Good morning, welcome to the Novozymes conference call. Today, we'll review our performance for the first three months of 2018, as well as the outlook and key priorities for the year. Our presentation should take around 20, 25 minutes, and after that, we'll take your questions. My name is Peder Holk Nielsen, and I'm the CEO of Novozymes. I'm joined here today by the full executive leadership team and investor relations. Please turn to slide number two. Sales in the first quarter grew organically by 2%, which is in line with our overall expectations. Back in February, we stated that growth would be higher in the second half of the year than in the first half. We now reiterate the 4%-6% organic sales growth outlook for the full year.
On an industry level, we're slightly ahead of plans in household care and a bit behind plans in agriculture and feed. We're monitoring the geopolitical agendas and tensions that could impact global trade flows, particularly in agriculture. With the current insight on these matters, we remain confident about our full-year outlook. The EBIT margin was strong and close to 29%, including a negative impact from currencies. We're ramping up to support our increasing emerging market presence, but these investments are not fully reflected in the first quarter figures. After delivering a solid first quarter, we maintain the full year outlook for the EBIT margin at around 28%. Our innovation pipeline is very healthy and progressing according to our plans. With many near-to-market opportunities as well as product launches, which we'll talk more about as they get to market during the year.
Now, let's look at the regional sales development before we move on to a discussion of the different industries. Please turn to slide number three. As you know, we're investing in the emerging markets as we see significant emerging opportunities in these markets. Our organic sales growth in the emerging markets was 6% in the first quarter. That was driven by Asia-Pacific and to a lesser extent, Latin America. The strongest growth contributor in the emerging markets were household care and food and beverages. Developed markets remain crucial to Novozymes' success as they represent roughly two-thirds of overall sales. Here, we continue to expand our offerings with many new and improved solutions across all segments. Frontia for grain milling, our yeast product called Innova Drive for starch-based ethanol, and our new enzyme for automatic dishwash are just a few examples.
First quarter sales in developed markets were flat year-over-year, which was roughly as expected. Here, household care was soft, whereas bioenergy performed very well. All in all, sales were roughly as expected, also from a regional point of view. Now I hand it over to Anders to go through household care. Anders, please.
Thank you, Peder. Please turn to slide four. Household care had a slightly better start to the year than expected. Sales grew by 1% organically in Q1, driven by positive developments in the emerging markets, as well as continued strong growth in our dishwash segment. During most of 2017, we talked about how diverging trends were impacting our business. These trends have to a large extent continued in 2018 with solid growth from regional customers while our global customers continue to focus on cost optimizations. We are encouraged by our regional customers' interest in stepping up performance. This is closely linked to our effort to promote tailored innovations through our top 20 customer program. We have showcased how they can use enzyme technology as a key differentiator in the marketplace. These initiatives are driving strong growth with the regional players.
Looking at the regional development of the business, we continue to see strong growth in Asia-Pacific, where all areas, China, India, Southeast Asia, contributing to growth. Growth in the developed market was mixed. Cost optimization by some of our global customers continued to put a damper on growth, while we see the dishwash segment continuing to deliver strong growth. Automatic dishwash is a very interesting market for us, partly boosted by an increased demand for phosphate-free solutions as well as innovation. In Q1, we launched significant innovation for automatic dishwash with a new molecule designed to tackle dried-in cereals. This is exciting news, which we will talk more about later in the presentation. I'm also really excited about our first product from the freshness and hygiene platform. The product is being rolled out as planned in the emerging markets.
Sales are ramping up as expected and will be more material in the second half of the year and in the years to come. If we move to Technical and Pharma, sales were down 10% for the quarter. Timing was the main explanation for this. With that, I'll hand it over to Andy. Andy, please.
Thanks, Anders. Please turn to slide five. We had a good start to the year in Food and Beverages with 5% organic sales growth driven across the majority of our industry segments. We continue to invest in our portfolio of solutions to help our customers improve the quality and sustainability of their food and beverage products. I'm pleased to see our efforts continuing to make progress. In the first quarter, we delivered solid growth in our baking business, driven by increased uptake of our solutions for bread types consumed in Asia-Pacific and Latin America. We have been increasing sales efforts in these regions. That is paying off. To open additional opportunity, we've opened a state-of-the-art baking lab in Turkey. It's a great place to work with regional customers from Middle East and Africa to showcase our products' benefits for their business.
This new facility will help to accelerate penetration in our emerging market baking business and to open up new application areas specific to this high-volume bread market. In Q1, the patent of our fresh-keeping product, Novamyl, expired in the U.S. We've worked hard to prepare for this change by proactively reducing prices while securing long-term distribution and development partnerships. I feel confident that this preparation will help us to retain our strong position in North America. Sales and enzymes for the nutrition segment delivered solid growth in the quarter, driven largely by Saphera, our unique innovation for lactose reduction in dairy. This solution is seeing good pickup across regions, with Latin America giving particularly strong results. Saphera is being used by leading dairy companies in Brazil and Mexico, providing a solid growth driver for the future.
