Good morning, and welcome to the Novozymes conference call. My name is Peder Holk Nielsen, and I'm the CEO of Novozymes. I'm joined here today by the full executive leadership team and investor relations. Today, we'll review our performance for the first six months of 2018, as well as the outlook and strategic priorities for the year. Our presentation today should take a good 20 minutes, and after that, we'll take your questions. Please turn to slide number 2. Halfway into the year, our performance is satisfactory, and sales have overall tracked with our expectations. We delivered 4% sales growth with 5% in the second quarter. Our innovation pipeline is very strong, and we're executing well on our commercial plans. This includes more focus on the emerging markets. It is critical for our success to understand local needs and demands in these regions, and we are investing to capitalize.
There's good momentum in the overall business. There are also variations. We continue to see very strong performance in bioenergy, where we are in a solid position with our strong technology offerings. BioAg also posted a strong second quarter, while our animal feed business was soft, mainly because of the Latin American market. Household Care came in below expectations. With some reasons, we believe the weak performance is isolated to the second quarter, and we expect Household Care to grow for the full year, supported by the freshness and hygiene platform. We report an EBIT margin of 28.1%. This is in line with our expectations, and we're well on track to deliver on our full-year EBIT guidance. Our innovation pipeline continues to look very healthy and is progressing according to plan.
Today, we'll provide more insights on two upcoming launches later in the year, which we are very excited about. I'm also pleased to tell you that the first commercial detergent product, including our freshness and hygiene technology, is available on the shelves now. All in all, we maintain the full year guidance on all parameters. There's some industry variations. The uncertainties around the global trade conflicts and the agricultural markets, in general, are still high. With current insights, all segments are expected to grow organically. We maintain our 4% to 6% organic sales growth guidance with around 28% EBIT margin for the full year. Let's look at the regional sales development before we move on to an update on our business segments. Please turn to slide number 3. We post 7% organic sales growth in the emerging markets. Both Asia-Pacific and Latin America showed strong performance.
While Asia-Pacific has delivered solid growth over the last couple of years, it's really encouraging to see Latin America come back as a growth contributor. This is particularly driven by increased corn ethanol production in Brazil. Our food and beverage business also posted good growth. That's following a strong interest in our innovation for the food and grain segment in Latin America. Sales to the developed markets increased organically by a modest 2% for the first half. While we saw positive developments across most industries, sales in Household Care was challenged. With this, I now hand it over to Anders to go through Household Care and Technical & Pharma. Anders, please.
Thank you, Peder. Please turn to slide number four. Sales in Household Care declined organically by 2% in the second quarter and ended down 1% for the first six months. This was a bit softer than expected and mainly explained by two second quarter events. Firstly, the Brazilian truck strike impacted our Latin America business negatively, and secondly, one of our global customers experienced distribution issues in North America, which also impacted sales. Moving on to the more foreseen events, our laundry segment continued to be impacted by cost optimization by some of our global customers. This development is in line with expectations also for the second quarter, but it puts growth in negative territory in the developed markets. On the positive side, we see continued solid growth with our regional customers, particularly in the emerging market. Growth is supported by both innovation and increased commercial efforts.
Markets such as Middle East and Africa, Southeast Asia delivered good growth in the second quarter. Our sales in China continued to progress as expected, supported by strong growth of liquid detergents. Our dish business also continued to deliver solid growth, partly driven by our recent launch that removed dried-on cereals and partly driven by an increased demand for phosphate-free automatic dishwasher detergents. While performance in the first half of the year was soft, we have higher expectations for the second half as sales from our freshness and hygiene platform is ramping up. On the freshness and hygiene platform, I'm very pleased to tell you that the first detergent with our new technology is available on shelves in the Philippines. It's, of course, very exciting to see, and the launch is backed by strong advertising. We're tracking according to plan, and more markets will follow in the coming quarters.
Moving on to Technical & Pharma, our organic sales development was flat in the second quarter and down 6% for the first half. Timing is the main explanation for the decrease and relates primarily to Pharma. With that, I hand it over to Andy. Andy, please.
Thanks, Anders. Please turn to slide five. In Food & Beverages, we're working to advance our business by focusing on our growth platforms and through higher penetration in emerging markets. Although we feel good about first half progress, our Q2 results present a mixed picture. We saw growth across multiple industries and geographies, and further development in our grain milling and vegetable oil growth platforms. However, there was weakness in baking and starch that dragged on our growth. That meant we delivered 4% organic sales growth for both Q2 and overall for the first half. Geographically, growth was strong in most of our emerging markets, while our developed markets were softer. Food nutrition, vegetable oil processing, and beverages grew strongly, while starch showed slow growth and baking was soft. Food nutrition was our strongest industry, with double-digit growth both in the second quarter and the first half.
