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

Welcome to the Novozymes Q4 Conference Call. [Operator Instructions] Today, I'm pleased to present Tobias Cornelius Björklund, Head of Investor Relations. Please begin your meeting.

Thank you, operator, and welcome, everyone, to Novozymes' Full Year 2021 Conference Call. My name is Tobias Björklund, and I'm the Head of Investor Relations here at Novozymes, as mentioned. At this call, our CEO, Ester Baiget; and our CFO, Lars Green, will go through our performance and key events of 2021 as well as the outlook for 2022. Also present at this call are Tina Fanø, EVP, Agriculture & Industrial Biosolutions; Amy Byrick, EVP, Strategy & Business Transformation; Anders Lund, EVP, Consumer Biosolutions; and also Claus Fuglsang, CSO, EVP of Research and Development. The entire call will take about 50 minutes, 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 statements. With that, I'll now leave the hand to our CEO, Ester Baiget. Ester, please.

Thank you, Tobias, and thank you all for calling in. Please turn in to Slide #2. I'm very pleased with our performance in 2021. We delivered strong sales, earnings and nonfinancial numbers and advanced our business in accordance with our refreshed strategy, Unlocking growth – powered by biotech, that we launched last September. Organic sales grew 6% and benefiting from our diversified portfolio. Performance was particularly strong in Food, Beverages & Human Health, in Bioenergy and in Grain & Tech Processing. All 3 business areas delivered strong double-digit growth. Household Care declined slightly, and Agriculture, Animal Health & Nutrition was flat. And when both business areas were soft, they were roughly in line with our latest expectations for the full year. Over the past couple of years, we have invested in our commercial activities, especially in emerging markets. And it's very, very encouraging to see the sales here growing by an impressive 18%. Sales in the developed markets also grew, although at a more moderate rate. Sustainability, it's part of our DNA here at Novozymes. And I'm very pleased to say that we are on track to meet 12 of our 13 nonfinancial targets. While the targets are for 2022, we actually exceeded several of them already in 2021. The benefits to the wall from the use of our products are something we are all very proud of. And we embrace the responsibility to be at the forefront of the movement for a healthy planet as a company with a strong purpose. We are committed to support the transition towards a climate-neutral society. And in 2021, 77% of our revenue was generated from products that contribute to lowering CO2 emissions by reducing the use of fossil-based resources and by reducing waste. Another key to achieve a more sustainable world is to transform food systems. In 2021, 35% of our revenue came from products enabling our food production systems to produce more food from less and improve nutrition and quality. Additionally, we're strongly committed to enabling healthy lives, and 5% of our full year revenue came from products that enable a better health for people around the world. From an innovation perspective, 2021 was another strong year with the launch of market-leading products such as Pristine, which is the broad market freshness solution; and ProAct 360, which improves digestibility of proteins for animals. In total, we launched 14 products during 2021, including 6 in the fourth quarter alone. This is much in line with previous years. Turning to our financials, we delivered a strong EBIT margin and ROIC, including goodwill as well as a strong free cash flow, and while reinvesting significantly in commercial activities, making several acquisitions and increasingly experience the headwinds from higher input costs towards the end of the year. Executing on our strategy has been our #1 priority in 2021. After acquiring Microbiome Labs and the Biota technology asset in the first quarter, we took another important step to advance our BioHealth business in the fourth quarter with the acquisition of Synergia Life Sciences. Synergia is a leading developer and manufacturer of spore probiotics, a natural vitamin K2-7, and it will play a key role for us in expanding our position in human health and also in functional foods. Also in the fourth quarter, we entered into a very exciting collaboration with Saipem on enzymatic carbon capture and continue the construction of the new state-of-the-art production for Advanced Protein Solutions in Blair, Nebraska in the U.S. The steps we have taken during the last couple of years sets us up to deliver another good year in 2022, and we expect to be off to a good start for the year. In 2022, we expect sales to grow by 3% to 7% organically. With growth across all business areas, sales in Danish kroner is expected to be around 3 percentage points higher. The EBIT margin is expected at a solid 25% to 26% despite significant pressure from higher input costs. And lastly, we expect ROIC, including goodwill, to end between 16% and 17%, while the free cash flow before acquisitions is expected between DKK 1.7 billion to DKK 2.1 billion, including a significant uptick in CapEx, mainly driven by the new production line in Blair. With that overview, let's now look at each of the 5 business areas in more detail and starting with Household Care. Could you please turn to Slide #3? Thank you. Household Care declined by 1% organically in 2021. The soft full year performance came against a strong performance in 2020. Emerging markets performed well, supported by investments to expand our commercial footprint and tailored solutions, resulting in an increased enzymatic penetration. Our sales developed -- in developed markets declined as European consumer demand was significantly lower than expected. Performance further worsened in the second half of the year when also 2 midsized private label players went out of businesses. The Freshness technology performed well and in line with expectations. It was made available across multiple countries in Europe, and the broad market solution was successfully launched in the third quarter. Sales in the fourth quarter declined 3% organically. Similar to the full year performance, emerging markets performed well, while Europe, in particular, continued to decline for the same reasons, as mentioned, for the full year. While the 1% decline in 2021 was not satisfactory, an average annual growth rate of 2% over the past 2 years is a meaningful step in the right direction. Looking ahead, we expect sales in Household Care to grow by 2% to 4% in 2022. Growth is expected to be driven by increased