Earnings Call: Q1 2019

Apr 24, 2019

Good morning, and welcome to the Novozymes Conference Call. Today, we'll review our performance for the 1st 3 months of 2019. As well as the outlook and key priorities for My name is Peter Hutt 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. We had a 4% decline in organic sales in the first quarter. While most industries delivered according to expectations, our Bioenergy business came in below. The U. S. Ethanol business was more challenged than we expected. The slowdown in ethanol production was a bit larger than anticipated, And on top of that, floods in the U. S. Midwest from mid March and onwards made the tough situation even worse. It continues to affect our sales into cycles. For the first quarter, we estimated our customer's bioethanol production is down some 7%, 8% year on year, due to these tougher than expected quarter numbers negatively. But all that was as expected, and as we highlighted to you back in January, We still expect higher growth ethanol conditions in the 1st 15 weeks of the year, we take a percentage point off the higher end of our organic sales growth guidance So we now guide 3 percent to 5 percent organic growth for the full year. Our innovation pipeline remains healthy and is progressing according to plan. Incremental sales for the year is largely driven by our product launches from the last couple of years such as the freshness technology for laundry detergents. This year, we have many near to market opportunities as well as product launches, which we'll tell you about when they materialize. As we move through the year, we'll also benefit from the seasonality in BioAg, stronger animal feed performance and a pickup in bioenergy. The comparable from the Middle East and the U. S. Baking price declines are also getting much easier. The EBIT margin came in at 25.7%. This was roughly in line with expectations, and impacted by a combination of lack of operational leverage, higher raw material costs. Sales and distribution costs also increased This is mainly to support growth opportunities and sales in of 29% to 30% following the earnings upgrade on April 4th. And on that note, I'm very excited about the future set up for our BioAg business. I'm certain we'll be able to capitalize on the new structure and extract more value from our future BioAg investments both with Bayer and with our new partners. Before we take a look at Back in January, we highlighted the Middle East baking in the U. S. And animal feed in emerging markets as negative impacts in the first quarter. These are, as I said, as expected. In the developed markets, we subsequently saw our U. S. Ethanol business in a tougher situation than expected. Especially after the Midwest and flooding. Leaving this aside, sales overall were much as expected in the first quarter. The decline in emerging market sales was mainly due to the Middle East. In our reporting, Iran is a part of Asia Pacific So to be clear, the minus 13% in Asia Pacific is largely explained by the development in Iran. In the first quarter, Asia Pacific is also negatively affected by starch processing and animal feed, but all that was as expected. So all in all, except for U. S. Bioethanol, sales were roughly as expected. And now I'll hand over to Anders to go through Household Care. Anos, please. Thank you, Peter. Please turn to slide number 4. Household Care had a weak start to the sales declined by 3% organically in the first quarter, which was in line with expectations. We continue to see good performance in India and China, while the Middle East remains the main negative. Due to economic distress and trade sanctions. This is a continuation of the impact first felt in the second half of last year. In the last couple of years, we've talked about how diverting trends are impacting our business. To a large extent, these trends have continued in 2019. With solid growth from regional customers, while our global customers remain focused on cost optimizations. Momentum in the market. It's developing according to plan, and the customer feedback we receive is very encouraging. The platform will contribute more to growth during the second half 2019 as the product becomes available in more markets. Our dishwash business performed as expected high growth rates we experienced in 2018, driven by the European ban on phosphate in automatic dishwash detergents have come down and our business is now following the market development. The continued focus for the year is the ramp up and geographical expansion of the very exciting freshness technology. In addition, we'll continue driving other opportunities in the emerging market and keep the momentum in countries such as India and China. For the full year, we maintain Our expectations for low single digit growth, including close to 2 percentage point headwind from the Middle East. Let's move on to technical and pharma. The business grew 5 percent organically in the first quarter compared with the same quarter last year. This was slightly better than expected, but mainly due to timing of farmer sales. For 2019, we still expect low single digit growth for the segment. And now I'll hand over to Andy, Andy, please. Thanks, Honas. Please turn to Slide 5. The first quarter results for food and beverages presented a mixed picture. We saw growth across multiple industries and geographies, but weakness in baking, starch and the Middle East outweighed underlying growth drivers. Sales declined by 2% organically in first quarter, which was challenging Middle Eastern business environment as well as planned price reductions in the North American Freshkeeping market. These headwinds overcame growth from penetration, which regional baking customers in Europe and Asia Pacific as we see continued increased uptake of our baking enzymes solutions to bread improvers in these regions. It was a demanding quarter for our starch business. We anticipated a weak Q1 due to the early Chinese New Year, which shifted sales volume into Q4 last year, Additionally, extreme weather in the U. S. Midwest and tough economic conditions in the Middle East overcame together to depress sales in our starch refining segment. Despite the headwinds, we saw good development in our Grain Milling platform with the launch of Frontier Jade. This product will