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Edited Transcript of NZYM B.CO earnings conference call or presentation 23-Jan-20 8:00am GMT

Q4 2019 Novozymes A/S Earnings Call

Bagsvaerd Jan 28, 2020 (Thomson StreetEvents) -- Edited Transcript of Novozymes A/S earnings conference call or presentation Thursday, January 23, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Anders Lund

Novozymes A/S - EVP of Household Care & Technical Industries

* Andrew Fordyce

Novozymes A/S - EVP of Food & Beverages

* Lars Green

Novozymes A/S - EVP & CFO

* Peder Holk Nielsen

Novozymes A/S - President and CEO

* Thomas Videbaek

Novozymes A/S - EVP & COO of Research, Innovation & Supply

* Tina Sejersgård Fanø

Novozymes A/S - EVP of Agriculture & Bioenergy

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Conference Call Participants

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* Annette Lykke

Handelsbanken Capital Markets AB, Research Division - Medtech Analyst

* Anton Brink

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Charles Greig

Citigroup Inc, Research Division - Assistant VP & Senior Associate

* Jonas Guldborg Hansen

Danske Bank Markets Equity Research - Analyst

* Lars Topholm

Carnegie Investment Bank AB, Research Division - Co-head of Research of Denmark and Financial Analyst

* Laurence Alexander

Jefferies LLC, Research Division - VP & Equity Research Analyst

* Michael Novod

Nordea Markets, Research Division - Director of Healthcare, Healthcare Analyst & Sector Coordinator

* Nicola Tang

Exane BNP Paribas, Research Division - Analyst

* Sebastian Christian Bray

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Silke Kueck-Valdes

JPMorgan Chase & Co, Research Division - VP

* Søren Samsøe

SEB, Research Division - Country Head of Denmark and Analyst

* Theodora Lee Joseph

Goldman Sachs Group Inc., Research Division - Equity Analyst

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Presentation

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Peder Holk Nielsen, Novozymes A/S - President and CEO [1]

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Good morning, and welcome to the Novozymes conference call. My name is Peder Holk Nielsen, and I'm CEO of Novozymes. I'm joined here today by the Executive Leadership team and Investor Relations. We'll start by reviewing our performance and key events for 2019, and we'll discuss the outlook for 2020. Our presentation should take around 30 minutes. And afterwards, we will be happy to answer your questions.

Please turn to Slide #2. Despite an improvement in the second half of the year, sales performance in 2019 was unsatisfactory. Organic sales grew 1% in the fourth quarter but declined 1% in the year. As expected, the first half was negatively impacted by the annualized effects of sanctions and the general economical distress in the Middle East. On top of that, the challenge -- it was challenged by severe weather conditions in the U.S. Midwest.

Household Care performed well, especially in the second half, and delivered on the expectations we communicated at the beginning of the year. The severe weather conditions and weak ag markets impacted especially our Bioenergy business and our Ag & Feed businesses. We had good traction with Frontia for grain milling and a strong momentum in the nutrition business. But as Food & Beverage was also impacted by the U.S. weather, the Middle East as well as a challenging Chinese starch business, Food & Beverage was below our expectations in terms of sales. All in all, it was a tough year in terms of sales performance.

We are reporting good financials with a 28.1% EBIT margin and DKK 2.2 billion in free cash flow. This was satisfactory. 2019 was also a year of change with the launch of our Better business with biology strategy. The implementation is progressing according to plans and positions Novozymes to deliver stronger performance.

Now let's turn to the outlook. Novozymes sales is expected to grow by 1% to 5% organically in 2020. That includes the effects from portfolio changes. Growth will be driven by innovation, broader commercial presence and a strong focus on execution and follow-up. We also expect to improve both underlying earnings and free cash flow in 2020. The wide sales outlook indicates some uncertainty. It is especially related to the ag-exposed businesses. The growth outlook for Household Care and Food & Beverage are narrow, around the midpoint of the overall company range, while we see more uncertainty in both Bioenergy and Ag & Feed.

Earnings for the year are expected to be solid, driven by operational improvements. We expect an EBIT margin of around 27%, which is roughly 1 percentage point above the 26% underlying margin of 2019. We expect a free cash flow of DKK 2.5 billion to DKK 2.9 billion, which improves on the free cash to sales ratio.

We proposed a dividend of DKK 5.25 per share and a stock buyback program of DKK 1.5 billion, which is in line with our capital structure policy. All in all, we're positioning the business for stronger sales growth, stronger earnings and stronger cash generation.

Before we move on to the segment review, I'll cover the geographical performance. Please turn to Slide #3. In the fourth quarter, emerging markets grew by 5% organically. This was mainly driven by Household Care and Bioenergy. Developed markets declined by 1% in the fourth quarter due to weak North American performance in Bioenergy and BioAg.

For the full year, sales to both developed and emerging markets declined by 1% organically. Developed markets declined mainly due to challenging agricultural markets in the U.S., and emerging markets were down mainly due to sanctions and the economic distress in the Middle East. There was also some weakness in starch processing in China.

With that, I'll now hand it over to Anders to review the developments in Household Care. Anders, please?

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Anders Lund, Novozymes A/S - EVP of Household Care & Technical Industries [2]

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Thank you, Peder. Please turn to Slide #4. Sales in Household Care grew 5% organically in the fourth quarter, driven by strong growth from the Freshness platform and good performance with local customers. Sales in China rebounded after a slow start to the year. Together with solid growth in the Americas, Europe and India, this shaped our good fourth quarter performance.

Organic sales grew 1% in 2019, and it was encouraging to see a 5% growth in the second half of the year. Some of the positive developments surfaced after being overshadowed by negative effects from economic disturbance and sanctions in the Middle East in the first half. Overall, the full year performance was largely driven by positive contributions from Freshness and local customers.

