Earnings Call: Q2 2019

Aug 8, 2019

Good morning, and welcome to the Novozymes Conference Call. Today, we'll review our performance for the 1st 6 months of 2019, and our outlook and key priorities. Our presentation should take around 25 minutes and afterwards, we'll take your questions. My name is Peter Hock Nielsen, and I'm the CEO of Novozymes. I'm joined here today by the Executive Leadership Team And Investor Relations. Please turn to Slide 2. Before we jump to the quarterly performance, I'd like to take this opportunity to thank all of you who attended our Capital Markets Day in mid June. We had more than 100 investors, analysts and journalists at the event and many more joining the webcast. I'm sure you can imagine it has been a busy period since. We now in the process of executing on the changes to the business portfolio and on the reallocation program. And As you've probably seen this morning, we announced the change in the executive leadership team. Prisca Hafanek Kossek previously EVP and CFO of Novozymes has been a strong support in driving the agenda on how to secure the delivery on our updated strategy. We have mutually agreed she'll discontinue her position as EVP and CFO for personal reasons. We wish Frisca every success in her future endeavors and would like to thank her for her time with us over the last 18 months. We expect to announce a replacement soon Now let's turn to our performance in 2019. In 2nd quarter organic sales declined by 2%. Although this trend is an improvement from the 4% decline in the 1st quarter, We're not satisfied with the overall performance of our business in this first half of twenty nineteen, but we are confident sales will pick up in the second half of the year. As we've communicated in the revised full year outlook on June 6, the flooding and general softness in the agriculture business combined with weakness, and some emerging markets have created headwinds, which impact agriculture, bioenergy and parts of food and beverages negatively. For the second half of the year, we expect a ramp up in sales as the Middle East comparison eases BioAC sales increases in preparation for the 2020 planting season and innovation such as our freshness platform, the launches, and new Bioenergy products built momentum. The EBIT margin was 30% for the first half of the year. This was in Before we review the individual business areas, let's look at the sales performance by geography. Please turn to slide number 3. Sales to developed markets were flat organically, while emerging market sales declined by 8 percent in the first half of the year. The weakness in the emerging markets was partly expected. It is mainly due to the economic constraints in the Middle East, which primarily affects affected our Household Care And Bacon businesses. China had a soft first half, particularly in feed and starch, Latin America has also experienced softness. Some of that, but not all was expected. And now I'll hand it over to Anders for a review of the developments in Household Care. Anders, please. Thank you, Peter. Please turn to slide number 4. Organic sales for Household Care declined 1% in the second quarter by 2 in the first half of twenty nineteen. The weakness in the second quarter had been expected as economic distress in some Middle Eastern markets continue to detract from our performance. Adjusted for the headwinds in the Middle East, we saw positive underlying performance, which we expect to be visible in the second half of the year. Sales in the developed markets grew slightly in the second quarter while sales to the emerging markets declined. Growth in the developed market was mainly driven by North America, in the emerging market strong performance in India was more than offset by softness in the Middle East and a few other markets. In general, our sales to emerging markets are more volatile However, we still see significant penetration potential and continue to invest for the future. The trend in the past years solid sales growth with regional customers and declining sales to our global customers continued in the first half of twenty nineteen. Our freshness platform is developing well from both commercial and innovation perspective. The commercial rollout is progressing according to plan, and our research into both broad market solutions is showing very encouraging results. The geographical expansion of our freshness platform combined with the annualization of the Middle Eastern headwinds are the main reasons for why we continue to expect low single digit growth for the full year in Household Care. With an acceleration in the second half. Technical And Pharma sales declined 2% in the second quarter, delivering first half organic growth of 2%. This development was in line with expectations following That's all from me. Andy, please. Thanks, Anas. Please turn to Slide 5. In food and beverages, we've had a difficult half due to weakness in persisted countering solid growth in both our food nutrition and beverage businesses. Overall, 2nd quarter sales declined by 3% organically resulting in a 2% developed baking markets, combined with economic distress and some share loss in the Middle East. While we had hoped to regain traction in the Middle East, the market contraction has continued competition per share has also been a factor. Adding to the headwinds, developed market Freshkeeping has not yet achieved a new market price point after the expiry of our Nova Mill patents, leading to higher than expected price erosion. We're working with our banking channel partners to maintain value in Fresh Keep while focusing on accelerating our first quarter was impacted by softness in China and wet weather in the U. S. Midwest. While the U. S. Has returned to expected run rates, China remains challenged due to high corn basis. On the positive side, our Grain milling launches continue to