market penetration in emerging markets by Freshness as well as in the non-laundry areas of professional and medical cleaning and in dishwash. As mentioned, we launched the broad market version of Freshness technology in 2021. This was a significant milestone, and Freshness is expected to increasingly contribute to growth as the year progress as well as in the years to come. Could you please turn in to Slide #4? Thank you. Our Food, Beverages & Human Health businesses had an excellent year, and the team has done a terrific job in executing on the strategic direction while also capitalizing on the supportive market conditions. Sales grew 14% organically in 2021 with all 3 main categories growing by double digits. Growth in Food was mainly driven by market penetration, and demand was particularly strong for health-focused solutions such as acrylamide reduction in baking, sugar reduction in dairy and solution for plant-based protein extraction. In addition, baking benefited to some extent from raw material optimization and ingredient substitution. Beverages performed well and outgrew the underlying market while also benefiting from a recovery in global beer volumes. Growth in Human Health was very strong and driven by cross-selling and geographical expansion. In the fourth quarter, sales grew 13% organically. The performance was led by Food. Beverages grew slightly and was somehow impacted by destocking, whereas Human Health performed well and according to the expectations. Also, in the fourth quarter, we strengthened and accelerated our BioHealth business by acquiring a majority stake in Synergia Life Science and as I've already mentioned. Let me now turn to the outlook. In 2022, we expect organic sales in Food, Beverages & Human Health to grow by high single-digit rate with all sub-areas contributing to growth. Growth in Food will be driven by market penetration supported by health-focused solutions and raw material optimization in ingredient substitution. For Beverages, we expect growth on top of the double-digit growth in 2021. And for Human Health, we expect continued solid double-digit growth, driven by innovation, cross-selling and regional expansion. Please turn in to Slide #5. Thank you. Full year sales in Bioenergy grew 11% organically. The strong performance was driven by the recovery of U.S. ethanol production, growth from innovation, capacity expansion of corn-based ethanol production in Latin America and market penetration with enzymatic solutions for biodiesel production. Putting the U.S. development a bit into context, it's important to remember that U.S. gasoline demand and ethanol production was severely disrupted during 2020. U.S. ethanol production rates gradually recovered during 2021, but still remain lower than the 2019 pre-COVID level. Organic sales in the fourth quarter grew 10%, driven by the same factors, as already mentioned, for the full year performance. Additionally, sales benefit from growth market conditions for ethanol producers with some of the biggest crush margins in almost a decade. For 2022, we expect sales to grow by low- to mid-single digits. And as in 2021, growth continues to be driven by the recovery of U.S. ethanol production, innovation, capacity expansion in Latin America as well as market penetration in biodiesel. And as a final note, the past 2 years have been unusually volatile for the ethanol industry, and uncertainties related to the pandemic and volatile market conditions are still present. This is also why Bioenergy covers a relatively broad range -- broadly growth range. Please turn in to Slide #6. Thank you. Grain & Tech Processing sales grew 13% organically in 2021. Sales in both Grain and in Tech grew by double digits with strong performance across sub-areas. The growth in Grain was led by market penetration with solutions for vegetable oil processing, innovation in starch particularly in grain milling as well as an increased end-market demand for starch-delivered products, especially in emerging markets. Tech grew primarily due to the recovering sales in textile following the negative COVID-19 impact in 2020. Good performance in areas such as pulp and paper, leather and diagnostic enzymes for the pharmaceutical industry, they also contributed to the full year performance. Fourth quarter sales grew by 15% organically. The performance was also broad-based in the quarter with the growth being pulled by innovation and high end-market demand in starch-delivered products, market penetration in vegetable oil processing and sales of diagnostic enzymes for pharma. Looking at 2022, the development is expected to be more moderate compared to 2021. And thus, we expect the sales performance to range from flat to low single-digit growth. Growth will be led by continued market penetration in vegetable oil processing and from innovation in starch such as for grain milling. Similar to the situation in Bioenergy, the relatively large uncertainty related to the pandemic and the volatile market conditions are affecting the way we see prospects for Grain & Tech Processing. Hence, we have applied a relatively broad sales range for this business area as well. Can you please turn to Slide #7? Organic sales in Agriculture, Animal Health & Nutrition ended the year flat despite a negative base effect from DKK 60 million one-off in the second quarter of 2020 related to the former BioAg setup. Sales in Animal Health & Nutrition grew primarily from increased market penetration, driven by innovations such as Balancius and ProAct 360. Sales in Agriculture declined due to the aforementioned base effect, and increased if adjusted to it. The adjusted performance was driven by market penetration led by Latin America. Fourth quarter sales grew 7% organically. Growth was strongest in Animal Health & Nutrition with increased demand for both protein and health solutions. Sales in Agriculture also grew driven by higher demand for bioyield solutions. In 2022, we expect organic sales in Agriculture, Animal Health & Nutrition to grow in the high single digits to low teens. Growth will be led by Agriculture, which is expected to grow at double-digit rate. Good market conditions and beneficial sustainability pull is expected to benefit a higher usage of inoculants. This, combined with innovation and a refined go-to-market model, will enable increased market penetration of both bioyield and biocontrol solutions. Animal Health & Nutrition sales are also expected to grow pulled mainly by innovation, end-market-driven volume growth supported by favorable market conditions. And with that, I'll hand over to Lars for a review of the financials. Lars, please.

