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

Ladies and gentlemen, welcome to the Novonesis conference Call. I am Joseph, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Tobias Cornelius Bjorklund. Please go ahead. now. You may now start.

Thank you, operator, and welcome, everyone, to today's conference call relating to Novonesis acquisition of DSM-Firmenich part of the Feed Enzyme Alliance. My name is Tobias Bjorklund as mentioned, I'm heading up Investor Relations here at Novonesis. In this call, our CEO, Ester Baiget; and our CFO, Rainer Lehmann; as well as our EVP of Planetary Health Biosolutions, Tina Fano, will go through the strategic rationale for the transaction. The conference call will take about 30 minutes, including Q&A. Please change to the next slide. As usual, I would like to remind you that the information presented during the call is unaudited and that management may make forward-looking statements. These statements are based on current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in any forward-looking statement. With that, I have now the pleasure to hand you over to our CEO, Ester Baiget. Ester, please.

Thank you. Thank you, Tobias, and welcome, everyone, from my side as well. We are excited to speak with you today regarding Novonesis as the natural owner of this business and why it generates incremental value to both customers and shareholders. If you could please turn now to Slide #3. Thank you. The Feed Enzyme Alliance has existed for more than 25 years, building a comprehensive and innovative portfolio of animal feed and gut health enzymes. As a clear industry innovator, we have been leveraging our scientific insights and development capabilities to optimize animal health and feed efficiency, at the same time, reducing the industry's environmental impact. This strategic offering aligns perfectly with Novonesis' Planetary Health Biosolutions business and directly tackling some of the animal industry most pressing challenges. Let me already here leave the word to Tina for further details to this deal. Tina, please.

Thank you so much, Ester, and good morning from me as well. Novonesis and DSM-Firmenich complementary capabilities have historically enabled the solid value chain of the Feed Enzyme Alliance. Novonesis have been responsible for R&D and production of the profit-sharing alliance, developing world-class enzymes. And DSM-Firmenich, on the other hand, has facilitated the go-to-market model with a specialized sales force and global distribution setup. And with this acquisition, Novonesis will be driving the full value chain. This allows us to drive stronger growth and innovation together with customers. We will leverage our position from an existing strong commercial presence and excellence in probiotics, and we will build on Novonesis' excellent R&D and production capabilities of both enzymes and probiotics. And then please turn to the next slide, Slide 4. Because up until now, Novonesis has been limited in -- on how to go to market directly from a consolidated technology point of view. Novonesis only had the direct market access in the probiotic space, and we lagged a similar model in the Feed Enzyme business, where we relied on DSM-Firmenich for the sales and distribution activities. And you can see that in the upper part of the slide. In the lower part of this slide, you will see the new setup where Novonesis will be able to drive the full value chain. We will be able to leverage our strong R&D, application and production capabilities and combine our enzyme and probiotic solutions in one consolidated go-to-market model. The new setup will allow Novonesis operational freedom across the full value chain, strengthening our global presence for all our solutions with direct customer access across all the regions. One of many synergistic examples is the strong commercial presence we have in the U.S. market for probiotics already and where we now will be able to cross-sell our enzyme solutions. And with this intro, let me leave the word back to Ester, who will then share some further thoughts on the strategic rationale of the deal. Ester, please.

Connection with the speaker has been lost. [Technical Difficulty]

Ester, we lost you, but yes, I went through my part, and we are on Slide 5.

