Good morning, welcome to the Novozymes conference call. My name is Peder Holk Nielsen, and I am the CEO of Novozymes. Today, I am joined by the executive leadership team and Investor Relations. We'll start by reviewing our performance and key events for 2018. We'll also discuss the outlook for 2019. Our presentation should take around 30 minutes. After that, we'll be happy to take your questions. Please turn to slide number two. We met our financial guidance parameters given at the beginning of the year. This is satisfactory, but we had set our sights on organic sales growth of more than 4%. We've been impacted by a challenging situation in the Middle East, which takes roughly one percentage point out of our growth. Our financials were good, with 28.3% EBIT margin and DKK 2.3 billion in free cash flow.
We're in the process of commercializing products from our priority innovation platforms. We support our new innovations with solid investments in commercial activities. This includes increased presence in growth markets. We had variations in performance of the different businesses. Food & Beverages, Bioenergy, and BioAg all did well during the year. Household Care was flat, whereas Feed and Technical and Pharma declined. In 2019, we expect to increase sales organically by 3%-6%. The outlook reflects annualization of the Middle Eastern impact and uncertainty around the future setup of our BioAg business, as well as volatile agricultural markets. Growth comes from strong innovation and increased market penetration, particularly in the emerging markets. We are bringing new game-changing products and technologies to the markets, such as freshness in laundry, yeast for Bioenergy, and Balancius for Feed.
For Q1 of 2019, we expect to post a modest decline in organic sales growth as the Middle East, Feed, and U.S. baking are all likely to experience a challenging start to the year. Earnings for the year will be solid with productivity improvements, cost control, and as it looks right now, a currency tailwind. We expect an EBIT margin of 28%-29%, and CapEx as a percentage of sales to be below 2018. With that fly-in, let's move on to take a closer look at regional sales development. Please turn to slide number three. Growth in the developed markets was driven by strong Bioenergy and BioAg sales in North America, whereas Household Care was challenged, particularly in Europe.
Latin America grew mid-single digit, mainly driven by increased corn ethanol production in Brazil and by Food and Beverages. Asia-Pacific also grew mid-single digit. Household Care performed well, whereas our starch business was a bit challenged by the low sugar prices. Overall, it's good to see both emerging and developing markets posting organic sales growth for the year. Our increased commercial investments in growth markets are beginning to benefit the business. We've added close to 70 people in these growth markets over the year. After this quick review, it's over to Anders to go through Household Care. Anders, please.
Thank you, Peder. Please turn to slide four. Growth in household care was challenged in 2018 with organic sales growth of 1% in the fourth quarter and flat for the year. As you know, sales were negatively impacted by some of our large global customers who reduced their enzyme spend. While that was expected, unforeseen disruptions in the Middle East, supply chain issues at a North American customer, and the truck strike in Brazil took out altogether a couple of percentage points of full-year growth. On the positive side, we continue our strong performance with regional customers, particularly in the emerging markets. China delivered solid growth supported by innovation and growth of liquid detergents. Africa, Southeast Asia, and India also delivered solid growth. The rollout of the freshness platform continues.
The first product is ramping up according to plan, and we are now shipping to five destinations covering an estimated 10-15 countries. The platform will contribute more to growth during 2019, with additional emerging markets being added as we move through the year. As planned, we'll start shipping products to the broader European market toward the end of 2019. Outside laundry, our dishwashing business delivered good growth. This was driven by an increased demand for phosphate-free automatic dishwashing detergent and our ability to supply innovative and sustainable solutions for this area. Looking at 2019, we expect organic sales growth to be low single digits in household care, with the main swing factor being the Middle East.
Our focus for the year is to continue the ramp-up and geographical expansion of our exciting freshness platform. In addition, we'll continue to pursue opportunities in the emerging markets and drive performance with local accounts across geographies. Moving on to Technical and Pharma. Organic sales declined by 5% in the fourth quarter and 6% for the year. Second half was weaker than expected as the pharmaceutical sales performed below expectations and our textile business continued to be challenged in the Middle East. For 2019, we expect low single-digit organic sales growth for Technical and Pharma. Now I'll hand it over to Andy. Andy, please
Thanks, Anders. Please turn to slide five. Overall, 2018 was a solid year for our food and beverages business. Full year sales grew 5% organically and by 7% in the fourth quarter. Growth came from all industries except baking. High performance standouts for the year included Food Nutrition, vegetable oil processing, and our beverage businesses. The starch business posted moderate growth while baking contracted slightly. At the beginning of 2018, I commented that we saw good opportunities for our business coming from consumers' desire for healthier diets and clean label foods. Our Food Nutrition and vegetable oil processing businesses benefited strongly in 2018 from these long-term consumer trends. Enzymes for lactose reduction and plant protein processing help customers provide more free from and vegetarian options for their consumers.