Thank you, Ester. Let me start by reviewing the performance of our sustainability and nonfinancial targets. Please turn to Slide #8. With our refreshed strategy, Unlocking growth – powered by biotech, we made new long-term commitments to accelerate towards a climate-neutral society, transform food systems and enable healthier lives. We also significantly raised the bar by including Scope 3 emissions, in addition to Scope 1 and 2, in our CO2 savings target for 2030. The 2022 nonfinancial targets from 2019 are still valid and serve as milestones on our long-term journey. And it's encouraging to see that we are on track to meet 12 out of the 13 targets we defined back in 2019. As the nonfinancial targets are coming to an end here in 2022, we are also committing to communicate the progress and milestones we have towards our long-term targets for 2030 and 2050. You'll hear more about this during the year. Now please turn to Slide #9 for a review of our financial performance. The performance in 2021 was highly satisfactory, meeting or exceeding all targets as set out at the beginning of the year. In addition, we successfully integrated 2 companies, acquired a third and launched our strategy, Unlocking growth – powered by biotech. Sales grew 6% organically and 7% in reported Danish kroner and included a 2 percentage point contribution from M&A and roughly a 1 percentage point headwind from currencies. Sales in the fourth quarter grew 7% organically and 11% in Danish kroner. The gross margin was strong at 57.7%, 170 basis points higher than the gross margin in 2020. While many companies experienced the impact from higher input costs already in 2021, Novozymes' unique productivity improvements and production excellence, including our leverage, allows for some alleviation of such changes in input costs. However, we are not immune to the significantly higher input costs, and we started to see a growing impact in the fourth quarter when the gross margin came in at 56.1%. This was 60 basis points above the fourth quarter of 2020, but around 200 basis points lower than for the first 9 months of 2021. We saw the same beneficial operational factors throughout the year with the addition of a supportive price/mix and M&A contribution. The fourth quarter year-on-year gross margin development was driven by the same factors as for the full year, with input costs becoming a stronger headwind in the quarter. The EBIT margin was solid at 26.8%, in line with expectations and 70 basis points higher than in 2020. Higher operating costs were more than offset by higher gross profit and an increase in other operating income. As implied by the 27% full year outlook, the fourth quarter EBIT margin was expected to be soft, and the year-on-year decline was primarily due to increased operating costs which offset the improved gross margin. The fourth quarter increase in operating costs was as expected, mainly due to higher sales and distribution spend, one-off transaction costs and the recognition of acquisitions. Currency has provided a slight headwind for the full year, but were marginally supportive in the fourth quarter. When adjusting for one-offs, the underlying full year EBIT margin for 2021 was around 27% and roughly on par with the underlying EBIT margin for 2020. Further, when comparing year-on-year margins, 2021 included close to a 1 percentage point headwind from M&A and currencies compared to 2020. In the fourth quarter, the underlying EBIT margin, when adjusted for both the transaction costs related to the acquisition of Synergia Life Sciences and the sale of a noncore building in Switzerland, was around 22% compared to the 21% reported. Additionally, the fourth quarter included higher operational costs as expected and included in the outlook of around 27% for the full year. Net investments totaled DKK 1.1 billion, somewhat below expectations, mainly due to timing in the fourth quarter. Free cash flow before acquisitions was solid at DKK 2.9 billion. Working capital changes and increased net investments offset higher net profit and improved earnings quality. The lower year-on-year cash flow was much as expected following the 2020 BioAg one-off and the previously highlighted timing effects that had a positive effect on working capital in 2020. The fourth quarter free cash flow was DKK 200 million and roughly in line with expectations following higher net working capital as well as higher investments. Return on invested capital, including goodwill, was 19.3% in 2021. This was 40 basis points higher than in 2020. The improvement in ROIC was due to the higher net operating profit after tax, which more than offset an increase in average invested capital following the 3 acquisitions. Please turn to Slide 10 for the 2022 outlook. We continue to invest and position ourselves to unlock Novozymes' true sustainable long-term growth potential. Organic sales are expected to grow by 3% to 7% in 2022, and sales in Danish kroner are expected to be around 3 percentage points higher, including roughly 1 percentage point from the acquisition of Synergia. The indicated ranges per business area are broader for the agricultural exposed areas, catering for higher implied end-market volatility. The full year indications per business area are in line with the overall 2025 targets presented at our recent Capital Markets Day. Seen over the year, we expect performance to be off to a good start in 2022. The EBIT margin outlook for 2022 is between 25% to 26%, including an expectation of a slight year-on-year benefit from currencies. The margin will benefit from operational leverage, productivity improvements as well as targeted price increases. This is expected to be more than offset by significantly higher input costs and continued investments in the business. Included in the outlook, the gross margin is assumed to decline by 1.5 to 2 percentage points in 2022 compared to the previous year. We are making a dedicated effort to pass on higher input costs. And while we expect this to have a net neutral impact on our year-on-year sales growth, the effort is expected to be supportive to the gross margin and is included in the outlook. The free cash flow before acquisitions is expected at DKK 1.7 billion to DKK 2.1 billion, including a significant step-up in net investments to support our growth opportunities. Net investments are expected at between DKK 2.5 billion and DKK 2.8 billion. The increase in net investments reflects maintenance, expansion and optimization CapEx as well as investments to support our ambitions in the food and health-related areas. The amount we expect for net investments in 2022 includes roughly DKK 1 billion related to the advanced specialty protein facility in Blair. When adjusting for the protein investment, net investments add up to around 10% CapEx-to-sales ratio, which is in line with what we communicated at our Capital Markets Day. The outlook for the return on invested capital, including goodwill, is for 16% to 17%. Subject to approval at the Annual Shareholders' Meeting in March, the dividend is proposed at DKK 5.5 per share, up by 5% from the year before and corresponding to a payout ratio of 48.5%. In addition, a share buyback program of up to DKK 500 million has been approved for 2022. 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 and a net debt-to-EBITDA ratio of around 1. With this, I'll now hand back to Ester for a wrap-up before we open up for questions. Ester, please.

