Good morning, welcome to the Novozymes conference call. Today, we'll review our performance for the first three months of 2019, as well as the outlook and key priorities for the year. Our presentation should take around 20 to 25 minutes, and after that, we'll take your questions. My name is Peder Holk 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 two. 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 April. Like other ag and ag service companies have announced, Novozymes does not expect to recover the lost sales. For the first quarter, we estimated our customers' bioethanol production is down some 7%-8% year-on-year due to these tougher than expected conditions. The Middle East, U.S. baking, and animal feed all impacted first quarter numbers negatively. All that was as expected and as we highlighted to you back in January. We still expect higher growth in the second quarter, as well as a significant step up in the second half of the year. Given the tough U.S. ethanol conditions in the first 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%-5% 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 the emerging markets.
We maintain our full-year EBIT margin guidance of 29%-30% following the earnings upgrade on April 4th. On that note, I'm very excited about the future setup 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 the segments, let's look at the geographical sales development. Please turn to slide three. 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 Midwestern 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, to be clear, the -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. All in all, except for U.S. bioethanol, sales were roughly as expected. Now I'll hand over to Anders to go through household care. Anders, please.
Thank you, Peder. Please turn to slide number four. Household care had a weak start to the year. 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 diverging 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. The rollout of the Freshness platform continues to build positive 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 of 2019 as the product becomes available in more markets. Our dishwash business performed as expected. The 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 two percentage point headwind from the Middle East. Let's move on to technical and pharma. The business grew 5% organically in the first quarter compared with the same quarter last year.
This was slightly better than expected, mainly due to timing of pharma sales. For 2019, we still expect low single-digit growth for the segment. Now I'll hand over to Andy. Andy, please.
Thanks, Anders. 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 in the Middle East outweighed underlying growth drivers. Sales declined by 2% organically in the first quarter, which was much in line with expectations, as we anticipated a weak Q1. Sales in our baking business declined due to the challenging Middle Eastern business environment, as well as planned price reductions in the North American fresh keeping market. These headwinds overcame growth from penetration with regional baking customers in Europe and Asia Pacific, as we see continued increased uptake of our baking enzyme 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.
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 Frontia Jade. This product will expand our solutions for corn milling to the important Chinese market and enable our customers to improve their yield capacity and profitability. The trends in health and wellness continue to create opportunity, which we can take advantage of in our various businesses. In food nutrition, solid growth was driven by increased penetration 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 in acrylamide reduction continues to grow solidly.
For our beverage businesses, we had broad-based geographical growth in both our brewing and juice and wine segments, while enzyme sales for beverage alcohol were flat. To summarize, we are 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 us start by looking at bioenergy on Slide 6. Bioenergy 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. The bioenergy business came out softer than expected in the first quarter of 2019. The implications have continued to disturb our ethanol customers here in April. For the first quarter, we estimate our customers' production is down by some 7%-8% year-on-year due to the tougher than expected conditions. This is more than the reported weekly EIA numbers of 3%-4% decline and mainly explained 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. Due to the volatility of the business, we posted an 8% organic sales decline for the segment in the 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 4th, 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. Bayer is 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 500, 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 biocontrol. 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 enzyme sales remain 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 uncertainties 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. Consequently, we maintain our low single-digit decrease to mid single-digit increase guidance for Agriculture and Feed. To summarize, the message for the two areas. Bioenergy was hit by unexpected 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 weak start to the year, but in line with our expectations. Now I'll hand over to Thomas.
Thank you, Tina. Please turn to slide number eight. As mentioned by Peder, it's been a good start to the year from an innovation perspective. We launched the two new products in the first quarter, and 2019 looks to be a solid year for new product launches. In January, we launched Frontia Jade in China, a new addition to our grain milling platform, which Andy mentioned earlier. Jade will help untap the extra value in corn by releasing more starch, more fibers, and more protein. In March, Bayer introduced CTS 500, as mentioned by Tina, a new industrial biological soybean inoculant in Brazil, already tested by Monsanto in the marketplace. The product that brings together biological inoculants of selected bacteria with high efficiency in nitrogen fixation. The product guarantees 60 days of pretreatment stability on soybean seeds, and it'll be available for the 2019/2020 growing season.