expand our solutions corn milling to the important Chinese market and enable our customers improve their yield capacity and profitability. The trends in health into plant protein and plant extraction applications, along with good development in various dairy segments. In our vegetable oil business, we are seeing increased interest in specialty oil solutions with more opportunity coming from healthy vegetable oil opportunities. Additionally, business and acrylamide reduction continues to grow solidly. For our beverage businesses, we had Broad Bay geographical growth in both our brewing and juice and wine segments, while enzyme sales for beverage alcohol were flat. To summarize, we're pushing hard to grow the business through innovation and working with customers to identify penetration opportunities, especially in emerging markets, where we see a high level of interest in enzyme technology. We continue to expect a ramp up of sales as we move through the year due to increasing traction in new product launches and broad based geographical penetration across our industry segments. We maintain our view that food and beverages will show mid single digit growth in 2019. Tina, over to you. Thank you, Andy. Let's start by looking at Bioenergy on Slide 6. Bio Energy saw lower than expected ethanol production volumes and severe weather with flooding in the U. S. Midwest meant the underlying ethanol volumes declined more than expected year on year. Hence, the Bioenergy business came out softer than expected in the first quarter of 2019. And the implications have continued to disturb our ethanol customers here in April. For the first quarter, we estimate our customer's production is down by some 7% to 8% year on year, due to the tougher than expected conditions. Laying by customers being impacted by the floods in the Midwest. Although we expected a soft start, this was worse than projected going into the year. And due to the volatility of the business, we posted an 8% organic sales decline for the segment in first quarter of 2019. Given the more negative U. S. Ethanol development in Q1 relative to our expectations, we do not expect U. S. Production to fully recover this year. Therefore, we lower the full year segment guidance from high single digit growth to mid single digit growth. Outside the U. S, The capacity expansion in Latin America combined with our broad technology offering and the yeast platform is expected to continue performing well through the year. Now let's turn to slide 7 for an update on agriculture and feed. On April 4, we announced a new structure for our BioAg business after successfully concluding the negotiations. We'll continue our close commercial and innovation partnership with Bayer in the mutual stronghold of corn. Buyers also a distributor in the main soy markets of the U. S, Brazil and Argentina. An example of the continued efforts in soy is the recently launched inoculant CTS-five hundred which Bayer has made available in the Latin American market. Beyond the extensive collaboration with Bayer, Novozymes engages with additional strong partners. As announced, we have entered into a commercial partnership with Univar Solutions in Canada and a commercialization and innovation partnership with Indian Multinational UPL, focusing on buyer control. The performance of the Agriculture And Feed segment in the first quarter of the year was weak, but in line with expectations. The 6% organic decline was caused by a double digit decline in feed enzyme sales, while sales to the agriculture business performed well. Sales to Animal Health developed positively during the first quarter, but the business is still small. The feed in time sales remained negatively impacted by the weak Brazilian market as well as a tough Chinese comparable in Q1 of last year. Sales to the agriculture related markets remain subject to uncertainty, primarily due to global farm economics and trade related concerns. Besides the uncertainty surrounding agricultural markets in general, we still see uncertainty regarding the timing of revenue recognition for the year. Feed sales are expected to grow modestly for the year end. Consequently, we maintain our low single digit decrease to mid single digit increase guidance for Agriculture And Feed. So to summarize, the message for the 2 areas: Bioenergy was hit by Onyx expected volume slowdown in the U. S. And is not expected to recover what has been lost so far. Therefore, we lower the 2019 organic sales growth guidance. Agriculture and feed had a wheat start through the year, but in line with our expectations. And now I'll hand over to Thomas. Thank you, Tina. Please turn to slide number 8. As mentioned by Peter, it's been a good start to the year from an innovation perspective. We launched 2 new products in the first quarter 2019, looks to be a solid year for new product launches. In January, we launched Frontier Jade in China, a new addition to our Grain milling platform, which Andy mentioned earlier. Kate will help untap the extra value in corn by releasing more starch, more fibers and more protein. In March, Bayer introduced CTS500, as mentioned by Tina, a new industrial biological Cybean inoculant in Brazil, already tested by Monsanto in the marketplace. The product that brings together biological inoculants of selected bacterias with high efficiency in large gen fixation. The product guarantees 60 days of pretreatment stability on soybean seeds, and it will be available for the 2019, 2020 growing season. We also continue to explore pressing global challenges. In February, we brought together a group of experts and innovators for a 2 day event in Bengal or India to discuss the cities water and sanitation challenges. The aim is to go from a good idea to a glass of clean water in the shortest amount of time. Finally, Novozymes have again been honored by major customers. P and T and Henkel have recognized our best in class innovation solution and presented us with innovation supplier awards. This is a testament to our joint efforts over many years, continuously raising the bar for biological and sustainable solutions. To summarize, it's been a good start to the year for our innovation efforts with good product launches, recognition from our largest, the Household Care customers and the pipeline that looks