Latin America is the world's second-largest market for lactose-free products, the positive customer reaction there is great to see. Our starch business performed well in the first three months of the year across markets, driven by recent years' innovation for yield improvement. We also see continued progress on rolling out our Frontia grain milling solution. Our beverage business ended flat compared to Q1 2017, driven by good growth in our distilling business, whereas sales to the brewing industry declined. From a regional viewpoint, emerging markets had a strong start to the year, while developed markets were roughly flat compared to last year. Summing up, we had a good start to the year with good growth across our main industry segments. We continue to work rolling out innovation and penetrating the solid opportunities we see with customers across the globe. Now I'll hand over to Tina.
Thank you, Andy. Let's start by looking at bioenergy on slide number six. I'm very pleased that we in bioenergy see a continuation of the good momentum from 2017. Sales were up by 9% for the first three months, supporting the decarbonization of transportation fuels. U.S. ethanol production is estimated to have been roughly flat in Q1 year-over-year, while producer margins and inventories have slightly improved. Although this is good news, we remain cautious as margins continue to be low in a historical context and inventories are still above average. We continue to see our broad and innovative product portfolio support the good growth in the market, and we'll continue to work closely with our customers to optimize their production through a tailored approach. I am also very pleased that we in Q1 launched Innova Drive. It's our first starch-based yeast product.
Although this is a new area for us, we have already seen a high level of interest in our offering. We are encouraged by the positive signs in the global ethanol industry in such markets as China and Brazil. In the U.S., we see both upsides and downsides due to the discussions around biofuel policies. We base our forecast on current global political conditions. On the shorter term, we see the current conditions for ethanol producers supporting our expectations for the full year. Now let's turn to slide number seven for an update on agriculture and feed. As we've talked about previously, our agriculture-related business is more volatile than the other industries we serve. In this business area, organic sales declined by 5% in Q1. While part of this is explained by timing, sales came in slightly lower than expected.
Our performance in feed enzymes was down, mainly due to a tough comparison because our alliance partner was building inventory in the first quarter of last year. We have a strong innovation pipeline in our animal health and nutrition business and are close to launch a product that should contribute to our performance in the second half of the year. Sales of animal probiotics developed positively during the first quarter, although from a small base. During Q1, we obtained registration in the European Union for Alterion, our probiotic solution for poultry. We now have the product registered in all main regions, and this is a key milestone in our collaboration with Adisseo. Sales in BioAg ended down in Q1, mainly due to continued poor farm economics.
Sales were also impacted by a new import tariff on pulses in India, which led to lower expected acreage of the crop being planted in Canada. Over the coming years, we plan to introduce new breakthrough solutions from our joint R&D efforts to drive sustainable agriculture. As an example, the BioAg Alliance recently obtained approval to produce and sell Acceleron B-360 ST for corn. The upgraded version of the corn inoculant increases yield. Production and shipment of products to Monsanto are expected later during the year for the 2019 planting season. To summarize for both areas, ag and feed had a more challenging start to 2018. This was partly explained by tough comparisons in feed and continued headwinds in agriculture. In this area, I expect innovation to support growth in the second half of the year.
Bioenergy had a very good start to the year, supported by continued momentum for our broad offerings. Our first yeast product was successfully launched in Q1, and we expect to deliver more innovation during 2018 and the years to come. Now I'll hand over to Thomas.
Thank you, Tina. Please turn to slide eight. It's been an exciting start to the year from an innovation perspective. We see many near-to-market opportunities and have more impactful solutions coming out later this year. In the first quarter, we launched Innova Drive, as mentioned, our first yeast product for conventional biofuels. This allows faster fermentation under tough conditions and at higher temperatures
Building on our strong position in enzymes for starch-based ethanol, we are now able to leverage synergies between yeast and enzymes. This enables higher ethanol yields and more efficient production for our customers. In the first quarter of 2018, we also launched a brand-new enzyme class for automatic dishwasher, adding to the 2 existing enzyme classes in this industry. This novel enzyme stems from our understanding of fiber structures and targets dried-in cereals, solving an everyday consumer challenge. The technology supports the good traction we see in automatic dishwash and is an exclusive launch to 1 customer. Within animal health, we're working on a major innovation. This enzyme will enable increased uptake of nutrient and improved feed conversion rates in monogastric animals through a new mode of action.
To summarize, we had a good start to the year on the innovation front, with 2 product launches and a number of exciting new innovation coming out later in the year. That's all for me, and I'll hand you over to Prisca.