We also continue to explore our newest priority innovation platform solutions for water. Clean water is one of the most pressing global challenges. In February, we brought together a group of expert and innovators for a two-day event in Bangalore, India to discuss the city's 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&G 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 Household Care customers, and a pipeline that looks solid.
That's all from me. I'll hand you over to Prisca.
Thank you, Thomas. Please turn to slide nine. Let me take you through the financial performance for the first quarter. Overall, as Peder 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 Technical 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 increased raw material costs from the second half of last year. Lower recognition of deferred income also impacts the gross margin negatively, whereas the price mix 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 one percentage point lower than last year. Net profit was 14% lower, impacted by the lower EBIT and hedging loss on the US dollar. Free cash flow before acquisitions was 420 million DKK in the first quarter, roughly on par with Q1 last year. Net profit developed negatively in Q1 year-on-year. CapEx was lower, whereas trade receivables and inventories developed favorably, trade payables decreased. Please turn to slide number 10 for the 2019 outlook.
We maintain our full year earnings outlook after the early April upgrade, but narrow organic sales growth guidance to 3%-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 lower 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 one-off earnings upgrade at the beginning of April, we expect an EBIT margin of 29%-30%, net profit growth of 5%-10%, free cash flow before acquisitions of 2 billion-2.4 billion DKK, and a ROIC of around 24%.
Now I'll hand you over to Peder for a wrap-up. Peder, please.
Thank you, Prisca. Please turn to slide 11. 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. 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 BioAg seasonality, stronger U.S. ethanol, and feed performance, U.S. baking price decline easing, as well as the Middle Eastern issues being out of our books, will drive stronger growth as we move into the year. 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 must ensure we focus on the right opportunities and that we have the right level of engagement to maximize the value generation from our technologies and market position. You should have received an invitation by email containing practical information about the event. If you haven't, please contact our IR department.
We hope to see you all there. That concludes today's presentation, and now we're ready to take your questions. Operator, please begin.
Thank you. Ladies and gentlemen, if you do have a question for the speakers, please press 01 on your telephone keypad now. The first question is from Michael Parsons from ABG. Please go ahead, your line's open.
Thank you so much, and three questions from my side then. First of all, Tina, could you give us an update on the state of the U.S. ethanol production here at the end of April? 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 in the second quarter, and can you explain a bit more in detail the sharp change in payables in Q1 here? My final question is on the impacts from deferred income going into 2020.
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 BioAg alliance? Thank you.
Thanks for your questions. As you pointed out, Tina is the one that knows about U.S. ethanol. Tina, please.
Yes, you're right, Michael, that it has continued here into April. We, though, see an easing of the effect compared to how it was into March and early April, but it's still on, but to a lesser extent than it was before.
Okay, not 100% production and not 100% in terms of supplies and so on, yet.
It is easing. Yeah, you're right.
Thank you.
Yes, maybe I'll start with the deferred income question. Yes, you are right. As you go forward into 2020, there will be no deferred income on our balance sheet anymore, as we will release it in Q2, as we have also announced with the [inaudible] . If you ignore for the fact the one-off release of the deferred income that impacts 2019, if you just take the planned deferred income, you are roughly at a percentage point both on gross margin and on EBIT that will not be there going forward 2020. If I 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. 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 it impacts our free cash generation quarter by quarter, where we've seen fairly big fluctuations, particularly last year, and I would expect that to continue in 2019. In the payable side, this is normal fluctuations that we see on both receivables, inventories, and payables. There's no particular thing to point to. I hope that has answered some of your questions.
Okay, thank you so much.
Next question is from the line of Anton Blank from Kepler Cheuvreux. Please go ahead, your line is open.
Yes, two questions from my side. Firstly, I fail to fully understand the large difference in the food and beverages unit in Q1 versus Q4, as I would say that some of the mentioned adverse conditions were also apparent back then. May I ask for some additional explanation there? 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.
We'll let Andy take the food and beverage question. Andy, please.
