. On our journey of becoming carbon-neutral, our North American headquarters, located in the state of North Carolina, are now 100% solar powered. As you can see, we have had a very high activity level, and this in a year that has been different in so many different ways. I am very proud of the way we, as a company, we have digitally navigated during these difficult times. And now it's time to look ahead. But before we present the 2021 outlook, I'd like to spend a few minutes reviewing the results for 2020. Could you please turn into Slide #2? Organic sales performance was flat for the year and declined by 3% in the fourth quarter. This was all in line with the expectations. And the performance was mixed across the business areas, which were impacted in different directions by the pandemic during the year. Household Care benefit will -- while Bioenergy and Grain & Tech Processing contract. Sales in emerging markets grew by 1% organically, while developed markets declined by 1%. And our earnings and cash flow were solid despite a flat organic top line, currency headwinds and one-off costs. Now let's turn to the outlook, where we expect sales to grow by 2% to 6% organically in 2021, and we expect solid earnings and cash flows. Sales growth will be driven by innovation, by stronger commercial presence and by a gradual recovery in those industries affected by the pandemic. Let us now look at each of the business areas in a little bit more detail. Please turn into Slide #3. Sales in Household Care grew by 5% organically, driven by the Freshness rollout, increased penetration in emerging markets and supported by increased consumer demand for laundry and dish washing detergents. Sales were flat in the fourth quarter, and this was as expected and driven mainly by destocking and lower demand from the professional cleaning area. In addition, last year, Q4's comparator was quite demanding. The rollout of the Freshness platform continues to drive growth and to develop according to plan. The technology is available to consumers across most major European markets and as well as parts of the Southeast Asia, the Middle East and Africa. Looking ahead, in 2021, growth will be led by the continued penetration of our solutions with a focus on emerging markets. And along with increased penetration, we are preparing for the broad market launch of the Freshness technology. This is a key milestone, and it is expected to become an important growth contributor in future years. We're also expecting consumer sustainability awareness to become an increasingly important trend. This is shaping up to become an exciting, long-term driver for increased usage of enzymes and microbes across the cleaning space. Please turn into the Slide #4. Food, Beverages & Human Health grew by 1% organically in 2020 compared to 2029 (sic) [ 2019 ]. The performance was mixed with food doing well, benefiting from increased at-home consumption; while beverages, mainly brewing, was impacted negatively by COVID. Human health progressed well, although it only accounts for a relative small part of the business area. In the fourth quarter, sales declined by 4%, which was roughly in line with expectations. The decline was driven by destocking in baking, while beverages improved compared to previous quarters. We have seen exciting projects for -- progress for the strategic opportunity area, human health. In Q4, we launched a new product, BioFresh 4+, and announced the Microbiome Labs acquisition. By acquiring Microbiome Labs, Novozymes has added a broad range of proprietary microbiome solutions. The acquisition also creates an attractive entry point into the North American probiotics market via network of health care practitioners. It is a key milestone for advancing Novozymes' human health activities. BioFresh 4+ is a clinically proven enzymatic technology for fighting bad breath, giving up to 4 hours of lasting effect. Additionally, in the food space, we launched 3 new products for baking, 2 of which target the broad market: Optiva LS, which allows for a reduction of added sugar in bread; and Gluzyme Fortis, a salt reducer tailored to baking conditions in emerging markets. And for 2021, we expect broad-based solution growth across Food, Beverages & Human Health. Innovation and emerging market penetration, supported by increased consumer dietary health awareness, are the main drivers for growth in the food business. In beverages, we expect a gradual recovery following the 2020 COVID-19-related disruption. Please turn into Slide #5. Bioenergy declined by 9% organically in 2020. While the performance was mixed across the regions, the decline was expected and driven by the lower ethanol demand in U.S. following COVID-19-related stay-at-home restrictions. According to the U.S. Energy Information Administration, production rates for 2020 are estimated to be down 12% to 13% compared to 2019. Outside of the U.S., all major regions contributed to growth. In the fourth quarter, sales declined by 4%. Similar to the full year trend, the decline was driven by lower industry production rates in the U.S. However, the performance in Q4 improved compared to the lows early in the year. We also launched a new solution called Fortiva Hemi. Fortiva Hemi unlocks improvements in both corn oil and ethanol yields and is another step on our journey to provide even better full-service solutions to ethanol producers. Looking ahead, the U.S. ethanol production is expected to gradually recover following last year's severe industry disruption, with the full recovery to 2019 production levels not expected until later. Further, uncertainty persists in the U.S. with high ethanol inventories, low producer margins and continued concerns about gasoline demand. Exports, more miles driven and higher blending are ways for the industry to expand. Outside the U.S., Novozymes' solid presence, combined with an underlying capacity expansion, is expected to support growth also in 2021. And please turn into Slide #6. Grain & Tech Processing, a combination of the former Food & Beverages processing areas and what we previously referred to as Tech & Pharma, declined by 1% in 2020 and by 4% in the fourth quarter. The performance was mixed, with tech being the reason for the decline both for the year and in the fourth quarter. The decline was due to the negative impact of COVID-19 causing significant disruption in global textile production. While the performance was still negative compared to Q4 2019, sales declined less in the fourth quarter compared to earlier in the year. Grain posted solid growth in 2020, with the fourth quarter roughly flat. Growth in 2020 was broad-based and especially strong in grain milling and vegetable oil processing. Starch grew slightly in 2020 but declined, as expected, in the fourth quarter due to timing. And for 2021, Grain & Tech Processing is expected to grow. Growth in the grain business is led by vegetable oil processing. And in tech, growth will mainly be driven by a gradual recovery in the global textile industry. Please turn into Slide #7. Agricultural, Animal Health & Nutrition grew 1% organically in 2020 and declined by 6% in the fourth quarter. In 2020, the double-digit organic sales growth in agricultural was broad-based across the main categories. Also, sales benefited from a one-off in the second quarter, as previously highlighted. Sales in the fourth quarter declined mainly due to timing. Animal health & nutrition declined in 2020 following a weak second half of the year, including the fourth quarter. The full year sales decline can be explained by -- partially by inventory adjustments following a strong first half of the year and partially by related weak in-market demand for our nutritional solutions. In 2021, we will continue to build and develop the BioAg business across crops and regions, aiming for an underlying double-digit organic sales growth. For animal health & nutrition, the outlook reflects persistent uncertainty. This relates particularly to the nutrition part of the business, as inventory levels in the value chain and COVID-19 implications are less clear. A strong product portfolio and partnership setup, coupled with signs of improving farmer economics following many years of challenging conditions make us cautiously optimistic about the coming years. And that's all for me now. I will hand over to Lars. Lars, please.