Thank you, Thomas. Please turn to slide nine. Let me take you through the financial performance for the first quarter. Overall, as mentioned by Peder earlier, sales came in as expected at 2% organic growth. Household care was slightly better, and agriculture and feed slightly worse. As you know, most currencies in our exposure, in particular the US dollar, are weaker than a year ago, and we report a negative FX impact on sales of close to 8%. With current spot rates, the negative currency pressure should ease as we move through the year. Gross margin was flat year-over-year at 57.8%. We continue to see good productivity improvements and mix effects offsetting a slightly negative impact from currencies and input costs. Reported EBIT margin was up by 190 basis points to 28.9%. This was despite a negative currency impact of around 1%.
If we exclude the reorganization costs in Q1 last year, EBIT margin was on par. Investments to increase our emerging market footprint will continue to ramp up throughout 2018 and are not fully impacting the first quarter. The effective tax rate for the quarter was 20%, roughly 1% lower than last year. This relates to the transfer of IP assets to Denmark initiated in Q4 last year. Net profit came in 5% higher year-over-year. This was explained by higher EBIT, hedging gains, a lower provision for stock appreciation rights, and a lower tax rate. Cash flow from operating activities in the first quarter was DKK 403 million, roughly DKK 300 million lower than Q1 last year. This was driven by higher working capital, which is as expected and is explained by timing. CapEx at DKK 281 million was roughly flat year-over-year.
All in all, we delivered a solid set of financials for the quarter as expected. Please turn to slide number nine for the 2018 outlook. I am pleased to tell you that our outlook 2018 is maintained on all parameters. First quarter sales were overall fully in line with our expectations. On February 7th, we guided a softer first half and relatively higher growth in the second half of the year. This is due to seasonality in BioAg and the expected contribution from the freshness and hygiene platform in the second half. Overall for the business, we expect 4%-6% organic sales growth in 2018. We are making additional investments to support future growth and expect an EBIT margin of around 28%. Currencies, and especially the U.S. dollar, are a drag in reported terms.
We hedged our 2018 exposure at 6.18 to the dollar, which is well below 2017 rates but above the current spot rate. 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. I hand over to Peder for a wrap-up. Peder, please.
Thank you, Prisca. Please turn to slide 11. Let me just quickly summarize our message today. With 2% organic sales growth in the first quarter, we are in line to deliver our full year outlook of 4%-6% organic sales growth. Some of you may think it is a steep climb from 2% in Q1 to 4%-6% for the full year, but it is in line with our plans given the current insights. Let me once again remind you of we stated that the second half of the year would be stronger than the first half already when we guided early February. When we look at the 4%-6% full year outlook in more detail, we see only minor changes within the ranges that we provided back in February for the various segments.
For the full year, Bioenergy and Food & Beverages looks a bit better, whereas Agriculture and Feed looks on the soft side. From a strategic point of view, we are seeing the benefits of our more customer-focused approach in the divisions. For example, we interact with new and existing customers through our top 20 program in Household Care and by inviting regional customers to our new baking lab in Turkey. We are already seeing sales agreements materializing, and this support our optimism about the shorter and longer-term developments. Our innovation agenda is strong with many near to market opportunities. I mentioned a few of them in my introduction, and there are many more to come. 2018 is moving ahead according to plans, and we should be able to accelerate sales growth in 2018 and beyond. That concludes today's presentation, and now we are ready to take your questions. Operator, please begin.
Thank you. Ladies and gentlemen, if you haven't already, please press zero and then one on your phone keypad now in order to enter the queue. After I announce you, just ask that question. If you find that question has been answered before it's returned to speak, just press zero and then two to cancel. We'll now go to the first question, which is from the line of Ben Gorman of UBS. Please go ahead.
Hi, guys. Thanks for the chance to ask some questions. I guess a few from me. First of all, in terms of how much of a positive impact you saw from the automatic dishwasher product, can you just clarify, would the underlying Household Care number on organic have been negative in the quarter if you didn't have this product? It sounds negative in sort of the major international players and a bit more positive in terms of the local. Secondly, can you give us a bit more of an idea in terms of the innovation pipeline in Bioenergy for the rest of this year? It sounds from the guidance that actually the second half of this year for Bioenergy could be weaker than the first. How does the innovation sort of pipeline compare to what we had last year?
Obviously, a massive outperformance last year versus the underlying volumes in the market. Finally, just quickly on Food & Beverages. Within the starch business, any specific commentary on starch in China? Was this actually a drag versus sort of tough comps in Q1 last year? It sounds like you had a particularly strong performance this time last year, and I just wondered whether this was sustainable or actually sort of normalizing. Thanks very much.
Thank you for your questions. We'll let Anders talk about the importance of auto dishwasher products. Anders, please.
You're right, we call out dish as being a strong growth driver and delivering 1% growth. Of course, doing the math, we do not guide on specific segments and outline how those are not driving growth. It's important to note that what we call out as strong growth areas are dish, and it's largely the emerging markets. Then we have some softness in the European segment.
