Earnings Call: Q2 2018

Aug 10, 2018

Good morning, and welcome to the Novozymes Conference Call. My name is Peter Huck, and I'm the CEO of Novoz times. I'm joined here today by the full executive leadership team and Investor Relations. Today, we'll review our performance for the 1st 6 month 2018 as well as the outlook and strategic priorities for the year. Our presentation today should take a good 20 minutes And after Our performance is satisfactory and sales have overall tracked with our expectations. We delivered 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 reinvesting to capitalize. There's good momentum in the overall business, but 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, but 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 percent. 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 2 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 freshness and hygiene technology is available on the shelves now. All in all, we maintained the full year guidance on all parameters. There's some industry variations and 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. And we maintain our 4% to 6% organic sales growth guidance with around 28 percent EBIT margin for the full year. Now 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, but our food and beverage business also posted good growth. That's following a strong interest in our innovation 2% for the 1st With this, I now hand it over to Anders to go through Household Care And Technical And Farmer. Anders, please Thank you, Peter. Please turn to Slide 4. Sales and Household Care declined organically by 2% in the second quarter. And ended down 1% for the 1st 6 months. This was a bit softer than expected and mainly explained by 2 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 Costa 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 good, 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 And Southeast Asia delivered good growth in the 2nd quarter. Also, our sales in China continues 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 drydawn cereals and partly driven by an increased demand for phosphate free to automatic dishwash detergents. While performance in the first half of the year was soft, have higher expectations for the second half as our 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 and 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 Farmer. And with that, I'll hand it over to Andy. Andy, please. Thanks, Anas. Please turn to Slide 5. In food and beverages, we're working to advance our business by 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 Safira 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, Pomora, with a solid outlook 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 this. However, we've seen demand in the Middle East and Africa decrease in Q2 as some of these markets experienced 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. Also, 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 Now let's start by looking at Bioenergy on Slide 6. I'm very pleased to report that Bioenergy continues to deliver very good growth. 6 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% to 3% versus a flat performance in Q1. Inventories remain elevated and producer margins continue to be tight. Ensign sales for conventional biofuels continues to benefit from the broad technology base we have and the innovative product portfolio. Our newly launched yeast product in Nova Drive also contributed to growth in the second quarter, although from a modest base. Looking outside North America, We had strong performance in Latin America where Brazilian producers has increasingly started to expand into corn based ethanol production. And number of plans have started to operate and more are expected to come on stream over the next few years. And finally, on the Bioenergy segment, we continue to follow the recent debate on U. S. Biofuel policies where current conditions for ethanol producers looks set to support our expectations for the full year. Now let's turn to Slide 7 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 B300 B360 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 in Brazil, in particular, was challenging in the quarter. Lastly, As you all know, innovation driven growth is key to us, and we are about to launch 2 new exciting products in animal health and in bio ag. Thomas will provide more details on this during his R and D update. So to summarize the message for the 1st 6 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 B300 B360 combination product. And innovation will benefit the second half of the year in both animal feed and BioAg. Then for Bioenergy growth accelerated in the second quarter with a strong 20 percent organic growth, building on the strong momentum from mid-twenty 17. And now I'll hand it over to you Thomas. Thank you, Tina. Please turn to slide number 8. I'm excited to tell you about 2 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 inside 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 parlor 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 DKK0.5 billion and we planned 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 B360. 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 accelerant B300 SAT. And combined, they are expected to reach at least twice as many acres next spring compared to the roughly eight 1,000,000 Corn acres that was reached in 2018. So to sum up, we have some very exciting news from our egg related pipeline that are expected to hit the market soon. Those products, I 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 9. 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 and we report a negative currency impact of sales of around 7%. The gross margin of 57.3 percent 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 1 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 2 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 DKK1.5 billion, roughly DKK 500,000,000 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 release of the P and L as expected. CapEx stood at DKK635 1,000,000 for the first half year, which was roughly flat year on year. All in all, we delivered a solid set of financials. Now please turn to Slide 10 for the 2018 outlook. We maintain the 2018 outlook on all parameters. 