progress with solid growth of our Frontier product line in multiple geographies fees, helping to counter contraction in starch refining. Food Nutrition delivered growth in both the second quarter and the first half as a whole, The good performance was most notably driven by the increased penetration of our protein ingredient, dairy and plant extraction solutions. Additionally, we continue to on pushing commercial penetration and developing new Sales to the beverage industry are performing very well, driven by double digit growth in juice and wine and solid sales in brewing. While sales to the beverage alcohol industry remains sluggish as they are affected by high corn pricing in China. In conclusion, It's been a dissatisfying first half in food and beverages due to softness in baking and starch as well as tough conditions in the Middle East. In the second half, we expect a ramp up of our sales as we see acceleration in our Food Nutrition business plus more impact from our efforts in grain milling and vegetable oil processing. Although the negative impact from the Middle East will ease, we don't expect a full recovery from the first half headwinds, And therefore, the outlook for food and beverage is low single digit growth for 2019. Tina, over to you. Thank you, Andy. Let's start by looking at Bioenergy on Slide 6. Bioenergy recovered somewhat in the second quarter after the weak first quarter closing the half year at minus 4 percent organic growth. For the 2nd quarter in isolation, the business was flat. In the first quarter, flooding and wet weather in the U. S. Midwest affected our Bioenergy business negatively. This continued into the second quarter with high corn prices and low producer gross margin as a result. So while the U. S. Energy Information Administration estimates that the overall ethanol production volumes are 1% to 2% lower than last year, Our customers are down slightly more in the first half due to the first quarter underperformance. Outside of the North American market corn based ethanol capacity expansion in Latin America combined with our broad technology offering and the yeast platform is expected to accelerate to accelerate growth throughout the year. Looking ahead, despite E15 year round sales now being allowed in the U S, We expect this to add very little should provide gradual support blend as provinces announced implementation plan, but it is still early days. We also have a number of very exciting product launches But I'll let Thomas tell you more about these game changing innovations, which are expected to benefit performance in the second half of the year. So now let's turn to Slide 7 for an update on Agriculture And Feed. As expected, Sales in the Agriculture And Feed business remained under pressure in the second quarter of the year, while the Agriculture business in decline partly due to tough comparisons. This was somewhat mitigated by improved performance in feed. For the first half of the year, the agriculture and feed business declined by 6% organically year on year, while in the second quarter, the decline was 7% year on year. As communicated on June 6th, the wet weather in the U. S. Midwest has had a negative impact on our agriculture business. The very wet soil conditions affect both corn and soybean planting and expected yields, creating short term uncertainty in the industry. The new BioAg set up is progressing well with good traction for our key product launches with buyer for upstream corn and for Latin American soy. As well as with a dedicated sales team under the brand, Univar, Nexus BioAg, and we continue constructive dialogue with additional partners such as UPL. So after 4 months with the new structure, the BioX setup is progressing well in terms of product launches and partners. Now let's turn to our performance in fleet. Feed sales grew in the second quarter and by Lancios, our new gut health enzyme jointly launched with our aligned partner DSM was recently approved for the European market. So to summarize the messages for the two areas, while ethanol markets remain volatile with North American inventories elevated and producer gains low, our performance in Bioenergy improved in the second quarter compared with the first. We expect an acceleration in the second half driven by innovation and capacity expansion in Latin America, and we expect low single digit organic sales growth for the full year. Acriculture and feed is also subject to some uncertainty and had a weak start to the year, mainly due to the wet weather in the U. S. Midwest. Here, we expect low single digit decline to flat organic sales growth with an acceleration in the second half driven by innovation and increased sales in BioAg. And now I'll hand over to you, Thomas. Thank you, Tina. Please turn to Slide 8. The second quarter was busy in terms of innovation. We commercialized 3 additions to our Bioenergy Product portfolio Inoverforce, Inoverfit and Fortiva. Inoverforce is a new yeast yeast that in combination with our enzymes deliver the most reliable and flexible solution yet for this industry. Further, the Inova platform was expanded with a dry version of our non GM yeast in Overfit. This yeast enables penetration of markets in Latin America and Europe. The 3rd launch Fortiva is a new in somatic offering in the liquefaction to meet the demand for temperature and robust solutions. These innovations gives us an even stronger portfolio supporting this business. In addition to these 3 launches, we had 5 customer specific launches. As Tina mentioned earlier, in the partnership structure in the bio ag is progressing well. Bayer recently launched 2 new products for the European wheat market, scheduled to be marketed in the forthcoming winter season. Both products enhance the interaction between the plant and the microbes present in the soil and are based on the jointly developed corn