Excellent. Thank you so much, and I apologize for this little technical detail, I lost connection. Thank you, and I'm glad to be back. When we end on Slide #5, we would like to share with you how Novonesis is uniquely positioned to realize the full potential of the Feed Enzyme Alliance and our Animal Biosolutions business. We acquire a high-quality asset with low execution risk in a core segment. Through this vertical integration, we now control our full value chain in Animal Biosolutions, including the sales and distribution activities for Feed Enzymes. We improved our ability to directly serve both existing and new customers worldwide by cross and upselling market-leading enzymes and probiotic solutions. Besides expansion of our customer and product reach, we will continue to supply enzymes to DSM-Firmenich's premix business as DSM-Firmenich becomes a strategic customer. Our leading position in animal biosolutions is further supported by significant R&D insights and unique production at scale. Driving this business in full gives more direct customer access with accelerated growth and innovation, while at the same time, reducing the operational complexity. If you could please turn to Slide #6. Thank you, Macht. Last year at our Capital Markets Day, we shared with you Novonesis' key drivers of growth. Growth will come mainly from our core business areas as well as from adjacencies and explorative opportunities. They are all building blocks that leverage on our key strengths. This acquisition, the acquisition we present today is a perfect match with our strategic agenda as it belongs to our core, unlocking growth and more opportunities. Let me share a few examples of how this acquisition will create additional value to customers and profitable growth to Novonesis. Our unique animal feed and gut enzymes will now be available to non-alliance customers, including those customers that today only buy probiotics from Novonesis. Tina mentioned how we can build on Novonesis' already strong commercial presence in probiotics, such as in North America to also build and expand our presence in enzymes. Our best-in-class probiotics can now be sold directly to previous alliance customers in addition to enzyme solutions we already provide. Customers are requesting optimal solutions to secure improved animal health and increase yields. This increase -- this includes the need to reduce the use of antibiotics, which is an area where our probiotics and health enzymes both come into play. And now with an even stronger reach and dialogue with customers, we are now set to drive more long-term innovation opportunities across the portfolio. The synergistic benefits of adding enzymes and probiotics to animal diets is an increasing part of our dialogue with customers. We are, for example, considering the use of specific feed enzymes to generate probiotics that these ones will -- could benefit our probiotics for even better gut health compared to the solutions that exist today. By having the freedom to operate the full value chain in Animal Biosolutions, we will be able to drive more growth and value for both the short and the long term. And by this, let me now hand the word over to Rainer who will provide some more color on the financial profile and details of the transaction.

Thank you, Ester, and welcome, everyone, also from my side. Let's turn to Slide #7 for some insights into the financial profile of this transaction. To start off, the acquired business is highly accretive -- attractive to drive stronger growth in Animal Biosolutions and is highly accretive to our earnings. The acquired business will have an annual revenue contribution of close to 3% in year 1 on group level, and around 5% on the Planetary Health BioSolutions division. The acquisition will accelerate Novonesis midterm sales growth of Animal Biosolutions by a low single-digit CAGR above the market growth, which is estimated to be at mid-single-digit growth. Further, the acquisition will contribute around EUR 70 million to the adjusted EBITDA, equivalent to around 0.5 percentage point accretion to the group adjusted EBITDA margin on the first full year basis. This translates to around 1 percentage point accretion to the Planetary Health Biosolutions division. And as we expect operational efficiencies and economies of scale, the margin has further accretion potential in the years to come. Additionally, the acquisition is expected to contribute by a low single-digit percentage to the adjusted EPS, excluding amortization in the first full year, increasing to a mid-single-digit percentage in year 3. And let me also mention that the deal has highly attractive cash conversion with limited CapEx needs. Let's turn to the next slide. And let me share the transaction overview. As you're aware, Novonesis pays EUR 1.5 billion on an all-cash consideration for DSM-Firmenich's share of the Feed Enzymes Alliance. The acquisition is 100% debt financed and fully committed. The expected strong cash generation will allow for deleveraging to the current target range of 1.3 to 1.7x net debt divided by EBITDA within the next 2 years. Novonesis will continue the long-term supply relationship with DSM-Firmenich for their premix business. And we expect that the transaction will have no impact on dividend payouts and closing of the transaction is expected in the course of 2025. With this, I'll now hand it back to Ester for a wrap-up before we open up for questions.