When it comes to the innovation pipeline within biofuels, as you know, we have been introducing a whole number of different products into this segment over the last couple of years, and we continue to find ways where we can increase value from our products at our end customers' production sites, be it saving in energy, be it saving in chemicals, and we will continue to do that. We introduced this first quarter a yeast product, and we expect that we will see more yeasts coming into the market as the year progresses. Andy, starch in China, how is that going?
Yep. Starch overall looks good. China's an important part of that, but it's to a lesser extent than it was last year based on the reduced corn prices. Now it's more based on rolling out new innovation and just working together with customers in a great way.
As you can hear, there's a lot of new products that drives growth across these different segments. We'll take the next question, please.
Thank you. That is over to the line of Lars Topholm at Carnegie. Please go ahead. Your line is now open.
Yes, a couple of questions from my side. One is on BioAg. I mentioned your comments relating to the Monsanto Bayer transaction. You mentioned it's not expected to affect revenue for 2018. I just wonder, since you specifically mentioned 2018, could there be any implications in the subsequent years, and can you put some comments on how that alliance might affect your business? On household care, we've now seen the oil price move up, and I guess one function of that is increased commodity price inflation for your large customers. We could see that in P&G's Q1 results. Are there also some dynamic effects, i.e., a shift away from petroleum-based ingredients, or what would it take before we see that? Maybe one final question.
In bioenergy, the fact that Green Plains Energy will shift to using Enogen corn from Syngenta, could that hurt your growth rate after the 2018 corn harvest? Thanks.
Thank you. Good questions. We'll let Tina start talking about BioAg and bioenergy. Tina, please.
Yes. The question was relating to the Bayer-Monsanto combination. It's right that we highlight in 2018 that we don't expect any input. If you look at where Monsanto is strong, as we've talked about before, Lars, it's in corn and soy, and it's in the Americas. Bayer comes in with a complementary footprint. From that perspective, that could be opportunities for the alliance. However, it is too early to tell how it all will pan out. We have also talked about that, you could say we do think that we, together with Monsanto, have developed a very important asset and will for sure secure that we take good care of that going forward.
Is there any risk Bayer will want more than 50% of the economics?
Yes. Maybe. I think it's too early to tell and speculate. There is a lot of different options how it could end. We are quite happy with what it is we have developed and how we see things going forward. On the Green Plains and Enogen corn is for sure part of the biofuel mix. It's for sure something which is out there and which we're competing against. It's only one enzyme, which is in the Enogen corn, and still there is a lot of other enzymes around it which is needed. It's not something which I'm too worried about.
It will not have any impact on your business?
Well, for sure it does have some impact on the global or on the biofuel market. In general, the performance we have seen in this quarter, as well as towards the end of 2017, as well as what we expect for the full year, is that first of all, we work closely with customers, get them on a tailored enzyme offering, get them on, you could say, more value. A positive mix effect. We also take some share. Overall, we are quite confident in the outlook on bioenergy.
Okay.
Is higher oil prices, is that good or bad news?
The way we usually talk about this is at longer term, this is good news, and it eases the conversations we have of why enzymes are relevant. Short term, it will have less of an impact. I think it's also important to consider that our customers need to believe in sustained longer-term high oil prices. If that's the case, we will see this being a positive supporter to our business.
Thank you very much for taking my questions.
We now go to the line of Michael Rasmussen of ABG Sundal Collier. Please go ahead. Your line is open.
Thank you very much. Three questions, sir, please. First of all, on the Household Care division, you have both in the past and also in this quarter talked about cost-focused large customers. Is this less in Q1 versus in the last couple of quarters, or is this impact basically still the same? That's my first question. Secondly, after the 1st of March, when Novamyl gone ex-patent, what kind of moves have you seen from competition to date? The last question on the Innova Drive in Bioenergy. How many customers have you seen switched so far, or asking this in another way, what is your market share in yeast at the moment? Thank you.
Thank you. Also good questions. Anders, Household Care and the softness with the large customers, please.
What we've experienced in Q1 is very much the same development we also saw in 2017. It's no more, no less. It is of course a drag to our business that we see these cost optimizations with a few of our selected global customers, but no more and no less.
Andy, Novamyl competition?
Yeah. The patent expired in March, as you indicated. As I said in my part of the script, we have been preparing for that for a long time. We haven't seen any sort of major moves from competitors. You remember, Novamyl's been off patent in Europe for a long time, so the market has achieved a certain stability. We'll see how it develops over the year, but we're comfortable with our position.
On market share in yeast. We launched the product here in February. We have been out, as we talked about trialing in production scale as well before. We have converted a number of customers to also commercial pricing, and they continue on the product. We don't specify exactly how many wins and how much we have, but you could say it's a new area for us, we're just getting started.
