Good morning, welcome to the Novozymes conference call. My name is Peder Holk Nielsen, 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, we'll discuss the outlook for 2020. Our presentation should take around 30 minutes, afterwards, we'll be happy to answer your questions. Please turn to slide number two. Despite an improvement in the second half of the year, sales performance in 2019 was unsatisfactory. Organic sales grew 1% in the fourth quarter, declined 1% in the year. As expected, the first half was negatively impacted by the annualized effects of sanctions and the general economic distress in the Middle East. On top of that, 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 Agriculture & Feed businesses. We had good traction with Frontia for grain milling and a strong momentum in the nutrition business. As Food and Beverage was also impacted by the U.S. weather, the Middle East, as well as a challenging Chinese starch business, Food and Beverage was below our expectations in terms of sales. All in all, it was a tough year in terms of sales performance. We're 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. Let's turn to the outlook. Novozymes sales is expected to grow by 1%-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 and Beverage are narrow around the midpoint of the overall company range. 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 one percentage point above the 26% underlying margin of 2019. We expect a free cash flow of DKK 2.5 billion-DKK 2.9 billion, which improves on the free cash to sales ratio. We propose 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 number three. 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.
Thank you, Peder. Please turn to slide number four. 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 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. Andy, over to you.
Thanks, Anders. Please turn to slide five. 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. 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. This means we end the year flat in baking. Sales in the food and 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 and 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 and 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 one to five Novozymes overall outlook, but with a more narrow range than the company outlook as a whole. With that's all from me. Tina, please.
Thank you, Andy. Let's start by looking at Bioenergy on slide six. 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 nine 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 -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. Now please turn to slide seven for an update on Agriculture and Feed. 2019 was a weak year in terms of organic sales in our Agriculture and 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.
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 and 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 penetration of corn inoculants in the North American market. With that, I'll hand over to you, Thomas.
Thank you, Tina. Please turn to slide number eight. In the fourth quarter, we launched three new products, two of which were for the broad market. Over the course of the year, we launched a total of 20 new products, with nine solutions for the broad market and 11 tailored to specific customers. Some of the more significant launches were Frontia Jade and the two new yeast solutions, Innova Force and Innova Feed. 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 Feed, 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. 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 specialty proteins, are progressing well.
We are evaluating new candidates and will provide an update as they are included in our strategic opportunity framework. I'd also like to present our sustainability and non-financial 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 three 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, wellbeing 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 from me, and I'll hand you over to Lars.
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-over-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 costs following the August restructuring.
Furthermore, an income related to the divested pharma assets 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 advanced 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 number 11 for the 2020 outlook. For 2020, we expect organic sales growth of 1%-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 and 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-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-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%-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 1x.
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.
Thank you, Lars. Please turn to slide number 11. 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%-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 title Better Business with Biology. Novozymes possesses unique technology and knowhow, and it is positioned well not only to deliver organic growth and solid returns to shareholders
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 interactions since we IPO'd in 2000. That concludes today's presentation, and we're now ready to take your questions. Operator, please begin.
Thank you. Ladies and gentlemen, if you do wish to ask a question, please press zero and then one on your telephone keypad now. Our first question is from Jonas Guldborg from Danske Bank. Please go ahead. Your line is open.
Yeah, good morning, and thank you for taking my questions. First of all, a question on the underlying EBIT margin in 2019. If I take the numbers 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. Just if you could confirm that I need to do that also. On Household Care, could you just tell us, is the negative impact from global players using less enzymes, is that still outweighing the growth you see from local customers? On Bioenergy, how much did your sales to customers decline in Q4, in the U.S.? Thank you.
Thanks for your questions. The first one is a pretty easy one, t hat's a confirmation. That's a yes, y ou need to include the restructurings. Anders, on Household Care, please.
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 three global accounts in 2020.
On Bioenergy, Jonas, sales to customers, they continued to pull back more than the average market.
Okay. Just to follow up 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?
I'll try to answer that one, Jonas. 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 2019. 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. 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.
Perfect. Thank you very much.
Next question is from Theodora Lee Joseph from Goldman Sachs. Please go ahead. Your line is open.
Hi. Thanks for taking my question. I've got two, 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 looks 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 your new CapEx guidance? Thank you.