inoculum technology. On June 16, we announced information of 3 new strategic opportunity areas in connection with the updated strategy. The purpose is to spearhead new business for the long across our 30 or so industry based on the differentiated portfolio role framework. The process of differentiating and we estimate that we increase speed and the likelihood of success, which actually gives a higher net value of the total pipeline. All in all, a busy quarter, and we look forward to adjust our innovation efforts in light of the upstated strategy. That's all for me. And I'll hand you over to Peter. Thank you, Thomas. Please turn to Slide 9. I'll take you through our financial performance for the first half of the year. Second quarter organic sales declined, as you heard, by 2%, which was an improvement on the 4% decline in the 1st quarter. Overall sales came in as expected following the June 6th update to the full year guidance. Floods and wet weather, as you heard, in the Midwest and some emerging market softness have created headwinds impacting our agriculture bioenergy and parts of food and beverage. Household care and technical farm and pharma are delivering according to the expectations set out. At the beginning of the year. In reported Danish Kronos sales declined by 1%. This includes a positive currency deferred income and the divestment of The gross margin was down roughly 200 basis points year on year at This is partly due to the weak top line and partly to higher input costs starting in the second half of last year. One offs had a negative impact on the gross margin. Price mix was neutral and currencies provided a tailwind. Overall, the gross margin of 55.1 percent was in line with our expectations. At 30%, the reported EBIT margin came in as expected at roughly 200 basis points higher than last year. However, the reported Q2 margin of 34.4 percent benefited from once offs including included in other operating income. In addition, R and D cost was impacted by a provision for the cost of data strategy and restructuring. Adjusting for the various one offs mentioned, the underlying margin was roughly 26%, or 150 basis points below the same period last year. The effective tax rate for the quarter was 19% which is on par with last year. Net profit was 1 and a hedging loss on the U. S. Dollar. Free cash flow before acquisitions in the first half of twenty nineteen was DKK1.2 1,000,000,000. That's roughly $300,000,000 up on last year. Free cash flow before acquisitions grew year on year as CapEx and trade payables were lower, while trade receivables and inventories develop favorably. Now let's turn to Slide 10 for the 2019 outlook. We maintain our full year outlook on all parameters following the June 6th adjustment and confirm the expected organic sales growth acceleration in the second half of the year. As mentioned earlier today, it's important to stress that while the business face faced some unexpected headwinds in the first half of the year, our forecast for the second half ramp up have not materially changed. For 2019, we expect an EBIT margin free cash flow before acquisitions of DKK 1,900,000,000 to DKK 2,300,000,000 and a return on invested capital of around 23%. As we've previously communicated, divestment of the remaining farmer related royalty. This will not impact organic growth but it will have a negative impact of around 0.5 percentage point on reported 2019 revenue growth in Danish Kroner. The proceeds from the divestment are recognized as other operating income and Further, as a result of the new BioX setup, the remaining balance of the deferred income is 0. Before we close, let me Flars and wet weather in the U. S. As well as softness in the few emerging markets have resulted in a weaker than expected start to the year. Organic sales in months into the year. This outlook is reconfirmed today, corresponding to a ramp up in the second half of the year, driven by increased sales in BioAg, and easening of the Middle East comparison and sales from new innovations in Bioenergy, as you heard, about animal health, And the Household Care Freshness, as those innovations build momentum, it will accelerate our growth. While we continue our focus on delivering the full year outlook, we're executing on the updated strategy called best Better Business with Biology. We're making good progress on all fronts with focus on changing the business portfolio and thereby position Novozymes for stronger performance in the to come. That concludes today's presentation. Thank First question is from Michael Noble from Nordea Markets. Please go ahead. Your line is open. Thank you very much. Yes, it's Michael Loebel from Nordea Marketing Copenhagen. Thanks for taking the questions. First of all, a question on the gross margin you did say highlight for the first half some of the challenges. Could you try to explain also regarding the high input costs higher input costs going to the 2nd half because there's no doubt looking at the year over year erosion in the gross margin actually feeds some concerns. So maybe just get a better feeling for where you should expect to end for the full year on the gross margin with the knowledge you have now on the input costs. This as well. And then on the different business areas, in particular, food bev, bioenergy, and Ag FEED. So going through all your 2019 outlook comments, it seems more than more of a challenging environment that things are looking up. So maybe you could just highlight for those three areas the single most important factor for each area in order to see this recovery for some of the areas very significant recovery in the second half compared to the first half of the year? Thank you. I'll take the gross margin question and then the divisional can prepare for their single most important growth accelerator. On gross margin, as I said, we've had some headwinds