The positive results come from development of our Saphera product for lactose reduction and further penetration within plant protein and specialties. The strong results in vegetable oil processing come from positive developments in multiple segments. Our customers see a step up in market demand for trans fat-free foods where our enzyme solutions can help. Further, we see customers continuing to trial our palm oil extraction product, Palmora, with a solid outlook for expanding the trialing activities. In beverages, sales picked up in Q2 for both brewing and distilling, following softer sales to developed markets in the first quarter. For starch, although we're seeing solid growth in our new grain milling technology, commodity price movements in Asia have led to some headwinds in this large segment.
In baking, we continue to absorb the impact of our glide path pricing strategy in North America, with some of the erosion being balanced by growth across our emerging market baking business. We've seen demand in the Middle East and Africa decrease in Q2 as some of these markets experience economic distress and currency devaluation. Summing up, we see solid developments in the food and beverages business. Our growth platforms continue to progress as we target innovation in new segments like palm and grain milling. Our emerging market expansions are delivering growth. Currently, we're working through some headwinds in baking and starch, which once resolved, will give stronger overall results for the business. This means we expect healthy growth for the full year. Tina, over to you.
Thank you, Andy. Let's start by looking at bioenergy on slide six. I'm very pleased to report that bioenergy continues to deliver very good growth. Six months into the year, organic growth was a satisfying 14%, and the second quarter posted a strong 20%. U.S. and global ethanol production saw a pickup in the second quarter, growing by an estimated 2%-3% versus a flat performance in Q1. Inventories remain elevated, and producer margins continue to be tight. Enzyme sales for conventional biofuels continues to benefit from the broad technology base we have and the innovative product portfolio. Our newly launched yeast product, InnovaDrive, also contributed to growth in the second quarter, although from a modest space. Looking outside North America, we had strong performance in Latin America, where Brazilian producers has increasingly started to expand into corn-based ethanol production.
A number of plants have started to operate, and more are expected to come on stream over the next few years. Finally, on the bioenergy segment, we continue to follow the recent debate on U.S. biofuel policies, where current conditions for ethanol producers look set to support our expectations for the full year. Let's turn to slide seven for an update on agriculture and feed. After a soft first quarter performance, sales in agriculture and feed picked up and posted 13% organic sales growth in the second quarter. The first half came in at 3% organically. In BioAg, we saw a strong growth in the second quarter. After the regulatory approval of the new B-300, B-360 inoculants, we were able to produce and ship some volumes to our alliance partner already here in the second quarter.
This was a bit earlier than expected and allows the alliance to prepare even better for the 2019 planting season. Our sales to the animal feed industry continued to decline in the second quarter. The Latin American market and Brazil in particular, was challenging in the quarter. Lastly, we saw a strong development within animal probiotics, and sales developed very well across all regions. As you all know, innovation-driven growth is key to us, and we are about to launch two new exciting products in animal health and in BioAg. Thomas will provide more details on this during his R&D update. To summarize the message for the first six months, animal feed came in softer than expected due to Latin America, and BioAg posted strong growth in the second quarter with some benefit from the B-300, B-360 combination product.
Innovation will benefit the second half of the year in both animal feed and BioAg. For bioenergy, growth accelerated in the second quarter with a strong 20% organic growth, building on the strong momentum from mid-2017. Now I'll hand it over to you, Thomas.
Thank you, Tina. Please turn to slide number eight. I'm excited to tell you about two new solutions from our priority innovation platforms. These are expected to be solid growth contributors both in the short and long term. The first solution is unique enzyme within the animal health and nutrition area with a completely new mode of action. This enzyme improves the digestion and gut health of animals and has been registered for broiler chickens initially.
Our scientists have, together with our alliance partner, DSM, found a solution for degrading the bacterial cell wall debris in the gut that impedes optimal nutritional digestion and absorption. We look forward to sharing further details with you following the external launch later in the fall. The alliance believe that this new solution has the potential to achieve a yearly in-market sales of up to half a billion Danish kroner, and we plan for an in-market launch in the coming months. Another very exciting product currently being prepared for the spring planting season is our new Acceleron B-360 ST. This product improves yields by promoting the symbiosis between microbes and corn plants to strengthen the root system and increases plants' access to nutrients.
The product will be used in combination with Acceleron B-300 SAT. Combined, they are expected to reach at least twice as many acres next spring compared to the roughly 8 million corn acres that was reached in 2018. To sum up, we have some very exciting news from our BioAg-related pipeline that are expected to hit the market soon. Those products are a sample of how we can expand our offering and help farmers around the world to improve the health of animals and yield performance in plants. That's all from me, and I'll hand you over to Prisca.
Thank you, Thomas. Please turn to slide nine. From a financial perspective, performance was satisfactory for the first half year. Overall, sales were roughly as expected. We continue to feel headwinds from currencies, in particular the U.S. dollar. We report a negative currency impact of sales of around 7%. The gross margin of 57.3% was in line with expectations. Productivity gains impacted the gross margin positively, whereas higher input costs, lower deferred income, as well as currencies, all had a negative impact. At 28.1%, the reported EBIT margin came in as expected, and it was one percentage point higher than last year. Adjusted for the reorganization costs and the change to the leadership team last year, our EBIT margin ended down 0.4 percentage point. This is the result of negative currencies, higher input costs, and lower deferred income.