Great. Tina, is it right to assume that the share of revenues is approximately the same as what we see in biomass conversion, i.e., a couple of % of revenues, or is it less?
It's less.
Thank you.
Our next question is over to the line of Annette Lystbæk at Handelsbanken. Please go ahead, Annette, your line is now open.
Thank you so much. My question relates to the dynamics of the tariffs from India, also how you see potential dynamics in terms of potential tariffs from Chinese on soybeans. I was just wondering because one communication from you have been that if tariffs are coming from Chinese on soybeans, this would mean that you would have had additional demand from the LATAM, which will not be affected by the tariffs. I'm just wondering how long time does it take to sort of shift and add additional crops in LATAM? Will there be a delayed effect? For example, in India, where you also have seen tariffs now hitting Canada, will that shift to another market and how long time will that take?
On the tariffs, it's a very good question. If we start out with India, the tariffs came into play at around end last year, early this year. It is about 30%-50% depending on the specific crop. It's something where when we look at the expectation, planting is just happening now in Canada. The expectation is that pulse crops will go down with about 20%-30%. It's a matter of that the Indians want to try and incentivize their own production of pulses, and they have way less use of inoculants compared to what they do in Canada. On the China and soybean and the global trade flows, it is difficult to predict what it is that would happen with these flows. It is so that soybeans is about half of our business in BioAg.
It is so that in the U.S., there is, you could say, inoculants are used to a less extent that it is in Latin America. For sure, there is some lag effect, given that the crops needs to be planted until you can get them in.
Okay.
I think the bottom line is that, of course, we try to observe what's going on out there in terms of tariffs and how these potential trade wars might be unfolding. It's not like this scares us a lot. We see risks of some bumps on the road, but in general, we think Latin America is going to replace whatever might happen in the U.S. As Tina pointed out, we actually have higher use of our products in Latin America than we have in the U.S.
Have you seen any sort of reduction in acres in the U.S. already now in sort of reflecting the uncertainty, or is that something that first happens? Are farmers first adjusting once things are for real or?
What we're seeing, we are in fact seeing corn acres going down a bit in the U.S., and soy is roughly maybe a bit lower, but it's minor moves.
A final question for you, Peder. When you say that you are basing on the insight you have to the geopolitical situation right now, is it correct for me to understand that you have not included any tariff rise now from China in your expectations?
As I said before, we expect that if these tariffs, as they are known now, were to come, which is a fair estimate, we would see a pickup in Latin America that would compensate for it. With the insights we have now, we're not changing our guidance.
Thank you so much.
We are now over to the line of Laurence Alexander at Jefferies. Please go ahead. Your line is now open.
Good morning. Three questions, if I may. I think last time you pegged the size of the alpha-amylase within your bioenergy, I think it was roughly about half of the business, but your mix has changed over the last few years. Can you break out where alpha-amylase stands within the portfolio now? If so, can you give us a sense for what kind of performance you're seeing? Then lastly, can you walk through in a little bit more detail the bridge for getting technical and pharma back to positive growth?
Thank you. I think the first question was about how our alpha-amylase portfolio is performing in bioenergy and the rough size of that portfolio. Tina, please.
Yeah. Alpha-amylase is a large part of what we do. We have both the glucoamylase as well as the alpha-amylases, and it sits roughly, you could say, the value per gallon of ethanol is a bit more on the saccharification side, a bit less on liquefaction side, but they're roughly equal.
Tina, BioAg performance or performance of our products in Latin America, I think compared to the U.S. was the question. Do we know whether our products perform in Latin America?
Our products do perform in Latin America, Latin America is a big part of our business there. They have a strong tradition of using inoculants down there. They're using it quite widely.
Anders on the technical industries, when will we see growth?
Maybe just to explain a little bit what it is you see right now. A little more than 1% of Novozymes is what we account as pharma business, that business has always been quite lumpy over the quarters, that's part of the reason why we still maintain our guidance on the technical pieces is, of course, that we expect to get some of that back during the year. Also that we expect that our forest business will continue to deliver growth, primarily driven by new innovation of the Syclarity launch we launched a couple of years ago.
Thank you.
I do apologize. Hans Gregersen at Nordea, please go ahead.
Good morning. Food and beverage, why is brewing not having any growth momentum for the time being? Secondly, in relation to a couple of the other sectors, ag farming risk was mentioned. How does that play into food and beverage if there's adverse price movements in the raw materials? That's the first question. Second question, bioenergy. In yeast, as far as I understand, we can see the enzyme and yeast process as a combined biological process. What is the scope for integrating selling of those two products, and how will that affect the ramping of this product? Finally, BioAg. You have first mentioned in soy now, in some pulse crops, that you're being hit by various factors in farm economics. What is the risk that this can spread further into other crops? Thank you.
I like the intonation in your question about brewing. Why is brewing not growing, Andy?