The development of our Freshness platform progressed well during 2019. Products containing our technology are now on the shelves in selected countries across Southeast Asia, the Middle East and Europe. Furthermore, we achieved all key innovation milestones we aimed for going into the year, and we are well on our way to launch more Freshness innovations in the coming years.

Growth with local customers in 2019 was driven by both developed and emerging markets. It was encouraging to see strong growth in both India and Africa following the recent years' focused investments.

Looking at 2020, we expect a solid momentum with local customers to continue, fueled by an even stronger regional setup and more solutions tailored to emerging markets. In addition, we expect continued growth from our Freshness platform as the technology is rolled out to more countries.

Now moving on to Technical & Pharma. Organic sales in Technical & Pharma declined 4% in the fourth quarter and 3% in 2019 overall. The negative development in 2019 was primarily caused by the textile business as production shifted away from China to countries with lower enzyme penetration.

And now, Andy, over to you.

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Andrew Fordyce, Novozymes A/S - EVP of Food & Beverages [3]

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Thanks, Anders. Please turn to Slide 5. For our Food & Beverages business, Q4 came in at 2% organic growth, continuing the modest recovery after a difficult first half of the year. For the quarter, sales in baking were robust, and food & nutrition and brewing showed solid growth. Starch and beverage alcohol continued to decline. For the full year, the recovery in Q3 and Q4 were not enough to overcome the first half weakness. So all in all, F&B declined 1% organically for the full year.

2019 was a difficult year for our starch processing business. Sales in China were under pressure from adverse commodity prices. Further, developed markets suffered from severe weather conditions in the U.S. Midwest and general weakness in the high-fructose sweetener market. On a positive note, our newly launched grain milling solution, Frontia, has been doing well and has been received by customers in multiple geographies. This gives us confidence we have a solid long-term potential in the new segment of grain milling.

Q4 was a solid quarter for our baking business. We saw improvement in the developed market business as fresh-keeping prices showed some stabilization. At the same time, China and Southeast Asia continue to post high growth as we capture demand in those growing baking markets. Further, the Middle East and Africa and Latin American businesses returned to modest growth in the quarter, providing the beginnings of a recovery from the earlier decline. All in all, this means we end the year flat in baking.

Sales in the food & nutrition business continued to post good growth in 2019. Strong consumer demand for high-quality, healthy and sustainable food fit very well with our innovative solutions, especially our protein ingredients and plant extraction solutions were in high demand with broad-based sales growth throughout the year.

Sales in beverages grew slightly in 2019, driven by solid growth in brewing and juice and wine, while sales to distillers contracted. Brewing growth was strong in most regions and balanced across application segments. Summing up 2019, it was a disappointing year in Food & Beverages, where poor results in the starch processing and selected baking markets meant we didn't deliver on our growth ambition for the year.

Looking forward to 2020, we expect our recently launched innovations in grain milling, food & nutrition and vegetable oil processing to drive growth. That, combined with stabilization in starch and baking, mean we expect to return to positive organic sales for the coming year. From a geographical viewpoint, growth will be broad-based, and we expect emerging markets to return to higher growth rates than developed markets. We estimate organic sales growth for Food & Beverages in 2020 will be around the midpoint of the 1% to 5% Novozymes' overall outlook but with a more narrow range than the company outlook as a whole.

And with that, that's all for me. Tina, please.

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Tina Sejersgård Fanø, Novozymes A/S - EVP of Agriculture & Bioenergy [4]

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Thank you, Andy. Let's start by looking at Bioenergy on Slide 6. 2019 was a tough and unpredictable year for our Bioenergy business. For the full year, organic sales declined by 3%, while sales in the fourth quarter grew by 2%, which was an improvement compared to the first 9 months.

During the year, the U.S. ethanol industry was challenged by low producer margins, elevated inventories and severe weather conditions in the U.S. Midwest. According to the U.S. Energy Information Administration, the production decline eased somewhat in the fourth quarter and ended at minus 2% for the year. As I've mentioned on earlier calls, our customers pulled back significantly more than the 2%.

On the positive side, our yeast platform continued to perform very well, and Brazil is on an exciting journey towards increased production of starch-based ethanol. The Brazilian production reached close to 400 million gallons in 2019, and Novozymes is well positioned in the region with a strong setup of tailored solution and industry expertise.

In the U.S., the Environmental Protection Agency finalized a more flexible regulation for vapor pressure, allowing for up to 15% ethanol blends all year round. This removed one of the more significant barriers to wider sales of E15 in the U.S. In December, the renewable fuel obligations for 2020 was announced at roughly 20 billion gallons, of which 15 billion is starch-based.

Looking at other countries, China recently indicated that it will not implement a countrywide E10 blend already in 2020. This is in line with Novozymes' expectations and does not impact the sales outlook. Growth in 2020 is expected to be driven by the continued capacity expansion in Brazil and further penetration of our yeast platform. We expect a flat volume development in the U.S. market for 2020 as low ethanol producer margins, elevated inventories and small refiner exemptions are sources of uncertainty.

And now please turn to Slide 7 for an update on Agriculture & Feed. 2019 was a weak year in terms of organic sales in our Ag & Feed business. Organically, sales declined by 5% for the year and by 9% in the fourth quarter. The performance in Q4 was expected and mainly due to weak farm economics and lower Latin American planting. As mentioned in previous quarters, the decline in BioAg was mainly due to the severe weather conditions in the U.S. Midwest, amplified by weak farm economics. But despite the headwinds, BioRise, our new corn inoculant launched in partnership with Bayer, is doing well.