Yes, thank you for that question. 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 1x, and that we plan to return all cash flow generated to shareholders through a combination of dividends and share buybacks. 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. A solid step on the way to the 50%. We are now proposing a new, or have approved a new, buyback program of DKK 1.5 billion. Again, a solid step towards the 1 level between EBITDA and net debt.
We ended last year at 0.8x, significant up compared to 0.5x the year before. What we are proposing now is really just a confirmation of the capital structure strategy that we announced in June. When it comes to CapEx, we expect maintenance or sort of like a CapEx level of 7%-8% to be the level that we assume will be required to support our future growth included in the new strategy. Our guidance of 0.8x to around 1x this year is actually slightly lower than that level. This reflects the fact that we have solid capacity available. We are still going to prepare and invest where needed to secure we can also supply for the future.
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. That's the background for our guidance on capital expenses in 2020.
Okay, thank you very much.
Next question is from the line of Søren Samsøe from SEB. Please go ahead. Your line is open.
Yes. Good morning, gentlemen. I just had a question, first of all, on your margin guidance of 27%. You have, of course, lower cost, I guess, in the first part of 2020, given that you are going to need to hire a lot of people, which is what you have communicated. I was just wondering, what is the underlying margin when we get to the end of 2020? For modeling purposes, what should we factor in after that? Again, the cost there will be higher when we get to the end of the year. Then secondly, on Agriculture and Feed, if you could remind us, Ag used to be 50%. How big part of the division is it now? 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. 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? Thank you.
Thanks for your questions. We'll let Lars have a go again at margin. Lars, please.
Yeah. As I said, yeah, we will invest and reinvest the resources we released back at the restructuring in August, which means that we will gradually do that during the year. Rather than look at higher cost 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+% in 2021 and 2022. 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.
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 three years.
I was just wondering what the margin level would be if your growth didn't 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?
I'm not going to speculate what will happen if we are not delivering on our margin. 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 2022. I think the next question was, could you remind me, Søren, on the one on Ag?
On Ag, yeah. First of all, how big part of Ag- Feed is Ag now? Secondly, on the Bayer agreement, it seems like the visibility is lower than when you had the Monsanto agreement. On the back of that, would it be fair to revise the longer-term outlook down for BioAg? Can you still put up with growth for the longer term? Thank you.
Good. Thank you for that. BioAg is around a third of the Agriculture & Feed segment. That's excluding the deferred income that we used to have in our sales earlier on. Of course, when you operate through a partner, there is a step between you and the market. That is what sometimes convolutes, you could say, our reported sales, and then the end use in the market, but w e'll try and help everyone understand to the best of our ability what that difference is, so that we can also continue to grow, which is our expectations that there'll be continued expansion of use of our products in the BioAg space also in the future.
Thank you.
Next question is from Laurence Alexander from Jefferies. Please go ahead. Your line is now open.
Good morning. Can you flesh out a little bit the comment 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? What's your expected rate of share creep? For the buyback, how much of the buyback is needed just to offset your standard option dilution?
Thanks for your questions, Laurence. We'll let Tina talk about, I guess it's in DDGS protein content in DDGS. Tina, please.
Yes. 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 collaboration agreement here in December. It is early days, and we're just getting started. You'll have to wait some time until you see the impact of that.
On buybacks, Lars, please.
Yeah. 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?
Do you have any share creep that you need to offset due to any incentive comp?
Any options from our incentive programs would have a very marginal impact, if any, on our earnings per share. I don't consider that significant in any sense on our earnings per share.
Thank you.
Next question is from Lars Topholm from Carnegie.
In Household Care, can you comment on plans for rolling out the freshness platform in the U.S., please? A question on net working capital. In your printed annual report, I can see your working capital grew from DKK 2.8 billion-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? Thank you.
Thanks for your questions. Anders, freshness, please.
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.
Lars, net working capital, please.
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 it started the year. The 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. It's included in the starting balance. 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. There is a direct correlation between the lower CapEx and also lower liabilities to our vendors. We have actually seen a reduction in our inventory.
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. 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 mixed impact of our accounts receivable in that space. As we move forward, we see that development overall improve. We see net working capital at more or less the same level in 2020 as we saw it in 2019.
Thank you. Just a Household Care question relating to Søren's question before, with ag being one-third of ag and feed. If feed is flat in Q4, is it mathematically fair to assume the ag part is down between 25% and 30%? Thanks.