Thanks, Peder. The brewing business, actually, the majority of it is in the developed markets where we've seen quite a bit of consolidation. We've seen quite a bit of pressure actually on the brewers because consumer consumption has actually gone down and is moving towards things like micro-brewed beer and other beverages. That's been a bit of a tough part of it. Now last year, we actually had a nice counterbalance in the emerging markets, especially Africa, around local raw material brews, things like sorghum, things like cassava. We still have expectations that that will be a great driver for us.
In Q1, we actually had a situation where some of the launches from last year in Africa were actually withdrawn after the market started to settle on, and that meant that some of our customers had excess inventory in Q1, and things will pick up in Q2 and beyond.
Andy, can you talk about the effect of raw materials pricing in the general food and beverage business?
Yeah. Hans, we don't see a lot of, I would say, definitive effects as we move out farther into the value chain within food. It's pretty stable. Eating habits don't change a lot just based on slight movements in the ag markets, it's a lower percentage of the overall cost, so it doesn't have a big impact farther out.
Thanks. Then Thomas, on yeast, please.
Thank you. It's a very good question, Hans, on how enzymes and yeast work together in the ethanol process. Of course, the overall goal of an ethanol process is to get ethanol yields out of the raw material applied. The enzymes, they break down the raw materials and make it nutrients for the yeast. The yeast then convert those nutrients to ethanol. The more you can tailor the enzyme to break down and make the right nutrients available, the more you can optimize. Of course, as you also know, we have been in the enzyme business for many years and had a good business out of that without being in yeast. We're talking at the final defined parts of optimizing here, but there are certainly optimization possibilities in this, that's why we have moved into yeast.
Thomas, being a little bit more specific, if you take an enzyme cocktail from a competitor, if you take a yeast from a competitor against your enzyme portfolio versus your own yeast, what benefits can a user potentially see, if any?
Under the right conditions, the user will see that the nutrients made available is just a little bit more optimized when you use the portfolio of enzymes and the yeast from Novozymes. We are in the details here, Hans. It's not enormous differences. We have to be careful here doing this. Of course, we get into this segment because we think there is an optimization opportunity in doing it this way.
What is the selling point then? Is it a higher yield on the yeast itself?
The selling point in this specific yeast we just introduced is robustness in the process. It's a very robust yeast we've developed.
As you heard, it's picking up very well in the marketplace. I'll take the BioAg question, if you allow me. We were actually not surprised by the Indian tariffs. We knew that when we did our plans for 2018, also when we guided for 2018, obviously. The tariffs, as Tina pointed out, has led to a slightly, or at least we expect a slightly lower acreage in Canada. The recent information we've gotten from Monsanto about their expectations is slightly worse than what we had already built into our plans. It's not like this surprised us at all. Again, on soybeans, I think we're well-positioned in Latin America to pick up the business. With the insights we have now, the current projections for tariffs on American soybeans, we do not see that affect our business in a significant way.
Let me just reiterate that the real driver of our business in 2018 is preparing for the much better corn inoculant that we'll bring to the market in 2019. That is what is going to create the growth in the third and fourth quarter in BioAg. Thank you.
Our next question is from the line of Gunther Zechmann at Bernstein. Please go ahead. Your line is open.
Can I ask on your margin guidance, please? Your margin in the quarter was above your full year outlook, despite the growth being below the 4%-6% guidance. It seems to me that things are getting easier on the profitability side. You get some operating leverage as you're confident with the 4%-6%. Currencies are getting less adverse as well. Is there anything I should know about reinvestments in the remainder of the year that would keep a lid on margins, or is that more conservative stance you take so early in the year? Thank you.
Please, margin guidance, please.
Thanks a lot. Maybe to start, you are right, we are at 29.8% in the Q1, you have to, of course, factor in the reorganization cost that we saw in the last quarter. We see basically a better mix impact in Q1, which is helping us, but it will level out over the year. We see deferred income, as you know, will be reduced. That will also hit margin. That is a known fact. We also will see a small effect from increased raw material prices that we don't see in Q1 yet, but we expect that to kick in into the year. The overall theme, I think we have also mentioned in the announcement is, as you know, we are ramping up emerging markets, and you see, I think some of the sales growth also happening.
That will basically on an annualized impact also hit our P&L more as we go throughout the year 2018. Overall, that is the reason why we are guiding to around 28% for the full year.
That's very helpful. Thank you.
Our next question is over the line of Sebastian Bray at Berenberg Bank. Please go ahead. Your line is open.
Good morning, thank you for taking my questions. I would have three, please. The first is just a quick one on technical. Following the divestment of Albumedix, what is the pharma component left in this business? What does it do? The second one is on bioenergy in China. Do you see any move amongst potential customers towards reaching the new goals set by the Chinese government of potentially hitting E10 nationwide by 2020? Also on bioenergy, could you please give some comments on the outlook over the next two to three years for 2G? Is this just something we should think of as being flat for the foreseeable future?
