Novozymes A/S (OTCPK:NVZMF) Q2 2022 Earnings Conference Call August 11, 2022 3:00 AM ET
Company Participants
Tobias Bjorklund – Head of IR
Ester Baiget – President and CEO
Lars Green – Executive VP and CFO
Anders Lund – EVP of Consumer Biosolutions
Claus Fuglsang – CSO and Executive VP of Research and Development
Amy Byrick – EVP of Strategy and Business Transformation
Tina Fanoe – EVP of Agriculture and Industrial Biosolutions
Conference Call Participants
Alexander Jones – Bank of America
Michael Novod – Nordea
Georgina Fraser – Goldman Sachs
Chetan Udeshi – JPMorgan
Sebastian Bray – Berenberg
Charles Bentley – Jefferies
Charles Eden Sedan – UBS
Søren Samsøe – SEB
Lars Topholm – Carnegie
André Thormann – C&I
Operator
Welcome to Novozymes Conference Call regarding the First Half 2022 Results. [Operator Instructions]
Today, I’m pleased to announce Tobias Bjorklund, Head of Investor Relations. Please begin your meeting.
Tobias Bjorklund
Thank you, operator, and good morning, everyone, and welcome to Novozymes’ Conference Call for the First Half of 2022. My name is Tobias Bjorklund, as mentioned, I’m the Head of Investor Relations here Novozymes.
At this call, our CEO, Ester Baiget; and our CFO, Lars Green, will review our performance and key events in the first — in the second quarter and for the first half year as well as the outlook for the full year.
Also attending today’s call are Tina Fanoe, EVP agriculture & Industrial Biosolutions; Amy Byrick, EVP Strategy & Business Transformation; Anders Lund, EVP Consumer Biosolutions; and also Claus Fuglsang, CSO and EVP of Research and Development.
The entire call will take about 45 minutes, including time for questions at the end. As always, I would like to remind you that the information presented during the call is unaudited and that management may make forward-looking statements. These statements are based on current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in any forward-looking statements.
With that introduction, I now hand you over to our CEO, Ester Baiget. Ester, please?
Ester Baiget
Thank you. Thank you, Tobias, and welcome, everyone.
Please turn to Slide number 2. Thank you. The first 6 months started strong, and we delivered very satisfactory organic sales growth of 10%, both for the half year as well as for the second quarter. Four of our 5 business areas grew by 10% or more and both emerging and developed markets delivered growth of 10%. All business areas performed at least in line with expectations in the second quarter with Bioenergy and Grain & Tech Processing coming in stronger.
Turning to our financials. We delivered a solid EBIT margin, ROIC including goodwill, and free cash flow. The unprecedented effect of higher input and logistics costs is clearly visible. And in Q2, we started to see the effects of more positive pricing, coupled with continued positive effects from productivity improvements and operating leverage.
Regarding innovation, we introduced 6 new products in the first half year, including 4 in the second quarter, covering yeast solutions in Bioenergy, growth stimulators from broad agri crops in agricultural and a solution for sub bars in household care, enabling further penetration in emerging markets as the product allows for longer storage times.
We continue to see good progress on our key activities across the venture portfolio. We have entered partnerships in the agricultural area, focusing on biocontrol and post-harvest solutions. And we clearly feel a growing need for our sustainable solutions in our various markets as well as on the Wall as we attended and discuss sustainability at the Wall Economic Forum in Davos.
For the full year, we have increased our organic sales outlook to the upper end of the previous range of 4% to 8% to now 6% to 8%. Our well-diversified business and agile and flexible solution toolbox are the main enablers for the upper organic sales growth outlook. And Bioenergy and Grain & Tech Processing now look to the end of the year on a higher note than previously indicated. The indicators for the other areas are maintained.
We had 2 nonrecurring events after the interim period. And as a result, the EBIT margin and ROIC, including goodwill, are increased by around 1 percentage point each. And Lars is going to tell you more about it later in the presentation and how we capitalize additional value for our intangible assets.
Our work on pricing continues in close collaboration with customers, and we expect these efforts to provide a stronger support as the year progresses, leading to a slightly positive effect for the full year.
And with that, our view, let’s now look at each of the 5 business areas in more detail, starting with Household Care. Could you please turn to Slide number 3. Thank you.