Also, Novozymes' enzymes that eliminate trans fats in edible oil and reduce acrylamide in processed foods helped our customers to respond to regulation aimed at healthier diets. Looking more closely at vegetable oil processing, we saw broad-based growth both geographically and in various applications, as our innovations in these areas are paying off. Specifically, opportunities like oil degumming and specialty fats processing are increasing, and we are prepared to serve these growing needs. Further, we continue to focus on palm oil extraction with Palmora as a growth area, but with modest sales results in 2018. For baking, 2018 was a mixed year. While we saw continued strong growth in most emerging markets, this was a down year in the Middle East as sanctions, economic turmoil, and flour export regulations created issues in this important market.
The downside we experienced in Middle East, along with the planned price reduction effect in North America, meant, in all, our baking business contracted slightly and underperformed our expectations for the year. Switching to beverage, growth in our distilling and juice and wine business was strong. Brewing was moderate, as growth in Latin America and India was tempered by share loss in other geographies. Looking forward, in 2019, we anticipate broad-based growth to continue for our food and beverages business with an outlook of mid-single digit growth. We see solid opportunities in our food nutrition business, along with vegetable oil processing and grain milling, where our prior innovation platforms all have solid potential.
Speaking of grain milling technology, I am happy to announce that we have just launched Frontia Jade, expanding our corn milling yield offering to the important Chinese market. In baking, we expect emerging markets and demand for acrylamide reduction solutions to be positive drivers for penetration in this segment. However, although our pricing glide path in North America fresh keeping stabilizes after Q1, we expect competitor activity in the developed markets to remain a headwind. To sum up the Food and Beverages division, I am satisfied with our performance in 2018, and I am pleased to see that our growth came from a broad base. This picture continues to reflect our opportunity in 2019, as we are working hard with customers to transform the quality and sustainability of the world's food and beverages industries. With that, Tina, over to you.
Thank you, Andy. Let's start by looking at bioenergy on slide six. 2018 was a very good year for our bioenergy business, supporting decarbonization of transport. For the full year, we delivered 12% organic sales growth, which came on top of a strong 11% growth in 2017. The fourth quarter was, as expected, a bit softer with 5% organic growth from lower ethanol volumes and a tough comparison from Q4 2017. As I have mentioned in previous conference calls, growth was driven by a strong momentum due to our broad technology base, the launch of our yeast product for conventional biofuels, and good performance in Latin America with producers expanding into corn-based ethanol production. U.S. ethanol production is estimated to have been up roughly 1% for 2018, including a fourth quarter that was down 3%-4%. Ethanol inventories are high, and producer margins have declined throughout the year.
We are happy to see continued discussions supporting expanded use of biofuels. In the U.S., we are awaiting clarity on E15, which is expected sometime before summer. In Brazil, the RenovaBio framework should support the continued expansion of corn-based ethanol production. China is investing in new capacity, and the RED II directive in Europe has been adopted, member states are now working on the implementation process. Let's turn to slide seven for an update on Agriculture and Feed. 2018 was a mixed year for the Ag and Feed business. BioAg posted double-digit organic growth, whereas the Feed business declined. The combined organic sales growth for the full year was 3%, but negative in the fourth quarter. The weak fourth quarter sales were impacted by timing of corn product sales, as well as low sales of feed enzymes.
BioAg performance in 2018 was strong and driven by the new corn product, Acceleron B- 360, which was sold for application to roughly 16 million acres of corn for the 2019 planting season. As I'm sure you are aware, our BioAg partner was acquired by Bayer last year. We are currently in negotiations with Bayer on the future setup of the BioAg business and expect to conclude in the coming months. Feed enzyme sales declined in 2018, mainly explained by a weak market in Brazil. On the other hand, the animal health business had good performance. Alterion did well, and the newly launched enzyme Balancius has been well received in the market. But as it is early days, the contribution is small. We expect a solid ramp-up during 2019. To summarize the messages for the two areas, Bioenergy continued its strong performance on top of a strong 2017.
BioAg posted good growth, while Feed was negative due to Brazil. We had a strong year on the innovation front with the launch of Balancius and two new yeast products. For 2019, we expect Bioenergy to post high single-digit organic growth. We expect global ethanol production to be roughly flat. The outlook for Ag and Feed includes a relatively higher degree of uncertainty, and we expect low single-digit decline to high single-digit growth. The high degree of uncertainty relates both to the future setup of our BioAg business and volatile agricultural markets. Now I'll hand over to Thomas.
Thank you, Tina. Please turn to slide number eight. 2018 was a strong year of innovation for Novozymes. We launched eight new products with an additional five exclusive launches, and we had progress across our innovation platform with solutions such as Balancius for improved chicken gut health, Acceleron B-360 for improved corn yield. Each of the priority platforms has the potential to open up completely new markets with significant sales contribution over the medium to long term. We expect another strong launch year in 2019. Today, Novozymes' innovation pipeline includes more than 120 research projects, with many more active leads. Our structure enabled the divisions to bring innovation to the market at a higher and faster rate than ever, while at the same time significantly leveraging cross-segment R&D synergies. This is a structure we constantly try to optimize. Please turn to slide number nine.