1st half sales were overall roughly in line with our expectations, and we maintain our organic sales growth guidance of 4% to 6% for the full year. On reported sales and with spot rate 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 that would be so 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 and consequence that 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 in 'nineteen platform accelerates. For food and beverage and TAC and 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 percent for the full year. Currencies, especially the U. S. Dollar, will continue to be a drag and report attempts at the current spot rates, but the negative currency impact will ease as the U. S. Dollar DKK rate has strengthened. As you can see from the announcement, we've hedged our 2018 exposure at $6.18 to the dollar, which is well below the current spot rates and the average for 2017. CapEx is expected at DKK1.3 billion to DKK1.5 billion and the outlook for free cash flow is between DKK2.3 billion and DKK2.6 1,000,000,000. And now I'll hand over to Peter for a wrap up. Peter, please. Thank you. Please turn to slide 11. So let me summarize our presentation today. With 4% organic sales growth after the 1st 6 months, we are on track to deliver on our full year outlook of 4% to 6% organic growth. We expect all segments to deliver organic growth for the full year But as Prisca highlighted, we see some adjustments to the industry growth mix with some uncertainty to Household Care following the second quarter issues Alice described. And there are general uncertainties to global trade and agricultural markets. From a strategic point of view, We increased our emerging market activities. Over the last year, we have established new application development centers in India, in Turkey and in China, and we're opening new sales offices in Kenya, Thailand and 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 inoculum are 2 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 17th 18th 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 2nd 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 and we hope to have the opportunity to and we hope you have the opportunity to participate. This concludes today's presentation. And now we're ready to take your questions. Operator, please begin. Thank Our first question comes from the line of Gunther Shechman of Bernstein. Please go ahead. Your line is open. Hi, good morning, everyone. If I can start with two questions, please. So the first one is on the margin development. The gross margin in the quarter and also for the first half was lower, but your operating margins improved So how much of that lower cost, if I look at sales and distribution down 11% administrative costs down 14%. R and D down 7%. What's the sustainable level, please, on the operating cost side? Because the currency headwinds, I would expect to fade we lep print and annualize those. That's my first question. And the second one is on Household Care, unless 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 Plisca talk about margin development. Plisca, please. Yes, yes, you are right. Our operating margin is better relative to our gross margin, but bear in mind that our gross margin in Q1 was a fairly good gross margin. I think we also pointed that out and that the currency impact is significantly higher in that respect it by currency even higher. This is why we see that in gross margin sorry, why we see that the difference. Now also bear in mind that If you look at the reported numbers, you have to factor in the reorganization from last year's the reorganization. So we have to compare likes with likes. And with that, I would say if the operating the ratios for OpEx will roughly be in line with last year if you affect all the currency impact. And to the other question, in developed markets, we're talking about something to the tune around half of our businesses, global customers. I also want to mention that it's not isolated to our global customers to develop markets. They're also quite present in the emerging markets. Okay. That's very clear. Thank you. Thank you. Our next question comes from the line of Son Samserve Please go ahead. Your line is open. Yes, good morning. First question on the Biogen Energy segment where you had the 20% growth. Just 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? Also, if you could, you keep talking about these high inventory levels, just say, what's the real risk here if, if, let's say that they disappear in 1 quarter, you know, what would be the rescue? And then finally in Bioenergy, if you could give an update on the sort of the China, what's going on there? You've mentioned it a couple of times and it looks like a quite interesting potential. That was my first questions. Thank you. That was a some very good questions for Tina. Tina, please? Yes. So first, the growth. So we grew the 20% in Q2 in the bioenergy segment. There are two things, sir, and what I think is the most pronounced. We see That's in America as a nice contributor. It's, given their Renewable bio, 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. And then we have the yeast adding in because you have to remember it's a global number we are reporting on. It's not only the U. S. Sales. So that's why Latin America is also in the picture. Then you asked about China. So yes, you're right. That China, there's an interesting opportunity. If they are to reach the 10%, they need to get to 5,000,000,000 gallon and currently they are less than 1,000,000,000 gallon. However, 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, but it's still the early days. And in inventory levels, Tina? In the U. S. Bioenergy business? So inventory levels in the Bioenergy business for that is for ethanol producers and they are high and they have been there for quite some time now. But what happens if if they disappear in 1 quarter, what would be the impact to you, you think? That will have to. So you could say if they start So your question is what if they start selling only from inventory instead of buying from