including higher input cost. The higher input cost is really about it's mostly about chemicals where we saw a an increase in our price, the prices we procured at in the middle of last year. And then it's, it's some of our energy spends that are more expensive. We think that will ease in the second half of the year. And of course, all of this is included in our EBIT margin guidance of 28% to 29% for the full year. So an ease on the gross margin pressure in the second half is our expectation. And I think we have pretty good visibility on that. Then I'll pass it over to Tina to talk about acceleration? Yes, I can go first. So, in Bioenergy, I mean, it might not be one, Michael. I hope that is okay, but that is the innovations coming and then it's new capacity getting online in Latin American. But innovations in the North American market is a big part of it. We have progressed well with especially the with the LEAST launches we launched the first product 1.5 year ago, and it is going very well. And we see a lot of interest in it. And then on top, we also have the new Alvheim laser for liquefaction. So innovations in Brazil is the answer on bioenergy. On ag and feed, it is a matter of of launches. And then for sure, I mean, at least compared to 1st half, we do, in general, in agriculture see a stronger second half given that we are preparing for the new season. And then also we have innovations here, both, most notably, I would say, Balanjos, but also the bio rice launches are the big ones here. So timing and launches in ag and feed. And then over to Andy to answer the same. Yes. So we had always expected a stronger second half in food and beverage. And I think the difference that we're experiencing is, of course, the first half we knew would be tough, but it was tougher than we had expected. So for the second half, it's focused on ensuring the work we've been doing in building more business in Grain Milling, and in vegetable oil processing, those concrete opportunities come to fruition in the second half and, further expectations that our food nutrition which is growing nicely, actually, even accelerates in the second half. So it's known opportunities that we're working on, executing on those in the new growth areas. Okay. Super. Thanks a lot. Next question is from Gunther Zechmann from Bernstein. Open. Hi, good morning. Two questions from my side, please. The first one is on pricing. You spoke at the Investor Day about testing price elasticity a bit more a bit, I think you'd mentioned in the prepared remarks that pricemix was actually neutral or is it always used to be slightly deflationary? So Can you just give an update of what your initial feedback on the commercial side is on testing that price elasticity it. That's the first one. And the second one on Tina, maybe you could comment on China E10. Any anecdotal evidence of production ramping up there and the kind of growth that you're seeing? So I'll take the pricing question. When we look at the 1st half, We have just the reported numbers, we have a lower than normal price decline for the total business. That is a, of course, an average of a lot of things. And there are pockets of the business, and I would rather not go into details right here, but there are pockets of the business where we are definitely testing price elasticity and we also successfully in many areas, but of course, that's a complicated, a grid and for competitive reasons, I don't think I want to talk about it here. But I think we're making progress and we have more planned or we have more in our plans. But pricing, despite the lower growth or the low growth in the first half, I think pricing is roughly, I was going to say, in control and price, price erosion is actually lower than we've seen for a long time. And then Tina to talk about China. So on China, it is still early days, Gunther, but we do see some provinces, Shanshi and Hiva, if I pronounce it correct, are planning on rolling out E10 mandates, but it is still early days. We also, as I think we have talked about earlier, have started seeing some new capacity getting online, but it is, as I said, early days and it's not a big part of our numbers. But it is encouraging that they are starting on, you could say, to implement, with provinces going to E10. Thanks. And, Peter, if I can just follow-up on the pricing. Did you have any regretted losses on the volume side from increasing prices? Every loss is regrettable, but we also have wins. Thank you. Okay. Thank you. Next question is from last time from Carnegie. Please go ahead. Your line is open. From Carnegie. Please go ahead. Your line is now open. Yes, sorry. I accidentally muted the very unprofessional. A couple of questions on my side, in R and D, you mentioned this one off impact from a patent case in the U. S. Can you specify how big the impact is and maybe also comment on what specific case it's regarding? And then Tina, regarding your new yeast which Thomas mentioned, we'll give you access to the Latin American East market. How big is that market in total value Thank you. On the provision for the R and D, for the patent case, which is related to Bioenergy in the U. S, I think, obviously, for various reasons, I would rather not give the exact number when you look at the hike up in our relative R and D spend, I think you pretty much get a number there for how much we're providing for It is related to a particular application in biofuels. And we do not agree to to the drift of the patent case, but we think it's prudent to provide for it right now. And then I'll let Tina talk about yeast Yes. Lasse, so the U. S. Yeast market is around US200 $1,000,000, and this is significantly less also as the inside market for corn ethanol is significantly. I think of the launches, which we are having, I mean, we both have a an an MGM launch And then we have the Inova force, which is an