solid. That's all from me, and I'll hand you over to Priscilla. Thank you, Thomas. Please turn to Slide 9. Now let me take you through the financial performance for the first quarter. Overall, and as Peter mentioned earlier, sales came in weaker than expected at a negative 4% organically as bioenergy came in below expectations. Household Care Food And Beverages and agriculture and feed were roughly as expected while tech and pharma was slightly better. The gross margin was down roughly 200 basis points year on year due partly to lower than expected top line growth and partly to increase raw material costs from the second half of last year. Lower recognition of deferred income also impacted the gross margin negatively whereas the pricemix was neutral and currencies provided a slight tailwind. The reported EBIT margin was down 320 basis points compared to Q1 last year. Due to the lower gross margin and higher sales and distribution costs, mainly caused by our expansion in the emerging markets. The effective tax rate for the quarter was 19%, roughly 1 percentage point lower than last year. Net profit was 14% lower impacted by the lower EBIT and hedging loss on the U. S. Dollar. Free cash flow before acquisitions was DKK 420,000,000 in the 1st quarter, roughly on par with Q1 last year. Net profit developed negatively in Q1 year on year. CapEx was lower, where trade receivables and inventories developed favorably, trade payables decreased. Now please turn to slide number 10 for the 2019 outlook. We maintain our full year earnings outlook for the after the early April upgrade, but narrow Organic Salesforce guidance to 3% to 5% following the weakness in U. S. Ethanol, which has continued into April. We do not expect to fully recover this weakness through the year, so we lowered the full year outlook for Bioenergy to mid single digit organic growth. We maintain our full year growth indications for the other areas. We expect stronger growth in Q2 and a solid acceleration of organic growth in the second half of the year as more innovation enters the market. Following the 1 off earnings upgrade at the beginning of April, we expect an EBIT margin of 29% to 30%. Net profit growth of 5% to 10%, free cash flow before acquisitions of DKK 2,000,000,000 to DKK 2,400,000,000 and the ROIC of around 24%. And now I'll hand you over to Peter for a wrap up. Peter, please. Thank you, Plisca. Please turn to Slide 11. So let me quickly summarize our message today. With a 4% organic sales decline, we delivered below our expectations for the quarter. All industries delivered roughly in line with our estimates, except for the U. S. Ethanol industry. Although we expected this part of our business to be challenged at the start of the year, floods in the Midwest created additional headwinds, not only to Novozymes, but also to many other AG and Ag service related companies exposed to the U. S. Midwest. And the headwinds have continued into April. In January, we stated that the second half of the year should be stronger than the first half, and we believe the second half should improve compared to the first quarter. This still applies despite the U. S. Ethanol issues. We expect a strong contribution from new innovation launched in recent years, to benefit sales growth. One example is the freshness platform for laundry detergents. We're confident that also bioacc seasonality, stronger U. S. Ethanol and feed performance, U. S. Baking price decline easening as well as the Middle Eastern issues being out of our books will drive stronger growth as we move into the year. Before we open the floor for questions, a couple of practical remarks, we're working on our strategy update, which we expect to present to you on June 17th. We believe the winning formula is to deliver game changing sustainable solutions to a world in dire need. But we session. You should have received an invitation by email containing practical information about the event. If you haven't, please contact our IR department. And now we're ready to take your questions. You. The first question is from Nikkead Placzen from ABG. Please go ahead. Your line is open. Yes, thank you so much. And three questions from my side. First of all, Tina, could you give us an update on the state of the U. S. Ethanol production here at the end of the of vehicle. I heard that there have been some damage to some rail lines and making a distribution a little bit challenging in the U. S. My second question is for Prisca on the net working capital seems to surprise at least me a little bit on the negative side. Will this continue into in the second quarter? And can you explain a bit more detail the sharp change in payables in Q1 here? My final question is on the impacts from the 3rd income going into 2020. So is it rightly understood that all else equal both the gross and EBIT margins will be down roughly 100 basis points due to the lack of deferred income from the buyer guidelines. Thank you. Thanks for your questions. As you pointed out, Tina is the one that knows about U. S. Ethanol. Tina, please? Yes. And you're right, Michael, that it has continued here into April. We though see an easening of the effect compared to how it was in March early April, but it's still on, but to a lesser extent that it was before. Okay. So not 100% of production and not 100% in terms of supply and so on. Yes. Yes. So it is the evening. Yes. And maybe I'll start with the deferred income question. Yes, So you are right. We are, as you go forward into 2020, there will be no deferred income on our balance sheet anymore as release it in Q2 as we have also announced with the rose call. So if you ignore for the fact the 1 off release of the deferred income that impact 2019. And if you just take the plan deferred income, then you are roughly at a percentage point both on gross margin and on EBIT, that will not be there going forward 2020. For take the question on net working capital, we don't guide on net working capital. So I unfortunately can't give you a quarter guidance, but what I can tell you is that there, of course, are big fluctuations in working capital as we've seen. You've also seen how impacts our free cash generation quarter by quarter, where we've seen fairly big fluctuations, particularly last year. And I always expect to continue in 2019. In