Thank you. We'll let Thomas talk about the pharma and technical, please. Thomas?
Yes, thank you. You're right, we did the divestment of Albumedix back in December. That was our albumin business. That has now left our books. What we have left is a business, what we call biocatalysis. This is an area where big pharma companies are using our enzyme technology to produce their APIs. That's a business we have seen develop slightly over the last many years. It's a small business, but it's an okay business. And Sana said earlier, it comes in lumps when our customers order from us. On top of this, we have a royalty income coming from the half-life extension albumin technology that was not divested. That's the business we see in pharma now.
Thank you, Thomas. Tina, the exciting movements in China and maybe the more general outlook for 2G, please.
Yeah. On China, on their plans on getting to E10 in 2020. We have already seen, if you look closely at the numbers, ethanol exports from the U.S. to China has in fact been taking place here in January, February. It depends a bit on tariffs and a bit on, as well, ethanol price in the U.S., whether that makes sense. We do expect that the startup of the E10 in China will be, yes, they have their own business, which is running and which is good. They'll do some imports. They'll gradually move towards shifting maybe some distilling assets over to biofuel, they'll also be doing some building themselves. It does take time. It's interesting news, and we do see interest also from U.S. ethanol producers in the area. It's all well and fine.
In China, in the ethanol business there, we are present there. We've been there for many years. We have a good position. We think things look good there. On 2G. 2G, the way I look at 2G is that it is an interesting option. It's a growth opportunity, which will materialize. As we have talked about before, it's something which has taken way longer than we had hoped for, but it's still something which we expect will happen. The question is when, but I do think that it's something which will come.
Maybe if I can just add, amongst others, because that's going to be the long-term solution in China.
Yeah.
If I can just add, the new legislation in Brazil, the RenovaBio legislation is also incredibly interesting. That also speaks about much higher volumes of ethanol of both 1G and 2G. There's a lot of good movements happening around the world.
Also to build further on it, there's also moves in India where they rely on 2G, we have the European setup where they also look a lot into doing 2G.
Thank you very much. If I could ask a quick follow-up on the feed business. Just as a quick cross-check, is this simply a tough comps effect based on the inventory stocking that you mentioned, or is there anything here to pay more attention to in terms of the demand side?
It's a tough comparison compared to first quarter 2017. We do, in general, see regional differences, a bit softness in Latin America, but very strong growth in Asia and North America. It's a tough comparison you should pay attention to.
Thank you.
Our next question is from the line of Fulvio Cesa of Goldman Sachs. Please go ahead. Your line is open.
Yes, good morning. Thank you for taking my question. I have three actually on the operating margins, please. On the comments of input costs potentially becoming more of a headwind, can you just give us a sense of when you expect these to peak in terms of the quarters for this year? My second question is on the cost phasing relating to the emerging markets. Can you just give us an idea or quantify the effect of these ramp-up in costs in EMs and which cost lines could be most impacted, please? My third question is on depreciation. Obviously, we've seen last year and this year, CapEx running at roughly two times depreciation. When could these investments start to filter through to the P&L, please? Thank you.
Thank you. That's three good questions for Prisca. Prisca, please.
Thank you very much. I'll start with the operating margin, the inputs cost. We will see throughout the year, I would expect already basically starting now that you will see a slight impact, but you will not see a pronounced impact over the quarters. It's a general trend, basically as we basically get them from inventories capitalizing the cost of goods sold. That's what you will be seeing. If you look at emerging markets ramp up, I think it's a general trend if you compare Q4 with Q1, you'll already see sort of a pickup in the numbers. This will continue throughout the rest of the year. We are adding across the globe. I think the baking lab has been mentioned last month.
I think there's no concrete answer I can give you there as to numbers, but I think that should give you a rough guidance. As to which lines this will hit, obviously we are talking commercial teams. You would see that in sales and distribution, and then also some general admin. The last one was on depreciation and CapEx. If I remember, I think your question was around CapEx, when it will hit the P&L?
Because obviously we've seen a lot of investments going into CapEx. I was just wondering, when do you commission these facilities or R&D centers, which could obviously lead to a higher depreciation charge?
You're talking about current CapEx in 2018, is that correct?
Also what you did in 2017.
Okay, thanks.
It's been quite high for a while, yeah.
Yeah. Thanks for the clarification. Yeah, I think there's been three projects that have been mentioned. One is an ongoing project, which is the innovation campus in Lyngby, where you saw CapEx in 2017, and you'll also see a sizable chunk in 2018. As you know, it's an innovation campus, so it's a mix of R&D facilities and office facilities. The second project is the expansion in the U.S. that we have basically finalized. You'll see that already in the capacity of 2018. The third project is our facility in India, which is progressing well, is underway, and towards the end of the year should be finalized.
Great. Thank you.