Besides the technology and innovation progress during 2018, we also made two announcements that ties well with our priority platforms. In November, we announced a collaboration with Elanco focusing on the development of natural solutions for dairy and beef cattle. The application R&D is being conducted as a joint effort, and we are currently exploring the first ideas. In connection with the launch of our first product for the water platform back in December, we also announced a collaboration with BIOFOS, a large wastewater facility here in Denmark. The water treatment space offers an exciting opportunity for Novozymes to leverage our core technologies. While it's still early days, we are very excited about the impact our technology could make to help address one of the world's most significant challenges. That's all from me, and I'll hand you over to Prisca.
Thank you, Thomas. Please turn to slide 10. Our financial performance in 2018 was satisfactory. Our organic sales growth was 4%, currencies and deferred income were down by 4%, and the divestment of Albumedix impacted by roughly 1%, so giving a total minus DKK 1. For the fourth quarter in isolation, organic growth was soft at 2%, with currencies and deferred income flat, and the divestment of Albumedix impacting by roughly 1%, so giving a total of 1% growth in Danish kroner. The gross margin was at 57.4%, roughly 50 basis points lower than in 2017. Productivity gains benefited the gross margin, whereas higher input costs and lower deferred income were the main negatives. At 28.3%, the reported EBIT margin was 40 basis points higher than for 2017.
Adjusted for both reorganization costs and the divestment of Albumedix in 2017, the EBIT margin was down 70 basis points. As previously mentioned, this is mainly the result of negative currencies, but also higher input costs, a step-up in commercial activity, and lower deferred income. The effective tax rate was 18%, 1.5 percentage points lower than in 2017. This is mainly explained by the transfer of IP assets from Switzerland to Denmark, initiated at the end of 2017. Net financial costs were DKK 40 million lower than in 2017, and net profit came in 3% higher year-over-year. This was a result of a lower tax rate and despite hedging losses. We also had DKK 120 million write-off of a financial guarantee in the second half of 2017. Free cash flow was approximately DKK 2.3 billion.
This is roughly DKK 100 million lower than in 2017 and largely the result of an unfavorable development in working capital, which is due to a worse-than-expected development in receivables and inventories. CapEx was reduced by almost DKK 300 million from 2017 and totaled DKK 1.4 billion. We have now initialized trial production at our new facility near Mumbai, India. All in all, we delivered a satisfactory set of financials in line with our outlook. Now please turn to slide number 11 for the 2019 outlook. We expect 3%-6% organic sales growth for 2019. At current spot rates, we see an addition of around one percentage point for sales in DKK, including the effect from lower deferred income.
Our organic sales growth outlook reflects an annualization of the Middle Eastern impact, the future setup of our BioAg Alliance, as well as volatility from certain agricultural markets. For the first quarter, we expect to post a modest decline in organic sales growth as the Middle East, Feed, and U.S. Baking are all likely to experience a tough start to the year. Looking at the various businesses, we expect Bioenergy to post high single-digit organic growth for the year. For Agriculture and Feed, we mainly see uncertainty for the BioAg part, and the business as a whole should see a low single-digit decline to a mid-single-digit increase. This includes a slight growth for the Feed area. In general, agriculture markets and farm economics are not doing any better than last year. We expect low single-digit growth in Household Care. For Food and Beverages, we see mid-single-digit growth levels.
Finally, for Technical and Pharma, we have an outlook of low single-digit growth for the year. All in all, this adds up to an outlook of 3%-6% organic growth. We expect an EBIT margin of 28%-29% for the full year. Productivity improvements are expected to support the margin, whereas input prices are expected to impact negatively. At current spot rates, we expect a minor currency tailwind. We have hedged 100% of our 2019 U.S. dollar exposure at an average rate of 621 DKK to the U.S. dollar, which is well below the current spot rate. The effective tax rate is expected to be at 18%-20%, and we expect full-year net profit growth to be between 0% and 5%. The outlook for CapEx is lower than in 2018, at DKK 1 billion-DKK 1.3 billion.
The outlook for free cash flow before acquisitions is between DKK 2.2 billion and DKK 2.6 billion. We guide for around 23% return on invested capital. This includes a negative impact of roughly 1 percentage point from the implementation of IFRS 16 as of January 1, 2019. Subject to the approval at the shareholders meeting in February, we propose a dividend of DKK 5 per share. This equals an 11% increase from last year and a 44.6% payout ratio. Finally, we are announcing a share buyback program worth DKK 2 billion, which is on par with what we bought back in 2018. All in all, a solid financial outlook for 2019. Now, I'll hand you over to Peder for a wrap-up. Peder, please.