Feed sales were flat in 2019. Balancius, our solution for improved gut health in poultry, continued to gain momentum together with our partner, DSM. When it comes to the 2020 outlook for Ag & Feed, we are aware of the uncertain situation in the ag-related markets, which is primarily due to the global farm economics and trade-related concerns. Feed performance will be driven by the continued commercialization of Balancius. And in agriculture, performance will be supported by its penetration of corn inoculants in the North American market.

And with that, I'll hand over to you, Thomas.

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Thomas Videbaek, Novozymes A/S - EVP & COO of Research, Innovation & Supply [5]

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Thank you, Tina. Please turn to Slide #8. In the fourth quarter, we launched 3 new products, 2 of which were for the broad market. Over the course of the year, we launched a total of 20 new products with 9 solutions for the broad market and 11 tailored to specific customers. Some of the more significant launches were Frontia Jade and the 2 new yeast solutions, Innova Force and Innova Fit.

Frontia Jade is the latest addition to our grain milling platform specifically developed for the Chinese market. The product extracts additional value from corn by releasing more starch and more protein. Innova Force, which was launched back in second quarter, is a yeast that, in combination with our enzymes, deliver the most reliable and flexible solution available in the market. In the same quarter, we also launched Innova Fit, a non-GM yeast that enables penetration in Latin America and Europe.

2019 was a year of change as we aligned our activities with the updated strategy, Better business with biology. To operate our pipeline in a more focused way, we have selected the most impactful innovations and, as a result, reduced the total number of projects from more than 150 to around 100.

Looking at our strategic opportunity areas, we decided to merge the new water activities. And structurally, we have consolidated our investments in contamination removal where we focus on nitrogen together with our existing water platform. This will leverage the technology investment and secure commercial execution across the water platform.

Our investment in human oral and gut health as well as advanced speciality proteins are progressing well. We are evaluating new candidates, and we'll provide an update as they are included in our strategic opportunity framework.

I'd also like to present our sustainability and nonfinancial targets, so please turn to the next slide. As part of the updated strategy, we have 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 from our own operations.

The targets focus on people and the 3 global challenges: it's climate, it's water and it's production and consumption. 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. We'll keep you updated and hold ourselves accountable by reporting our progress on an annual basis.

We'll focus on reducing CO2 emissions from operation by increasing the share of renewable electricity and by reducing our overall energy consumption. We're also developing programs to achieve zero waste and ensure our site uses water in a sustainable manner in balance with local conditions. We continue to have strong emphasis on safety, well-being in the workplace and maintain a low number of occupational incidents. On the people side, we want to enable learnings and growth for our employees as well as nurturing diversity within the organization.

That's all for me, and I'll hand you over to Lars.

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Lars Green, Novozymes A/S - EVP & CFO [6]

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Thank you, Thomas. Please turn to Slide 10. Despite the pickup in the second half of the year, our overall sales performance in 2019 was unsatisfactory with 1% organic sales decline. The more ag-exposed areas in the business were under pressure, while Household Care performed as expected. A stronger U.S. dollar meant that the reported Danish kroner performance was flat year-on-year. The gross margin ended at 55.3% in 2019, which was 2.1 percentage points below last year. The decline was mainly due to lower operational leverage, lower BioAg deferred income and restructuring effects.

The reported 2019 EBIT margin of 28.1% was as expected and roughly on par with the reported margin in 2018. Both the full year and fourth quarter EBIT margins were affected by one-offs. The fourth quarter margin benefited from lower employment cost following the August restructuring. Furthermore, an income related to the divested pharma asset improved the fourth quarter EBIT by roughly DKK 40 million.

In addition to the restructuring and fourth quarter pharma income effects, the full year EBIT margin also benefited from the divestment of the pharma-related assets and recognition of deferred BioAg income in the second quarter. The net effect of those items amounted to around 200 basis points for the full year, and consequently, the underlying EBIT margin was roughly 26%. The effective tax rate was 17% in 2019, which was 1% lower than 2018. The effective tax rate was lower mainly due to reduced uncertainty in the tax position related to advance pricing agreements.

Net profit declined by 2% for the year as the positive development in the effective tax rate wasn't enough to compensate for losses on currency hedges and lower operating profit. In the fourth quarter, net profit grew 10% as it was positively impacted by one-offs and a lower effective tax rate. The free cash flow before acquisitions was DKK 2.2 billion in 2019, which was roughly DKK 100 million less than in 2018. While the cash flow benefited from lower CapEx, this was more than offset by the lower cash flow from operations.

Now please turn to Slide #11 for the 2020 outlook. For 2020, we expect organic sales growth of 1% to 5%. This includes the negative impact from portfolio changes as we align the business with our updated strategy. The relatively broad sales outlook range reflects uncertainty especially in our more ag-exposed businesses. Consequently, the expected growth ranges for Bioenergy and Agriculture & Feed are wider than the overall company range and narrower around the midpoint for Household Care and Food & Beverages. Organic sales in Technical & Pharma are expected to be slightly below the midpoint of the overall company range.

The EBIT margin is expected to improve by around 100 basis points from the underlying level of around 26% in 2019 to around 27% for 2020. The increase will be driven by a mix of sales growth, productivity improvements and lower input costs. The savings from the third quarter restructuring will have a positive effect on margins, particularly early in the year. This will gradually subside as resources are reinvested to support our updated strategy, Better business with biology. Applying current spot rates for the major currencies, we expect a neutral currency effect for both sales and EBIT margin for 2020.

The free cash flow is expected to increase to DKK 2.5 billion to DKK 2.9 billion, supported by higher sales, lower net investments and roughly flat developments in net working capital. Net investments are expected to be between DKK 0.8 billion and DKK 1 billion in 2020. This reflects an adequate level of maintenance, expansion and optimization CapEx. The return on invested capital, including goodwill, is expected to be between 20% and 21%, which is roughly on par with the 2019 level.