us? Is that the question, Sam? Yes, Yes. Okay. That will have to the inventories are above 40 days now, and they have been there for the last more than a half year. I think the risk on 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 sustained for a long period of time. And I think it would personally, I think it would be wrong to model that that would change dramatically. But of course, in a business where you have high inventories, you could see that come out over time. Okay. And then just one quick question on feed and times, DSM mentioned at the Capital Markets Day that that you're launching this enzyme Propulsion in Q4 and that it has a sales potential of between 1,000,001,000,000 per year. First of all, if you could just say what would sort of be the timing before you reach that level, how long should it take? And also just confirm that is the normal fifty-fifty split with an average group margin, which we should sort of assume that you will receive from this Thank you. We'll let Thomas take that question. Thomas, please. Thank you. When you look at this exciting insight, I said it's a completely new mode of action. We are launching in the coming months. And 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 5 year period is probably realistic. So as mentioned, it's something that will contribute in the short term because we do expect to see pickup on a short term basis, but it's going to be in the long term. We really reach the potential. And this is part of the Alliance as with any other products we have in that Alliance. And can you do you think it will work for other animals than poultry? That will be my last question. We are looking at using this enzyme also in OSB is, and of course, I cited to see the results of that. Thank you. Our next question comes from the line of Jonas Skobel of Danske Bank. Please go ahead. Your line is open. Yeah, good morning. Two questions from my side. First of all, you are talking about some of some sales of B360 being moved to Q2. Should we see this a sign of stronger demand than expected or is it just moving some revenue from second half to second quarter? And then the second question is to the gross profit where, please, you mentioned that there were some positive efficiency impacts here? Is it possible to kind of give a number on that? Yeah. So on the B360, 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's also from Monsanto because they need to get it on the On the gross profit, I think 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 debt. So I can't give you an exact number. We don't split it out that way. But if you look at the gross margin development compared to last quarter for those quarter 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 is roughly spread evenly between input costs, which are then mitigated by productivity improvements and FX. So there's a couple of moving parts in this equation. Our next question comes from the line on the hygiene platform and now it's launched it in the Philippines and ramping up. I just wonder how much in terms of organic growth, do you think this ice related skin can move the needle in the second half of the year? And then continuing on unchanged questions about the new enzyme to be launched with DSM. Just to be absolutely clear that this does not cannibalize on any existing enzyme revenue, right? And then a third question for some reason, you don't give a Q2 cash flow statement. You only give, for the 1st 6 months, is it correctly understood the free cash flow in Q2 was SEK 407 1,000,000, which is down by 30% and what will you do actively to manage your net working capital and how much should we expect working capital to come down in the coming quarters? Thanks. I'll take the DSM piece it's running under the same model as we have on the other enzymes And there's no reason to believe that at least product wise that you'll see cannibalization. So we think this largely going to be additive to the business that we are very excited about. And I think the technology will at least we hope it will prove to be a a game changing technology. The same is the case for hygiene and freshness, and I'll let Anna's talk about how that ramps up. So when we talk about the full year, and I guess that's what you're asking to then for household care, we believe we will get back into positive territory in terms of growth. And from that perspective, hygiene and freshness is going to be a big contributor to realizing that ambition. And I think I can also say that Our launch plans are quite solid and we have very high confidence in the partner rollout So everything is looking according to plan and then we are scaling up as we've anticipated. Prisca on networking capital and cash flow, please? Yes, I think the first one was in free cash flow. So you'll find the free cash flow number on the second page of the announcement. It's for the quarter. 1,000,000, which is 1000000 below previous year. This is driven by working capital as CapEx is on last year. And to your question, net working capital, this is mainly a timing issue as I pointed out earlier. So 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 So 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 sales and manufacturing pattern. But 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. So what we are we're not guiding as you know on working capital as a percentage. We are 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. So nothing has changed from that perspective. Thank you very much. Thanks for answering my questions. Thank you. Our next question comes from Annette Luce of Handelsbanken. Please go ahead. Your line is open. Yes. And first, a follow-up question on the inventories within the buy and all in the states. What do you see to be the reasons behind having a high inventories? You are at the same time saying that margins are tight for this industry. So 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? Then also on your launch of the relevant PGA 360 ST, can you say anything about pricing of this product compared to the 1st generation? And also thereby the commercial potential for you. I understand the number of acres, but I would like to to