Thank you, Prisca. Please turn to slide number 12. Let me summarize our message here today. We met our financial guidance parameters set up at the beginning of 2018. This is satisfactory, although we were aiming for higher organic sales growth. The Middle East was the main unexpected drag. On the financial side, earnings and cash flow were both solid. This year, we expect 3%-6% organic sales growth. Growth will come from innovation and market penetration, particularly in the emerging markets. Game-changing products and technologies such as freshness for laundry, yeast for bioenergy, and Balancius for feed will make strong contributions to our top line. We also expect solid earnings driven by our continued effort to optimize product solutions and reduce manufacturing cost. Our toolbox is unique, and we have a very strong number one position.
Our enzymes and microbes can create a more sustainable world with more efficient use of water, energy, and raw materials. Few companies can match the reach and impact of Novozymes solutions. In 2018, we reached more than 5.6 billion people with our products. We believe we have the potential to continue to create significant impact together with our customers and partners. We need to do more to make sure our solutions also play a role in shaping the world of tomorrow. We've initiated a strategic review exploring how we can get closer to realizing the full potential of our purpose and create greater impact from our investments .
The review also coincides with our long-term financial targets ending this year. We'll share the updated strategy and targets with you at a Capital Markets Day on the 17th of June. We invite you to join us for this occasion here at our offices in Denmark. More information will follow. I hope you'll all be able to participate. This concludes today's presentation. Now we are 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 the line of Jonas Guldborg Hansen from Danske Bank. Please go ahead, your line is now open.
Yeah, good morning. Two questions from my side. First, I would like to hear your assumption of stable global ethanol markets in 2019. What does that include regarding the U.S. market? Because you must have a negative assumption there, because you say that Brazil is growing, and there's also other places where we could see some positive development. Then maybe challenge you a little bit on your Household Care guidance for 2019, where you say low single-digit organic growth, because you had 0% in 2018, and then -1 from the Middle East and -2 from the other stuff. Then you're guiding low single digit in a year where we should see some increased traction from the freshness platform.
Thank you. We'll let Tina talk about ethanol. Tina, please.
Yes. You're right, Jonas. On the U.S., we have a slight negative expectation for ethanol volumes. That means that hardly any E15 and hardly any China is included in our expectations.
Thank you, Tina. Anders, Household Care budget.
Looking at the outlook for 2019, our freshness platform delivers exactly as we expected. Actually, it's building up really nicely. The challenge we have is related to the Middle East, where we have a relatively high exposure in Household Care. That relates to, of course, the trade sanctions in Iran and Syria. It relates to the Turkish devaluation, and then it relates to some challenges we have seen in the second half of 2018 and also in Saudi Arabia. All of that combined actually takes out a couple of percentage points of the growth outlook we had we not had that challenge in the Middle East.
You could say that underlying, you had a 2%-3% organic growth in Household Care in 2018. My question is, why is that going to be at the same level in 2019?
The effects that we saw are annualizing in 2019 of the Middle East. We have actually building strong momentum, but because of the difficulties we are having in the Middle East, we take some of that momentum out. Had it not been for that, we would actually be on a solid ramp-up of growth in Household Care.
Okay. Thank you.
Next question is from the line of Gunther Zechmann from Bernstein. Please go ahead. Your line is open.
Hey, can I start with two, please? One, following up on the E10 comments in China. You said, Tina, that you don't include anything in your guidance from that, but you mentioned on that call that you're seeing investment going into that ground, and those investments will need enzymes at some point. Can you just highlight what you're seeing in the market in terms of China's drive for E10 across the country? That's number 1. The second one on Household Care. I think middle last year, we were speaking around the high oil price and that you might have seen some activity of your customers thinking of reformulating enzymes back into their laundry formulations. Given where we are now, has this stopped? Or what's the current feeling you have around your large and midsize, I suppose, HBC customers? What are they doing in the market? Thank you.
Thank you, Gunther. We'll let Tina have a go at China and ethanol, please.
On China, the situation in the market is that there is an established business out there. We for sure have that included in our guidance. We also see some distilling plants moving over to fuel production. We also start seeing new capacity being built, but it takes, you could say, some time to really get up and matter. That's why I said that we don't have much in on extra capacity from new capacities in China. For sure it's there, and for sure, you could say we are following. We do expect that in the future years, that's where we really are going to see the impact on E10 in China. We expect it to come, and it's going to matter, but we haven't included that much of the extra growth in 2019.
Thank you, Tina. Anders, penetration of enzymes in Household Care, please.
On the relation to oil price, the hike we saw have not had any effect. I think what we also commented before, we need to see sustained high oil prices before we start to see that positive effect. Our guidance for 2019 is based on the oil prices as we have now. I wouldn't expect that to drive any significant change in the outlook.
Okay. Can I maybe just flip my question, Anders, and ask, are you seeing any higher inclusion rates of surfactants at the expense of enzymes, or is that just a neutral impact on your content in laundry currently?
Right now, I would say we're not seeing those effects. I think we've been under this oil price regime for a while, and there's no effects as a consequence of the low oil price right now. We don't expect that in 2019 either.
Thank you.
Next question is from the line of Annette Lykke from Handelsbanken. Please go ahead. Your line is open.
