Novozymes full-year profit outlook maintained in H1 earnings

By Katie Fletcher | August 06, 2015

On Aug. 6, Novozymes released its interim report for the first half of 2015, reporting that sales to the bioenergy industry were up by 2 percent organically compared with the first half of 2014, however, overall, sales growth slowed in bioenergy.

The growth in sales was supported by an estimated increase in U.S. ethanol production of 3 percent compared with the first half of 2014. Novozymes reported that the uncertainty in the company’s bioenergy and household care lines of business creates headwinds. Growth in bioenergy declined in the period and was negative in the second quarter compared with the same period last year.

In the report, Novozymes reported that bioenergy sales are expected to increase slightly for the full year, and that the challenging market environment in the U.S. is expected to continue throughout 2015. Two areas of concern discussed during the earnings call included challenging market dynamics—volatile commodity prices and low ethanol margins have customers focusing on costs—and a negative mix effect for Novozymes as some customers seek alternatives to yield solutions.

One way the company is hoping to accelerate growth is with its current test-marketing of a number of innovations to broaden the scope of its solutions and value propositions. Novozymes expects one or more of these to be launched in the second half of 2015 to address changing demands from U.S. corn ethanol producers. Overall, the company reported strong earnings performance despite the headwinds in important markets.

“The first six months have been hectic for Novozymes with a number of positive, but also some negative developments,” said Peder Holk Nielsen, president and CEO of Novozymes.

Nielsen said that on the positive side, the numbers presented in the first half of 2015 beat or equal any previous six-month period in the history of the company—highest sales growth in Danish krone (DKK), highest EBIT margin, and the highest return on invested capital. “The numbers are good, but 5 percent for the half year organic sales growth is below expectations,” Nielsen said. “We’re facing issues in household care and bioenergy and we expect these to temper growth for the remainder of the year. We expect all markets to contribute positively to sales growth in 2015.”

Some of the company’s short-term challenges in household care and bioenergy were discussed during its quarter-one results released in May. “These challenges did not go away in the second quarter,” Nielsen said.

Also during the quarter one interim financial report, a deal to supply enzyme technology to St1 Biofuels proposed cellulosic biofuel plant in Finland was announced. The project in Kajaani, Finland, will be colocated at a sawmill site, and will use sawdust from softwood as feedstock to produce cellulosic ethanol.

A small update on the company’s biomass conversion was provided on the call by Thomas Videbaek, executive vice president of business development with Novozymes. “We continue to work closely with our partners to ramp up and debottleneck their operations,” Videbaek said. “We don’t have any data to share at this point, but are happy to see things continue to improve and climb the learning curve as we start to deliver customized solutions to our global partners.”

As Nielsen stated, Novozymes reported 5 percent in organic sales growth, which is below expectations. In DKK sales, the company reported its highest-ever sales in six months with 15 percent growth to a total of DKK 7.028 billion ($1.03 billion). The company’s agriculture and feed experienced growth driven by performance and there was good contribution from the food and beverages business line for the first half of 2015. Sales to the agriculture and feed and technical and pharma industries were the most significant contributors to organic growth in the period in relative terms. Distribution of sales across the industries the company services were as follows: household care, 7 percent; food and beverages, 26 percent; bioenergy, 19 percent; agriculture and feed, 16 percent; and technical and pharma, 7 percent.

Novozymes made the bulk of its sales to North America at 38 percent and Europe, the Middle East and Africa making up 34 percent. Asia Pacific came in at 19 percent and Latin America, 9 percent. Sales to the bioenergy industry in Asia Pacific were lower, balanced by the main drivers of sales growth for the region in the agriculture and feed and food and beverages industries. 

Overall, the company’s 2015 profit outlook was maintained, but sales expectations lowered and reflect uncertainty in the business climate. Organic sales growth has been revised to 4 percent to 7 percent from 7 percent to 9 percent. Earnings before interest and taxes (EBIT) growth was maintained at 15 percent to 17 percent. EBIT margin increased to 27 percent to 28 percent. Net profit growth is maintained at 11 percent to 13 percent, and ROIC remains unchanged at 25 percent to 26 percent.

Total costs excluding net financials were up 12 percent compared with the first half of 2014. Total cost of goods sold increased 15 percent in comparison with the same period in the prior year due to a higher activity level and currencies. Gross profit also increased 15 percent, and the gross margin reported for H1 2015 was 57.9 percent, an increase of 0.1 percentage point to the comparable period in the prior year. Operating costs increased by 9 percent to DKK 2.201 billion, driven mainly by currencies. Net profit increased by 8 percent to DKK 1.389 billion in the first half of 2015, up from DKK 1.285 billion in the comparable period in 2014, as the higher EBIT was partially offset by higher net financial costs.

“We maintain our full-year profit outlook, as we see improved productivity and operational efficiencies leading to a higher EBIT margin,” Nielsen said.