The effective tax rate was 19%, around two percentage points lower than last year. This relates to the transfer of IP assets from Switzerland to Denmark, initiated at the end of 2017. Net profit came in 5% higher year-on-year. This is explained by a lower tax level and lower financial costs as hedging losses were below last year. Cash flow from operating activities was DKK 1.5 billion, roughly DKK 500 million lower than last year, which is mainly the result of an unfavorable development in working capital. This is in turn explained by timing in receivables and inventories, while payables ended lower due to less deferred income released to the P&L, as expected. CapEx stood at DKK 635 million for the first half year, which was roughly flat year-on-year. All in all, we delivered a solid set of financials.
Please turn to slide number 10 for the 2018 outlook. We maintain the 2018 outlook on all parameters. First half sales were overall roughly in line with our expectations. We maintain our organic sales growth guidance of 4%-6% for the full year. On reported sales and with spot rates as of yesterday, we now expect a 3% negative currency impact for the full year, down from a negative 5% after Q1. Looking at the different segments, then Bioenergy is performing very well, and we believe we could end the year on a better note than previously expected. However, remember that the second half in Bioenergy has tougher comps than what we saw in the first half.
Whereas BioAg is expected to do well, Animal Feed looks a bit softer for the year after a more challenging second quarter than expected. Consequently, the growth for the year is likely a bit softer for the Ag and Feed segment in total. In Household Care, the Brazilian and North American second quarter issues are not expected to be recovered, but we still expect to land the year on a positive note as sales from the freshness and hygiene platform accelerate. For Food and Beverage and Technical & Pharma, our expectations for the full year are more or less intact. As communicated earlier, we will continue to invest in commercial presence to support future growth and expect an EBIT margin of around 28% for the full year.
Currencies, especially the U.S. dollar, will continue to be a drag in reported terms at the current spot rates, but the negative currency impact will ease as the U.S. dollar decay rate has strengthened. As you can see from the announcement, we've hedged our 2018 exposure at DKK 618 to the U.S. dollar, which is well below the current spot rate and the average for 2017. CapEx is expected at DKK 1.3 billion-DKK 1.5 billion, and the outlook for free cash flow is between DKK 2.3 billion and DKK 2.6 billion. Now I'll hand over to Peder for a wrap-up. Peder, please.
Thank you, Prisca. Please turn to slide 11. Let me summarize our presentation today. With 4% organic sales growth after the first six months, we are on track to deliver on our full year outlook of 4%-6% organic growth. We expect all segments to deliver organic growth for the full year. As Prisca highlighted, we see some adjustments to the industry growth mix with some uncertainty to Household Care following the second quarter issues Anders described.
There are general uncertainties to global trade and agricultural markets. From a strategic point of view, we increase our emerging market activities. Over the last year, we have established new application development centers in India, in Turkey, and in China, and we are opening new sales offices in Kenya, Thailand, and in Indonesia. I also want to highlight the innovations we're about to deliver to farmers around the world. Our new enzymes to address animal health, as well as our 2nd-generation corn inoculant, are two great examples of how and why Novozymes is in a unique position to cater for a more sustainable future. Before we open up for questions, I would like to share the overall agenda for our capital markets days on the 17th and 18th of September in Raleigh, North Carolina.
The event will provide a unique opportunity to gain more insights on how we work with our broad-based innovation, as well as the commercial priorities of our different businesses. On the second day of the meeting, we'll focus in on BioAg and the significant opportunities we see here. We plan to have the full Executive Leadership Team present, we hope you have the opportunity to participate. This concludes today's presentation, now we're ready to take your questions. Operator, please begin.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press 01 on your telephone keypad now. Our first question comes from the line of Gunther Zechmann of Bernstein. Please go ahead. Your line is open.
Hi. Good morning, everyone. If I can start with two questions, please. The first one is on the margin development. The gross margin in the quarter, also for the first half was lower, Your operating margins improved. How much of that lower cost, if I look at sales and distribution down 11%, administrative costs down 14%, R&D down seven. What's a sustainable level, please, on the operating cost side? The currency headwinds I would expect to fade as we lap and annualize those. That's my first question. The second one is on Household Care. Anders, if you could maybe highlight or give some numbers, how much of your sales are to global customers in developed markets in Household Care, please?
Thanks for your questions. We'll let Prisca talk about margin development. Prisca, please.
Yes. You are right. Our operating margin is better relative to our gross margin. Bear in mind that our gross margin in Q1 was a fairly good gross margin. I think I also pointed that out, and that the currency impact is significantly higher in that respect in the OpEx. What you're seeing is basically an OpEx that has been impacted by currency even higher. This is why we see that difference. Bear in mind that if you look at the reported numbers, you have to factor in the reorganization from last year's reorganization. We have to compare likes with likes. With that, I would say the ratios for OpEx will roughly be in line with last year, if you factor out the currency impact.