Thank you so much. First of all, a question to Tina on the inventories of bioethanol in the U.S. They've been around for, I think it's two years now you have mentioned those. With squeezed margins, is it expectations of higher prices, or could you potentially share with us some thoughts on why you think these inventories are fairly high? Also, even though they are all-time high levels, how big are they? If we have a reduction, will it have any meaningful impact on your growth?
My second question would be to the expectations. You have a fairly wide spread on your growth from 3%-6%. I'm just wondering at what time we would know whether you would be in the low end or in the high end of your growth targets here. Should we get past the first half the Q1 quarter, or would you already at the Q1 maybe know where you would land through the year? There's a fairly big spread. Thank you.
Thank you, Annette. Tina, on ethanol inventories, do they matter to our growth, please?
Yeah. The expectation for the bioenergy business is a high single-digit growth, and that is assuming that inventories will remain high throughout 2019. For sure it is something which is influencing the business, and we do see, we have seen, as you saw in Q4, some decline in the U.S. ethanol production. That's the effect we have. We still expect high single-digit growth for next year.
Tina, can you say anything on why these inventory are so high when you have squeezed the margins? Is any good explanations for that?
That's a very good question. I can try and speculate, I think your speculations is maybe as good as mine. The way I see it is that, for sure everyone in the U.S. is waiting for E15 or a reopening of the exports to countries like China. Then there might also be a consolidation play going on. We have seen some of these moves throughout 2018. That would be how I would be speculating on it.
Could you then comment on how long time can the producers afford to have these inventories? Is a certain threshold here or timeline?
I wouldn't say there is a specific threshold or timeline. We have seen in Q4 a decline of at least 3%-4% in the ethanol production, and I think see that as an outcome for it. You shouldn't expect that beyond so many days of inventories, then it's an abrupt change in the situation.
Okay. Thank you.
On the guidance of 3%-6%, let me first say that of course the whole range, as far as we can see, is in play. The upper part of the range has to do with stronger performance than we have in our budgets on some of the introductions that we have made over the last couple of years, product introductions that is. They can certainly perform better than what we have in our budgets. It also includes that some of the expected reductions that Anders was talking about into 2019, that they will be smaller. Things can go better, things can also go worse. That's the 3%, where we see a bit more of the negatives than we see some weakness on some of the product introductions. Over-layering all this is, of course, a world with a lot of uncertainties.
We see the trade conflict between China and the U.S., which, as Tina talked about, influences businesses like ethanol and our BioAg business in soybeans in particular. We also have an internal, if you like, or specific to Novozymes, uncertainty that will, in all likelihood, disappear within the next few months relating to the BioAg alliance. When I combine all these things, I think the best go we have now is 3%-6%, and the whole range is in play, and it's too early to say anything about trigger points within the year where we would start thinking about narrowing the range. We'll have to see how business gets started and how these uncertainties, they unfolds, and how the opportunities unfolds.
Okay. Thank you very much.
Next question is from the line of Søren Samsøe from SEB. Please go ahead, your line is open.
Yes. Hi, it's Søren from SEB. I was disconnected from the call, so I apologize if my questions have already been asked. First of all, if you could say on the Middle East effect in first half, as you see it now, will it sort of be a fading effect, or is it flat, or is it accelerating as you see it now?
Secondly, the sales you expect in 2019 from the freshness platform, if you could maybe explain a little bit on how you see the visibility on that sales from your end . Then if you could also comment on the gross margin, which is declining both the full year and Q4 by 40 to 50 basis point. Seems to be due to high input cost. Could you quantify what are these input cost effects? Also, if you will see similar negative effects in 2019 at the current spot rates. Thank you.
Thank you, Søren. I actually don't think these questions have been asked before. I will let Prisca talk about the impact of the Middle East and gross margin. Prisca, please.
Yes. Thank you, Søren, for your question. On the Middle East impact for the first half year on 2019, I expect roughly a similar impact that we saw in the second half of 2018. I don't expect any change in sentiment in the first couple of months of the year. For the gross margin question, yes, you're right, we see a decline in gross margin. Also bear in mind that, of course, our gross margin has been fluctuating also in the past. However, the input costs that we have called out throughout the full year during 2018 have impacted the gross margin. We also have an FX impact there. Don't forget the impact of deferred income, which of course also in Q4 it can be seen.
As to your question for 2019, we don't guide on gross margin. I'm afraid I can't be much more specific on that. I expect raw material prices. I don't see we've seen a significant decline of the levels. I expect that will also be impacting input costs and therefore the gross margin going forward. Don't forget that we always have a counter effect that comes from productivity improvements in our operations. How that plays out.
Sure
Waits to be seen.
Sure. Prisca, maybe you can then elaborate on what input is it that are responsible for, you can say, the majority of the headwind you have?
It is both in the direct costs, which are raw materials, but also utility costs and general fixed production costs. You'll see a mix of both. Of course, there's always fluctuations quarter by quarter. I would call out the raw material cost for 2018 as I've done throughout the year of 2018, because in the beginning of 2018, we saw, or actually the end of 2017, we saw quite a steep increase in certain raw materials that we use for our manufacturing.