Thank you, Ester. Please turn to Slide 8. Let me start by reviewing the performance of our sustainability and nonfinancial targets. As part of the updated strategy, we adopted a new set of ambitious sustainability targets. The framework considers both our opportunities for having a positive impact through our commercial solutions and our responsibility to minimize the impact of our own operations. The targets focus on the impact Novozymes' products have globally as well as our own operations and on our employees. For each of the global challenges, we have defined long-term 2030 commitments to set the direction and midterm 2022 targets to drive performance in line with our strategy. Here in 2020, we are already well on track to deliver on 12 out of our 13 targets set for 2022. We are very encouraged by this, and it demonstrates our relentless focus on the important ESG-related agenda. Now please turn to Slide 9 for our 2020 financial performance. The group's organic sales performance was flat for the year and declined 3% in the fourth quarter. Sales in reported Danish kroner declined 3% for the full year and 8% in the quarter. Adverse currency developments, especially in relation to the U.S. dollar, had a significant negative impact on the reported Danish kroner numbers, while the additional sales from PrecisionBiotics Group, which was acquired in June, had a smaller positive effect on reported numbers. We delivered a solid set of financials in 2020 despite the very challenging conditions. The gross margin increased from 55.3% in 2019 to 56.0% in 2020. The full year gross margin benefited from lower input costs, improved production efficiency and a one-off settlement in the second quarter related to the former BioAg setup. The adverse currency developments and severance costs related to the September 1 reorganization affect the full year gross margin negatively. The fourth quarter gross margin was 55.5%, slightly lower than the 2019 figure due to negative currency effects. The underlying full year and fourth quarter gross margins adjusted for one-offs and currency effects were somewhat higher than in the corresponding periods of 2019. The EBIT margin ended at a solid 26.1% in 2020. This was 2 percentage points lower than in 2019, and the difference is explained by currency, M&A and one-offs. If you look at the 2019 EBIT margin, it benefited from the recognition of deferred income at the termination of the BioAg alliance in the second quarter of that year as well as proceeds from the divestment of a pharma-related royalty in the second and fourth quarters. Also, it was negatively affected by restructuring costs in the third quarter of 2019. The EBIT margin in 2020 was positively affected by the aforementioned one-off in BioAg and a contingent income from that same pharma-related royalty divested in 2019. Furthermore, the EBIT margin was adversely affected by severance costs related to the September 1 reorganization, transaction costs and P&L effects from the acquisition of PrecisionBiotics as well as transaction costs related to the Microbiome Labs acquisition in the fourth quarter. Also, we incurred an impairment loss in the fourth quarter. The adjusted EBIT margin, excluding one-offs and accounting for currency headwinds, ended at around 27% in 2020. This was roughly 1 percentage point higher than the 2019 adjusted EBIT margin of around 26%. The improvement was mainly driven by a higher underlying gross margin and lower operating costs. The reported EBIT margin for the fourth quarter ended at 23.1%, which was 6.5 percentage points lower than in the fourth quarter of 2019. However, adjusted for the aforementioned one-offs, M&A and currency headwinds, the EBIT margin in the fourth quarter was roughly 26%, which was similar to the underlying EBIT margin in the fourth quarter of 2019. The return on invested capital, including goodwill, ended at 18.9% in 2020, which was 2.2 percentage points lower than in 2019. The decrease in ROIC was due both to lower net operating profit after tax and higher average invested capital. Net investments, excluding acquisitions, ended slightly above DKK 900 million in 2020. This was slightly below