To the other question, in developed markets, we're talking about something to the tune of around half of our business is global customers. I also want to mention that it's not isolated to our global customers to developed markets. They're also quite present in the emerging markets.
That's very clear. Thank you.
Thank you. Our next question comes from the line of Søren Samsøe of SEB. Please go ahead. Your line is open.
Yes, good morning. First question on the bioenergy segment, where you had the 20% growth. If you could sort of give an indication of how much was price mix, and how much was market share gain, and how much was volume. You keep talking about these high inventory levels. What is the real risk here if let's say that they disappear in one quarter, what would be the risk to you? Finally, in bioenergy, if you could give an update on China, what's going on there. You've mentioned it a couple of times, it looks like a quite interesting potential. That was my first questions. Thank you.
That was some very good questions for Tine. Tine, please.
First, the growth. We grew the 20% in Q2 in the bioenergy segment. There are two things, Søren, which I think is the most pronounced. We see Latin America as a nice contributor. Given their RenovaBio legislation which they got into play, that's a good growth driver for us. We have some effect from share and mix and trading up and so forth. We have the yeast adding in. You have to remember, it's a global number we are reporting on. It's not only the U.S. sales, that's why Latin America is also in the picture. You ask about China. Yes, you're right that China is an interesting opportunity. If they are to reach the 10%, they need to get to 5 billion gallon, currently they are less than 1 billion gallon.
So far, they still need to put the specific legislation into place in the different provinces. We see some move in the various areas on extra utilization rate, some distilling capacity and so forth, it's still the early days.
Inventory levels, Tina, in the U.S. bioenergy business?
Inventory levels in the bioenergy business, that is for ethanol producers, and they are high, and they have been that for quite some time now.
What happens if they disappear in one quarter? What would be the impact to you think?
Your question is, what if they start selling only from inventory instead of buying from us? Is that the question, Søren?
Yes.
Yeah. Okay. The inventories are above 40 days now, and they have been that for the last more than a half year.
I think the risk, which I assume you're getting at on the U.S. bioethanol business, is a mix of a lot of things. We're calling out the high inventory levels, but as Tina points out, that's actually been pretty sustainable for a long period of time. Personally, I think it would be wrong to model that that would change dramatically. Of course, in a business where you have high inventories, you could see that come out over time.
Okay. Just one quick question on feed enzymes. DSM mentioned at the Capital Markets Day that you're launching this enzyme for poultry in Q4, and that it has a sales potential of between EUR 60 million and EUR 80 million per year. First of all, if you could just say what would sort of be the timing before you reach that level, how long would it take? Also just confirm that it's the normal 50/50 split with an average group margin, which we should sort of assume that you will receive from this potential. Thank you.
We'll let Thomas take that question. Thomas, please.
Thank you. When you look at this exciting enzyme, I said it's a completely new mode of action. We are launching in the coming months. As with all these things, we would like to see it move a lot faster than it probably does. We do expect to see this penetration, or you would say something like a five-year period is probably realistic. As mentioned, it's something that will contribute in the short term because we do expect to see pick up on a short-term basis. It's going to be in the long term, we really reach the potential. This is part of the alliance as with any other products we have in that alliance.
Do you think it will work for other animals than poultry? That'll be my last question.
We are looking at using this enzyme also in other species, and of course, are excited to see the results of that.
Thank you.
Thank you. Our next question comes from the line of Jonas Guldborg of Danske Bank. Please go ahead, your line is open.
Good morning. Two questions from my side. First of all, you are talking about some sales of B-360 being moved to Q2. Should we see this as a sign of a stronger demand than expected, or is it just moving some revenue from second half to second quarter? The second question is to the gross profit where, Prisca, you mentioned that there were some positive efficiency impacts here. Is it possible to give a number on that? Thank you.
On the B-360, we do see a good demand or we expect to see good demand for the solution. The benefit is related to supply chain optimization, both for us, because we can utilize our production equipment broader, and then it is also for Monsanto because they need to get it on the seed.
On the gross profit, you're fully right. Positive efficiencies are very important to a company like us, and we are fully on track with our plans there. However, if you try to explain the delta, I can't give you an exact number. We don't split it out that way. If you look at the gross margin development compared to last quarter, so quarter two 2017, you'll see there's a mix between a minor part of it, of the delta is deferred income, and the rest, I would say, is roughly split evenly between input costs, which are then mitigated by productivity improvements and FX. There's a couple of moving parts in this equation.
Okay. Thank you very much.
Thank you. Our next question comes from the line of Lars Topholm of Carnegie. Please go ahead, your line is open.
Yes, a couple of questions from me. Just on the Hygiene platform and now it's launched in the Philippines and ramping up. I just wonder how much in terms of organic growth do you think this in isolation can move the needle in the second half of the year? Continuing on Søren's questions about the new enzymes will be launched with DSM. Just to be absolutely clear, this does not cannibalize on any existing enzyme revenue, right? A third question. For some reason you don't give a Q2 cash flow statement, you only give for the first six months. Is it correctly understood that the free cash flow in Q2 was DKK 407 million, which is down by 30%? What will you do actively to manage your net working capital? How much should we expect working capital to come down in the coming quarters?