Thank you, Rainer, and thank you also, Tina, for these summaries. Please turn to the Slide #9 for wrapping up. The acquisition plays exactly into our accelerating growth ambitions, and it does so by strengthening our position in an attractive and growing core business. [ Last year ] combination between Novozymes and Chr. Hansen has made this opportunity even more attractive as we can leverage on existing and new strengths across the full value chain. Besides driving a stronger growth, the acquisition has also an attractive and accretive earnings profile. It will drive increased value to customers and to our shareholders. Thank you. And by this, we're now ready to open for the Q&A. Operator, please?

[Operator Instructions] The first question comes from the line of Alex Jones from Bank of America.

Two questions, if I can. The first, you refer in the press release to market growth for Animal Biosolutions of mid-single digit. But can you give us a bit more detail about the historical growth rate of the Feed Enzymes Alliance and also what you'd expect that sales growth to be going forward with all these synergies that you've outlined on the call today? And then second question, just more conceptually, when you're looking at bolt-on acquisitions like this, can you remind us if there's a return on capital threshold that you require the deal to reach in a couple of years and confirm that, that applies to this deal as well?

Thank you, Alex. I will let Rainer to bring the financial aspects and then also Tina to put more color on the market dynamics historically and also future looking forward.

So Alex, I can take that first regarding -- as you are aware, we are going to introduce ROIC, and we basically reintroduced the ROIC, and we committed to do that with the announcement of our long-term plan with the H1 figures. So a little bit of patience, and then we can talk about this a little bit more in detail, but it will also be -- it's expected to be accretive to our ROIC. That one I can say.

Yes. And on the market, it is -- the market is projected to grow at mid- to high single-digit CAGR by the various drivers, which we all know of, I mean, protein demand and so forth. And we expect to grow above that with the Animal Biosolutions to the higher end of that range.

Okay. And that was true historically as well.

So historically, yes, I would say so. A bit less. a bit less given the synergies because you have to add the synergies up. But it is a relatively wide range with the mid- to high single digit we are giving. So yes, historically, mid-ish, and we're in the high end.

The next question comes from the line of Soren Samsoe from SEB.

Congrats on the acquisition. Just sort of in practical terms, are you -- how many people are you taking over? If you could say a little bit more about that? Also, if you could maybe elaborate a little bit more on the potential synergies. I assume it's mostly sales synergies you can see.

I will let Tina build in, but don't also forget that we already have people in Animal sales force, which is within the probiotics value chain. And now we will be by welcoming the future colleagues from DSM-Firmenich, we will accelerate the boots and the eyes on the [ trope ] and the field. And that's what's going to be driving the growth synergies by the combination of the portfolio and being a better partner to customers, but particularly also being stronger also geographically with now a broader presence. And Tina, if you could...

But is there anywhere where you can now sort of accelerate the journey you have controlled?

Exactly. So it's a combination of the presence that we have today already existing with the one that is coming, that together, they're going to be much stronger, particularly in a couple of geographies. But I will let Tina bring further details here.

Yes. So exactly, as you have said already, I mean, we expect it to be around 100 people, which we will -- you can say, of new employees we'll get. And at the same time, we expect to hire in order to accelerate the growth. But I think it's important to say that we do have a number of people already in this field and the combination of the 2 is what makes us believe that we will accelerate. So just to make it clear from before, so historically, we have seen a mid-single-digit CAGR growth in the market. We expect to add with this a low single-digit CAGR. So that brings us to, you could say, what I talked about before. But just to make it clear for Alex. Did it answer your question?

The next question comes from the line of Chetan Udeshi from JPMorgan.

The first question was just a clarification because I'm a bit confused between your communication and what DSM is saying. They are saying it's EUR 300 million of sales for them. And I think you are implying about EUR 120 million. So can you just bridge the gap exactly -- maybe it's an accounting difference? The second question was just curious about the valuation. It's almost 22x EBITDA you are buying or 21. I would have thought you would have had the right of first refusal with this JV. So what prompted you to pay such a high multiple for this business?