enzyme expressing which is an east expressing 2 enzymes. I think of these 2, it's the Inova force will is, the bigger part of that. So, yeast in Brazil is is is not very big. And the biggest where we expect most impact from is from the Enover force. Tocino, one additional question, of your Bioenergy revenue, can you indicate how much of that is U. S. Now? Around 85%. Fantastic. Thank you for good answers. Next question is from Anton Beck from Kepler Cheuvreux. Please go ahead. Your line is open. First question, can you be a bit more explicit on the core EBIT in Q2? And the implied margins from that. Is it fair to assume a 1 off effect of roughly 350,000,000 Dkk? And then a second question, listening to all the major ethanol makers reporting last week, and I guess production data that we've seen for July, I must say, I feel to understand your positiveness on Bioenergy And H2. You mentioned innovation in Brazil, but I guess to what degree does the output decline in July were you? We've seen minus 3, minus 3 and minus 6 in the last 3 weeks. And comments by the ethanol makers have definitely not been positive. Okay. On the EBIT margin, just to save you a lot of calculations, our expectation of the or our estimate of the underlying EBIT margin for the second quarter is 25% to 26%. And then I'll let Tina talk about Ethanol, Tina, please. Yes. So you are right that it is a constrained market with where some players are pulling back and we for sure also follow the news as you're alluding to. And also in talks with customers. When we are, though still expecting a low single digit growth in for the full year. It is due to that, we saw a flat year in Q2, for Bioenergy. And then also we have the innovations coming in. On top of that, we have Brazil with new capacity see expected to come online, which is also part of the numbers. But you are right, it is a challenging condition conditions But we do expect that with the launches that we would be able to deliver, mid single digit growth, low single digit growth. However, our expectations are for a decline on the total volumes in the U. S. Market. Maybe follow-up, in a scenario that we would see closures to what degree would that put your current guidance at risk? I mean, are you to some degree accounting foreclosures? So what you can say A, closures, we have a bit more than 50% of the U. S. Ethanol market. So it depends on who is that is closing. And then we are taking, in our considerations, we are looking at less ethanol being produced in the market, a couple of percentage points. So that is included. But for sure, as you also know, it is It is a tight situation in the U. S. Ethanol market. And it can go worse, it can go better. I just want to add that. I think it's It's maybe not fully appreciated that we have actually grown a very significant yeast market and been very successful in the yeast market in the U. S. And expect that also these launches will continue to enable growth in the yeast market in the U. S. So this is not a 0 sum game or even a negative game if volumes go down, It's a plus game because we're adding a lot of really, really significant innovation to the e space. Okay, clear. Thank you very much. Next question is from Anita Luede from Handelsbanken. Please go ahead. Your line is open. Thank you very much. I hope you can question on the bioenergy growth because in your press release on page 2, it says that you had a negative organic growth in Q2 2019 at -1. And then in your presentation, you say that the organic growth in Q2 2019 page 6 is 0%. I just want to know which one is the right. And then a question on for food and beverage, the new bread types, how fast do you expect the uptake to be? Overall, it's my understanding that the food industry is fairly conservative. And so how fast should you expect this to compensate for the lack of growth in other areas? And also could you elaborate of how big is this new potential for new blood attack compared to the existing market you are in today? Thank you so much. I think we'll let Andrew start with the Food And Beverage question, Andy, please. Yes. So, it's not new that we've been working on new bread types. And in spite of the fact that the first half has been tough overall in baking, we actually see good progress in multiple emerging markets in bread types that are sort of not traditionally Western. So how fast? Well, we're actually investing more in flat breads, which is a big category. And we're also investing in things like sugar reduction in bread, which is particularly relevant in many emerging markets for both cost savings and also kind of health effects. I have to admit that I think the first half was being tougher. It makes us, a little bit terrful about how we view the overall category within baking. But we do expect a good second half performance in these new areas that will somewhat help us recover the tough general conditions in Middle East and, in, fresh keeping in the developed markets. But I'm still cautious about the full year effect on that. From an overall size of opportunity viewpoint, if you think about sort of the West market, there's on the order of 100,000,000 tons of flour consumed every year for bread. In the developing markets, there's an equal plus, probably 50% more amount of flower consumed that is unpenetrated. So there's actually a pretty substantial long term opportunity in baking if we're successful in both innovating and penetrating this volume. And that's what we're working on for the medium to long term. Thanks, Andy. And then I think we might have resolved the potential noise around biofuels growth, Tina, The answer is flat. Next question is from the line of Ben Gorman from UBS. Please go ahead. Your line is open. Hi, guys. Just a few quick ones from me. First of all, in terms of understanding the starch business, run rate. My understanding was that was quite