Yeah. Three effects explain the big swing between the quarters. One is there's a seasonality in especially the starch business within China that depends on Chinese New Year. This year, Chinese New Year was quite early, and that meant we realized significant starch sales in the very end of Q4 that we realized in Q1 the year before. 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. Those have been hit by two 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. The third part was the Midwestern floods in the U.S.
That's also a large starch-producing area, it's impactful for our business, and some of our customers were hit alongside the fuel people. That explains it.
On feed in China. You are right that the African swine fever is significant this year there, for sure it means something for the general feed business. For us, the biggest effect is due to the tougher comp.
But I think the-
Okay.
You're absolutely right in pointing out that if swine fever in China leads to a much larger production outside China, then that should be a positive for Novozymes. 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.
Good morning. Starting with bioenergy. You mentioned that your production is down, or your customer's production is down versus 6%-7%. Is that entirely driven by the floodings, or is there any implied market share losses as such, if you could extrapolate a little bit more on that, please. In terms of the new BioAg setup. Previously, you shared revenue and earnings with Monsanto, now 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? Then to your cash flow statement. There's a significant increase in the tax payments. Is that a part of the deferred income payment relating to BioAg, which you got it being around DKK 200 million? Thank you.
Thanks for your questions. We'll let Tina take the bioenergy question. Prisca take the two next questions.
You're right. We estimate that our customers' volume are down 7%-8%. It is due to a general pullback and then accentuated by the flooding in the last part of Q1. Market shares are roughly stable.
What you're saying is basically that your customer base has a greater exposure to the flooded areas than your competition?
Yes.
Okay. To your two questions on the cash tax payments related to Monsanto. Those payments are not in Q1 2019, they will be coming later in 2019. They are not affecting the first quarter. As to the second question on the setup and the commercial impact on the revenues and EBIT. Obviously, we are not disclosing the specifics of the BioAg segment or 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 is uncertainty with revenue as we are changing the setup.
As you know, we are changing both the distribution setup with Bayer Monsanto, but also with our new partners. There is some volatility that I expect for how revenues will be phased over the next few quarters because of that.
My question goes, in the past, if we say everything excluding corn was shared 50/50 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 Bayer going forward. 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?
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 this affects, I wouldn't expect any major impact from that.
You're now saying that you will continue to 50/50 share revenue recognition?
No. We have changed to a distribution agreement, I think the way I understood your question was that it was related to does it change our revenue. In as such, it doesn't change our revenue. I wouldn't expect any one-off effect from the change in setup.
Sorry to continue that. I simply do not understand the answer. In the past, you shared the part of the revenue with BioAg. You will no longer do that going forward as this is now distribution, meaning that whatever revenue Monsanto was booking, that should now go into your accounts. This is what we've been told before.
Yeah. I think we might be able to take it offline, and I'll explain it in more detail. Of course, there is a difference in how we recognize the revenue because of the difference in the agreements. 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, or IR, to get back to you on that to explain the exact mechanisms around it.
Appreciate it. Thank you.
Next question is from Jonas Guldborg from Danske Bank. Please go ahead, your line is open.
Yeah. Good morning. A couple of questions from me also. First of all, Tina, what should we expect for Bioenergy in the second quarter? Because here you're up against very tough comps from last year where you grew 20%. Then this continued impact from Midwest flooding, it almost sounds like we should expect higher negative organic growth than in Q1. Also to you, Tina, on Ag and Feed, you're still uncertain on when you will see revenue recognition from the new setup, when do you expect to be able to narrow the guidance for this division? 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.
We'll let Tina talk about Bioenergy Q2.
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. It requires continued penetration of our existing yeast products, and it requires continued growth outside the U.S., like Latin America, and then also biomass contributing to our growth. That's what we have, you could say, included in the mid-single-digit growth. 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, the Q2 last year was a very strong growth, but that's also due to the comparison for 2017. We see an easing here into April. Beginning of April was still significantly down, we do start seeing an easing.
Thank you, Tina. On Ag and Feed division then, as we pointed out in January, there's some transactional uncertainty with the new deal 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, I think you should expect it to continue into Q4. You had a question on group level revenue in Q2, obviously with our 3%-5% guidance for the full-year, we expect good growth in the second quarter for the corporation.