Subject to approval at the Annual Shareholders' Meeting in February, we propose a dividend of DKK 5.25 per share. This is 5% higher than last year and corresponds to a payout ratio of 46.8% compared to 44.6% the year before. In addition, we are announcing a share buyback program of up to DKK 1.5 billion for 2020. This is in line with our financial strategy to return the free cash flow generation to shareholders through a combination of dividends and stock buybacks at a net debt-to-EBITDA ratio of around 1.

In summary, we expect positive sales and financial developments in 2020 while, at the same time, acknowledging the ag-related uncertainties that hit us hard in 2019.

With that, I'll hand it over to you, Peder, for some final remarks.

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Peder Holk Nielsen, Novozymes A/S - President and CEO [7]

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Thank you, Lars. Please turn to Slide #11 (sic) [Slide #12]. Let me summarize the message here today. Although we saw an improvement in the second half of 2019, sales performance for the full year was unsatisfactory. Our ag-exposed businesses were marked by uncertainty and impacted by the severe weather conditions in the U.S. Midwest. We expect to do better in 2020. It is driven by innovation, a broader commercial presence and a stronger focus on execution and follow-up.

Novozymes sales are expected to grow by 1% to 5% organically. The broad outlook range reflects uncertainty, especially in the more ag-exposed businesses, and includes an expected negative impact from portfolio changes as highlighted at the strategy update. Earnings and cash flow are expected to develop well.

Before we open for questions, I would like to note, this is my last conference call. It's been fantastic to be a part of Novozymes and the Novo Group over the past 35 years, and it's been a privilege to serve on the executive team for 25 years. Next Saturday, I'll hand over to Ester Baiget. I'm confident Ester and the team will develop Novozymes' unique position and technology while driving the company to deliver on our strategy, which we titled Better business with biology.

Novozymes possesses unique technology and know-how, and it is positioned well not only to deliver organic growth and solid returns to shareholders but also to find biological answers for better lives in a growing world together with our customers. Personally, I want to thank you all for your interest in Novozymes and for our interaction since we IPO-ed in 2000.

That concludes today's presentation, and we're now ready to take your questions. Operator, please begin.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Jonas Guldborg from Danske Bank.

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Jonas Guldborg Hansen, Danske Bank Markets Equity Research - Analyst [2]

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First of all, a question on the underlying EBIT margin in 2019. If I take the numbers that you have -- that you talked about during the year, then if I have to get to the around 200 basis points impact on full year, I need to include the restructuring benefits. So just if you could confirm that I need to do that also.

Then on Household Care, could you just tell us, is your -- is the global -- the negative impact from global players using less enzymes, is that still outweighing the growth you see from local customers? And then on Bioenergy, how much did your sales to customers decline in Q4 in the U.S.?

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Peder Holk Nielsen, Novozymes A/S - President and CEO [3]

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Thanks for your questions. The first one is a pretty easy one. That's a confirmation, that's a yes, you need to include the restructurings.

Then Anders, on Household Care, please?

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Anders Lund, Novozymes A/S - EVP of Household Care & Technical Industries [4]

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It's correct, we expect to have lower growth with our global players in 2020 and that what we've commented on the last years is expected to continue. Now we do expect performance to pick up also with the 3 global accounts in 2020.

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Tina Sejersgård Fanø, Novozymes A/S - EVP of Agriculture & Bioenergy [5]

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And on Bioenergy, Jonas, sales to customers, they continue to pull back more than the average market.

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Jonas Guldborg Hansen, Danske Bank Markets Equity Research - Analyst [6]

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Okay. Then just a follow-up. And then on your EBIT margin guidance for 2020, is benefits from restructuring then coming on top of the guided 27%? Or is it included in the 27% guidance?

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Lars Green, Novozymes A/S - EVP & CFO [7]

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So I'll try to answer that one, Jonas. So as Peder confirmed, the benefits of the restructuring are included in our one-offs as we consider them in the underlying 26% EBIT margin for '19. We are planning to reinvest the resources we released as a result of the restructuring. And as I said in my little summary here, that will come potentially gradually over the year. So it is included in our guidance of 27% EBIT margin for the year that we will reinvest the savings from the restructuring we did in Q3 of 2019.

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Operator [8]

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Next question is from Theodora Lee Joseph from Goldman Sachs.

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Theodora Lee Joseph, Goldman Sachs Group Inc., Research Division - Equity Analyst [9]

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I've got 2, actually, more on capital allocation. First is I'm interested in finding out actually what informs your decision in setting how much shares to buy back, given your balance sheet is still below your target leverage, your growth trajectory, you look positive and your free cash flow generation is also expected to grow year-on-year?

My second question is whether you can remind me of what your maintenance CapEx actually is? And can you talk us through the assumptions of the bottom end and top end of the new CapEx guidance?

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Lars Green, Novozymes A/S - EVP & CFO [10]

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Yes. Thank you for that question. So our capital allocations, as we announced in June in connection with the updated strategy, we target a capital structure where our net debt to EBITDA will be around 1 and that we plan to return all cash flow generated to shareholders through a combination of dividends and share buybacks.

So as we also look to increase our payout ratio to a level of 50%, what we are now proposing is fully in line with what we said back in June, namely an increase in the payout ratio from 45% approximately last year to 47% next year, and so a solid step on the way to the 50%. And likewise, we are now proposing a new -- or have approved a new buyback program of DKK 1.5 billion. So again, a solid step towards the 1 level between EBITDA and net debt. So we ended last year at 0.8, significantly up compared to 0.5 the year before. So what we are proposing now is really just a confirmation of the capital structure strategy that we announced in June.