the payables side, this is normal fluctuations that we see on both receivables, inventories and payables. So there's no particular thing to point to. I hope that has answered some of your questions. And next question is from the line of Anton Brink from Kepler Cheuvreux. Please go ahead. Your line is open. Yes. Two questions from my side. Firstly, I feel to fully understand the large difference in the food and beverages unit in Q1 versus Q4. I would say that some of the mentioned adverse conditions were also apparent back then. So may I ask for some additional explanation there? And then secondly, a question on feed enzymes, especially on China. You're mentioning tougher comps, but I was wondering to what extent the African swine fever is also impacting your business there? Thank you. Yes. So 3 effects explain the big swing between the quarters. One is, there's a seasonality in the, especially starch business within China that depends on Chinese New Year. And this year, Chinese New Year was quite early and that meant we realized significant start sales in the very end of Q4 that we realized in Q1 the year before. And that has a pretty big impact because it's a relatively large swing. The other part is that in the beginning of last year, we had sales in the Middle East that were higher. Now those have been hit by 2 things: one is economic distress But the other part has been trade sanctions that were negative for us in Q1 and will ease as the year goes on. Then the third part was the Middle Eastern or sorry, the Midwestern floods in the U. S. That's also a large start to producing area. So it's impactful for our business and some of our customers were hit alongside the fuel people. So that explains it. And on Feed in China, so, you are right that the African swine fever is significant this year there. For sure it means something for the general feed business. But for us, the biggest effect is due to the tougher comp. But I think the absolutely right in pointing out that if swine fever leads to swine fever in China, leads to a much larger production outside China, then that should be a positive for Novozymes. But we're not putting that into our numbers yet. Okay. Next question is from the line of Hans Gregersen from Nordea. Please go ahead. Your line is open. Starting with Bioenergy, you mentioned that your production is down or your customer's production is down versus 6% to 7% Is that entirely driven by the floodings or is there any implied market share losses such as if you could extrapolate a little bit more on that, please. Then in terms of the new BioX setup, previously, you shared revenue and earnings with Monsanto Bayer going forward. As far as I understand, a larger degree will be 100% consolidated in your new business model. Are you now able to address what the financial impact will be on revenue and EBIT on that? And then to your cash flow statement, there's a significant increase in the tax payments. Is that a part of the deferred income payment to relating to buyback, which you guided being run 200,000,000. Thank you. Thanks for your questions. We'll let Tina take the Bioenergy question and please go take the 2 next questions. Yes. So, you're right. We estimate that our customers' volume are down 7% to 8% It is due to a general pullback and then, accentuated by the flooding in the last part of the of Q1, market shares are roughly stable. So what you're saying is basically that your customer base has a great exposure to the product areas than your competition? Okay. Then to your two questions, on the cash tax payments related to one Santos. So those payments are not in Q1 2019. They will be coming later in 2019. So they are not affecting the first quarter. As to the second question on the setup and the commercial impact on the revenues and EBIT. So obviously, we are not disclosing the, the specifics of of the BioAg segment or our business. But what we have said also in the call, early April is that we expect to capture more value from the new setup that we have with Bayer Monsanto. And I think that should give you a little bit of an indication, particularly on the margin side. On the other hand, of course, we've also called out that there's uncertainty with revenue as we are changing the setup. As you know, we're changing both the distribution set up with Bayer Monsanto but also with our new partners. So there is some volatility that I expect for how revenues will be faced over the next few quarters because of that. Yes. But my question goes, in the past, if we say everything excluding corn was shared 50 with you and Monsanto. Now you're taking everything back except for corn, meaning that you don't have to share the revenue recognition with your with the buyer going forward. So what I'm asking specifically is how much extra revenue do you expect to consolidate as a matter of these structural changes to the strategic setup of BioAg. So you won't see an impact on the revenue from that. It's a distribution agreement now. It was an alliance agreement prior. Of course, there are some minor technicalities that these effects, but I wouldn't expect any major impact from that. So you're now saying that you will continue to a fifty-fifty share revenue recognition No. We have changed to a distribution agreement, but I think the way I understood your question was that it was related to does it change our revenue? And as such, it doesn't change our revenue. So I wouldn't expect any one off effect from the change in setup. Sorry to continue on that. I simply do not understand the answer. What you, I mean, in the past, you share the part of the revenue with the BioAg, you'll no longer do that going forward as this is now distribution, meaning that whatever revenue on Sensio was booking that should not go into your accounts. This is what we've been told before. Yes. I think we might be take it offline, and I'll explain it in more detail. But the of course, there is a difference in how we recognize the revenue because of the differences in the agreements. But what I'm trying to say is that you shouldn't expect any material change in our revenue line from that. And I'll be happy to, you know, IR to get back to you on that to explain the exact mechanisms around it. Appreciate that. Thank you. Next question is from Euna Skupol from