Thank you. Thank you, Lars. Please turn to Slide #11. Thank you. I'm very pleased with the strong set of both financial and nonfinancial results that we have delivered in 2021. We grew our sales 6% organically with double-digit growth in 3 of 5 business areas. We delivered solid earnings and cash flow while still reinvesting significantly in the business. And we are on track to meet 12 out of the 13 of our nonfinancial targets. We expect the strong performance from 2021 to continue in 2022. And we are guiding for a 3% to 7% organic sales growth with a solid EBIT margin that comes despite higher input costs. Both ROIC and cash flow are impacted by high investments to secure growth of the business. Our relatively broad range for sales growth allows us to navigate through continued uncertainty related to the pandemic and volatile market conditions, similar to the way we positioned our outlook for 2021. At the beginning of 2021, we outlined 4 progress areas to allow you to follow our strategic execution from a different angle. One of them was to engage in at least 3 large commercial R&D collaboration. This goal was achieved with the collaboration with Saipem with a key player in the plant-based industry and with FMC in agricultural. The second progress area focus on commercializing innovation. This goal was also accomplished as more than 30% of our sales were from solutions launched during the last 5 years. Thirdly, we wanted to reach more customers and aim to generate at least 50% of our sales leads digitally. This goal was achieved as more than 60% of our new leads were generated digitally. And finally, we want to be a strong voice on the world stage for the ever-increasing need of sustainable solutions. We wanted to take part in at least 3 global events linked to sustainability. And by participating at the World Economic Forum, the UN Global Compact Leaders and the COP26 in Glasgow, we also reached our target for this key progress area. Executing on our strategy remains a top priority here in 2022. And key progress areas for us are achieving key milestones in the construction of the new production line for Advanced Protein Solutions in Blair, Nebraska; leverage the recent acquisitions and deliver double-digit growth in Human Health; continue to strengthen our commercial setup also by initiating investments in the first customer co-creation center; and finally, we will secure that we keep diligent focus on prioritizing in our core business, making sure we deliver on our short as well as our long-term commitments. Novozymes is in a unique position to drive change towards a healthier planet. And as a company, we have a responsibility to make this happen. We have built an even stronger foundation over the past 2 years. And with our 60-year legacy in understanding biotechnology, we are committing to grow our business sustainably, making a lasting difference to the world and to all our stakeholders. And with these words, please let's now begin the Q&A session. Operator, please begin.

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

A few questions from my side. The first one is on a comment that you have in your release around the ROIC where you say that you expect NOPAT in 2022 to be lower and that explains the lower ROIC guidance. Can I just confirm that? Because if I take the midpoint of your organic growth guidance with the Danish kroner guidance on top and an average margin, even with the higher tax rate of 22% in 2022, I get to about a flat NOPAT. So I'd like to understand why you have an assumption now that you have a lower NOPAT in 2022. The second one, I was intrigued by your comments on pricing to pass on the higher raw material costs. Can you give us some guidance what you've already seen in the field and what you're expecting to experience in 2022? Because it's not usually -- the enzyme market is not usually one where you see positive pricing. So some commentary there would be very helpful. And then lastly, one for Tina, if I can sneak that one in as well. If I'm very bullish on BioAg, usually, at the beginning of the year, you have a wide guidance range -- a wider guidance range in BioAg. What gives you the confidence for the strong growth that early in the year already in BioAg, please?