Thank you, Prisca. Anders, on how freshness is going to go to market in 2019. Anders, please.
The status now is we are shipping to five destinations, covering an expected 10-15 countries, mainly in the emerging markets, Southeast Asia, Middle East, and Africa. The ramp-up is going according to plan. The bigger impact we'll see in the later part of 2019, where Europe will also come online, both with powders and liquids. You'll see a gradual ramp-up, but that will basically ramp up over the course of the year.
Okay, thank you.
Next question is from the line of Lars Topholm from Carnegie. Please go ahead, your line is open.
Yes, a couple of questions from me. One is on the net working capital. When we discussed this after Q3, you assured me it went up due to seasonality, but that doesn't seem to be the case. I wonder if you can put some comments on what is then the reason for higher working capital and how do you see this in 2019? Second question, your R&D cost as a percentage of sales dipped quite significantly in Q4.
Is this just a quarterly blip or are you forecasting R&D expenses will be on a new lower level? If so, what are you holding back on? A final question goes to BioAg, and you raised the flag for potential changes to the alliance subject to your discussions with Bayer. I wonder if you can say anything about the timeframe for those discussions being finalized, and maybe also list some of the potential scenarios we should prepare for. Thank you.
Thank you, Lars. We'll let Prisca have a go at net working capital and R&D spend. Prisca, please.
Thank you, Lars. Yes, let me take R&D first. This is a normal quarterly fluctuation. We haven't changed any investment level in R&D whatsoever. If you look into the trend of the quarterly R&D in terms of sales over the last 18 and 17 quarters, you see fluctuations between 12.3%-13.5%. It's quite a wide range, and it's well within the range. There's nothing particular happening in Q4 that would have an effect for 2019 or so on. We are at the same investment level in R&D. As for net working capital, yes, you are right, and I'm actually quite a bit disappointed by the net working capital development in the last quarter of 2018 because we expected higher than we have seen a decrease of net working capital.
As to your question of seasonality, as you have seen, we've had quite a diverse growth pattern by quarter in 2018. I can think also say I will expect something similar in 2019. That drives fluctuations in working capital, amongst other things. If you've seen our free cash flow has fluctuated somewhere between DKK 300 million and DKK 1 billion in a quarter. That's a swing of DKK 700 million. I expect to see also quite significant swings in free cash flow generation on a quarterly basis also going forward, and that is what I was referring to mainly with the seasonality. You are right that particularly the receivables performance, but also the inventories have not come down as much as we would have expected them by the end of 2018.
Prisca, may I ask you what you do to actively optimize this?
Yeah, I think that's a very valid question. Working capital has my full attention. As my colleagues will be able to vouch for. We're doing a couple of things. Before I go into that, let me just maybe explain structurally. Structurally, we are investing in growth. We are also, as you know, investing in strong growth in the emerging markets. The emerging markets footprint comes with a certain carry of working capital that we are consciously investing in. In addition to that, as you also have known, and I think from a resilience of revenues point of view, that's a very good thing. We're expanding our portfolio as to markets, but also as to products, and that also has an impact on the complexity in the inventory. That is basically a headwind that we have from that.
How do we address that? We are investing continuously, but have actually quite recently invested into planning software or planning systems, that we hope will better enable us to manage our inventory. Having said that, I think it's also important that in our kind of business, we will always be very prudent on stock levels because we don't want to run out of stock at the business that we're in, and particularly the gross margins we're in. It's always a delicate balance. We'll also be very carefully watching receivables and managing receivables and DSOs. It has a high attention, but there's a couple of, I would say, counteracting structural trends that are related to our investments in emerging markets, amongst others, that we have to mitigate.
Thank you.
On the BioAg business. As of now, you could say the BioAg business, the alliance is completely committed to continue delivering. However, as we are also calling out in our expectations or in our outlook for the segment for ag and feed, we are talking about a low single-digit decline to a mid-single-digit growth. One of the reasons is, you could say exactly how will the future be of our BioAg business. There's also the normal underlying uncertainties, especially in these geopolitical situations, in the agricultural market. We are and have been for quite some time, in good and constructive discussions with Bayer. These discussions continue, and it's too early to say when we'll finally conclude. We expect it to be in the period to come, but these things take time, and therefore it's difficult.
I can assure you that we'll inform you as soon as we have something definite on how we see the future of that business.
Tina, can I ask you, could a potential outcome be that you continue with Bayer, but just on corn and then are free to find other partners for other crops?
One of the great things about the BioAg business is that there are so many different opportunities and possibilities, and we are looking into all of them in order to take it forward the best possible way.
Thank you. Thank you for answering my questions.
Next question is from the line of Michael Rasmussen from ABG. Please go ahead, your line is open.