Danske Bank. Please go ahead. Your line is Yes, good morning. A couple of questions from me also. First of all, Tina, what should we expect bioenergy in the second quarter because here, you're up against very tough comps from last year where you grew 20%. And then this continued impact from Midwest flooding, it almost sounds like we should expect a higher negative organic growth than in Q1. Then also then to you, Tina, but on an ag and feed, you're still uncertain on when you'll see a revenue technician from the new exit up, but when do you expect to be able to narrow the guidance for this division? And then my last question is for Prisca just a clarification. Did I hear you right when you said that you expect positive organic growth at group level in Q2? Thank you. So we'll let Tina talk about Bioenergy in Q2. So you are, I mean, what we expect in order to get to the mid single digit growth as we now are expecting for Bioenergy. That requires innovation. We are looking at launching new products in both liquefaction as well as in yeast, then it requires a continued penetration of our existing yeast products And it requires a continued growth outside the U. S. Like Latin America. And then also biomass contributing to our growth. So that's what we have, you could say, included in the mid single digit growth. And then we have also for sure included that volumes get back in Q2 in order to get to the level we are at. You are right that Q2 last year was a very strong growth but that's also due to the comparison for 2017. So we see an easening here into April beginning of April was still significantly down, but we do start seeing an easing. Thank you, Tina. Then on Ag And Feed division, then as we pointed out in January, there's some transactional uncertainty with the new deal with with Bayer exactly when do they take product from us and put them into inventory that we need to understand. And I think that uncertainty will continue to be there into Q4. Maybe we'll know a bit more mid October, but I think you should expect it to continue into Q4. Then you had a question on group level revenue in Q2. And obviously with our 3% to 5% guidance for the full year, we expect a good growth in the second quarter for the corporation. But you will not put your, you will not say that it will going to be positive? A good growth in the quarter is positive to me. So absolutely positive, yes. Okay. Thank you. Thank you very much. Next question is from Gunther Zechmann from Bernstein. Please go ahead. Your line is open. Hi, good morning. Can I just follow-up on a couple of things? Firstly, on BioX, similar to the previous question, What has changed in terms of the visibility in that business and has it reduced? Do you have, in the first quarter, I make it mid single digit growth but the guidance for our Ag and Feed hasn't changed lower by low single digits for the full year to up mid single digit. And your feed guidance hasn't changed either. So clearly, no higher visibility in BioAg despite 1 more quarter in the books now. You can just explain a bit more the sensitivities around the visibility in that business. And then secondly, on the innovation side, Can you talk any a bit about the ramp in Frontier and in Palmora and given indication of the size of these businesses And if I can take on 1 more innovation, any color similar to what you've done with the full year numbers around the ramp in the freshness platform, the launches in, maybe you can't say which countries, but the number of countries or the contribution to your sales that you achieved would be very helpful. Thanks for your questions. So Tina, once again, on BioAC and BioAg visibility. Tina, please Yes. So Gunnar, you are right. We are quarter into the year, but it's not that long since we finalized the agreements with our partners So it is still early days. And in general, the agricultural markets are highly volatile, and that's why we keep the guidance on that segment. So that's as much we can say. I mean, it is a volatile business and that's why we keep it at that level. And as Peter was alluding to before, there are some uncertainty on when will our partners take the volumes for the 2020 growing season as well? And then Andy on Frontier and Palmora. Andy, please? Yes. So these 2 innovations, I think we're still in the phase of testing, actually, both of these in major markets. So I think Frontier is a bit farther along than Palmora, where we've got good starting penetration in the European market where we launched a couple of years ago. And in the U. S, we're actually doing significant trialing to some major partners right now. Now it takes time because we have to work through sort of the impact of the technology. We have to work through sort of, changes in their setup with CapEx requirements. We also have, regulatory issues we have to work through. So this is a longer term, introduction process. We also just launched in China, as we said, and we've got a significant number of trials going there. So it's all the right signals are out there, but it'll take some time for to have a material impact. And what I've been saying is, both Palmora and Frontera are kind of $250,000,000 to $500,000,000 DkkK over 5 to 10 years. But it's still early days. Palmora, on the other hand, is, a little bit, let's say, farther behind Frontia, it's, it was introduced later, and therefore, it's still in the early trialing phases. We're getting kind of good signals But we also have to work through the fact that it's a pretty fragmented space, and we have to prove it in different plants with the kind of reliable seasonality effect. So also on good progress, but still a ways to go before it turned into real money on the top and bottom line. So Palmora will add revenue growth this year, but not significant, but that is the case for freshnessanos. Sorry? And the next question. Sorry. Can I just, I didn't push the button on the microphone? Freshness brands up according to plan, we are getting really good feedback from both customers and consumers of this. It's part of the reason why we believe that household care will turn positive throughout the year. While I think it's important also to state that while we would like to be very open and provide as much detail on the rollout of our fresh platform, we have to respect