Beautiful questions. I'll start tipping on the first one, the last one, and then I'll pass it to Rainer. This is the value that it took to bring the deal home. This business belongs to Novonesis. We're bringing a [ haisan ] in a place that we are the natural owner. And then when we're putting those -- all those capabilities together, people and enzymes and probiotics together, we're becoming a stronger value creator for our customers and then accelerating growth and value for our shareholders. We're not going to comment on the specific of the details of the contracts. We feel very pleased with where we are on the deal. And then also maybe passing the word to Rainer to build up on your first question.

Yes. Absolutely, Chetan. And first of all, let me clarify, right? This is not a traditional joint venture we had. There was a profit sharing alliance. So as Tina also said, DSM basically had the go-to-market model. In order, of course, to fulfill those sales to the market, we already had sales to DSM-Firmenich in our books, right? And that is exactly the difference between the EUR 300 million that DSM communicates, which are sales to market. We, of course, have already supplied those in orders for DSM to sell them around EUR 180 million, I'm following your math. So therefore, we're just acquiring EUR 120 million. So this is also a little bit of the specialty. It's really a vertical integration where we are just now adding the incremental sales to us, of course, with then a very attractive margin profile. Is that clarified?

Yes, it's clear. Did you say it's -- so it was profit sharing. So did you have like 50-50 profit sharing in the past because I'm still sort of wondering how it might be different between the 2 companies. But anyways, we can follow up separately. The other question maybe for Ester, just clarifying how quickly do you think the revenue synergies come? Do you have to build the capabilities for the next 12, 18, 24 months before you can do that? Or can it happen rather sooner than that?

So first, we're going to close, which is going to happen within this year, and we feel comfortable about the -- very excited also about the path moving forward. And then as we're bringing in our full capabilities for Animal together, we're going to see impact immediately by the combination of the sales force and by simply being able to come with our customers from both sides with a broader portfolio, that, and then start harvesting the fruit of that connectivity. At the same time, don't forget that now, maybe just repeat that at this time, now we will be even better equipped to develop the solutions of the future. And that will take more time. So there is a gradient here of how we're speaking of immediate cross-fertilization of existing solutions that they're here, enzymes from one side, probiotics from another one. We're connecting them. We're bringing them on the field. We become a better partner to customers. In some cases, it is also connecting fruits of the place of sellers that we didn't have or the boots that we didn't have in the geographies. So a physical geographical expansion. Those are immediate and coming as we close. And then the accelerated also long-term synergies by being in a stronger biosolutions enabler of value creation for our customers.

Got it.

So net-net, accretive growth, as Tina mentioned so nicely, as we close and then also sustained accelerated growth by harvesting the fruits of the innovation capabilities. What we're doing here is we're simply making us the machine of R&D that we have, we're making it better by having those eyes in the tropes and then connecting probiotics and enzymes. It's simply bringing home what they were supposed to be there.

The next question comes from the line of Andre Thormann from Danske Bank.

So I have 2 questions. The first is regarding the geographical exposure of this business and whether you are already exposed to these areas with the probiotics part of the business? And the second question is whether you see any cost synergies at all from combining the sales force of enzymes and probiotics.

I'm going to pick on the second one, and then I'll pass it to Tina. This is -- combination is meant to be driving growth. Of course, there's going to be some efficiencies in the way that we operate here and there, but the main driver is growth synergies. And as also, as Tina said, we're bringing home new sellers and new boots, but we're also going to continue to be investing because the main focus is going to be driving and capturing the accelerated growth that we can be capturing now. Tina?

Yes. And in terms of geographies, the Alliance is particularly strong in Europe, APAC and LatAm. And that's the markets where the Feed Alliance was very, very strong, while for Novonesis, the probiotic exposure was biggest or is biggest in the U.S. market. So that's, you could say, complementarity.

[Operator Instructions] The next question comes from the line of Nicola Tang from BNP Paribas.