So when it comes to CapEx, we expect a maintenance or sort of like a CapEx level of 7% to 8% to be the level that we assume will be required to support our future growth included in the new strategy. So our guidance of DKK 0.8 billion to around DKK 1 billion this year is actually slightly lower than that level. And this reflects the fact that we have a solidly the capacity available. We are still going to prepare and invest where needed to secure, we can also supply for the future, but we are also including in this maintenance investments so that we make sure our facilities are all the time up to speed and up to the quality standards that is required. So that's the background for our guidance on capital expenses in 2020.

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Operator [11]

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Next question is from the line of Søren Samsøe from SEB.

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Søren Samsøe, SEB, Research Division - Country Head of Denmark and Analyst [12]

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I just had a question, first of all, on your margin guidance of 27%. How -- I mean you have, of course, lower cost, I guess, in the first half of '20 given that you are going to need to hire a lot of people, which is what you have communicated. So I was just wondering what is the underlying margin when we get to the end of 2020. So for modeling purposes, what should we sort of factor in after that? Because, I guess, the cost level will be higher when we get to the end of the year.

And then secondly, on Ag & Feed, if you could remind us -- I mean ag used to be like 50%. How big a part of the business is it now? And also, now that you have the agreement with Bayer, is your visibility lower than in the past? You used to be very good at forecasting on what the contribution would be from the Monsanto deal, but it seems like you have less visibility now. And would it be fair now with this agreement and the lower visibility to maybe revise on lower longer-term outlook for BioAg in the future?

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Peder Holk Nielsen, Novozymes A/S - President and CEO [13]

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Thanks for your questions. We'll let Lars have a go again at margin. Lars, please?

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Lars Green, Novozymes A/S - EVP & CFO [14]

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Yes. So as I said, yes, we will invest and reinvest the resources we released back at the restructure in August, which means that we will gradually do that during the year. But rather than sort of look at the higher costs and lower margins, relatively speaking, at the end of the year, you should also think about the growth rate picking up and also our expectation that we will deliver against the strategic ambition of 5-plus percent in '21 and '22.

So this is -- we consider a step on delivering also on the margin expectations that we announced in June, which is that we will approach the 28% in 2022. So the guidance is valid for the entire year. And we consider it a step towards a higher margin of 28%, to a large extent, driven by further productivity improvements in our gross margin, but also operational leverage from growing volumes and an increase in organic sales for the next 3 years. So...

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Søren Samsøe, SEB, Research Division - Country Head of Denmark and Analyst [15]

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I was just wondering what the margin level would be if your growth did pick up, i.e., how much higher will your cost level be in the end of the year, more or less, is what I'm asking.

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Lars Green, Novozymes A/S - EVP & CFO [16]

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But -- so I'm not going to speculate what will happen if we are not delivering on our margin. So our guidance is 27% for the year. It's a solid step, and we continue and expect to continue to increase the margin towards the 28% in '22. So I think the next question was -- just could you remind me, Søren, on the one on ag?

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Søren Samsøe, SEB, Research Division - Country Head of Denmark and Analyst [17]

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On ag, yes. Yes, first of all, how big part of Ag & Feed is at now? And then secondly, on the Bayer agreement, it seems like the visibility is lower than when you had the Monsanto agreement. And then on the back of that, is it -- would it be fair to revise the longer-term outlook down for BioAg? I mean can you still put up good growth long term?

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Lars Green, Novozymes A/S - EVP & CFO [18]

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Good. So thank you for that. So ag is around 1/3 of the Ag & Feed segment, and so that's excluding the deferred income that we used to have in our sales earlier on. So of course, when you operate through a partner, there is a step between you and the market. And that is what sometimes sort of convolutes, you could say, our reported sales and then the end use in the market. But we'll try and help everyone understand to the best of our ability what that difference is so that we can also continue to grow. This is our expectations, that there will be continued expansion of use of our products in the BioAg space also in the future.

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Operator [19]

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And the next question is from Laurence Alexander from Jefferies.

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Laurence Alexander, Jefferies LLC, Research Division - VP & Equity Research Analyst [20]

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Can you flesh out a little bit the comments around the products for upgrading the protein content in corn and when we should see sort of more detail on that as a commercial platform? And can you -- and what's your expected rate of share creep? So for the buyback, how much of the buyback is needed just to offset your standard option dilution?

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Peder Holk Nielsen, Novozymes A/S - President and CEO [21]

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Thanks for your questions, Laurence. We'll let Tina talk about, I guess, it's a DDGS -- protein content in DDGS. Tina, please?

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Tina Sejersgård Fanø, Novozymes A/S - EVP of Agriculture & Bioenergy [22]

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Yes. So it is a field which for years have been the focus of Novozymes and the focus of a number of players in the field. We announced an early -- a collaboration agreement here in December. So it is early days and we're just getting started, so you'll have to wait some time until you see the impact of that.

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Peder Holk Nielsen, Novozymes A/S - President and CEO [23]

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And on buybacks, Lars, please?

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Lars Green, Novozymes A/S - EVP & CFO [24]

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Yes. So we are announcing a new buyback program of DKK 1.5 billion. I'm not sure I understand, Laurence, your question related to dilution. Can you just elaborate what that was all about?

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Laurence Alexander, Jefferies LLC, Research Division - VP & Equity Research Analyst [25]

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Just do you have any share creep that you need to offset due to any incentive comp?

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Lars Green, Novozymes A/S - EVP & CFO [26]

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So any options from our incentive programs will have a very marginal impact, if any, on our earnings per share. So I don't consider that significant in any sense on our earnings per share.

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Operator [27]

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Next question is from Lars Topholm from Carnegie.

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Lars Topholm, Carnegie Investment Bank AB, Research Division - Co-head of Research of Denmark and Financial Analyst [28]

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A couple of questions from me. In Household Care, can you comment on plans for rolling out the Freshness platform in the U.S., please?