that our partners desire to disclose too much information on the details of the road plan. It's not necessarily aligned with ours. So there is a limit to how much we actually can provide of guidance. But I think the important thing is we are on the plan exactly where we expect it to be. And that will contribute to growth for a year. And when you say turning positive throughout the year, you mean positive for the full year, just to be specific on that, so it can become a negative growth in Q1? Yes, that's correct. So the next question is from Sam Samsu from SEB. Please go ahead. Your line is open. Yes. First question on ethanol, the sales of loss due to flooding. I just wanted to understand if this should be seen as a completed all sales or do you expect to regain that in Q2 or Q3? And then secondly, you mentioned about the explanation for growth in second half product innovation. Please, if you could elaborate exactly what product innovation is it that you are referring to? Because based on history, I think most of your product relation takes a bit longer time before you actually see the impact, the real impact on your numbers. It takes time to ramp up. So please elaborate on that. So to save Tina's voice, I'll take the flooding question. As you can hear, our customers have been impacted in a significant way by the floodings. When we announced Q4, we understood that there would be some softness in the U. S. Bioethanol industry because of the very low margins in Q4. And getting back on one of the earlier questions, I think we got more than our fair share of that softness. So our customers actually took more of a of a volume downturn than the market did in total. So we expect our customers to be down around 8 versus a market that's probably down 4th 5 when numbers get closed. The flooding itself is traumatic. We have plants in the Midwest that are closed down because of flooding. We have severe logistical issues, as some of, of, as it was pointed out earlier, there are some logistical issues that are still hampering the business in the Midwest. You might expect that this would be recovered as we get into Q2 and Q3. But you need to bear in mind that inventory levels on ethanol are pretty high. So while they've come down in Q1, they're actually still pretty high. So we don't dare to, I mean, believe that it will just come back. I think there are other uncertainties on ethanol that actually more significant. There are positive things that could happen. We still have not booked E15 in our numbers. But that might create demand for more volume between U. S. And China on customs. There's currently a 70% tariff on ethanol going into China. If that would easen or even go away, that would, of course, reinstall the exports out of the U. S. To China, which would favor our business. And I think at all fairness, the other in the other direction, you have an uncertainty about corn planting in the Midwest because of the same floodings as we've talked so much about. So we see a ramp up. The ramp up that's going on now. It's not completely back to normal, but we'll soon get back to normal. And we don't dare to just book a full recovery, and that's why we take the top off our guidance. That's entirely due to this situation in the Midwest. And then Thomas will talk about product innovation. Thomas, please. Yes. Thank you. When we talk about our innovation, we of course talk about product that has been launched and continuing to do well in the marketplace and actually starting to make an impact in our numbers Last year, we talked a lot about how we were doing in the area of yeast, a new area for nose times. So we see significant continued penetration of this product line, and that will certainly also contribute throughout the year. We haven't talked today about the Bellatchers, our product within animal feed. That's also a significant innovation that we'll start to see, make it to the numbers of of Novozymes. And of course, Anders has already talked about freshness. On top of that, there's a number of tailored solutions that we're doing with specific customers and that we know are going to go into their products or their productions as throughout the year. So that's why we continue to talk about innovation as being part of the driver also for getting Novozymes to the 3% to 5% growth for the year. Okay. Thank you for that. Next question is from Ben Gorman from UBS. Please go ahead. Your line is open. Hi guys. Thanks for taking my questions. Just a few from me. First of all, on Household Care, are you sort of quite helpful on going through the bridge versus Q4 and to Q1 in food and beverage. Could you do the same in Household Care? I obviously understand the automatic dishwash, but, sort of the incremental negative on Q1 versus Q4, particularly in the middle east. Was this something that you obviously talked about it before Q4? So was it something that just didn't hit until Q1? And then is it specifically Egypt and Saudi Arabia? Or how should we think about that phasing through the year? That's maybe the first one. The second one, still on Household Care, actually, you mentioned turning positive through the year because of the hygiene platform. Can you just can you quantify that anymore? Would the business be down year on year for the year if it wasn't for the high teens? Platform? And then just finally, on the margin, can you give any more detail in terms of the mix impact in different divisions, and whether it would surprise me, really if you didn't have a negative impact in Bioenergy in the quarter purely because of where the oil price was and what was happening in terms of profitability in the industry. And it sounds like actually you're saying it was pretty much down in line with the volumes of your customers. So can you just give a bit of an idea about mix and that impact on the margin as well? So we'll let Anos build the bridge from household care sales in Q4 into Q1. Anos, please. So the bridge, that when we look at, if the biggest impact on our numbers and the negative growth we see in Household Care it all relates to the issues in the Middle East. 1 is sanctions, exactly as Andy talked about. The other one is distressing in certain markets and all of that is essentially what takes growth down to the negative territory. When it comes to freshness, It