So you mentioned that there would be limited CapEx spend, but I was wondering on the OpEx side, whether you see the need to increase investment to build up your go-to-market strategy. You talked a bit about having existing capabilities already, but I was just wondering whether you needed to add a bit more around, I don't know, whether it's commercial or regulatory expertise and so on. And could you perhaps talk about what you had from the existing legacy Novozymes and Chr. Hansen businesses? And then the other question, not to sort of labor around a bit, but I'm still a bit confused in terms of on the synergy side. Are you mainly talking about cross-fertilization of taking existing products and cross-selling across customers? Or are you talking about combining your products together, so putting together enzymes and probiotics? Or is it a combination of the 2?

It's taking existing solutions and bringing them into customers that we -- that they didn't have access for and then it's creating the capabilities for future new solutions with now the combined portfolio. And Tina, if you could also build on the first and second question.

Yes. So yes, we do expect that we will be both taking over people from DSM-Firmenich in order to strengthen the Novonesis footprint. And at the same time, we expect to add extra people in order to drive the growth synergies. In terms of synergy realization, I would bucket it almost in 3 buckets. There is the first bucket, which is a near-term bucket, which is the cross-selling. It is a matter of that you could say some of our probiotics customers can now also get enzymes and vice versa. The other one is the geographical footprint. That's also a relatively short-term synergy in terms of that we strengthen our footprint in geographies as we just talked about before in the question from Andre. And then the last one is the innovation synergies, which is of putting the products together and utilizing the 2 aspects, the 2 benefits and deliver the full solution to customers. That's a bit more long term because it involves R&D. But it's all 3 elements. I hope that clarifies the example of synergies.

The next question comes from the line of Alex Sloane from Barclays.

A couple of questions from my side. In terms of the opportunity to sell probiotics to the Enzyme Alliance customers that you couldn't do before, are these customers already buying other strains of probiotics? Or is the big opportunity to really go in and replace antibiotics that they're using? And then the second one, could you tell us how important the DSM Premix business that you're going to continue to supply to will be as a customer for this business or for your business going forward?

Tina?

Yes. So the Novonesis or we at Novonesis have the world-leading probiotics and we also have a world-leading enzymes for feed optimization. And therefore, we believe that combination of the best-in-class probiotics and best-in-class enzymes will enable synergies to be delivered. On DSM-Firmenich and how they will remain, they will remain a significant and large strategic customer for us in the future.

Okay. And if I can maybe just squeeze in one more. Just in terms of the margin accretion that you're guiding to 50 basis points year 1 and then building from there. Can I assume that encompasses your plan to hire more sales force, which I think you've alluded to in terms of the accretion building?

I can take that. Yes, that's correct.

One last question, operator.

The next and last question comes from the line of Charles Bentley from Jefferies.

So Ester, can I ask just if I remember correctly, I think if I'm right, I think Animal is something like 15% of sales for the combination. So if I think about kind of a low single-digit percentage of accretion for the business, it would be probably something like 50 basis points accretive to group growth. How does this make you feel in terms of the kind of confidence around setting your likely higher midterm targets in the middle of the year?

That's a beautiful question, Charles. And I feel very confident on where we are as a company and also as we're moving forward. It's only been a little bit more than a year that we put the 2 companies together, and we are in a very good place. And this acquisition just makes us even stronger because it makes us rounder by putting what it was supposed to be home, home. It unleashes -- it gives us the right to unleash growth synergies by combining enzymes and probiotics that we have both in the value chain, but were not fit in the most effective way to capitalize on that opportunity. So I have a high level of comfort on, already I had it before. And now with this acquisition, even stronger on what we're doing and the amazing and beautiful company that we are creating.

Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Ester Baiget for any closing remarks.

Beautiful as usual to hear from you. It was a good day today with Novonesis, one of many more to come. We made a beautiful move with this acquisition, creating stronger capabilities for a segment, which is important for us and important for the world. And we're now better equipped to drive value growth for our customers and value accretive growth for our shareholders and growth for our company. Thank you very much for all your time and looking forward for the next call soon.