the level in 2019 and equals 7% of sales for both years. The free cash flow before acquisitions ended at a very strong DKK 3.4 billion in 2020. This was DKK 1.2 billion more than in 2019. The improvement was mainly driven by higher cash flow conversion from better earnings quality, the one-off in BioAg as well as positive changes and timing effects in working capital. Please turn to Slide 10 for the 2021 outlook. Organic sales are expected to grow by 2% to 6% in 2021. The upper and lower bounds will mostly depend on the pace and level of the gradual recovery in the market. Seen over the year, we project organic sales in the first quarter to decline by mid-single digits due to a tough comparator. Full year sales in reported Danish kroner are estimated to be roughly 1 percentage point less than the organic sales growth outlook due to a negative currency effect and a positive M&A effect. For the business areas, organic sales in Food, Beverages & Human Health and Grain & Tech Processing will grow by mid-single digits; and Bioenergy is expected to grow by mid- to high-single digits. Household Care is forecasted to grow in the low single digits in 2021, following a better-than-expected performance in 2020. And we expect flat to low single-digit growth in Agriculture, Animal Health & Nutrition. The EBIT margin outlook is 25% to 26%, including a negative year-on-year impact from currency and M&A-related effects of close to 1 percentage point each. Hence, adjusting for the negative currency and M&A-related effects, the implicit underlying EBIT margin is 27% to 28%, and this is an improvement compared to the underlying EBIT margins of roughly 27% in 2020 and roughly 26% in 2019. The underlying development is mainly supported by sales growth as well as productivity improvements and also includes continued reinvestments in the business. The free cash flow before acquisitions is expected at DKK 2.7 billion to DKK 3.1 billion. This is slightly lower than in 2020, as higher net investments and timing in working capital offsets the positive effects of higher sales and an improved operational cash flow. Net investments are expected at between DKK 1.0 billion and DKK 1.2 billion. This reflects maintenance, expansion and optimization CapEx. And the outlook for the return on invested capital, including goodwill, is around 19%. Subject to approval at the Annual Shareholders' Meeting in March, we propose an unchanged dividend of DKK 5.25 per share, corresponding to a payout ratio of 51.9% compared to 56.8% last year. In addition, we are initiating a share buyback program of up to DKK 1.5 billion for 2021. This is in line with our capital structure policy to return the free cash flow generated to shareholders through a combination of dividends and share buybacks at a net debt-to-EBITDA ratio of around 1. In summary, we expect positive sales and financial developments in 2021 while being mindful of the uncertainty related to the ongoing pandemic. Before I hand back over to Ester, I would like to give you an update on how we're tracking towards our midterm targets. You'll find them on Slide 11. We set the midterm targets back in June 2019 based on a stable world economy, a stable currency environment and excluding M&A activity. But the world has not been stable, and currencies have moved. Novozymes has made 2 acquisitions in the human health space. We have scenarios for the 5-plus percent midterm organic sales target in our 2021 outlook and in our plans for 2022. However, the world has changed and so have some of the parameters from 2019, and we address these new circumstances with a relatively broad 2021 sales outlook. When it comes to our earnings, we are also on track to deliver on our midterm targets. The implied 2021 underlying EBIT margin is 27% to 28%, on track towards meeting the midterm 2022 target of 28% or higher. And the same applies to the underlying return on invested capital, including goodwill, where we see 23% as being within range. And finally, we are also on track to deliver on 12 out of our 13 ESG-related nonfinancial targets. With this, I'll now hand back to Ester for wrap up before we open up for questions. Ester, please.