It is roughly that range.
Thank you very much. Thanks for answering my questions.
Next question is from Anton Brink from Kepler Cheuvreux . Please go ahead, your line is now open.
Yes. Morning, all. 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 significant tax rate increase in 2020? Next to that, can you elaborate a bit on the Technical & Pharma one-off gain in Q4? I don't think that was expected. What's exactly happening there?
I can take your question on net profit. We are giving you all the information you need to calculate the impact and expected development on net profit. We are not, you could say, giving less insights to that level. We actually trying to give you exactly what is the difference between EBIT and net profit. 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. The royalty stream that we sold in the second quarter. There was, at that point in time, a contingent liability that was reduced in the fourth quarter. Therefore, we recorded an income to the level of DKK 40 million in the fourth quarter of our P&L.
Okay. Implicitly for 2020, we shouldn't expect any other operating income.
We have not planned for any such in 2020. Any one-off or non-recurring or any of that nature is not built into our guidance for the year.
Okay. Thank you.
Next question is from Michael Rasmussen from Nordea Markets. Please go ahead, your line is now open.
Thanks a lot. Just two follow-up questions on the business areas. On Household Care, you end the year pretty strongly on 5% growth, and also for the second half of the year. Then you're guiding sort of towards the midpoint of 1%-5% in 2020. Is that all related to the drag from large internationals? Because I would've assumed that you should be able to accelerate with the freshness launch and no negative comps, et cetera, in 2020. Just to get a feeling for what is actually driving the midpoint of the 1-5. The same for Bioenergy. Maybe more sort of an understanding of the larger ranges than 1-5. What should drive Bioenergy sales growth to say, sort of above 5, in the 2020?
Thanks for two good questions on Household Care and Bioenergy. Anders, Household Care, 5%, is it going to continue?
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. Let me also remind you that we delivered only 1% growth in 2019. Although the second half has been really strong, we also had to accept that the first half of 2019 was weak. The guidance that we have now is with the narrow around the midpoint of the 1%-5% is what we believe is a solid guidance. Yes, we are still seeing some softness among our three global accounts. Again, it's easing compared to what we've been through the last three, four years.
Thank you.
On Bioenergy, we are expecting for 2020 flat volumes. 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. Last but not least, if our innovations get a better footprint than what it is we have expected.
Why should volumes in the U.S. ramp up significantly?
We have E15.
To get a flavor on that.
Yeah. We have E15 as one of the drivers, and we also, in our numbers, is having some assumptions on how it is our customer are going to behave.
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.
Of course. Yeah.
That's not built into our guidance. As Tina says, we assume flat production volumes in the U.S. There's certainly things in ethanol that can go better than what we have in our books right now.
Thanks a lot.
Next question is from Annette Oliger from Handelsbanken. Please go ahead, your line is now open.
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 tanks 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. bioethanol market statement for E15? Getting back to the margins, can you tell us, I can see that this one-off from the earn outs from a pharma asset of DKK 40 million is around 100 basis points. How much is the lower staff cost in the Q4? Is that another 100 basis point, or how much have you saved in this respect? That is my question. Thank you.
Thanks for your questions. First, E15, Tina, how much do we have in the books?
Very minor. We are not anticipating on a big rollout. It is a gradual increase, which we expect to see.
On the margin.
How many?
Sorry. on the margin-
Tina.
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. Combined with the non-recurring Pharma other ordinary income, this means that the margin of the fourth quarter is around 26%. As we sort of reinvest those resources and grow our top line, that's what bring us to 27% for the year of 2020. Adjusting for the savings in the fourth quarter, that brings us to an underlying of 26% also in the fourth quarter.
Thank you. Returning to Tina's answer on the E15. Can you share with us how long time it would take before you see an effect, or how should we see this, I would say, more investments in infrastructure in U.S. gas stations to be ready to sell E15?
Annette, currently there's 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. It'll be a gradual rollout of it. As Peter was alluding to earlier, I think in terms of volumes, the biggest tick up which 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. That if a change to that would mean a significant change to the volumes.
Okay. Thank you.
Next question is from Nicola Tang from Exane BNP Paribas. Please go ahead, your line is open.