will be a significant part of the contribution to growth. We do not guide specifically on how much that is in terms of the segment. I think it's important to say that it's a major part of why Household Care will get back to positive territory. The other one is that the issues with the Middle East will ease over the coming months and over the in Q3 and Q4. And then finally, we also expect that some of the challenges we have had and we've talked about for now some years with our largest customers will also ease as we go through the year. And all of that gives us confidence that we will actually end positively with Household Care for the year. So just to make absolutely sure that we all understand it, we expect Household Care for the full year 2019 to deliver growth. On biofuels and margin, then we do not of course, it's a competitive marketplace, but the, we do not see any changes there. Actually, I think we've been very well positioned to deal with the situation and support our customers in this, both, I mean, their profit has been under pressure. So we've been very well positioned to cater for the needs that come off that. And logistically, we've also been very well positioned deal with the flooding. The flooding, the issues we've had with flooding is entirely on the customer side, we've actually been able to operate even though we have a plant right in the middle of the whole thing. So there's no real margin impact on the downturn in Bioenergy, but of course, there's an impact on the full business because of the lower top line. And I'll let Presque elaborate that. Thank you, Peter. Yes, maybe just to follow on, the gross margin, as you have seen, is is lower year on year, but also keep in mind that the comp from Q1 'eighteen was fairly high at 57.8 And that was in particularly because of lower variable costs, because of lower raw material prices. And we see actually the opposite in Q1 2019. So that has an impact addition to what Peter alluded to, from a loss of top line also on the gross margin. So just on the raw materials, you'll sort of hope to get that back through the course of the year, but do you have any idea how long that would take and I don't know, obviously some businesses say 1 quarter, 2 quarters, can you give an idea of that? Yes. I don't think I can be specific on quarters, but what I can tell you, if you remember, Q3 2018, we also had a fairly high raw material costs and we called them out. That was the opposite to Q1 2018. And now we're calling it out in this quarter, what you see is it does fluctuate, yes? Overall, you noted we've seen over the last 12 to 18 months fairly strong raw material prices commodity prices for those raw materials. But overall, there's no, I would say expect it slightly to ease, but there will be quarterly fluctuations. So I would keep that in mind. Great. Thanks guys. The next question is from Annette Lyugin from Handelsbanken. Please go ahead. Your line is open. Thank you very much. I only have two questions. First of all, just to go back to what Peter said before about immune choice within the bioethanol in the U. S. You have a flat disc as a risk previously. Do you think there's a higher risk that we'll see those going down now? And that is my first question. And my second question is in relation to the timing of your reduced sales outlook. You recently, 3 weeks ago, we reiterated your outlook of a 3% to 6% and then 3 weeks after you're now guiding for 2% to 5% do you have a lack of transparency in terms of see how business is doing or what has changed during these 3 weeks Thank you. So on the, U. S. Inventories of ethanol have come down, I believe, about 5 or 6 days of consumption over Q1. They are still, if you look back to 2 or 3 years inventory level are still pretty high. So what I said is that we do not dare to believe that it's just automatically going to refill with the 6 to 7 days that been chipped off so far. Okay. I would argue, but that, I mean, I don't think we have any particular insights and I actually think it depends a lot on the other things I talked about like exports to China, exports to Brazil, E15 in the U. S. But I would, of course, argue that inventories now are lower than they were a quarter ago. So the likelihood of them going lower now is smaller than it used to be. But we do not dare to believe in that it's just going to rebuild. Then as regards timing of sales outlook, and I just want to take you through what happened on our side. So the U. S. Midwest had like 3 feet of snow dumped on them March 12 through 15, and then March 16 or 17 temperatures turned to like 60 Fahrenheit, and they got another 1.5 inches 2 inches of or 2 inches of rain on top of with massive runoffs, we only realized that the effects of that and how severe it was after we announced the update on April 4th. And what we have realized now is that it's not only about a couple of weeks in March, it drags into April. And that's why we adjust our guidance now from 3 to 6 to 3 to 5 because we do not see since we do not believe we're going to recover this lost sale bioenergy. We do not hold it likely that we can reach the 6% growth for the company. I hope that explains. Yes, helpful. Thank you. Next question is from Sebastian Bray from Berenberg. Please go ahead. Your line is open. I would have just two please. The first is on the extent of operating leverage and gross margin and it builds on a question that's been asked earlier. But the last time I remember Novozymes doing negative organic growth of this kind back in Q3 of 2016, but the oil price was slightly higher in Q1 of the current year, but not a 1,000,000 miles away. And in that quarter, gross margins were 57.3% as opposed to adjusted over 55% reported in Q1 of 2019. Could you perhaps give some indication of what has changed and what exactly is changed in the space here? Is it just raw materials or why seemingly the degree of operating leverage higher? And it's my first. And my second is there has been a number of announcements by larger end customers in Household Care about a return to innovation at some stage. And the press release makes reference to the fact that this is like people will call the end customers are expected to continue reducing dosages through 2019. You seeing any light at the end of the tunnel or the potential