Thank you so much. Apologies, I also had a couple of technical problems here. First of all, on the household care, in terms of the hygiene platform, can you share with us what kind of feedback that you've been hearing out from the markets, meaning feedback from end users, if anything? Also, are the detergent producers in these markets adjusting the sales prices? Secondly, a bit of a household question on bioenergy.
Can you give the typical growth breakdown in terms of share gains, impact from yeast, price, and just remind us when yeast is standardized. I think you launched it in Q2 of 2018. Finally, also a bit of a household question on bioenergy. I do note that you've started to guide for global ethanol volumes instead of U.S. ethanol volumes. Can you give us please the rough estimate split between the U.S., Europe, Latin America, and China? Thank you.
Thank you, Michael. Anders on freshness, please. Feedback.
The best evidence we have is, of course, in the conversations we have with our partner with whom we have launched this. They continue to be very excited about this. The initial feedback that we have seen from the Philippines, where it's been out and also being promoted, are also quite positive. I think it's too early to tell what's the consumer perception, and that's also the feedback we get from P&G.
In terms of sales price as a consequence of including these enzymes and specifically this technology, is still a relatively small part of the total formulation. I don't think we should expect that sales prices will change. I think every time you include a new claim or you change your formulation, you do it in a way where you basically have the entire formulation in play. At least the experience we have seen is that they try to balance the cost, and that means that something will go out and something will come in. In this case, it's the freshness platform that comes in.
Maybe if I can allow an addition. I think that's what we're seeing now in the emerging markets. I think as we get into the more matured markets and with some liquid versions and some of the specialty brands, you might see a different positioning of the whole thing. It's going to be exciting times, and it's going to be exciting to see how, in the first instance, P&G is going to play this technology across their full suite of different brands and geographies. Tina, please.
Yeah, on the, as you call it, household on biofuel. The growth we saw throughout 2018 and also in Q4 2018 is a continuation of what we saw throughout, you could say, the full year, which is the mix of, I would say, three things. It's a mix of especially Brazil, but Latin America, but particularly Brazil, moving more and more into corn-based ethanol. We see also a good contribution from our innovations, specifically the yeast products. Then we see, you could say, mix price share contributing as well. Yeast, we launched, in fact, two yeast products in 2018. The first one was launched, I think it was the 6th of February, but at least in Q1. The second product was launched in Q4. We launched two yeast products, and they are also a significant part of the growth we have seen.
We also talk about the ethanol volumes. In the U.S., we do expect a slight decline. Why do we do that? One of the reasons is that margins and inventories are high, as we have talked about throughout the year. We have not factored in, you could say, the E15 push, which we hope will come. Given timings, we have not factored that in. We do, outside the U.S., expect an increase in ethanol volumes. Here, the biggest driver for that is in Brazil as it was also in 2018. While in China, we do see, you could say, moves in building up that market further, but it's still too early to include a significant part in our 2019 sales. I hope that answered your questions, Michael.
Yes. The question was asking also relating to the revenue split.
Yeah.
By region.
By region. We sell about, I think it's around 85-ish% in the U.S. and the rest outside.
Okay. Thank you so much.
Yeah.
Next question is from the line of Nicola Tang from Exane BNP Paribas. Please go ahead. Your line is now open.
Hi, everyone. Thanks for taking my questions. The first would be on ag and feed and this very wide guidance. It sounds like the width of the guidance depends on BioAg. I was wondering whether you could talk a little bit about more on the feed side. Did I hear correctly that you're guiding for slight growth, but the comp in Q1 is very tough? Can you remind us of how feed developed through the year?
Because from memory, it was actually quite tough for most of the year. What's your assumption on the underlying market, given the fact that you actually have a few innovations coming through? The second question is on the Middle East. You talked in Q3 a little bit about some workarounds, perhaps in Turkey around the baking business. Based on your guidance where you say that H1 this year will be similar to H2 of last year, sounds like maybe you haven't found a workaround. Is that a correct assumption?
Thank you. Tina, you get to talk about feed now.
Yes. On the feed side, you're so right. Feed has been rough throughout 2018, and we have seen the business in decline. Most of it is coming from Latin America, and particularly the segment which we call proteases. That decline has, you could say, throughout 2018, although we have seen a bit of sales for our Balancius product, our new innovations, but that has not been able to make up for the decline in the underlying feed enzymes market. Throughout 2018, we also saw strong growth of our probiotics, for example, Alterion, as I'm calling out. There are these, you could say, positives on Balancius, on Alterion, but the decline, particularly in proteases Latin America, are not compensating for the growth we see elsewhere. For 2019, we do expect slight growth in the feed market overall. Yes.
Andy has cleared his voice to answer your question on the Middle East and Turkey. Andy, please.
In 2018, kind of the back half of the year, we saw quite a bit of turbulence in the Middle East that impacted baking. More because of the Turkish lira devaluation. It's an important market for us. That's not the main driver of, let's say, softness in baking in Q1. It's a part of it. We'll have to annualize sort of a rebasing, but we're optimistic about getting back into those markets and regrowing in 2019 after the rebasing. The bigger impact in Q1 is the continued price pressure on Novamyl in North America, which is our planned price reductions actually get annualized after Q1. That's the bigger impactor on baking for the softness start.