I'll take the DSM piece. It's running under the same model as we have on the other enzymes, there's no reason to believe that, at least product-wise, that you'll see cannibalization. We think this is largely going to be additive business that we are very excited about. I think the technology will, at least we hope it will prove to be a game-changing technology. The same is the case for hygiene and freshness. I'll let Anders talk about how that ramps up.
When we talk about the full year, and I guess that's what you're asking too then, for household care, we believe we will get back into positive territory in terms of growth. From that perspective, Hygiene and Freshness is going to be a big contributor to realizing that ambition. I think I can also say that our launch plans are quite solid, and we have very high confidence in the partner rollout. Everything is looking according to plan, and we are scaling up as we've anticipated.
Prisca, on networking capital and cash flow, please.
Yeah. I think the first one was on free cash flow. You'll find the free cash flow number on the second page of the announcement. It's for the quarter, DKK 487 million, which is DKK 100 million below previous year. This is driven by working capital as CapEx is on last year. To your question, networking capital, this is mainly a timing issue as I pointed out earlier. What you've seen, also if you go back over the last couple of years, we do have a certain seasonality pattern in our working capital, and we're seeing a more accentuated pattern here. Currency will also do their thing there. We are, of course, managing working capital quite actively, as many companies do. I think that would be expected, and we'll keep continuing managing that working capital.
You'll see quarterly fluctuations in working capital as we go forward as this reflects our seasonal manufacturing pattern.
For the year, we shouldn't expect that you end with a higher working capital intensity than by the end of last year, for example.
We're not guiding, as you know, on working capital as a percentage. We're guiding on free cash flow, and we stick to our free cash flow guidance as we have put them, our outlook that we put in with the announcement in February. Nothing has changed from that perspective.
Thank you very much. Thanks for answering my questions.
Thank you. Our next question comes from Annette Lykke of Handelsbanken. Please go ahead. Your line is open.
Yes. First, a follow-up question on the inventories within bioethanol in the U.S. What do you see to be the reasons behind having high inventories? You are at the same time saying that the margins are tight for this industry. Why would you expect them to continue to have this additional cost in terms of very high inventory levels? Are there any sort of delivery risk or something we should be aware of to take into consideration? Also on your launch of the Acceleron B-360 ST, can you say anything about pricing of this product compared to the first generation, and also thereby the commercial potential for you? I understand the number of acres. I would like to hear a little bit on the pricing if possible. I will stay with that for now.
Thank you. Those are, I think, good questions for Tina. Tina, please.
Yes. On the inventories, as I've said, the inventories and as well as the margins have, in fact, for quite some time, inventories have been high and margins have been tight in the U.S. ethanol industry. The reason why we call it out is to show that there is a caution on it. If I look at how we operate and how things are going, things are going very well. It's not something, you could say something we're calling out as an uncertainty, nothing more than that. For sure, as part of the U.S., they have a significant part of their production is going for export. Right now, there's no exports to China. Brazil seems to take up most of the exports. That's what I'll say on that.
On the pricing on B-360, we have an alliance with Monsanto where we do have a profit split model. We do expect to price the B-360 based on the benefit it delivers in the market. I'm sure you remember some comments from Monsanto on the benefits it is delivering. It's a quite nice benefit, which we expect to come from that. This is one of the, you could say, main drivers for, that we throughout the year have talked about good growth in the BioAg segment in 2018.
The price increase, are this like 30% or so? Is it not possible for you to say anything about that?
I don't think we can say anything firm about it. As Monsanto has indicated, the yield is quite a bit higher with this new inoculant, at least based on the last two years of field trials. On top of that, we think we're also getting into a territory, or Monsanto think we're getting into a territory, where yield will be easily noticeable by farmers. That also gives a better pricing position. Having said all this, we need to see the field trials of 2018 come in. They will be reported in the late fall, and then we and Monsanto will decide on the exact pricing for the sales in 2019.
Okay. A last question on Household Care. You have, for the past three years, experienced some market difficulties of different reasons and quarters, and you also tend to see those effects as isolated for the market, or for a few quarters like the one you are seeing right now for Household Care. However, over the last two to three years, you have only delivered around organic growth rate close to 1%. Isn't it fair to say that you are actually now seeing a structural softer market for detergent enzymes? As such, I then again ask, as I've asked before, how do you see the acceptance of your new innovations? Is there a risk that there will be a cannibalization of other enzymes simply for the detergent producers to keep costs down?
To your first question on whether it's structural or not, I actually think if you look at the challenges we've had, they've come from quite a number of different sources. One is related to some of our customers have run cost savings programs. Some of our customers have changed strategy in terms of what enzymes they wanted to claim on their packaging. Some have had, in this recent quarter, supply chain disruptions. I would not call it as a structural challenge. The reasons are actually quite different. In terms of your other questions on risk with the freshness and hygiene platform, I will repeat what I've said before, there is no reason to believe that enzymes should be any more exposed than any other technology.