change in this behavior in 2020? Thank you for your questions. Prisca, gross margin? Yes. So, obviously, I have to dig out the quarter you referenced in 'sixteen, but you are fully right. It's a weak quarter for gross margin. So I'm I'll try to explain it like I also done before. So one of the reasons is, raw material costs, variable costs, pressure in that quarter. The other reason, of course, is that we, if you then take it to EBIT, we do have high OpEx ratios. We have, slightly higher, sold sales and distribution costs, we have, I would say, R and D and admin are in line, but overall, is higher, particularly in as a ratio. So that, of course, has an impact. So I think what you're seeing is simply the combination of raw materials affecting variable costs and then fixed cost leverage being less because of the quite significant negative organic growth. And on Household Care, just rewind a few years back, I think it's important to stress that 2015 2016, we and we also have communicated that we had one customer that took out one technology that had to do with the multi cycle effect 17, 2018, we had a pressure from investor pressure on some of our very large customers and that also translated into margin pressure. I think throughout this entire period, there's always been an interest in introducing new technology and introducing new innovation, but we have had these single events has challenged our numbers. Now the dialogue we have right now is very, very positive. And I think the outlook for innovation is actually quite solid in Household Care. And with all our 3 global customers, we have very, very impressive programs for the future that we believe will deliver growth in Household Care. So I think we can say clear, loud and clear that there is an interest in the market for driving an innovation agenda with Novozymes in this space. All right. Thank you. Next question is from Hans Kratos from Nordea. Please go ahead. Your line is open. Yes, just a follow-up. I don't know if you went, so Peter continues to have a bad voice. But the E15 approval process, could you just give a little bit further insight into that process, how that is progressing with EPA? That is definitely a question for Tina. Tina, please. Thanks a lot, Peter. Has directed EPA to draft some legislation. And, they have done that and it's now now it's now out in public hearing And that, in fact, ends here, the 29th April. After that, there's going to be between the different agencies, some some further discussions and negotiations and then the law is going to come into place. But as I think I've also said in some of our earlier calls, We do expect that there might also come some lawsuits as part of that. So you could say right now, it's on track. We're still optimistic and hope for that it comes before the summer driving season, but there is a risk off that that doesn't materialize. So that's why we have not baked any of the E15 volumes into our numbers. However, for sure, it would be positive if it came before the summer driving season. I know it might be impossible for you to answer, but if you look on those potential lawsuits, what would a layman term be in terms of how much track that could do to the timing of the approval process? Oh, that's difficult to answer, hence, but it, you could say as it is right now, we are, you could say, E15 is allowed outside the summer months. So, the key is really do we get it for the summer months, or do we get past the summer months? And what I would be afraid of is that that could drag beyond the summer driving season so that it wouldn't be until next year that we see an impact. But it is for sure difficult to say on that note. Maybe just to add a detail to it, Hans, then I think the industry, if you look at there, the organizations represents the fuel industry. They expect that a positive E15 conclusion before the summer would add between 1% to 2% to ethanol volumes in 2019. And I think you should expect the same thing to happen to our sales, so a bit of tailwind, but don't expect it to be a blast this year because it's going to get complicated And I think I'm not don't we don't have particular insights, but I suspect it will get complicated, stay by state, and you'll see the Midwestern states have more cards and incentive to move faster than some of the coastal states. But if I take that statement, let's disregard the summer season but could one expect or could we expect that the industry will start ramping up during the fall with a wider use of E15 in anticipation of summer sales next year, that could still drive some growth in the half, I will imagine. So if we look back, I mean, the amount of stations, petrol stations carrying Dean has been on a steady increase over the last years. So for sure, you could imagine that that was something which which could happen. But as Peter said, and as I alluded to before, so far we are not booking it into our numbers, but it would be one of the things which could help sales grow faster. Next question is from Anton Pfing from Kepler Cheuvreux. Please go ahead. Your line is open. Yes. Thank you. Well, now we touched upon the subject of lawsuits. I had a question on a lawsuit that seemed to have been overturned Thursday or Friday, if I'm correct, regarding a patient's case, over technology used in the Bioenergy unit. It seems to relate to a USD 7,500,000 jury verdict, but I was wondering, should we clearly see this as an exceptional cost, or could it also impact revenue generation? Yes, so let me answer that. So of course, it is early days for this. You could see both. You could see a cost and you could also see a small revenue impact from this, but it's too early to call out more details on that. So we haven't, of course, we're reading the verdict and we're trying to make up our mind as to whether we want to pursue this. We have already provided for this. So I don't think it's material in any way And the product in the marketplace is actually fairly small one. So, but obviously, as you can hear, it was a surprise to us that the the verdict came out this way. I think we, we have to close the session here. We're 1 minute over time now. I want to thank you for for your questions and then reiterate my hope that we'll see you on June 17th, where we expect to be able to talk about how we invest