Thank you, Lars. Please turn to Slide #12. The work we've done during 2020 has built a solid foundation and positioned us to accelerate growth, securing our long-term potential. To continue our progress here in 2021, we will, amongst other things, work to drive sales from new solutions launched during the last 5 years to constitute more than 30% of our sales; work to generate more sales leads, with at least 50% of those sales leads generated digitally; engage in at least 3 large commercial R&D partnerships, we announced the first one yesterday through the collaboration with a U.S.-based company, FMC; drive and be a strong voice on the world stage for the ever-increasing need for sustainable solutions by taking part in at least 3 global events, such as the World Economic Forum in Davos last week. To summarize the message here today, we have a positive view on 2021 and beyond despite the uncertainties and the persistent challenges from COVID-19. We continue to focus on bringing the voice of the customers into our business, and this will ensure that the solutions launched from our innovation pipeline are translated into commercial success with an even greater impact for our company and for the world. And with that, we're ready to take your questions. Operator?

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

I'll start with 2, please. First, I'd like to understand better your midterm targets in the context of your 2021 guidance. And so I understand there'll be quite wide guidance for 2021 given the uncertainty. But the 5% plus, is that a per year or a CAGR target? So anything that you may or may not achieve below 5% in 2021, do you expect to recover that in 2022 or beyond that? That's my first question. And the second one on BioAg. Thanks for splitting out the targets for 2021 as well with double-digit growth. Can you just remind us how big soy is? Is it around 40% of sales in BioAg today? And how much of the double-digit growth that you guide for is from improved soft commodity prices, mainly soy? And how much is Novozymes-specific product launches and higher penetration of the acreage?

Lars, if you could take the first question on the aggregated sales, and Tina then follow up with BioAg.

Yes. Thank you for that question. So the way to understand our midterm targets is that this is sort of on an annual basis, so it's not cumulative. So you should consider them one by one. So that's how we have defined the long-term targets.

And on BioAg, so we are looking at, as you were saying, Gunther, the double-digit growth when adjusting for the one-off, which we had in 2020. And we expect growth both to come from corn and soy. We see growth from -- also from our biocontrol area, both with the, you could say, with the products we have in the market, like this Syngenta partnership which we have, and then also from our innovations in the upstream corn area. So it is -- the growth is going to come from a mix of innovations as well as acreage expansion and how we go to market. You also asked about how big is soy out of our BioAg, and it is roughly 1/3, I would say.

And the next question comes from the line of Laurence Alexander from Jefferies.

Two questions on Bioenergy. With the shift by the U.S. ethanol producers to start moving towards more coproducts, whether high-protein cuts or trying to convert dry mills into sugar plants, is that -- are those transitions a net positive or negative for Novozymes compared to the enzymes sold into the ethanol production? And secondly, can you give an initial view on how the RFS might evolve after 2022?

Tina, please.

Yes. So super good questions. So on the coproducts, we are -- I would say it is neither negative nor positive. What is positive, and that's what I think you'll see most, is that the ethanol producers, they need to have a good margin in order to operate. And the possibility for them to generate more value from coproducts, it is a positive in that aspect. The enzymes we are selling is also important for them to help them get higher, you could say, higher benefits, whatever it is, whether it is in DDGS, whether it is in corn oil and so forth. And it gives us an innovation space to enter into. I'm sure you remember, we announced also a collaboration in that field with Green Plains about a year ago, a bit more than a year ago. So I would say it is a slight positive for us. It gives extra innovation space. But overall, the most important is that the ethanol, you could say, or the biorefineries that they have a good outlet for the products, being it ethanol or being it something else. Then on the second point you were asking about with the RFS beyond 2022. So in the U.S., right now, there's the mandated blending of these roughly 10% based on the RFS. I think that what is key there is that in the U.S., and if you look at the economy for blending in ethanol, it is securing that you have a cleaner fuel, and it is securing that you have a more cheap fuel at the pump compared to if you didn't include ethanol. So overall, I would say that it is more the economics which is supporting ethanol being blended in the U.S. However, it is also important for the blending in that you do have the octane boost, which is an important part of a fuel mix as well. So I'm convinced that no matter what the RFS is going to bring beyond 2022, that there is both an economic as well as performance-based need for ethanol in the fuel mix and then not to forget that the CO2 reductions that it is delivering to the world.