hear a little bit on the pricing if possible. I'll stay with that for now. Yes. So on the inventories, as I've said, the inventories and as well as the margins have in fact for quite some time been, yeah, inventories have been high and margins have been tied in in the U. S. Ethanol industry. The reason why we call it out is to show that there is a caution on it But if I look at how we operate and how things are going, things are going very well. So it's not something it's it's it's a it's a it's a it's you could say something we are calling out as an uncertainty, nothing more than that. For sure, as part of the U. S, they have had or they have a significant part of their production is going for exports. Right now, there's no exports to China, but Brazil seems take up most of the exports. So that's what I'll say on that. On the pricing on B360, We have an alliance with Monsanto where we do have a profit split model We do expect to price the B360 based on the benefit it delivers in the market. I'm sure you remember some comments from Monsanto on the benefits it is delivering. So it's a quite nice benefit which we effect to come from that. And this is one of the, let's say, main drivers for that we throughout the year have talked about good growth in the BioAg segment in 2018. Price increase, are this like 30% or so? Or I mean, or is it not possible for you to say anything about that? I don't think we can say firm about it. As Monsanto has indicated, the yield is quite a bit higher with this new inoculant, at least based on last 2 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. But having said all this, we need to see we and Monsanto will decide on the exact pricing for the sales in 2019. Okay. Then a last question on Household Care. You have for the past 3 years experienced some market difficulties of different regions and quarters and 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 2 to 3 years you have only delivered around organic growth close to 1% and isn't it fair to say that you are actually now seeing a structural softer market for detergent and signs And and as such, I then again ask you as I've asked before, how do you see the exceptions of you, your new innovations Is there a risk that there will be a cannibalization of other enzymes set before the detergent producers to keep costs down? So to your first question on whether it's structural or not, I actually think if you look at the challenges we've had, they come from quite a a number of different sources. 1 is, relates 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 disruption. So I, we do not, I would not call it as a structural challenge, but the reasons are actually quite 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 enzyme should be any more exposed than any other technology. But what's also clear is that our customers will typically have to do some kind of reformulation when they use very, very new and groundbreaking technology, and they'll need to find a way to price that into the market. And that could be either formulation changes or it could be from them pricing in our middle market. I'm sure we will see all of those scenarios play out. And maybe just to add, I think what you're seeing in 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, whether it's, I mean, the general business that over time, you start seeing that the emerging markets matters a lot more And we have really, really solid growth in the emerging markets and an incredibly strong position in the emerging markets. And I think with all the new resources we're putting into detergent design centers in India and was laps in China. We're in a really good position to help customers introduce technologies in these markets. So over time, you'll you'll see the emerging markets play a much larger role. Thank you. Our next question comes from Fulvio Gazole of Goldman Sachs. Please go ahead. Your line is open. 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. And I know that you also highlighted that one of your customers have a disruption in the U. S. But I would have thought that this would have been offset by other customers growing share. So can you just also highlight what I may be missing here, are you whether you over index in a particular customer in the U. S, please? And then I have other questions on the other businesses. Okay. We'll start with your Household Care questions. Carlos, please. So the two issues we highlight for the second quarter are equal in size. And maybe one way of putting it into perspective, have these not, have we not experienced those 2 issues we would actually have been posting modest growth for the for the quarter. To the latter question on North America, we are in this specific case indexed higher with this specific customers and a customer and from that perspective, we're not capable of fully compensating for the challenge we have experienced in North America. Great. Thank you. And then my second question is on the gross margins. Just I know someone has already asked this, but I was just wondering if you can give us some color on how we should expect to develop the gross margin headwinds on in the second quarter to the rest of the year. I know a lot of that was currency related. Others was input costs related. 