You will not say that it is going to be positive?
A good growth in the quarter is positive to me. Absolutely positive, yes. Yeah.
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 BioAg, similar to the previous question, what has changed in terms of the visibility in that business, and has it reduced? You have in the first quarter, I make it mid-single digit growth. The guidance for 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. Clearly no higher visibility in BioAg despite one more quarter in the books now. If you can just explain a bit more the sensitivities around the visibility in that business. Secondly, on the innovation side, can you talk, Andy, a bit about the ramp in Frontia and in Palmora, and give an indication of the size of these businesses?
If I can tack on one more on 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. Thank you.
Thanks for your questions. Tina, once again, on BioAg and BioAg visibility. Tina, please.
Yeah. Gunther, you are right. We are a quarter into the year, but it's not that long since we finalized the agreements with our partners. It is still early days. In general, the agricultural markets are highly volatile, and that's why we keep the guidance on that segment. That's as much we can say. It is a volatile business, and that's why we keep it at that level. As Peder was alluding to before, there are some uncertainty on when will our partners take the volumes for the 2020 growing season as well.
Andy, on Frontia and Palmora. Andy, please.
Yeah. These two innovations, I think we're still in the phase of testing actually both of these in major markets. I think Frontia 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. In the U.S., we're actually doing significant trialing with some major partners right 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. 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.
All the right signals are out there, but it'll take some time for it to have a material impact. What I've been saying is both Palmora and Frontia are kind of DKK 250 million-DKK 500 million over 5-10 years, but it's still early days. Palmora, on the other hand, is a little bit, let's say, farther behind Frontia. 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 kind of reliable seasonality effects. Also on good progress, but still a ways to go before it turns into real money on the top and bottom line.
Palmora will add revenue growth this year, but not significant. That is the case for Freshness, Anders. Sorry?
The next question is.
Sorry, I didn't push the button on the microphone. Freshness platform ramps up according to plan. We're 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. 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 Freshness platform, we have to respect that our partners desire to disclose too much information on the details of the road plan is not necessarily aligned with ours. There is a limit to how much we actually can provide of guidance. I think the important thing is we are on the plan exactly where we expect it to be, and that will contribute to growth full year.
When you say turning positive throughout the year, you mean positive for the full year, just to be specific on that.
That-
It doesn't become a negative growth in Q1.
Yes, that's correct.
Yeah. Okay. Thanks.
The next question is from Søren Samsøe from SEB. Please go ahead. Your line is open.
Yes. First question on ethanol, the sales you've lost due to flooding. I just wanted to understand if this should be seen as a complete loss sales, or do you expect to regain that into Q2 or Q3? Secondly, you mentioned as part of 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 innovation takes a bit longer time before you actually see the real impact on your numbers. It takes time to ramp up. Please elaborate on that. Thank you.
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. Getting back on one of the earlier questions, I think we got more than our fair share of that softness. Our customers actually took more of a volume downturn than the market did in total. We expect our customers to be down around 8 versus a market that's probably down 4-5 when numbers get closed. The flooding itself is dramatic. We have plants in the Midwest that are closed down because of flooding. We have severe logistical issues.
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. You need to bear in mind that inventory levels on ethanol are pretty high. While they've come down in Q1, they're actually still pretty high. We don't dare to believe that it will just come back. I think there are other uncertainties on ethanol that are 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 in the U.S. Once you take a look at the ongoing negotiations between U.S. and China on customs, there's currently a 72% tariff on ethanol going into China.
If that would ease or even go away, that would, of course, reinstall the exports out of the U.S. to China, which would favor our business. I think in all fairness, 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. We see a ramp-up. The ramp-up, it'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 of our guidance. That's entirely due to this situation in the Midwest. Thomas will talk about product innovation. Thomas, please.
Yeah, 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 Novozymes. 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 Balancius, our product within animal feed. That's also a significant innovation that we'll start to see make it to the numbers of Novozymes. 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 throughout the year.