And then a question on net working capital. In your printed annual report, I can see your working capital grew from DKK 2.8 billion to DKK 3.5 billion. Can you put some comments on how you see the various value drivers in working capital develop in 2020, just so I can understand the cash flow guidance?

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Peder Holk Nielsen, Novozymes A/S - President and CEO [29]

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Thanks for your questions. Anders, Freshness, please?

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Anders Lund, Novozymes A/S - EVP of Household Care & Technical Industries [30]

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So we're looking at it from an innovation perspective, and we are on the target of what we set out to do. We're not going to give any specific guidance on when we expect to launch in North America, and that's simply by agreement with our innovation partner in this space.

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Peder Holk Nielsen, Novozymes A/S - President and CEO [31]

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And Lars, net working capital, please?

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Lars Green, Novozymes A/S - EVP & CFO [32]

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Yes. So you're right, in the books, our net working capital increased. When you look at that number, you have to remember also what constituted our net working capital when we started the year. So there's DKK 300 million or so which we recorded as deferred income in the second quarter when we terminated The BioAg Alliance, helped our net working capital entering the year. So it's included in the starting balance. So roughly half of the increase is simply a reflection of the deferred liability, which is no longer in our net working capital. Another component is lower CapEx spend and, therefore, also lower payables related to our capital expenditures. So there is a direct correlation between the lower CapEx and also lower liabilities to our vendors.

Then we have actually seen a reduction in our inventory. So we have also managed our inventory to a slightly lower level with a slight increase, on the other hand, in our accounts receivable. That is primarily because we see a change in the customer and regional mix. So with stronger growth in some of the emerging markets and a decline in our growth -- or actually, a decline in our sales in the U.S., there is a mix impact of our accounts receivable in that space. As we move forward, we see that development overall improve. So we see net working capital at more or less the same level in 2020 as we saw it in 2019.

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Lars Topholm, Carnegie Investment Bank AB, Research Division - Co-head of Research of Denmark and Financial Analyst [33]

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Then just a household question relating to Søren's question before with ag being 1/3 of Ag & Feed. So if feed is flat in Q4, is it mathematically fair to assume the ag part is down between 25% and 30%?

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Tina Sejersgård Fanø, Novozymes A/S - EVP of Agriculture & Bioenergy [34]

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It is roughly that range.

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Operator [35]

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And next question is from Anton Brink from Kepler Cheuvreux.

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Anton Brink, Kepler Cheuvreux, Research Division - Equity Research Analyst [36]

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Two questions from my side. Firstly, what has been the reason not to guide on net profit growth? You used to do that. Is there anything else besides the tax -- significant tax rate increase in 2020?

Next to that, can you elaborate a bit on the Tech & Pharma one-off gain in Q4? I don't think that was expected. What's exactly happening there?

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Lars Green, Novozymes A/S - EVP & CFO [37]

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So I can take your question on net profit. So we are giving you all the information you need to calculate the impact and the expected development on net profit. So we are not, you could say, giving less insights to that level. We actually -- we're trying to give you exactly what is the difference between EBIT and net profit. So in our view, it's actually more transparent than what it was before.

The one-off we have in our P&L in the fourth quarter relates to the pharma-related assets. So the royalty stream that we sold in the second quarter, that was a, at that point in time, a contingent liability that was reduced in the fourth quarter. So therefore, we recorded an income to the level of DKK 40 million in the fourth quarter of our P&L.

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Anton Brink, Kepler Cheuvreux, Research Division - Equity Research Analyst [38]

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Okay. But implicitly, for 2020, we shouldn't expect any other operating income?

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Lars Green, Novozymes A/S - EVP & CFO [39]

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We have not planned for any such in 2020. So any one-off or nonrecurring or any of that nature is not built into our guidance for the year.

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Operator [40]

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Next question is from Michael Novod from Nordea Markets.

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Michael Novod, Nordea Markets, Research Division - Director of Healthcare, Healthcare Analyst & Sector Coordinator [41]

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Just 2 follow-up questions on the business areas. So on Household Care, you end the year pretty strongly on 5% growth, [also] for the second half of the year, and then you're guiding sort of towards the midpoint of 1% to 5% in 2020. Is that all related to sort of the drag from large internationals? Because I would have assumed that you should be able to accelerate with the Freshness launch and no negative comps, et cetera, in 2020. So just to get a more -- get a feeling for what is actually driving the sort of the midpoint of the 1% to 5%.

And the same for Bioenergy, maybe more sort of an understanding of the larger ranges than 1% to 5%, what should drive Bioenergy sales growth to, say, sort of above 5% in the 2020?

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Peder Holk Nielsen, Novozymes A/S - President and CEO [42]

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Thanks for 2 good questions on Household Care and Bioenergy. Anders, Household Care, 5%, is it going to continue?

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Anders Lund, Novozymes A/S - EVP of Household Care & Technical Industries [43]

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So thanks for the question. We're, of course, pleased with the 5%. But also, let me remind you, this is exactly what we expected. We always said all along that the second half would be better. Of course, we're coming in with good momentum. But let me also remind you that we delivered only 1% growth in 2019. And although the second half has been really strong, we also had to accept that the first half of 2019 was weak. So the guidance that we have now is with the narrow -- around the midpoint of the 1% to 5% is what we believe is a solid guidance. And yes, we are still seeing some softness among our 3 global accounts. But again, it's easening compared to what we've been through the last 3, 4 years.

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Tina Sejersgård Fanø, Novozymes A/S - EVP of Agriculture & Bioenergy [44]

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And on Bioenergy, so we are guiding for -- we are expecting for 2020 flat volumes. So the key driver to get to the higher end of the range is if we have more volumes in the U.S., if production ramps up significantly. It's also if we get earlier starts of plants in Brazil compared to what it is we have anticipated. And last but not least, if our innovations get a better footprint than what it is we have expected.