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

Yes. Søren from SEB. First, on the new -- or the margin you're talking about for '21, underlying 27% to 28%, when you say you can compare with 27% last year and 26% in 2019, could you just -- when you then say we should compare with those years, what did you then, in that calculation, exclude and include in terms of, you can say, yes, one-offs or things you think you should adjust for? That's my first question.

So we stay with the first question. Then Lars, could you please answer that one?

Yes. Thank you, Søren, for that question. So as we said, this year, 2020 was impacted by a number of one-offs, one of them being the reorganization and the cost associated with that. We have also in the second quarter, you'll remember, we have a positive contribution from the BioAg settlement. We also have M&A-related effects in 2020, both the acquisition cost for PrecisionBiotics and Microbiome Labs as well as a bit of impact on the ongoing operational margin from PrecisionBiotics being on our books for half a year. And then here in the fourth quarter, we took an impairment loss of one of our intangible assets. In 2019, we had very substantial income in the second quarter, in particular, related to the termination of the BioAg alliance where basically took the deferred income we had on the balance sheet and recorded as an other ordinary income. And likewise, we sold and divested the pharma-related royalty stream that both impact the second quarter and later on also a sort of deferred income on that or contingent income in the fourth quarter. And then in 2019, we then had a negative impact from some of the restructuring costs we had in the third quarter. So those were the effects of 2020 and 2019.

Great. And then just on bioethanol, you did minus 4% in Q4. Just if you could remind us, how did that compare with market growth? And what has sort of -- what could -- what have impacted that you have grown differently than market growth? How has -- i.e., how has it been going in yeast and in Brazil and et cetera?

Tina, please.

Yes. So Q4, EIA numbers is roughly minus 7%, so it's a stronger performance from Novozymes side. It is driven by, I would say, a number of things, a, there's timing between quarters. As I'm sure you know, Søren, it's difficult with exact, you could say, splitting it out up on quarters. Then we saw growth from -- yes, both from yeast, continued from yeast, but also I would say, mostly from emerging markets, Latin America, as we have talked about a number of times. And then I also think it's important to say that, as we also have talked about a number of times, EIA is an estimate. It's not the only estimate which there are for the U.S. ethanol industry. Our customer base now and then does something different, and so does our performance. But overall, strong performance -- stronger performance than what EIA is indicating, driven by mostly Latin America, I would say, but also other emerging markets.

Okay. And then finally, on -- if you could just tell us how would you think about -- how would the higher corn prices that we have seen recently impacts your business net-net if you look across the areas in 2021? And also, if you can remind us how big part of group earnings today that BioAg is?

So on corn prices, what we are seeing is that, in general, higher commodity prices mean that there's more benefit on the solutions we are bringing. So that makes me, you could say, cautiously optimistic for the agriculture area, so including the feed area; and then also in the grain side, as we also see stronger benefit for our solutions there. On the grain side, we need to watch as well what is happening to sugar, as you know. And then on the bioethanol side or Bioenergy side, it is -- you could say the margin for the producers which is important. So overall, a higher corn price will lead to more [ wish ] in order to generate yield, but it needs to be that there's also a demand for the products or for the ethanol out in the market. Because if not, if the margin becomes too depressed, then the producers will stop producing, and then that's a negative. So a bit mixed picture.

Lars, could you please build on also?

Yes. So just one supplemental fact, which is that some of our input costs is, of course, also depending on the corn price. So there is a little bit of a negative margin impact on the gross margin from an increasing corn perspective. So just adding on top of the business perspective on the sales that Tina shared.

And how big part of your earnings was BioAg today?

So on the turnover-wise, there, BioAg is roughly 1/3 of the segment on agriculture. Profit-wise, we do not share that detailed level even at the subsegment level.

But margins are lower than the group average. That would be fair to assume, right?

So Søren, we're not sharing the margins per business area. I think what you will know is that we have significant investments from an R&D perspective. And of course, we are making those investments in return for an expected longer-term growth. But we're not sharing the details on the margin by the business area.

What is important to mention on BioAg is, first, the strong pull that we see from the industry on the increase need for more sustainable solutions from -- both from the yield enhancement but also from a biocontrol perspective. And then that this is a long-term journey that we are investing, and we are firmly moving ahead just because we see the strength and the fit for our solutions as providing the answers. The recent announcement we've made on the partnership with FMC is a true example of the strength of our portfolio and why enzymes will be an enabler of replacing chemicals in the use of pesticides today. So we are in, we're fully in, and we believe on the long-term growth capabilities for this business as it continues to contribute to the bottom line today and will deliver growth also in 2021.

And the next question comes from the line of Michael Novod from Nordea Markets.