Hi, everyone. Thanks for taking my questions. The first was for Tina actually on Balancius. Can you explain in the ramp-up of that, as that seems to be one of the main drivers for the feed business into 2020? I think your previous management mentioned or talked about potential total annual revenue of EUR 60 million-EUR 80 million once fully ramped. The second question was for Anders on Household Care. It seems like you saw quite a nice pickup in China towards the end. Is it a pick in market or this is a one-off related to some rollout? Can you explain that?
Yes. On Balancius, we are in the early days of rolling it out. We are testing with a lot of players as we also, in 2019, got a European registration. We also have the accurate competitor numbers which we have been talking about in terms of the expectations to the product. It is still in the early days.
On Household Care China, we have during 2019 had some challenges with a few large customers changing in the year that we're through. That is easing and again, making our business coming back to the level that we actually expected it to be throughout the entire 2019. It's good to see that that business is coming back, and actually also thinking about 2020. I'm hopeful that that will actually also continue into 2020.
Thank you. I was wondering if I could just sneak in one more. You talked about the 1%-5% organic guidance, including some assumptions around impacts of portfolio reallocation. Are there specific divisions where you think there could be a larger impact from this? Could you comment?
As we communicated on June of 16th, I believe it was, in the Capital Markets Day on the 17th. We are now executing on the strategy, and we've made changes to some of our positioning in some of the portfolios. Of course, we have assumptions as to how that's going to pan out. We do not have full visibility yet. We have included the expectation and also the uncertainty around this in our overall guidance. 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. When you look at the five segments that we report on here, you have a bit in every one of them.
Okay. Thank you.
Next question is from Silke Kueck from JP Morgan. Please go ahead, your line is open.
Hi, how are you?
We're doing well. Yourself?
Good, thank you. In your local currency growth outlook for 2020, what are your pricing assumptions in that outlook, if you have any? What was the pricing behavior in the fourth quarter? I was also wondering whether you can discuss your local currency growth in Household Care in the fourth quarter by region.
Thank you. We'll let Lars talk about pricing and pricing evolution in the business, please.
Yeah. The impact on pricing in the fourth quarter were more or less aligned with the level we saw for the full year. No significant change in that context. 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. That is the local currency guidance that we have built in of a 1%-5%.
The next question is from Charlie Gregg from Citi. Please go ahead, your line is now open.
Hi, everyone. Thank you for taking my questions. Just two. Looking first with Household Care. I know it's hard to give color here, but if you could say how far you're through with your kind of European rollout on a very big picture basis, do you think you're at the beginning there? Do you think you're coming close to the end? Any color there would be really helpful. Then looking at Agriculture & Feed, could you firstly clarify how the corn business progressed in 2019? Then looking to 2020, obviously, you've had a big fall off in soy acreage in the U.S. in 2019. A lot of our 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?
Thanks for your questions. Anders, can you put some flavor on the freshness rollout in Europe, please?
Europe is, of course, part of our guidance. We expect that to ramp up during 2020. We do not give specific guidance on where we are. Of course, a lot of the growth that we anticipate will be coming from that geography.
On the corn inoculant, that is rolling out according to plan. We are getting on more and more in acreage. We sold into around 16 million-20 million acres for use in 2019, and we see a nice step up on that into 2020. You're right on the soy business, that has not been performing well in 2019, and therefore, we do expect to see some improvement of that into next year. Our soy business has not been doing well here in 2019.
Fair enough. Thank you.
Next question is from Sebastian Bray from Berenberg. Please go ahead. Your line is open.
Good morning, thank you for taking my questions. I would have two, 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- 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 of E10 doesn't look like it's going to have a big impact on the numbers in 2020. I'm thinking on a 3- 5 year view. Aside from yeast, what is going to drive growth in this segment?
Thank you.
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. 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 it turns out we've been overly ambitious. I think we've taken stock of that, and we've put in a good plan for the buildup in 2020. Then I'll let Tina take the question on the Chinese 10% inclusion policy. Tina, please.
Yeah. 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. That means that there will, for the years to come, still be capacity getting online also in China. We still see a number of innovation opportunities within the refinery broad space, can be in within the yeast space, it's within the yield space and also other aspects where we can help improve the economies of biorefineries.
That's helpful. Thank you, Tina, and good luck to you in the future, Peder, as well.
Thank you very much. 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 the end of this week and next week, so I'll probably also see some of you. For now, I want to thank you for your interest in Novozymes and for attending this call today. Thank you very much.