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Michael Novod, Nordea Markets, Research Division - Director of Healthcare, Healthcare Analyst & Sector Coordinator [45]

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Why should volumes in the U.S. ramp up significantly?

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Tina Sejersgård Fanø, Novozymes A/S - EVP of Agriculture & Bioenergy [46]

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We have E15...

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Michael Novod, Nordea Markets, Research Division - Director of Healthcare, Healthcare Analyst & Sector Coordinator [47]

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Can you just give us a flavor on that?

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Tina Sejersgård Fanø, Novozymes A/S - EVP of Agriculture & Bioenergy [48]

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Yes, we have E15 as one of the drivers. And we also, in our numbers, is having some assumptions on how does our customer are going to behave.

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Peder Holk Nielsen, Novozymes A/S - President and CEO [49]

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And then maybe if I can just add. Of course, we do not have excellent insights on it. But if the trade war with China would be resolved, I think that would also lead to higher ethanol volumes in the U.S. manufactured volumes. So that's not built into our guidance. As Tina says, we assume flat production volumes in the U.S. So there are certainly things in ethanol that can go better than what we have in our books right now.

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Operator [50]

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Next question is from Annette Lykke from Handelsbanken.

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Annette Lykke, Handelsbanken Capital Markets AB, Research Division - Medtech Analyst [51]

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Just to get back to Michael's question on the E15. Can you say how much of an effect you expect? To my understanding, there is a lot of the gasoline tankers that is not capable of using or providing E15. What could be changed here? And how much have you included in the flat U.S. [volume] ethanol market statement for E15?

Then just getting back to the markets. Can you tell us -- I mean I can see that this one-off from the earnout from a pharma asset of DKK 40 million is around 100 basis points. But how much is the lower staff cost in the Q4? Is that another 100 basis points? Or how much have you taken in this respect? That's my question.

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Peder Holk Nielsen, Novozymes A/S - President and CEO [52]

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Thanks for your questions. So first, E15, Tina, how much do we have in the books?

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Tina Sejersgård Fanø, Novozymes A/S - EVP of Agriculture & Bioenergy [53]

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Very minor to -- so we are not anticipating on a big rollout. It is a gradual increase which we expect to see.

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Lars Green, Novozymes A/S - EVP & CFO [54]

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And on the margin?

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Annette Lykke, Handelsbanken Capital Markets AB, Research Division - Medtech Analyst [55]

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How many...

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Lars Green, Novozymes A/S - EVP & CFO [56]

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Sorry. So on the margin -- sorry, on the margin, Annette, the restructuring benefits in the fourth quarter is roughly 200 basis points, so to speak, of benefit from released resources. And so combined with the nonrecurring pharma one or the ordinary income, this means that the margin of the fourth quarter is around 26%. And so as we sort of reinvest those resources and grow our top line, that's what brings us to 27% for the year of 2020. But adjusting for the savings in the fourth quarter, that brings us to an underlying of 26% also in the fourth quarter.

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Annette Lykke, Handelsbanken Capital Markets AB, Research Division - Medtech Analyst [57]

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Then returning to Tina's answer on the E15. Can you share with us how long time it will take before you see an effect? Or how should we see this, I would say, more investment in infrastructure in U.S. gas stations to be ready to sell E15?

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Tina Sejersgård Fanø, Novozymes A/S - EVP of Agriculture & Bioenergy [58]

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So Annette, currently, there is a couple of hundred million gallons from E15, and we see a very gradual rollout of that because we need to have the infrastructure in place as well. So it will be a gradual rollout of it. As Peder was alluding to earlier, I think, in terms of volumes, the biggest take-up, which it is, you'll see is if China does something on the tariffs which they currently have off ethanol. Currently, China have 70% import tariff on U.S.-based ethanol, so that if a change to that would mean a significant change to the volumes.

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Operator [59]

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Our next question is from Nicola Tang from Exane BNP Paribas.

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Nicola Tang, Exane BNP Paribas, Research Division - Analyst [60]

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The first was for Tina, actually, on Balancius. Can you sort of explain where we are in the ramp-up of that as that seems to be sort of one of the main drivers for the feed business into 2020? I think your partner, DSM, had mentioned or talked about a potential total annual revenue of EUR 60 million to EUR 80 million once ramped up. Can you just talk about where we are on that?

And then the second question was for Anders on Household Care. It seems like you saw quite a nice pickup in China towards the end of the year. What -- is this a pickup in the market? Was it just a sort of one-off? Was it related to some rollouts? Can you explain a bit?

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Tina Sejersgård Fanø, Novozymes A/S - EVP of Agriculture & Bioenergy [61]

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Yes. So on Balancius, we are in the early days of rolling it out. We are testing with a lot of players as we also, in '19, got a European registration. We also have reoccurring customers. But compared to the numbers, which we have been talking about in terms of the expectations to the product, it is still in the early days.

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Anders Lund, Novozymes A/S - EVP of Household Care & Technical Industries [62]

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And on Household Care, China, we have during 2019 had some challenges with a few of our large customers in China relating to some supply chain buildup that has happened earlier in the year, in '18, that we had to work through. That is easening and, again, making our business coming back to the level that we actually expected it to be throughout the entire 2019. So it's good to see that that business is coming back. And actually, also thinking about '20, I'm hopeful that that will actually also continue into '20.

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Nicola Tang, Exane BNP Paribas, Research Division - Analyst [63]

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I was wondering if I could just sneak in one more. You talked about the 1% to 5% organic guidance, including some assumptions around impact of portfolio reallocation. Are there specific divisions where you think there could be a larger impact from this? Could you comment?