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. Yeah. I'll try this one. So overall, you see, we had 57.8 for Q1, we had 56.8 Q2. So you do see a variation. And like I said, I pointed out, it is a mix. You will see continue to see quarter value 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 this will come down and that's why also it comes in with an eye within our expectations. So while you will see some fluctuations in the quarters in Q2 compared to Q1, you saw a relatively high impact of input cost impact. I hope that clarifies it a bit. But were there sort of one offs in that or is this now going to be continue to be an issue in the coming quarters? Was there a step up in inflation, I guess, which could could remain is, I guess, is what I'm trying to get to. Yes. No, I would also not, it's not, it's a perfectly novel quarterly fluctuations. We are in a wide range of industries with wide mixed and variable input costs that drives that. And as we basically capitalize our the cost and inflation and release it to the P and L, you'll always see fluctuations that is so many factors driving gross margin. So it's maybe what I can do is as I've also stressed earlier, it is perfectly in line with our expectation. So there's nothing that came in on affected around the gross margin level for Q2. And actually we tried to point that out already in Q1. Okay, great. Thank you. And then 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, and For those who are interested, I would actually suggest it to go and watch some of the videos they are, but they are very, very good indications of what the technology can deliver. Okay, great. Thank you. Thank you. Our next question comes from the line of Hans First Flanders, the hygienic freshness platform, how much sales have that contributed in Q2. I guess you'll probably not get numbers, but just a slight indication. And the next question to household care, What do you actually see is needed in order to have the developed market returning to growth? Lenova, Tina, on BioAg, in the past, I know that you have been looking on developing a bacteria strains that can address drought. Where are you on this project? And then finally, on Bayer and Munson's integration What has the dialogue been with Bio Path the Future Corporation? Thank you. So to your questions on, it's been the rather modest, the sales we've had in Q2 for the freshness in 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 in hygiene platform into the developed market throughout 'nineteen. We'll 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. And 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. But Anders, could one argue that if consumers have a perception of, close or clean, whether there or not, it's 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, but the consumer research shows that there is a change in perception of what's needed and actually freshness in hygiene solutions or odor solutions are very, very high on the agenda of consumers. And actually, it's come to a point where they have taken over from stain removal as the most pronounced consumer need So I think we are hitting a sweet spot of a trend that we are 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. And just to add a bit of a technical edge to it, I can assure you that hence that clothes are not clean. There's still so much left on clothes and that's partly why you have an order problem and that's what we're trying to to solve with this technology. Then let's move on to BioAC. Tina, please drop resistance. Yes, so drought resistance is one of the areas for sure we are looking into. I think at the Capital Markets Day, you'll be able see a lot of the things we're doing on our BioX side. In general, we are working on securing that planned health becomes better and thereby also stronger drug resistance. On the bio Monsanto I know that you've been working sorry, Tina, but you've been working this project. I know, was initially covered about 6, 7 years back. Have you made any real progress on it Well, 6, 7 years back is before my time, so I think let's, Thomas answer that one. Hence, drought resistance is part of what happens when you're looking at the complex setup between microbes and root or plants. So what happens is that often the microbes helps the plants develop bigger root stronger routes and thereby also have resistant 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. And then on BioMonsanto, So, despite the transaction disclosed, Bayer still operates, it was not allowed to operate the assets they have acquired. So Monsanto has an interim management team in place and the alliance are plowing ahead with delivering on the sales expectations for the full year. And we have, for sure, as I'm sure, you know, have nice talks with buyer, but it's still too early to go into details also with them given that they're not allowed to operate the assets yet. Yes. I think that's the main point. I think also it's been the same that commercial strategy has been been good for the last couple of years. Main driver for audio issued the electronics or some of the expenses in the U. S. Our next question comes from the line of Sebastian Bray Our next question comes from the line of Michael Rasmussen of ABG Sundal Collier. Please go ahead. Your line is open. Thank you so much. A couple of questions from my side also. In Bioenergy, you mentioned a little bit Could you talk a little bit more about that, I. E. When is it going to be launched? Which products are we looking for? And 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 during Q3 or second half, which markets are we talking about and when will you launch And then also if you could add a little bit more on the potential for the higher oil price to, for the global to change the plants a little bit more towards enzymes that's interesting. Thank you so much. Thank you. We'll start with Tina and Bioenergy. Tina? Yes. So you asked about the upcoming launches in Bioenergy. So, we look at the innovations both in the yeast space as well as on the inside space. On yeast, the yeast we have launched now called Nova Drive, that is targeting a particularly good in one segment of the market and we're looking into other solutions in the yeast space. On the inside side, we're looking into both getting yield and throughput, but then also saving on other chemicals and so forth. And then and 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're seeing right now is benefiting from number of the innovations we have done earlier in time launches, as we have been talking about as well as the yeast launch. And then on the rollout of hygiene and the impact of oil prices, please. So what we can say on the rollout emerging models who also say. And the reason why we're not more specific is because we're doing this rollout of course with partner and they are quite keen on preserving sort of the ability to surprise the markets. So we cannot give more details, but course, we will let you know as soon as they hit the market. On the oil price, it's not an exact science saying that at this oil price, you'll