That's why we continue to talk about innovation as being part of the driver, also for getting Novozymes to the 3%-5% growth of 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, you were quite helpful on going through the bridge versus Q4 and Q1 in Food and Beverage. Could you do the same in Household Care? Obviously, I understand the automatic dishwasher, but the incremental negative on Q1 versus Q4, particularly in the Middle East. Obviously, you talked about it before Q4, so was it something that just didn't hit until Q1? 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 Freshness platform. Can you quantify that any more? Would the business be down year-on-year for the year if it wasn't for the Freshness platform?
Just finally, on the margin, can you give any more detail in terms of the mix impact in different divisions? 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. It sounds like actually you're saying it was pretty much down in line with the volumes of your customers. Can you just give a bit of an idea about mix and that impact on the margin as well? Thanks.
We'll let Anders build the bridge from Household Care sales in Q4 into Q1. Anders, please.
The bridge that we look at, 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. One is sanctions, exactly as Andy talked about. The other one is distress 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 in Q3 and 4.
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. All of that gives us confidence that we will actually end positively with Household Care for the year.
Just to make absolutely sure that we all understand it, we expect Household Care for the full year 2019 to deliver growth. On the biofuels and margin, of course, it's a competitive marketplace, but 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. Their profit has been under pressure, so we've been very well positioned to cater for the needs that come off that. Logistically, we've also been very well positioned to deal with 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. There is no real margin impact on the downturn in Bioenergy.
Of course, there's an impact on the full business because of the lower top line, and I'll let Prisca elaborate that.
Thank you, Peder. Maybe just to follow on. The gross margin, as you have seen, is lower year-over-year. Also keep in mind that the comp from Q1 2018 was fairly high at 57.8%, and that was in particular because of lower variable costs, because of lower raw material prices, and we see actually the opposite in Q1 2019. That has an impact in addition to what Peder alluded to from a loss of top line, also on the gross margin.
Just on the raw materials, you'll hope to get that back through the course of the year. Do you have any idea how long that would take? Obviously some businesses say one quarter, two quarters. Can you give an idea of that?
Yeah. I don't think I can be specific on quarters, but what I can tell you, if you remember Q2 2018, we also had fairly high raw material costs, and we called them out. That was the opposite to Q1 2018. Now we're calling it out in this quarter. What you see is it does fluctuate, yeah? Overall, you know that we've seen over the last 12 to 18 months, fairly strong raw material prices, commodity prices for those raw materials. I would say I expect it slightly to ease, but there will be quarterly fluctuation, so I would keep that in mind.
Great. Thanks, guys.
Next question is from Anette Lykke 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 Peder said before about inventories within bioethanol in the U.S. You have flagged this as a risk previously. Do you think there's a higher risk that we'll see those going down now? That is my first question. My second question is in relation to the timing of your reduced sales outlook. You recently, three weeks ago, reiterated your outlook of 3%-6% and then three weeks after, you're now guiding for 2%-5%. Do you have a lack of transparency in terms to see how business is doing or what has changed during these three weeks? Thank you.
On the U.S. inventories of ethanol have come down, I believe about five or six days of consumption over Q1. They are still, if you look back two or three years, inventory levels are still pretty high. What I said is that we do not dare to believe that is just automatically going to refill with the 6 to 7 days that has been chipped off so far.
Okay.
I would argue, 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. 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. We do not dare to believe in that it's just going to rebuild. As regards timing of sales outlook, I just want to take you through what happened on our side. The U.S. Midwest had 3 feet of snow dumped on them March 12th through 15th.
March 16th or 17th, temperatures turned to 60 degrees Fahrenheit, and they got another 1.5 inches and 2 inches of rain on top of that with massive runoffs. We only realized the effects of that and how severe it was after we announced the update on April 4th. What we have realized now is that it's not only about a couple of weeks in March, it drags into April. That's why we adjust our guidance now from 3%-6% to 3%-5%, because we do not see, since we do not believe we're going to recover this lost sales in 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.