Thank you, Gunther, for these very good questions. I'll comment on pricing and then pass it to Lars for the -- building on your comments on ROIC and then Tina on BioAg. So on pricing, what gives us the confidence? I mean it's not the -- we have not started the journey on pricing today. This is a long journey that we have already been working, if you remember, already since the time for sure since I have been in the team. And we start seeing the benefits of those focus last year. And this year, we're doubling our energy in this segment. We live in extraordinary circumstances with the rapidly increasing raw material prices. As you've seen -- as you heard Lars saying, we did a fantastic job this year plowing and postponing the impact of this high increased raw material until Q4, but we're not immune. And this opens a fantastic situation for environment, for our discussions and conversations with our customers as contracts expire, as contracts sunset to bring up the discussion on value, on price on the table. And we're aiming for a space where we're going to move into a positive impact from pricing in gross margin. But then, yes, overcome by the higher raw material price increases, and then overall, still with a slightly compaction of gross margin of 1.5% to 2%. And then I'll pass it to you, Lars.

Yes. Thanks, Ester. And Gunther, to your question on ROIC, clearly, the biggest impact on the lower return on invested capital is coming from the invested capital component where the acquired assets from our acquisitions is increasing the invested capital number. So the NOPAT is a smaller impact. And of course, our guidance is sort of a range on a number of parameters. And so therefore, our comments should be seen in that light. I think the key point is that the biggest impact on ROIC is coming from invested capital.

And then I'll answer on the Agriculture, Animal Health & Nutrition comment and the BioAg specifically. So yes, we do guide a relatively broad range here from high single-digit growth to the low teens. And if we just take a step back in that area and in these ag-exposed areas, the growth drivers is both innovation, it's market penetration, it's sustainability. And then there's also support when the commodity prices are high, given that what we deliver is a yield benefit and that has more value in a high commodity market. If you look at the performance in 2021 in Agriculture, Animal Health & Nutrition, then you have to remember, it was a flat performance. You have to remember the DKK 60 million which we saw in 2020. And also, we grew 7% in Q4. So we are on a strong trajectory, and we also think there is some timing, and that is supporting the high expectation for 2022.

That comes from the line of Michael Novod at Nordea.

Just 2 questions, one to Grain & Tech. Maybe, Tina, you had previously talked about the impacts from enzymes to COVID-19 testing. Maybe you could just detail for us also how much of growth was impacted by this in Q4 and 2021 and how much is expected in 2022. And then secondly, to Lars, regarding CapEx. So is -- should we assume that 2022 levels are the peak? Or would there be one more sort of significantly elevated and then sort of fading off from there?

Tina and Lars.

Yes. So in Grain & Tech, it's -- if you look at, yes, both for the year and the quarter, then roughly 70% of the segment is coming from Grain and 30% is coming from Tech. And that means that -- and within the Tech segment, as you know, we have many different businesses. So diagnostics is a small part of that, so it is a small impact.

And on CapEx, we guided in the Capital Markets Day back in September for a CapEx-to-sales ratio of around 10% through the period to 2025. And then on top of that, we have our advanced protein facility in Blair. Now the latter is roughly DKK 2 billion in total over the 3-year period, '21 to '23. And we recorded roughly DKK 200 million in '21. Another DKK 1 billion is expected here in '22. And so this leaves a residual roughly DKK 800 million for 2023. The good thing is we have progress in line with our plans. But exactly how the recording of the CapEx plays out, of course, is subject to a bit of uncertainty. So this is our expectations right now. So you have to add that the residual component of roughly DKK 800 million to the 10% also in 2023.

Our next question comes from the line of Nicola Tang at Exane BNP Paribas.

It was a few on Household Care, actually. I was wondering if you could talk a little bit about the reduced demand in Europe and private label issues. I know we were talking about them back at Q3. But can you confirm that the European issues are still sort of related to down trading? And when you think about your guidance, the 2% to 4% for 2022, can you just kind of clarify or explain what you're factoring for both those 2 elements? And then the second question, still on Household Care, we've seen a bit of news flow around activism and restructuring, and one of your big household care customers even knew that. And in the past, I think in the industry when we had activist cases or cost cutting, it's led to lower levels of customer innovation and reformulation. So I was wondering whether you see this as a risk or whether you're seeing anything, whether you see a sort of risk this time around for you? Or what has changed in the household landscape versus a couple of years ago?

Thank you, Nicola. And Anders, could you please take those questions?

Yes. So thanks. Let me start with Europe and what's going on. So the result of the performance in the retail market was that laundry, which is by far our largest single segment, is down 5% on volume. And the way we look at it, there's a few different sort of trends that's going on. We see customers, they are trading down to lower-tier brands. We also see that customers are washing a little bit less than what they did last year. And then, of course, we see the private label segment being under a lot of stress. And stress comes in different forms. It comes with -- 2 of our midsized customers have gone out of business, but also comes in a way where you can see that they're actually losing substantially more than the big brands. And our exposure to the private label market has traditionally been quite strong. So from that perspective, we also get quite some challenge in Europe. And I think when you look at the guidance for the full year, looking at Household Care, Europe is actually the single and only area compared to our plans that delivers the deficit to our original guidance. So that's what's going on. Looking ahead on Europe, we plan for a flat European market next year. We believe that we have sort of seen the bottom of this. We also believe that the private label pain that we saw that, that will travel to other private labels. So for us, that's, I think, a good belief that we'll see sort of the -- we've seen the bottom of the European market. Now if we turn to the next question, this is very -- it's difficult. And then, of course, I can only speculate and I can tell you what happened in the past. Of course, we've seen investor pressure coming in, and it has shown itself in different shapes and forms. This time around, I think it's uncertain to say what's going to happen to Unilever. We know that Unilever is on a journey where they are really driving sustainability hard. We have very strong conversations and also a very strong pipeline with Unilever. And I'm pretty sure that some of that will come through. It's too early to tell if there's going to be any negative impact. Right now, we don't see it, and our conversations are positive towards growth and innovation. I think that's it.