The next question is from the line of Anton Brink. Please go ahead. Your line is now open.
Yes. Good morning, all. First question would be on Henkel, stating that they would increase their innovation in, among others, their laundry care unit. I was wondering, is that expected to help your organic growth going forward? Or does the exclusivity to P&G in terms of the freshness and hygiene platform limit your capabilities there? Secondly, I have a question on BioAg and feed, I think has been extensively discussed already. Basically, the 2019 guidance is significantly below consensus expectations. Can you give us an indication of where the pipeline stands in terms of commercial launches, despite the setbacks you're facing with low crop price levels and the potential deal risk related to Bayer Monsanto? Thank you.
Thank you for your questions. The recent news on Henkel, Anders, please.
The recent news on Henkel does not change our outlook. We have a strong pipeline with Henkel as we do with all our large customers. That's built into our expectation through the year. The relationship between what we are doing with P&G on freshness and Henkel should not have any impact on our ability to service them. We have a strong pipeline, and we expect to execute on that.
Okay, that's clear.
Thomas will talk you through the BioAg pipeline and the future of that. Thomas, please.
BioAg and feed is areas where we have seen very strong pipeline innovation coming over the last couple of years, and we are expecting to see that turn into sales opportunities here in 2019. We launched the Balancius in the feed area at the very end of 2018. This is a very interesting product that we have been out, or DSM has been out, sometime last year saying that this is going to turn into a midterm revenue of EUR 60 million-EUR 80 million. That's certainly an interesting innovation hitting the market. Likewise, we have been talking about Acceleron B-360. That's getting into 16 million acres. Again, a significant innovation that's making its way into the marketplace and will also start to show up in our books.
Maybe a bit of a follow-up on that question, because I mentioned consensus being at 10%+ levels organic growth in the coming five years, if I'm correct. I mean, you're guiding for 2019 now, but can you give us a bit more on, let's say, the midterm outlook for this unit?
Yeah, for sure. You could say we are investing and have some of our growth platforms are in animal health, and it's also in BioAg. It is something, both of these are areas where we expect a higher growth than what we are guiding for 2019 on the longer term. As of now, we are looking at the ag and feed segment for 2019, and that's low single-digit decline to mid single-digit growth. On the longer term horizon, we do expect more to come out as the innovations get more impact into the market.
Maybe to add to that, I think BioAg is inherently an uncertain place, but I think because of the major flows of ag commodities, I mean, who knows where soybeans are going to be grown in the second half of 2019, given the potential expansion of the conflicts with China. It's not easy, but one thing that we know for sure is that the innovation that we're bringing out, in particular, what we're doing on corn inoculants drives really solid growth, and that's going to come through the numbers.
I also think what we're doing on animal health, the new areas that we're expanding in in animal feed, drives solid growth. The uncertainty is really more about there's some supply chain uncertainties with partners, and then there's uncertainty around the older businesses that we have in particular in feed, but also in the soybean area. We are excited about the investments we're making. We're running out of time. We may have time for just one last question. Thank you.
The next question is from Sebastian Bray from Berenberg. Please go ahead. Your line is open.
Good morning, thank you for taking my questions. I'd have three quick ones, please. The first is, what exactly has happened in the market for LatAm feed, aside from one-off Brazilian trucker strike, et al., that has meant that the growth rate has come down over 2018? That's my first question. My second is just following up on some of the others that have been asked. What can actually be negotiated in BioAg? Is it simply product scope, or could there be a change to the 50/50 profit sharing that is currently in play between Monsanto or Bayer as it is now and Novozymes? Thirdly, could you please outline the drivers for the above-market growth, and give us some idea of their importance in terms of order and of magnitude for bioenergy? If ethanol production is flat globally, why should Novozymes be able to grow 8%?
Thank you.
Those are quick questions that we say thank you for. They go to Tina.
Yes, I'll try to be quick then. On LatAm and feed, throughout 2018, we have had vitamin prices spike tremendously, which has meant something for how much feed producers have had to invest or have had money to, or ability to invest in other additives. We have seen something on soy prices. Last but not least, we have had a significant meat scandal. There's also other competitive moves. The three first ones are the main ones. On Bayer, we are in negotiations as we speak. Unfortunately, I don't have much more I can contribute with there. I do understand that it is frustrating. I'll for sure the minute we know more, we'll let you know. On biofuel, you are right. We are growing above the market. That is due to innovation in general, I would say.
Thank you, Tina. Thanks for all your questions. I'm afraid we have to close it now. Luckily, we'll be on the road, and hopefully meeting many of you over the next couple of weeks in the different geographies. Then as a last reminder from here, please take notice of June 17th, where we'll host a Capital Markets Day here in Denmark, and we'll get back with details. Thank you so much for your interest in Novozymes.