What's also clear is that our customers will typically have to do some kind of reformulation when they use very new and groundbreaking technology, and they'll need to find a way to price that into the market. That could be either formulation changes or it could be from them pricing it up in the market. I'm sure we will see all of those scenarios play out. Maybe just to add, I think what you're seeing, at least now with these first rollouts, is that there's no cannibalization of other enzyme technologies. I would also like to add on the general business that over time, you start seeing that the emerging markets matter a lot more. We have really solid growth in the emerging markets and an incredibly strong position in the emerging markets.
I think with all the new resources we're putting into detergent design centers in India and wash labs in China, we're in a really good position to help customers introduce technologies in these markets. Over time, you'll see the emerging markets play a much larger role.
Okay. Thank you very much.
Thank you. Our next question comes from Fulvio Cazzol of Goldman Sachs. Please go ahead. Your line is open.
Good morning, and thank you for taking my questions. My first one is on Household Care. I was wondering if you can quantify what the drag was from the Brazilian trucker strike, please, in the quarter. I know that you also highlighted that one of your customers had a disruption in the U.S., but I would have thought that this would have been offset by other customers' growing share. Can you just also highlight what I may be missing here, i.e., whether you over-index in a particular customer in the U.S., please? Then I have other questions on the other businesses.
We'll start with your Household Care questions. Anders, please.
The two issues we highlight for the second quarter are equal in size. Maybe one way of putting it into perspective, had we not experienced those two issues, we would actually have been posting modest growth for the quarter. To the latter question on North America, we are, in this specific case, indexed higher with this specific customer. From that perspective, we're not capable of fully compensating for the challenge we have experienced in North America.
Great. Thank you. Then my second question is on the gross margins. I know someone has already asked this, but I was just wondering if you can give us some color on how we should expect it to develop, the gross margin headwinds, I mean, in the second quarter to the rest of the year. I know a lot of that was currency related, others was input cost related. Can you maybe just give us some color on whether input costs will continue to be a drag in the second half, or whether you're going to start to lap in the comparables, the inflation at some point? Thank you.
I'll try this one. Overall, you see we had 57.8 for Q1, we had 56.8 for Q2. You do see a variation. As I pointed out, it is a mix. You will continue to see quarter variations. We do not guide on gross margin in particular, but what I can tell you is that we saw, I would say, a particular high relative to Q1 impact of input costs. I think we also called that out in Q1, when we had, I would say, higher than expected gross margin, that this will come down. That's why also it comes in line with our expectations. While you will see some fluctuations in the quarters, in Q2 compared to Q1, you saw a relatively high impact of input costs. I hope that clarifies it a bit.
Were there sort of one-offs in that or is this now going to continue to be an issue in the coming quarters? Was there a step up in inflation, I guess, which could remain? I guess is what I'm trying to get to.
Yeah, no. It's a perfectly normal quarterly fluctuations. We are in a wide range of industries with wide mix and variable input costs that drive that. As we basically capitalize the cost and inflation and release it to the P&L, you'll always see fluctuations there. There's so many factors driving gross margin. Maybe what I can do is, as I also stressed earlier, it is perfectly in line with our expectation. There's nothing that came in unexpected around the gross margin level for Q2. Actually, we tried to point that out already in Q1.
Okay, great. Thank you. My last and very quick question is, on the hygiene technology, can you tell us which product it is in the Philippines that has your technology?
I'll be more than happy to do that. It's the leading brand, Ariel, in the Philippines. For those who are interested, I would suggest that you go and watch some of the videos. They are very good indications of what the technology can deliver.
Okay, great. Thank you.
Thank you. Our next question comes from the line of Hans of Nordea. Please go ahead. You're on line.
Good morning. First for Anders. The freshness and hygiene platform, how much sales have that contributed in Q2? I guess you'll probably not give numbers, but just a slight indication. Next question to Household Care. What do you actually see is needed in order to have the developed market returning to growth? Over to Tina on BioAg. In the past, I know that you have been looking on developing bacteria strains that can address drought. Where are you on this project? Finally, on Bayer and Monsanto integration. What has the dialogue been with Bayer about the future cooperation? Thank you.
To your questions on, it's been rather modest, the sales we've had in Q2 for the freshness and hygiene platform, but it has been exactly as expected, and we are running according to plan. To your other question on what will it take to get developed markets back to growth, obviously, innovation is a big piece of that, and the fact that we will also be rolling out the freshness and hygiene platform into the developed market throughout 2019 will of course contribute to that. I think the other thing that's worth mentioning is that we're also seeing an increased interest from our customers in talking about reformulation opportunities as a consequence of oil.
Of course, if we can get to a point with sustainably high oil prices, I do think that there is a good opportunity for us to drive that agenda harder than what we've done over the last few years.
Anders, could one argue that if consumers have a perception of clothes are clean, whether they are or not is an entirely different question, that there's not really any demand for this extra new technology. Isn't that a challenge you have to overcome?