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Peder Holk Nielsen, Novozymes A/S - President and CEO [64]

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As we communicated on June 16, I believe it was in the Capital Markets Day on the 17th, we are now implementing the -- executing on the strategy, and we've made changes to some of our positioning in portfolios -- in some of the portfolios. Of course, we have a budget for -- or we have assumptions as to how that's going to pan out, but we do not have full visibility yet. We have included the expectation and also the uncertainty around this in our overall guidance. And when you look at it across the various segments, it's not one particular segment. It's a bit here and there. As you may remember, we're navigating more than 30 different business portfolios in the totality of the business. And when you look at the 5 segments that we report on here, you have a bit in every one of them.

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Operator [65]

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Next question is from Silke Kueck from JPMorgan.

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Silke Kueck-Valdes, JPMorgan Chase & Co, Research Division - VP [66]

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In your local currency growth outlook for 2020, what are your pricing assumptions in that outlook, if you have any? And what was the pricing behavior in the fourth quarter? And I was also wondering whether you can discuss your local currency growth in Household Care in the fourth quarter by region.

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Peder Holk Nielsen, Novozymes A/S - President and CEO [67]

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Thank you. I will let Lars talk about pricing and pricing evolution in the business, please?

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Lars Green, Novozymes A/S - EVP & CFO [68]

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Yes. So the impact on pricing in the fourth quarter were more or less aligned with the level we saw for the full year, so no significant change in that context. So as we move forward, we have built in an overall expectation that with our growth with our key customers, we will, of course, have some contracts where we will see increased volume. Pricing, not significantly different from where we were and the impact from where we were last year. So that is the local currency guidance that we have built in of 1% to 5%.

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Operator [69]

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So the next question is from Charlie Greig from Citi.

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Charles Greig, Citigroup Inc, Research Division - Assistant VP & Senior Associate [70]

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Just to -- looking firstly at Household Care, I know it's hard to give color here but if you had to say -- if you could say how far you're through with your kind of European rollout, a very big database, do you think you're at the beginning there? Do you think you're coming towards the end? Any color there would be really helpful.

And then looking at Ag & Feed, could you firstly clarify how the corn business progressed in 2019? And then looking to 2020, obviously, you've had a big falloff in soy acreage in the U.S. in 2019, a lot of ag consultants are calling for that to bounce back into 2020. How do you think your legacy soy business would develop in the context of a expanding U.S. soy acreage?

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Peder Holk Nielsen, Novozymes A/S - President and CEO [71]

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Thanks for your questions. Anders, can you give some -- put some flavor on the Freshness rollout in Europe, please?

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Anders Lund, Novozymes A/S - EVP of Household Care & Technical Industries [72]

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So Europe is, of course, part of our guidance, so we expect that to ramp up during 2020. We do not give specific guidance on where we are, but of course, a lot of the growth that we anticipate will be coming from that geography.

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Tina Sejersgård Fanø, Novozymes A/S - EVP of Agriculture & Bioenergy [73]

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And on the corn inoculant, so that is rolling out according to plan. We are getting on more and more in acreage. We sold into around 16 million to 20 million acres for use in '19, and we see a nice step-up on that into '20. And you're right, on the soy business, that has not been performing well in '19. And therefore, we do expect to see some improvement of that into next year. Our soy business has not been doing well here in '19.

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Operator [74]

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Next question is from Sebastian Bray from Berenberg.

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Sebastian Christian Bray, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [75]

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I would have 2, please. The first is on the potential use of cost savings which benefited Q4. How certain is it that these cost savings are reinvested? What I'm asking is that, is there a chance that 2 to 3 quarters into the year, the margins come in above your guidance because the projects into which these cost savings should be reinvested have not yet been identified? What's the certainty of this not having an impact on the margins next year or in 2020?

The second one is on Bioenergy. China has pushed out, seemingly indefinitely, its E10 target, and the uptake obviously doesn't look like it's going to have a big impact on the numbers in 2020. I'm thinking on a 3- to 5-year view. Aside from yeast, what is going to drive growth in this segment?

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Peder Holk Nielsen, Novozymes A/S - President and CEO [76]

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Thanks for your questions. I'll take the first one. We have fairly elaborate and solid plans for how we're going to expand the cost base. We're going to invest in the portfolio. We're going to invest, in particular, in customer-facing activities in the emerging markets. I think we have prudent plans in place, so I wouldn't expect a large deviation in terms of how the cost is going to build up over 2020. Of course, there can be delays. I think we have previously faced issues with recruiting people in the emerging markets. Sometimes, we have been, it turns out, we have been overly ambitious. I think we've taken stock of that, and we've put in a good plan for the buildup in 2020.

And then I'll let Tina take the question on the Chinese 10% inclusion policy. Tina, please?

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Tina Sejersgård Fanø, Novozymes A/S - EVP of Agriculture & Bioenergy [77]

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Yes. Yes. So as we have talked about a number of times, we have not anticipated E10 in 2020 in China. So that doesn't change anything. In terms of more longer term, how we look at the Bioenergy business, we see continued pickup and continued plans getting online in Brazil. It is also so that the Chinese announcement talked about that constructed -- or products in construction and plans in planning would be built. So that means that there will, for the years to come, still be capacity getting online also in China. And then we still see a number of innovation opportunities within the refinery broad space, can be within the yeast space, it's within the yield space and also other aspects where we can help improve the economies of biorefineries.

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Sebastian Christian Bray, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [78]

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That's helpful. Thank you, Tina, and good luck to you in the future, Peder, as well.

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Peder Holk Nielsen, Novozymes A/S - President and CEO [79]

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Thank you very much. And time is kind of running out here, so I think this has to be our last question. We'll be on the road over the next few weeks, and I hope that we'll get to see many of you as we travel. I'll be on the road next or -- yes, at the end of this week and next week. So I'll probably also see some of you.

But for now, I want to thank you for your interest in Novozymes and for attending this call today. Thank you very much.