Very well said, Anders. Nicola, you did not really implicitly ask for it, but I would like to build on Anders' comments on what gives us the trust on the [ 2.4 ] guidance and also on the long-term growth. It is that, for once, the very strong penetration of Freshness that we see, the broad launch sticking and contributing to the growth and also a contributor to the growth of 2022; the continued penetration of our solutions in emerging geographies that they do grew least this year, and they will continue to grow; and then the strong momentum and the pull for our customers for sustainable solutions, replacing chemicals and detergents. All these parameters, they make us confident that there is a growing path and that we are moving on the right direction to that growth path.

The next question comes from the line of Lars Topholm of Carnegie.

Congrats with another strong quarter. A couple of questions on my side. To the guidance, since you're passing on input cost inflation, at least partly, I just wondered to what extent that boosts your organic growth guidance. And in line with that, both you, Ester, and Lars mentioned that you were off to a strong beginning of 2022. So I just wonder what you mean by that and if this implies the year is going to be front-end loaded. And then a second question goes on alternative proteins because earlier in the year, you sent out a press release mentioning that you would like to sort of drive the creation of a microprotein industry body, or I don't know what the right word is. To my knowledge, you don't have any significant microprotein products in the market. Am I wrong? Is there something that is going to come? Why are you doing this? And should we expect any microprotein announcements going forward?

Thank you, Lars, for your very kind comments. Yes, we feel very pleased with the results and also that we expect a good start for the year. I'll let Lars answer your first question and then Amy, a follow-up on your second one.

Yes. So on our assumptions on pricing, our 2022 outlook includes a net neutral impact from price on the top line. We benefit from our targeted price increases, but we have also included some volume loss risks. So that's how we have built our guidance for the year. While the net effect on top line is neutral, we expect a minor positive contribution to the gross margin. And as Ester explained earlier on, we are looking to effectuate these price increases as contracts expire. So our commentary on being off or expecting to be off to a good start, it's important to understand that wording of expecting to be off to a good start. So we are really commenting on the fact that for the first quarter and for the beginning of the year, we see and expect the momentum we had in the last part of '21 to continue into '22 and, therefore, just trying to set the expectations for our first reporting of Q1 in April.

So does this imply around a 7% organic growth rate for Q1?

So that, we are not commenting on, Lars. We are just saying that we have 3% to 7% for the year and then that we are expecting a good start to the year.

But you grew 7% in the end of 2021. And if you're implying that growth is continuing, wouldn't that bring Q1 in at least in the high end of your guidance range? Am I completely misunderstanding what you're telling me?

So what I was saying is that we were continuing the same momentum from Q4. I didn't say we would have exactly the same growth rates. So I think, if anything, we are saying that we expect the first quarter of the year to be at least on average for the full year growth. And I think that's as far as we can help you on the first quarter expectations.

Fair enough. That's fair enough.

And if I take the second question, Lars, around alternative proteins, maybe to put this into context, our alternative proteins development really fall into the 2 categories if I link it back to the strategy. The first one in the expand space, which is our investments in Blair and everything we're doing in that area, which would be hitting us within the next 3 years in terms of really scaling up into growth. And then we have a piece of what we're working on, which is into our explore category from a strategic perspective, which is really looking at 2025 and beyond. And that's really where the microproteins falls into place. So the announcement we made last year was around an open call for innovation around microproteins, really looking to couple the work that we're doing internally from an innovation perspective with outside innovation and creating an environment and a network to accelerate innovation in the area. So we don't have anything that you should be expecting in the next year. This is really about that explore area into microproteins for the long-term growth.

But Amy, just to follow up on that, doesn't that mean it would be fair to assume that if we take a sort of 5-year perspective, your alternative protein portfolio 5 years from now should be significantly broader than what you have already announced and are investing specifically in Blair?

I think that's fair from an aspiration perspective, right? So I mean what we've announced with Blair would be that 3 years following the start-up, we would reach DKK 1 billion of sales. This microprotein space would be beside that, but again on a longer-term basis.

Our next question comes from the line of Alex Jones of Bank of America.

Two, if I may, please. The first, on the margin this quarter, I think you talked about 400 basis points lower underlying EBIT margin year-on-year due to sales and distribution. Could you give us a bit more color on exactly what in sales and distribution expenses increased and how we should think about that going into 2022? And second question, on Food, Beverage & Health, you talked about sort of raw mat optimization and ingredient replacement in bakery having a positive impact both in 2021 and expected in 2022. Could you give us a bit more color on sort of how that depends on, say, commodity prices versus how much is a structural evolution to the baking industry?

