Sales outlook
Novozymes expects 4-6% organic growth for 2018. Using current spot levels as full-year estimates for the major currencies, Novozymes expects to see a negative 2018 impact of ~5 percentage points on sales growth in DKK. The Albumedix divestment late 2017 is also expected to impact DKK sales growth negatively in 2018 by around 1 percentage point. Lower recognition of deferred income (BioAg) in 2018 relative to 2017 by some DKK 30 million also reduces reported sales. We expect a pick-up in organic sales growthSales growth from existing business, excluding sales from businesses acquired in the reporting period, measured in local currency.
throughout the year, mainly due to Agriculture & Feed seasonality and the Household Care contribution from the freshness & hygiene platform expected to impact the second half of the year.
Agriculture-related markets remain uncertain. However, based on current 2018 insight, we believe the uncertainty is covered within the guided range. As we move through 2018, we keep an eye especially on high US ethanol inventories and low prices, as well as selected crop prices, in particular corn and soybean.
Household Care organic sales growth is expected to be driven by increased penetration in emerging marketsMarkets that are progressing toward becoming more advanced, usually by means of rapid growth and industrialization., where we intend to tap into consumer trends with our innovative enzymes for liquid detergents. The first sales from the freshness & hygiene platform are expected to increasingly contribute to growth from the second half of 2018. We expect the reformulation focus from some of our large customers to continue, especially at the beginning of the year, which puts a dampener on growth. While the developed marketsMarkets that have a highly developed economy and advanced technology infrastructure relative to less industrialized markets. North America, Central Western Europe, Australia, New Zealand, Japan and South Korea. Rest of the world is considered as emerging markets.
continue to be dynamic, innovation, performance and differentiation remain in focus for both existing and new customers.
Food & Beverages organic sales growth is expected to be driven by a continued step-up in commercial presence, especially in the emerging markets, as well as by new products. Baking is still expected to be impacted by price reductions in the North American freshkeeping market, while sales are expected to perform well in other markets. Enzymes for low-lactose dairy products are expected to continue their positive growth trend. In general, we expect continued good growth across industries.
Bioenergy organic sales growth is expected to be driven mainly by new product launches and increased penetration from innovation. We expect US ethanol production for 2018 to be roughly on par with 2017, but note that US ethanol inventory levels remain high. Good sales development is expected to continue, as technology introduced over the last 18 months is adopted in the marketplace. Yeast is added to the product portfolio early 2018 and will contribute to growth. Sales of enzymes for biomass-based ethanol are expected to increase, but make up a small proportion of overall Bioenergy sales.
Agriculture & Feed organic sales growth is expected to be driven primarily by good growth in BioAg, but animal health and nutrition is also expected to deliver growth. New product launches will benefit sales, especially in the second half of the year. The changed sales pattern and shift of sales from the first to the second half of the year that has been ongoing in recent years should now largely be completed. We will continue to monitor the potential acquisition of Monsanto by Bayer, but currently do not expect this to have implications for our BioAg business in 2018. Sales to the agriculture-related markets are subject to some uncertainty, due primarily to global farm economics.
Novozymes expects to recognize around DKK 170 million of the deferred income in BioAg as revenueThe amount of money a company earns through the sale of goods and services. in 2018. Deferred income does not impact the calculation of organic sales growth rates; it impacts realized sales growth in DKK and has no cash flowThe difference between the available cash at the beginning and end of an accounting period. impact.
Technical & Pharma is impacted by the divestment of Albumedix late 2017. The divestment will not impact organic growth. Looking ahead, the divestment will reduce some of the quarterly lumpiness in sales.
Profit outlook
Reported EBIT marginEarnings before interest and tax as a percentage of revenue. in 2017 was 27.9%. Excluding one-time costs, the EBIT margin in 2017 was closer to 29%. Guidance for 2018 is ~28%. For 2018, we expect a strong negative impact from currencies, as well as a higher activity level on the commercial side to support growth opportunities, particularly in emerging markets. As currencies are experiencing high volatility, in particular the US dollar, a further weakening relative to what has been assumed in the guidance (6.00 USD/DKK) could impact the EBIT margin negatively. The DKK ~30 million lower deferred income expected in 2018 relative to 2017 also reduces reported EBIT by an identical amount. Sales growth and productivity improvements are expected to be supportive to margins.
In 2017, Novozymes transferred intellectual property (IP) assets from Switzerland to Denmark. This had a positive impact on the 2017 effective tax rate (ETR)Income tax expense as a percentage of profit before tax.
of roughly 2 percentage points. Additional IP transfer will take place in 2018, and we expect to carry out further transfers over the next three years. Following these transfers, Novozymes is likely to see a higher ETR. Given the current visibility and interpretation of different country-specific tax legislation and levels, including in the US, Novozymes expects an ETR of 19-21% over the next 3-4 years. We are still evaluating the real net effect not only of the lowered US corporate tax rate, but also of other US tax changes.
Net profit growth is expected to be ~0% in 2018. The USD has been hedged through forward contracts at an average exchange rate of 6.18 USD/DKK. At this level, the US dollar is ~9% lower than the average USD/DKK in 2017.
Net investments are expected to be DKK 1,300-1,500 million. The relatively high investment level for 2018 concerns a continuation of the building of the innovation campus in Lyngby, Denmark, as well as the completion of the enzyme production facility in Mumbai, India, and the final parts of the capacity expansion in Nebraska, US.
Free cash flow before acquisitions is expected to be DKK 2,300-2,600 million.
Return on invested capital including goodwill is expected at 24-25%. The average calculation for invested capital now includes a higher end balance following the big investment programs that we announced early 2017.
Currency exposure
From a currency perspective, we expect 2018 EBIT to be most exposed to fluctuations in the USD and EUR.
Other things being equal, a 5% movement in USD/DKK is expected to have an annual positive/negative impact on EBIT of DKK 110-130 million.
Other things being equal, a 5% movement in EUR/DKK is expected to have an annual positive/negative impact on EBIT of around DKK 200 million.
Sustainability outlook
Novozymes has an ambition to continuously improve business operations across our value chain – making our operations more cost-effective, environmentally friendly and socially responsible. The triple bottom line is fundamental in terms of how our business is run.
Sustainability reporting is long term by nature, and determining metrics and type of reporting is under constant review and development. We aim for our targets to reflect our commitment to transparent sustainability reporting, and at the same time, for the targets to be relevant to Novozymes from a materialityThe materiality assessment process identifies key topics that pose both risks and opportunities for Novozymes’ business strategy. It is based on a systematic analysis of internal and external stakeholder perspectives. Material topics merit inclusion in our report, as they reflect our economic, environmental and social impacts or because they might influence stakeholder decisions.
perspective and auditable.
In January 2015, Novozymes introduced three long-term environmental targets for 2020, with the aim of measuring our resource efficiency relative to gross profitA company’s total revenue (equivalent to total sales) minus the cost of goods sold., in other words: the resource intensiveness of our gross profit. However, this way of measuring progress has not proven to be optimal, as short-term changes in gross profit, caused by e.g. currency movements, revised sales growth expectations and product mix, distort the picture of the actual sustainability performance.
We have decided to explore a better way of measuring our sustainability performance, as we want to stay at the forefront on this matter. Consequently, we have decided to cancel the three 2020 environmental targets. While exploring better long-term sustainability measurements, we introduce annual targets for water, energy and CO2 emissions relative to organic sales growth. In general, we aim to keep growth in resource consumption lower than organic sales growth. We remain committed to continuing our legacy of taking a lead on sustainability disclosure, and providing detailed information on resource consumption data and types of resources in our annual reports.