a significant drag in Q1, particularly in China, and I thought in the 5 months as well. So can you just give an idea of what's changed there in terms of, is it sugar pricing versus Chinese corn pricing and or are you coming up against easier comps? So just sort of first one on that one. And then, just in terms of your sort of run rate in June, And given that we already knew what the 5 month number was on organic, it sort of looks like down almost 8% in June in terms of organic. So could you give an idea of whether basically July is looking better or worse than that? At this point. And then just a sort of quick one on the R and D provision side, you just confirm this is just a provision at the moment? It's not a cash out, so it's not in the cash flow. And also, sort of why now in of the provision? And have you ever reversed patent provisions in previous cases? So I Andy, starch business, please? Yeah. So the Chinese starch business is, based on corn, and it's been a decent place to be over the last few years because they've had quite favorable corn pricing as they had built up substantial corn stocks with some farmer support programs in previous years. And, they use the corn to go ahead and produce starch sweeteners, but also fermented products like organic acids and things like MSG. Now what's going on now is that there corn prices have gone up significantly for 2 reasons. One reason is they've sort of burned through at least the kind of food relevant part of the corn stockpile and, they're not really allowing corn into the Chinese market from the outside. And so some of these trade effects is actually hitting the starch producers in China. From a sweetener viewpoint, they're having trouble maintaining prices because they're competing against sugar, which is more affordable than at least sugar produced from corn in China. And therefore, overall, the market is depressed when it come to some of the main commodity outputs that they're producing in those markets. And that, let's see how that develops. I don't have an insight on whether going to remedy in the short term, but that's what we've been suffering over in the 1st 6 months. And then I'll take the 2 other questions. You had a question on the June run rate that was, what was low, It may not exactly pretty much as we expected when we announced on June 6th. But every year, I think, at least most of the years I've been involved in this. When around July 1st, you have customers that will such, there are inventory positions. And sometimes that gives a better June and a worse July, and sometimes it gives a worse June and a better July And our expectation this year without commenting on July at all is that we had a some weakness in June because of the inventory optimization that went on with our customers around July 1st. Then your next question was on the provisions for the patent case. We have provided because of we believe that we are gunner pay for the patent case. So it's a provision. Obviously, we are now negotiating and will negotiate as hard as we can. We don't think it's fair at all, but it's a negotiation that's going on. So of course, could be returned or could be taken down or could return cash, but Right now, it's our best belief, what we have put aside as a provision in the second quarter. Okay, thanks guys. That's really helpful. Next question is from Yona Skulbo from Danske Bank. Please go ahead. Your line is now open. Three questions from my side. First of all, with regards to your cash flow, your reversal of non cash items very low in Q2 and very much lower than usual. So could you put some words on why it's so low? Then also you announced some restructuring costs related to your new strategy or implementation of your new strategy, how much is Q2 affected by such restructuring costs? And then lastly, maybe you could put some words on how you have factored in to your guidance for both bioenergy and ag and feed the current trade war between U. S. And China. Yeah, if you could put some word on that. Thanks for your questions. If we take them in the reverse order, then the trade war per se is not well, it's factored in, but it's factored in because we take stock of the different businesses we operate in. So we take stock of what Bayer is telling us around planting in Latin America in the second half the buildup for 2020. We take, of course, into account what the Bioenergy business is telling us about the outlook for their businesses. So it's a it's things that are pieced together because we look at different industries. And I think we have covered them well. I don't know, but to me, the major part of it is probably in Bioenergy. And as you heard Tina talk about, we're not betting on an increase in bioenergy ex in biofuels exports to China So we're kind of booking that, that will not resolve over the year. Then your first question on on cash flow and reversals, I've agreed with Tobi as who is next to me that he'll call you and you can take those details offline, if that's okay with you. It's fine. And on the restructuring costs, that's There are some of that in the second quarter. Of course, we've had some help from consultants in developing the strategy we've also started on some of the restructuring programs internally. That's included in the the math I did before when you look at the underlying EBIT margin for the second quarter, you should assume that to be between 25% 26 And the restructuring costs that are to come in the rest of the year, we think, are fully accounted for in the guidance we have given you. Okay. Thank you. Next question is from Sam Samsu from Ceeb. Please go ahead. Your line is open. Yes. Hello, gentlemen. First a question on the Food and Beverage Division. Where you say the weak growth was partly due to price declines in pricekeeping and also, starch in U. S. And China. Just if you could say these price declines, if