Excellent. Thank you. Very good questions, Alex. Lars, if you could answer the first one and then, Anders, build on the dynamics on baking? Thank you.

Yes, absolutely. So our operational expenses in the fourth quarter were significantly higher than they were in the beginning of the year. And this, we called out actually already in the -- in our release of the second quarter that we were expecting higher operational costs in the second half, and the majority of those hit in the fourth quarter. So what they were, for example, in commercial investments we had in our OneHealth areas where we had significant investments in cross-channel and cross-geography promotion and new product launches, building on our acquisitions of the 2 and now 3 companies in the area. We initiated a number of clinical trials. And we also, across the businesses, not only in the area of OneHealth, but also in the other areas, had significant investments in digital solutions. So those were some of the key factors that impacted the fourth quarter spend primarily in the sales and distribution area. And when we look forward to '22, then the fourth quarter of last year is not the appropriate benchmark for how '22 would look like. So as we said on the gross margin, we expected for the year to be 1.5 to 2 percentage points lower than what we saw for '21. Maybe to give you an idea of the other line items then, admin cost is probably a good assumption to be in line with history at 5% to 6%. We have historically had R&D costs of 13%. S&D, 11% to 12%. But on the latter 2, we have consciously chosen to shift a bit of our resources from R&D to S&D. So I think you would probably see a slightly higher S&D ratio, maybe closer to 12% or 12-ish; and R&D, maybe still in line with the 13% or so. So I think that is maybe a good way to think about how the cost composition would be in 2022 and arriving at an EBIT margin of 25% to 26%.

And on Food and Beverages, I'll just expand a little bit on how growth is composed in '21. So the major driver for us was a very strong underlying demand and innovation and market penetration. That made up more than 2/3 of the growth in Food and Beverages. Then we saw, especially in the brewing space, some recovery that also supported growth, and then we come to raw material optimization. And absolutely, as you highlight, that was mainly in baking. What happened in baking was that we saw shortages of certain raw materials like vital wheat gluten, we saw quite some inflationary pressure on ascorbic acid emulsifiers and so on. And then you can ask, well, does this stick? We believe when we talk to customers, that it is actually quite sticky, and that's a business that we will continue. Our estimates is between 2/3 and 3/4 of this that will stick. And the reason we believe it will stick is that customers, they use it to sort of drive clean label claims. They, of course, also do it because of the stability of cost. And then there is some pain associated to make these reformulations. So all of that makes us quite confident that what we have seen of reformulation and optimization will actually remain in '22 and the years to come.

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

Just 2 questions from my side. First on to Lars regarding the margin bridge from the 27% underlying in 2021 to the 26.5%. If you could just give us the components to bridge that gap. And then secondly, you had quite impressively product -- 14 product launches in 2021 of solutions, you can say. Could you highlight the most important ones in terms of sales growth contribution over the next 5 years?

Lars?

Yes. So on the first question, so from the 27% underlying, the most important factor towards the 25% to 26% EBIT margin guidance we have for '22 is the lower gross margin, which we believe will be 1.5 to 2 percentage points lower than what we saw in 2021. We are also continuing to invest in our business. And therefore, as I just outlined with our expectations or at least the way you can think about some of the individual cost lines, we are still investing also in both sales and distribution and also R&D on a growing top line. So we don't see any significant other ordinary items in our 2022 numbers. So those would be the significant drivers of the margin arriving from the 27% last year to 25% to 26% in 2022.

And to your second question, we made 14 launches. We love them all. It's hard to choose which is the one that we feel more proud of. They're all contributing to what it has been already also a trajectory of where innovation continues to be a strong contributor of our growth. 30% of our sales this year, they were coming from launches we made in the last 5 years. But if you make me -- if you ask me, where would you see that contributing in the future? It will be across all fronts. So from one side, we have very high expectations on our launches in animal nutrition, including the latest launch we have made in [ 4 years ] for animal nutrition. Very strong trend and momentum we mentioned on Freshness with a broad launch. That continues to contribute to the -- to contribute to growth in Household Care. Very good momentum in Human Health. Very high level of cross-fertilization on the acquisitions that we brought in and also the tangible examples from innovation from our innovation muscle and then also cross-fertilization across the globe. And then lastly, not to mention, is a strong trend in the market for consumers for healthier foods, some by replacement of chemicals as a -- or ingredients, as Anders mentioned, but the strong also driver for nutritional changing habits in seeking for plant-based solutions where our enzymes contribute. If you couple that with also a stronger penetration in emerging geographies, I have to close your question saying, we love them all. And we're pleased with the 30% contribution of innovation, and we know that innovation is a key contributor of our long-term growth.

Our next question comes from the line of Sam Perry at Credit Suisse.

If I look at your 2-year stack organic growth, your '22 guide at the mid to upper end implies double-digit to mid-teen growth on a 2-year basis. This is a level that hasn't been seen on a 2-year basis since pre-2015 when commodity prices were also much higher. Similarly, if I look at the midpoint of your sales and EBIT growth, the EBIT guide for '22 is broadly in line with 2016 despite having some acquisitions. So I guess my question is, how much of your ability to print these higher growth and earnings numbers do you think is based on changes you've made to the business over the past 5 years and new innovation? And how much is based on increasing soft commodity prices and customers reformulating towards enzyme-based products?