I think, of course, it's also always a challenge to see whether consumers are interested. The consumer research actually shows that there is a change in perception of what's needed, and actually, freshness and hygiene solutions or odor solutions are very high on the agenda of consumers. Actually, it's come to a point where they have taken over from stain removal as the most pronounced consumer need. I think we are hitting a sweet spot of a trend that we're seeing in the market, especially also considering the lifestyle of people doing more exercise and using synthetic fabrics. I think we are seeing consumers having a clear demand for this.
Just to add a bit of a technical edge to it, I can assure you Hans, that clothes are not clean. There's still so much left on clothes, and that's partly why you have an odor problem, and that's what we're trying to solve with this technology. Let's move on to BioAg. Tina, please. Drought resistance.
Yes. Drought resistance is one of the areas for sure we are looking into. I think at the Capital Markets Day, you'll be able to see a lot of the things we're doing on our BioAg side. In general, we are working on securing that plant health becomes better and thereby also stronger drought resistance. On the Bayer Monsanto-
I know that you've been working Sorry, Tina. You've been working this project, I know, was initially discovered about six, seven years back. Have you made any real progress on it?
Well, six, seven years back is before my time, I think let's Thomas answer that one.
Hans, drought resistance is part of what happens when you're looking at the complex setup between microbes and roots or plants. What happens is that often the microbes helps the plants develop bigger roots, stronger roots, and thereby also a resistance to drought. This is something we continue to look at. It's not something we have taken out as a very specific target in itself, but as part of helping the plants take up nutrients in a more efficient way. It also leads to more drought resistance in certain cases, and we are certainly pursuing that, and we continue to pursue that.
On Bayer Monsanto. Despite the transaction is closed, Bayer was not allowed to operate the assets they have acquired. Monsanto has an interim management team in place, and the alliance are plowing ahead with delivering on the sales expectations for the full year. We have for sure, as I'm sure you know, have nice talks with Bayer, but it's still too early to go into detailed talks with them, given that they're not allowed to operate the assets yet.
Yeah. I think that's the main point. I think also their commercial strategy has been good for the last couple of years. They sued Plantronics a few years ago regarding Plantronics' main rival for audio. They sued Plantronics for some business practices in the U.S.
Our next question comes from the line of Sebastian Bray. Apologies, our next question comes from the line of Michael Rasmussen of ABG Sundal Collier. Please go ahead. Your line is open.
Yeah, thank you so much. A couple of questions from my side also. In bioenergy, you mentioned a little bit on some upcoming innovation. Could you talk a little bit more about that, i.e., when is it going to be launched? Which products are we looking for? Anything on penetration and peak sales. On Household Care, in terms of the Hygiene product, I think that you mentioned that you would move to other emerging markets during Q3 or in second half. Which markets are we talking about, and when will you launch them? Also, if you could add a little bit more on the potential for the higher oil price for the globals to change the blends a little bit more towards enzymes. That's interesting. Thank you so much.
Thank you. We will start with Tina on bioenergy. Tina, please.
Yes. You asked about upcoming launches in bioenergy. We look at the innovations both in the yeast space as well as on the enzyme space. On yeast, the yeast we have launched now called InnovaDrive, that is targeting a particularly good in one segment of the market, and we are looking into other solutions in the yeast space. On the enzyme side, we are looking into both getting yield and throughput, also saving on other chemicals and so forth. We are also looking into that. I cannot talk specifically about ramp up time and penetration and so forth. What I can say is that the performance you are seeing right now is benefiting from a number of the innovations we have done earlier enzyme launches, as we have been talking about as well as the yeast launch.
Anders, on the rollout of Hygiene and the impact of oil prices, please.
What we can say on the rollout is in emerging markets, we also say, and the reason why we are not more specific is because we are doing this rollout, of course, with a partner, and they are quite keen on preserving the ability to surprise the markets. We cannot give more details, but of course, we will let you know as soon as they hit the market. On the oil price, it is not an exact science saying that at this oil price you will see a breakthrough. It is clear that in an oil price scenario of DKK 70, DKK 80 a barrel, then we are in scope for improved conversations on reformulation. That is clearly something we see a larger interest of. It is clear that it is very different from an oil price of DKK 40 a barrel.
Thank you very much. Can you confirm whether you have moved into a second market right now as we speak, or that is still to come on the Hygiene launch?
I can confirm a similar story as we also saw in the Philippines. It takes a trade some months before it stacks up on all the shelves. We are in other markets. Give it a couple of months, and then you will also see advertising being rolled out in these markets.
Thank you very much.
Thank you. Just before we move to the next question, we'd just like to apologize for the audio issues we experienced with the last caller asking questions. We'll now move to our next question, which is from the line of Sebastian Bray of Berenberg Bank. Please go ahead. Your line is open.