they will also have a negative impact in the second half? Then secondly, I think you alluded to it before a little bit, but maybe if you could say a little bit more regarding the starts in China, I mean, it looks like we have scenario of higher comp prices in second half, most likely. And your guidance of 1% to 3% for this division for the full year implies 6% in in second half. So what is it that will grow, I guess, double digit for you to reach this guidance? Then secondly, a question on restructuring cost. If you just say a little bit more of what you're using this cost, is it layoffs in headquarter or is it more in out in the business areas? And also if we can when you have had these many restructuring costs this year, is that sort of it or would that be more next year? And you please start and price declines. So in baking, as I've told you over the last few years, we've seen a pretty fundamental change in the fresh keeping market because of our patent expiry. And we had done I would say preemptive price declines with our channel partners to rebase that business. That actually was a more significant price decline over the period than we've seen in 2019. But I think the difference is that we had expected it to stabilize more than it has So we've seen some declines that were, unexpected in our first half. It's starting to stabilize now. We have visibility around how that's impacting the going forward. Now baking is still going to be a tough area because of that, but, that's, that's factored into my low single digit growth forecast for the full year. On starch, one thing to think about is, yes, things tough in China. I don't have great expectations that the starch refining business is going to get very much better in the second half. But Another component of the starch business is our grain milling innovations that we launched a couple of years ago, and we've been working very hard on commercial penetration of that opportunity. That actually starts to have a decent impact in our second half as the trials turn into ongoing commercial business. Which somewhat tempers the, declines in refining. So you kind of have to factor it all together. Yeah. It's a bit tough in refining, but we have other things going that have longer term potential and they're starting to bear fruit. Sorry. Go ahead. No, I just wanted to know if Green Milligan was big enough, compensate for the other areas that are probably not going to show that high growth in the signal. No. Like I said, I still expect kind of softness with overall within starch, but it's not just all bad. We've got some good things that are compensating for the corn pricing that's affecting volume in, especially China Now the other part of the second half is that we actually have quite a bit that we've been doing, on food nutrition And we've also got quite a bit going on in vegetable oil processing, combined with an already planned order pattern effect that has a significant step up with selected customers in the second half. And that's what's going to get us over to the positive side and help compensate for the weaker first half. I'm not going to end where I originally thought I was going to end, which was kind of mid single digit, but low single digit is where we think we'll end based on a much more positive second half of the year. Cost. Then on June 16, we announced a pretty significant reallocation program in the company, where we are reprioritizing, as Thomas was talking about reprioritizing the different businesses in terms of how we invest in them. And we also are taking out resources in certain parts of the company. So most of the restructuring costs that is, is about letting people go. There will be layoffs in Novozymes in some parts of the company, there will also be significant layoffs. That's going to happen in the third fourth quarter, I expect most of that, the lion's share of that to be done in the 3rd quarter. I'm sure there will be a few things that will drag into 2020, but by far, the majority of it is is done in the second half of this year. Next question is from Sebastian Bray from Berenberg. Please go ahead. Your line is now open. I would two please. Your first is on the underlying EBIT margin of 25% to 26%. I'm wondering why this is down by, I think you mentioned 150 basis points or 160 basis points versus last year. And in particular, if the fact as responsible for pushing this margin down could be expected to revert or change in 2020 That is my first question. And my second is on the range of organic growth guidance. To hit the upper end of guidance for free percent, it looks as if Novozymes would need to be able to do 8% to 9% organic growth in H2 of this year. And I'm just wondering if this something which you view as, in the realms of the possible? Or if you would say that you are feeling more comfortable with the lower end of the 1 to 3 send. Thank you. Thank you. On the underlying market, margin for the second quarter, as I said, it's about 25% to 26% or 150 basis points below last year. It pretty much all of it comes from the gross margin. And as I said, I believe it's a question of input costs that are higher and then it's the lower volumes. The lower volumes have a significant impact on our gross margin. As you point out, we expect higher volumes in the second half and going forward. And therefore, we think that will correct itself And we think we also have good visibility on the input cost. And therefore, we believe that again, that's building the guidance of 28% to 29% for this year. Of course, we'll need to take stock of where we are at the end of the year and then we'll tell you about our expectations for 2020 when we get there. But at least that's what we are expecting for the second half. So higher volumes that will help us. And then the input cost is, we're getting that annualized the higher input costs we get