We -- thank you for your question. We have launched, as you recall, our strategy in September. And a lot of the fruits that we're seeing today are already from the work made on the past, but also from the steps we're taking for the implementation of the strategy. It's a combination of both. We're just capitalizing on the headwinds that we're seeing in the market. We're not shy of that. But then also many of those ones, they are sticky as they stay. We know that once you tried our solutions, then our customers fall in love with the value propositions of sustainability that we bring in. And that's true across all fronts: in animal nutrition, where we bring beyond increased protein enhancement, also lower manure; like in baking, where we're moving into natural and formulation and clean labels enabling; or detergents, leading to washing -- consumers who can wash at lower temperatures and replacing chemicals. So there is good momentum. We're capitalizing on that, but there is a lot of self-help. And the self-help comes from proactive investments we've made in emerging geographies on assets, on people, on labs. The self-help also comes from acquisitions that we have made in human health to maximize potential that we have as a biotech company and to contribute to the world in a very rapidly growing trend on healthier needs. Same will be for plant-based proteins on the investments we've made on Blair -- we're making on Blair. That's one of the key milestones also for this year to move ahead with those investments, and that will be a contributor also for the future growth.

Our next question comes from the line of Charles Bentley at Jefferies.

So I just have 2. So one is just on the comments around Household Care, that Europe has already bottomed and private label, you'll see it shifting. I mean, is this what you're already seeing in Q1? Because the guide implies kind of an acceleration versus the Q4 exit rate. So I just want to understand whether this is what you can already see in January and then coming through the order book for the rest of the fourth quarter? Or does this assume that this picks up at some point? And then secondly, just on the -- just another question on the kind of Q4 margins and the commercial investments you mentioned. I mean it seems to suggest there's something like DKK 100 million of costs in Q4. I think previously, you suggested it would be something like DKK 300 million total. Is that right? And then kind of related to that, what's the likely phasing on the remaining costs?

Thank you, Charles. I'll let Anders answer your first question. And then Lars, can you build up on the second one? Thank you.

Yes. So of course, we have 1 month in the books, and it confirms what I said before that we believe that Europe will look around flat, maybe slight growth. That's what we see now, and that's also what we see in the order books.

And I would say on the spend in the fourth quarter, I don't know, but I assume the DKK 300 million you referred to is the cost that we carved out all the way back in '19 when we started to sort of reshape our cost structures towards sales and distribution. I think now we are almost 3 years later, and I think it becomes very difficult to separate what was carved out and what is now invested where. So I would maybe rather look at our commitment to continue to invest in our business, which we also do and imply in our guidance here for 2022. And then we have also provided a long-term guidance back in the Capital Markets Day that we aim for an EBIT margin of 26% in 2025 or above and no individual year going below 25%. And that's what we are guiding for here in 2022 with a continued investment in our business to support the organic sales growth.

And that comes from the line of Sebastian Bray at Berenberg Bank.

They're primarily focused on gross margin development. I can understand why the current raw material environment would mean that the outlook is, let's say, downwards for 2022. What makes me curious is what the company thinks of as its mid- to long-term gross margin, i.e., if price recovery is good enough, do we get 100 to 150 basis points back? Is there anything in 2023 onwards? Is there anything to suggest that the current decline in gross margins may prove permanent as opposed to temporary? And secondly, a quick question on plant-based meat and products. If I say as a rough guess, I think Novozymes is making a little less than DKK 100 million in this area on an annualized basis. Am I getting warm?

Thank you, Sebastian. And I'll let Lars answer your questions.

Yes. Thanks, Sebastian. So right now, we are, like many other companies, are impacted by the higher input costs. And therefore, we are guiding to a lower gross margin of 1.5 to 2 percentage points. We are also saying that we are taking actions to pass on some of those higher input costs to our customers over time. And therefore, we see a small positive contribution from that pricing initiative on our gross margin. And then I would say, we are still continuing to see the productivity improvements as we have seen for years and years and years, leveraging the scale and the volume growth in our facilities. So in the long term, we still see potential to expand gross margin from productivity, from scale. And then we will see how the future develops, both in terms of input costs and also in terms of price discussions. But the fundamental factors that enables us to see gross margin expansion, those are intact. And then, of course, there are more parameters like we now experience in '22, which will determine the actual gross margin in the individual year.

Thank you, Lars. And that closes the session -- oh, sorry, Anders, yes, please build on the second question.

I think there was a question around protein, and let me just expand on that. I'll not give you a specific guidance on how much we sell and how -- whether DKK 100 million is warm or cold. But what we do, we have a sizable business on protein extraction and protein modification that relates to meat patties, both delivering on taste and texture and reduction of salt. It's a business that's growing very, very nicely right now and, of course, one, when you look at the trends, we have a lot of hope and faith will continue to grow for Novozymes.

And now, yes, thank you very much all for your questions. Thank you for your time, and looking forward to continue the conversations with you -- with many of you in the forthcoming days. Wishing you a very nice day. Thank you.