see sort of a breakthrough. But it's clear that in an oil price scenario of $70.80 a barrel, then we are in scope for improved conversations on reformulation. And that's clearly something we see a larger interest of. And clear that it's very different from an oil price of $40 a barrel. Can you confirm whether you have moved into a second market, right now as we speak or that has still to come on the hygiene launch? I can confirm as a similar story as we also saw in the Philippines. It takes a trade some months before it's stacks up on all the shelves. So we are in other markets and then give it a couple of months and then you'll also see advertising being rolled out in these markets. Thank you very much. Thank you. Just before we move to the next question, we 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 and thank you for taking my questions. I would have 2 please. The first is on Bioenergy. I'm just thinking about the sustainability the current growth rate that you were reporting. If the, so excluding the Chinese opportunity, or I don't know to what extent you've put this in your own numbers, what is the midterm organic growth rate that you are comfortable with for this business? I assume it's less than 20%. And as a follow-up to this, how do you feel about the demand for ethanol globally in the world returns 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 field demand continuing to glow? My second question is on the timing of BioAg. Does the preparation for the 2019 season? I'm referring in particular to corn products means that the usual H2 weightedness is going to be slightly less pronounced this year. Thank you. There are questions for Tina on Bioenergy, Tina, please? Yes. So, 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% 16% in the 2 last quarters. So you have to take that into consideration. So yes, it's probably not 20% for the coming quarters. You ask about the global price point, chemicals, EVs, and so forth. EVs is, is also here to stay. However, it will take quite some years until it is, you could say, the dominant transport form. So in in our models, we have spent quite some time looking into it. We need to be years, many, many years out in time, and we talk decades until half of the global fleet is on ED. It's an important part of making sustainable driving, but show as biofuel, and we do see quite strong demand coming from a number of different geographies. There's the RFS in the US, there's China, There's also the Renewal bio legislation in Brazil. And even Europe is now moving forward also with the Rettu 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. Then 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 say with the B360, we got something of it in here in Q2. But we still expect full year good performance in BioAg. 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 forgot to start off with the Food And Beverage division where you've seen a bit of a deceleration. I know you've 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, food and beverages or whether it could reaccelerate? Second question, quickly on BioAg. I heard you mentioned earlier that you're expecting the new products to at least double the acreage from the prior year. I wonder how you're planning about that and what you're thinking about the potential to go over that doubling and how you determine your production level And then finally, just quickly on the guidance for the full year in Household Care, could you still talk about whether you're expecting an acceleration in the second half? Thank you. So, finally, a question for Andy, Andy, please? Yes, the issue in Asia is related to commodity price for carbohydrates where there's a bit of an advantage right now to use sugar where you can. And since that's a relatively big segment for us, when that happens, it creates some headwinds. As I mentioned in, sort of our prepared comments, we're working through that. We see that as something that is quite a normal fluctuation, and we're pushing pretty hard, I think, to get, food and beverage growth rates up kind of on average. And 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 relatively unpenetrated. So that's what we push for. And on BioAg, yes, it's correct. We are looking into a doubling of the efforts, we're at around 8,000,000 acres this year, and we're looking at more than a doubling for next year. And we are in a good position in order to be able to supply these acreage. I'll just add on BioAg maybe it's not like we know exactly how much is going to 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. So and of course, our partner will start building models for volume assumptions in the marketplace as we get closer to the end of 2019. So we do not have a a very firm number in front of us in terms of acreage and more 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. And lastly, on Household Care, we post a negative 1% for the half year, and we expect to land the year in positive territory. So obviously that will imply an acceleration in the Household Care business. Thank you. Thank you. Our next question comes from the line of Ben Gorman at UBS. Please go ahead. Your line is open. Just two quick ones for me still. In terms of the Frontier products you talked about in in grain milling. Can you quantify your run rate at the moment? You've talked about 500,000,000 over the next 5 to 10 years. I'm just wondering how much of a contribution that's been so far this year? And then secondly, just back on the 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. Wondering whether that's a particularly big issue for you guys? Thanks very much. Grain milling, very small business right now. We expect take time to ramp up to that full potential. So it's not a big amount in our current run rates. And there's no impact whatsoever from Latin, so we are all good there. So no impact. Done our payments on. Thanks. We're running out of time and I think this has to be this has to be the last question. I want to thank you for all your questions and for the interest in Novozymes. And then I hope we'll see most of you at our Capital Markets Day on 17th 18th September in Raleigh. Thank you so much.