We now go to the line of Klaus Kuehl at New Credit Markets. Please go ahead. Your line is open.
Yes, hello. Two questions from my side. First of all, the hygiene platform. Could you give us a more thorough update on this one? Any data points you could share, feedback from clients, anything that could affect our conviction in this product. Secondly, just turning back to bioethanol. I must say that I have been pretty impressed by your performance lately or the last couple of quarters. How big an impact is yeast in this quarter? Could you give us any kind of indication of what the organic growth would have been without this product? Simply, to try to do the underlying calculations of the growth. Thank you very much.
Thank you. Anders will talk in a very excited way about hygiene. Anders, please.
Thank you very much, Peder. Of course, this is really exciting news, and let me share a few things for you. It is expected to hit the shelves within a couple of weeks in selected emerging market countries. Ramp up is according to plan in selected emerging market countries, and that will spread out throughout the remainder of 2018. Of course, that will also carry into 2019, where we do currently expect that we will also see more formats being introduced also to other geographies in developed markets. As you know, this is a launch we are doing with an exclusive customer, and we are not essentially disclosing which markets and countries that they are going to. You will have to carefully watch that yourself. I also want to add that our freshness and hygiene platform is not only this one product to one exclusive customer.
This is a platform that Novozymes is investing heavily in. You should expect over the course of the next years that we will come out with more technologies, also to more customers. We are reiterating our growth ambition of hitting DKK 1 billion in revenues over the course of the next five to 10 years.
Thanks for your kind words on bioenergy performance. Is it all yeast, Tina?
No, it's not. Yeast is a small part of it. Although we are very enthusiastic about the launch and the progress we are seeing, and it's something we expect a lot from in the longer term, in our current numbers, yeast is a small part of it. Let me try to maybe explain a bit more about where the numbers is coming from. It's a global growth which we see in bioenergy. We see growth in the U.S., but also significant growth outside the U.S. An example is in Latin America, where we do see a number of corn-based ethanol facilities getting up and running, and where we see that the sales are contributing to growth. In the U.S., we see both some mix effects, and we also see some market share gains.
Okay, just one follow-up question if possible. When will you launch the hygiene platform for more than just one client? Will that be in 2019, or is it 2020, or what are we talking about?
We will be out with some, what you can call technology that we are tweaking, and that will be already earlier in 2018 and 2019. The real big impact from a more radical innovation is expected to hit the market in 2020 for the broad market. I think it's important to stress that you can actually have hygiene claims with current technology. A lot of the hot and humid areas, you can actually benefit with current technologies. Which we'll, of course, also try to work with our customers on showcasing what capabilities those technologies have.
Thank you very much.
We now go to the line of Hans Gregersen at Nordea. Please go ahead. Again, your line is open.
Thank you. Just two follow-up questions. One for Andy. You touched earlier on the bakery, sorry, the patent expiring in Europe on Novamyl. What was the competitive behavior in Europe post then? Going back to bioenergy, a challenge question. If we look on Monsanto's guidance as an example for yield improvement towards 2030, one could argue that we will see a significant expansion in the corn harvest. Could that lead to that we will stay in 1G, and it does not make sense to move into 2G from either cost point of view or CapEx point of view, seen from bioethanol production's manufacture point of view? Thank you.
Andy, you lived through Novamyl changes in Europe. Please.
Yep. The same patents expired in 2009 in Europe. What we saw was over a couple year period, we saw some price erosion because of new entrants, and more competition around the fresh keeping platform. That's basically how we modeled our, let's call it preparation in the North American market, was not that it would take two years, but to get it down to more market prices. We've done that. We've got a good base price, we believe. I'm sure there'll be some market dynamics and some competition, but we feel like we're well positioned to maintain and grow our business, both in the developed and especially in the emerging markets in baking.
Okay, Hans, does that answer your question, as there's a lot of noise on your line?
Not the second.
I'll give it a go at the second question. There was just a lot of noise interrupting here. U.S. corn is really interesting, and I think the longer term, you can make many different scenarios, including ones that where corn will be so abundant in the U.S. that 2G is not a likely technology in the U.S. We are, as you've heard us for the last, I think three or four years, we've been more excited about what happens in Latin America and Brazil particular, in Asia and China in particular, but not only China, India too, and then in Europe, than we have actually been about the U.S. for that exact reason. The other thing that of course needs to be considered about the U.S. business is where the regulators wants to take that over the next five, 10 years.
If the administration, again, we're not booking this into our numbers, if they were to hike up the requested volumes of ethanol to where the original RFS was, I'm sure 2G would also happen in the U.S. That's just not very likely, at least not with current environment. Corn, a lot of corn is great for our business in North America. It doesn't make it very likely that 2G will happen in America, it's going to happen elsewhere. I think we can take one additional question, please.
Okay. At this stage, there are no further questions in the queue.