Good morning. Thank you for taking my questions. I would have two, please. The first is on bioenergy. I am just thinking about the sustainability of the current growth rate that you are reporting. Excluding the Chinese opportunity, although I do not know to what extent you have put this in your own numbers, what is the mid-term organic growth rate that you are comfortable with for this business? I assume it is less than 20%. As a follow-up to this, how do you feel about the demand for ethanol globally in a world with turned EV? Is there a price point at which the ethanol could potentially be used as a feedstock for the chemicals industry, or are you comfortable with global transport fuel demand continuing to grow? My second question is on the timing of BioAg.
Does the preparation for the 2019 season, I am referring in particular to corn products, mean that the usual H2 weightedness is going to be slightly less pronounced this year? Thank you.
Thank you. There are questions for Tina on bioenergy. Tina, please.
Yes. You are right, 20% is quite a growth rate. As Prisca was alluding to, the comparisons become tougher in the second half of the year. Last year, we grew already 14% and 16% in the two last quarters. You have to take that into consideration. Yes, it is probably not 20% for the coming quarters. You ask about the global price point, chemicals, EVs, and so forth. EVs is also here to stay. However, it will take quite some years until it is, you could say, the dominant transport form. In our models, we have spent quite some time looking into it. We need to be many years out in time, and we talk decades, until half of the global fleet is on EV. It is an important part of making sustainable driving, but so is biofuel.
We do see quite strong demand coming from a number of different geographies. There is the RFS in the U.S., there is China, there is also the RenovaBio legislation in Brazil, and even Europe is now moving forward also with the RED II, and so is India. Chemicals is also an option, but I do expect the transport sector to be a bigger driver in the next many years for us. The last question was relating to BioAg and timing. You are right that we had originally expected that it would be solely a second half history, or whatever we should say, with the B-360. We got something of it in here in Q2, but we still expect a full year good performance in BioAg.
Thank you very much.
Thank you. Our next question comes from the line of Ian Wood at Redburn. Please go ahead, your line is open.
Hi all. Thanks for taking my questions today. I would like to start off with the food and beverage division, where you have seen a bit of a deceleration. I know you have highlighted some commodity price changes in Asia. I wonder if you could talk about whether you think this is just a return to the normal business growth rate of food and beverages or whether it could re-accelerate. Second question, quickly on BioAg. I heard you mention earlier that you are expecting the new products to at least double the acreage from the prior year. I wonder how you are planning about that and what you are thinking about the potential to go over that doubling and how you determine your production level. Then finally, just quickly on the guidance for the full year in Household Care, could you still talk about whether you are expecting an acceleration in the second half? Thank you.
Thank you. Finally, a question for Andy. Andy, please.
The issue in Asia is related to commodity pricing for carbohydrates, where there's a bit of an advantage right now to use sugar where you can. Since that's a relatively big segment for us, when that happens, it creates some headwinds. As I mentioned in our prepared comments, we're working through that. We see that as something that is quite a normal fluctuation. We're pushing pretty hard, I think, to get food and beverage growth rates up on average. That's based on the fact that we're investing more in the emerging markets where there's latent demand for our existing portfolio and our new growth platforms around things like lactose reduction, grain milling, and palm oil, which are areas of high potential growth and are relatively unpenetrated. That's what we push for.
On BioAg, yes, it's correct. We are looking into a doubling of the acreage. We're at around 8 million acres this year, and we're looking at more than a doubling for next year. We are in a good position in order to be able to supply these acres.
I'll just add on BioAg maybe. It's not like we know exactly how much is going to be sold in 2019. We talked about before that pricing will only be determined at the end of the year, maybe at the beginning of next year. Of course, our partner will start building models for volume assumptions in the marketplace as we get closer to the end of 2019. We do not have a very firm number in front of us in terms of acreage, nor pricing for 2019 at this point in time. I think the earlier sales in Q2 is more of a supply chain thing, and it enables us to take care of larger volumes into 2019 if our partner should so desire. Lastly, on Household Care, we post a negative 1% for the half year, and we expect to land the year in positive territory.
obviously, that will imply an acceleration in the Household Care business.
Okay, thank you.
Thank you. Our next question comes from the line of Ben Gorman at UBS. Please go ahead, your line is open.
guys, just two quick ones from me still. In terms of the Frontia products you talked about in grain milling, can you quantify your run rate at the moment? You talked about DKK 500 million over the next 5-10 years. I'm just wondering how much of a contribution that's been so far this year. Secondly, just back on the sort of cash flow and payment terms, can you quantify how much of this is due to late payments in LATAM and Argentina? Some of the bigger players in China have been sort of complaining about weak payment terms in those areas. I'm just wondering whether that's a particularly big issue for you guys. Thanks very much.
Grain milling, very small business right now. We expect it'll take time to ramp up to that full potential. It's not a big amount in our current run rates.
There is no impact whatsoever from LATAM, we are all good there. No impact on our payment side.
Thanks. We're running out of time, and I think this has to be the last question. I want to thank you for all your questions and for the interest in Novozymes. I hope we'll see most of you at our Capital Markets Day on the 17th and 18th of September in Raleigh. Thank you so much.