Hello. Good morning, thank you for taking my questions. I would have just two, please. The first is on the extent of operating leverage and gross margin, it builds on a question that Ben asked earlier. The last time I remember Novozymes doing negative organic growth of this kind was back in Q3 of 2016. The oil price was slightly higher in Q1 of the current year, but not a million miles away. In that quarter, gross margins were 57.3% as opposed to the just over 55% reported in Q1 of 2019. Could you perhaps give some indication of what has changed and what exactly has changed in the cost base here? Is it just raw materials, or why is seemingly the degree of operating leverage higher? That's my first.
My second is there have 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 end customers are expected to continue reducing dosages through 2019. Are you seeing any light at the end of the tunnel or any potential change in this behavior in 2020? Thank you.
Thanks for your questions. Prisca, gross margin?
Yeah. Obviously, I have to dig out the quarter you're referencing in 2016, but you are fully right. It's a weak quarter for gross margin. I'll try to explain it like I also done before. One of the reasons is raw material costs, variable costs, pressure in that quarter. The other reason, of course, is that if you then take it to EBIT, we do have high OPEX ratios. We have a slightly higher sales distribution cost. I would say our R&D and admin are in line, but overall OPEX is higher, particularly as a ratio. That, of course, has an impact. 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.
On household care, just to rewind a few years back, I think it's important to stress that 2015 and 2016, and we also have communicated, we had one customer that took out one technology that had to do with the multi-cycle effects. 2017, 2018, we had 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. We have had these single events that has challenged our numbers. Now, the dialogue we have right now is very positive, and I think the outlook for innovation is actually quite solid in household care. With all our three global customers, we have very impressive programs for the future that we believe will actually deliver growth in household care.
I think we can say 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 from Nordea. Please go ahead. Your line is open.
Yeah, just to follow off on, I don't know if you will answer, Peder, as Tina's had a bad voice. The E15 approval process, could you just give a little bit further insight into that process, how that is progressing with the EPA? Thank you.
That is definitely a question for Tina. Tina, please.
Thanks a lot, Peder. The administration has directed EPA to draft some legislation, and they have done that and it's now out in public hearing, and that, in fact, ends here 29th of April. After that, there's going to be, between the different agencies, some further discussions and negotiations, and then the law is going to come into place. 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. 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 that that doesn't materialize. 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 drag that could do to the timing of the approval process?
Oof. That's difficult to answer, Hans. You could say, as it is right now, E15 is allowed outside the summer months. The key is really do we get it for the summer months, or do we get past the summer month? 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. It is for sure difficult to say on that note.
Maybe just to add a detail to it, Hans, I think the industry, if you look at the organizations that represents the fuel industry, they expect that a positive E15 conclusion before the summer would add between 1%-2% to ethanol volumes in 2019. I think you should expect the same thing to happen to our sales. A bit of tailwind, but don't expect it to be a blast this year because it's going to get complicated. We don't have particular insights, but I suspect it will get complicated state by state. You'll see the Midwestern states have more courage and incentive to move faster than some of the coastal states.
If I take that statement, let's disregard the summer season. Could we expect that the industry will start ramping up during the fall with a wider use of E15 ahead in anticipation of summer sales next year? That could still drive some growth in the second half, I would imagine.
If we look back, the amount of petrol stations carrying E15 has been on a steady increase over the last years. For sure, you could imagine that that was something which could happen. As Peder 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.
Thank you.
Next question is from Anton Blank from Kepler Cheuvreux. Please go ahead. Your line is open.
Yes. Thank you. Now we touched upon the subject of lawsuits. I had a question on a lawsuit that seemed to have been overturned last Thursday or Friday, if I'm correct, regarding a patent case over technology used in the bioenergy unit. It seems to relate to a $7.5 million USD jury verdict. I was wondering, should we purely see this as an exceptional cost, or could it also potentially impact revenue generation? Thank you.
Yeah. Let me answer that. 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. It's too early to call out more details on that.
We haven't. Of course, we're reading the verdict, and we are trying to make up our mind as to whether we want to pursue this. We have already provided for this. I don't think it's material in any way. The product in the marketplace is actually a fairly small one. Obviously, as you can hear, it was a surprise to us that the verdict came out this way. I think we have to close the session here. We are one minute over time now. I want to thank you for your questions, reiterate my hope that we'll see you on June 17th, where we expect to be able to talk about how we invest-