annualized. Then in essence, you ask about our guidance, the 1% to 3% And in our book, the 1, 2, both 1 and 3 are in play. There's uncertainty And of course, coming in with minus 3 for the first half, I understand why we end up talking a lot about risks and of course, there are risks but there are also very significant opportunities. And as you heard Tina talk about yeast, you heard Anders talk about the freshness platform where I think we have a very solid ramp up plan that's going to add a lot to Household Care. You heard Andy talk about that despite some softness in some of the businesses there also concrete order patterns that we think are very solid for the second half that will build good growth in the second half. So there's certainly also upsides. So we think both 1 and 3 are in play as we look at the business, going for the full year. Thanks for taking my questions. Next question is from Nicola Tang from Exane BNP Paribas. Please go ahead. Your line is open. In BioAga, I was wondering whether you had a sense of the inventory levels of your customers, particularly given the fact that the U. S. Planting season was potentially a bit weaker so that the planting in both applications may have been lower than expected and whether that means that they would send back product or perhaps keep it until next year? And then the second question was on feed. It seems like this business improved from what's been a challenging few quarters. I was wondering if this was an underlying improvement or is it mainly a contribution from Valencia or whether it was just a case of easier comps? Yes. So on BioAg, you are so right, that inventory levels are are something we are looking at. We have every year, you could say we make return provisions and we do have increased these return provisions this year here in Q2. So they are included in the numbers. Given that, as you say, planning has been very different compared to earlier years. So it is included in the numbers. And yes, return provisions are increased. On feet, the business is improving. But I think for the, especially in Q1, it was a tough comparison to, to, last year. And the improvement is coming from, yes, Balencios where we see a good traction, good interest. Lots of players are trialing the products. We also have reoccurring customer on it. So so that's going well, but then it's also, but I would say especially here for the first half, it is the comparison in Q1 where Q1 'eighteen was due to an import license as we've talked about earlier. And then just a follow-up thinking about feed for the rest of the year. How should we expect that to develop? I suppose the comps get easier and Valencia run sir? You should expect some growth, but overall for the Ag and Feed segment, we are estimating a low single digit decline to too flat organic growth. That's super difficult to say, but that's what we what we expect. But feed, slight growth. Okay. Thank you. Next question is from virendra Chauhan from Alpha Value. Please go ahead. Your line is now open. Hello? Yeah, so I had a question with respect to the guidance, but I just overheard someone ask exactly the same question. But then I thought overall guidance, I was looking at just the household care as well as the Bioenergy segment. So, there's been a lot of talk about, I mean, in your guidance that annualization of headwinds that we saw in H2 of 'eighteen. So, but when I look at the numbers, especially with respect to how solid we can, it doesn't seem that H2 'eighteen was particularly weaker than maybe H1 'eighteen. And similarly, bioenergy doesn't significant difference in H2 versus H1. So just looking at the guidance that you have given at the H1 'nineteen performance as well as the comps that we have in H2, what kind of gives that kind of a confidence for you guys to get get to still low single digit growth, I think, in both household care as well as bioenergy. Thank you. We'll let Annos start. Annos, please. So thanks for the question. We basically landed as we expected in the second quarter. Now the composition was a little different than when we did the original budgeting, we saw some weakness in China and in Latin America, but we also saw some stronger performance in India and in North America. When we talk about guidance, there are sort of 2 elements for why we continue to guide low single digit growth in Household Care. One relates to a ramp up of freshness where we have what we believe are very solid rollout plans and we are quite confident that that will materialize And the other thing is that, as we've also talked about before, the annualization of the sales that we had in the Middle East of 'eighteen we are getting out of that as we get into the second half of twenty nineteen. And those 2 are the main contributors to why we continue to guide low single digit growth for household. Tina? And on Bioenergy, it is a matter of capacity getting online in Brazil and then it's a matter of innovations getting impact in the market. Thanks very much, Tina. And I think this brings us follow-up. Okay. Yes. So on the rollout of freshness specifically, Could you give me a bit more color as to what commercial activities in H2 would you are you banking on? For that kind of momentum. So we're not giving any specific guidance on where this is being rolled out into the the magnitude of that. But what we are saying is that we are on the plan for freshness and it's going to be material, and we that's one of the major reasons for why we believe in the pickup of growth in Household Care. Thank you. And I think that bring or that does bring us to the end of this session. Thank you so much for your questions. And we're looking forward to seeing hopefully a lot of you as we get on with our road shows today and tomorrow and the following couple of weeks. But thank you very much for your attention today and for your good questions.