Household Care delivered a solid first half in line with our expectations. Organic sales were flat and grew 4% in reported currencies. Emerging markets performance was solid, mainly driven by Latin America and Asia Pacific. Developed markets declined slightly as expected and mainly due to the anticipated reduction in European market volumes. Sales in the second quarter grew 4% organically and 9% in reported Danish kroner. This was very much in line with our expectations and included a negative impact from the war in Ukraine. Similar to the first half development, sales in emerging markets performed well, driven by a strong performance in Latin America and Asia Pacific.
In developed markets, second quarter organic sales grew as the weakness in the European laundry market is somewhat compared to the first quarter.
The full year organic sales indication for Household Care is maintained at flat to 2% growth. As previously announced, this includes around 2 percentage point negative impact from the war in Ukraine.
We expect performance to be driven by enzymatic penetration in emerging markets, the freshness platform and including expectations of a roughly flat development in European laundry detergent volumes.
Please turn to Slide number 4. Thank you. Food, Beverages & Human Health reported a strong first half at 10% organic growth. The performance was mainly driven by the food and beverages areas, which benefited from favorable market conditions and high consumer demand. As also highlighted in the first quarter results, the performance was impacted by a positive timing effect.
The growth in food was broad based across sub-areas and supported by innovation, by ingredient substitution and raw material optimization. Beverages also delivered very solid numbers in the first half, especially in the low calorie brewing segment.
Human Health performed well with strong underlying demand, and we are very excited about the opportunities that the recent acquisition of Synergia Life Science is bringing.
Looking at the second quarter, Food, Beverages & Human Health grew 3% organically. The performance was in line with expectations and driven by growth in Food and Beverages. Human Health performed well against a strong comparator from last year, with continued solid underlying demand for our solutions.
For the full year, we maintained the indication of organic sales growth in the low teens with Food and Human Health being the key drivers. We expect solid double-digit growth in Human Health, driven by innovation, cross-selling and regional expansion. In Food and Beverages, growth will be driven by healthy-focused solutions while also benefiting from raw material optimization and ingredient substitution.
Please turn into Slide number 5. Bioenergy sales grew 23% organically in the first half. The performance continued to be driven by multiple factors. According to EIA, U.S. ethanol production was up by 6% to 7% in the first 6 months partially driven by a recovery in ethanol volumes.
In addition, there was a strong demand following solid producer margins and continued corn-based capacity expansion in Latin America. Our innovative and broad solution toolbox, such as fiber X continues to be well received by customers and penetrate markets where demand for efficiency and higher value products is critical.
Lastly, growth continued to be supported by market penetration with enzymatic solutions for biodiesel. The second quarter organic sales growth of 19% was driven by similar factors as those ones for the first quarter. And the EIA estimate for the U.S. ethanol production was up by 1% to 2% year-on-year.
Looking at the full year, we expect growth to be supported by higher U.S. ethanol production approaching pre-COVID levels, continued capacity expansion in Latin America, innovation and a strong focus on yield and optimization. As a result of the strong first half performance and continued fabric market conditions, coupled with an increased penetration enabled by innovation, we’ll raise our full year organic sales growth indication to mid-teens.
Could you please turn to Slide number 6. Thank you. Sales in Grain & Tech Processing grew 13% organically in the first 6 months, with double-digit growth in both Grain & Tech. The strong performance was driven by higher demand for our broad and innovative toolbox solutions, especially in starch and vegetable oils as well as the favorable market conditions where customers focus on yield and throughput enhancing solutions. Technical Processing grew very well across most subsegments and was further boosted by higher sales of diagnostic enzymes.
Second quarter organic sales growth was 19%, with grain driven by similar factors as those for the first quarter. Sales in tech were driven by growth across most subsegments and boosted by the strong sales in diagnostics segment — on diagnostic enzymes.
Looking at the full year, we expect growth to be broad-based with good performance across most of areas in both in grain and tech. The performance after the first 6 months and the favorable market conditions, especially in grain, increases our full year sales growth indication for Grain & Tech Processing to high single-digit growth.
Please turn to Slide number 7. Thank you. Agricultural, Animal Health & Nutrition sales grew 14% organically in the first half, led by double-digit growth in both Animal Health and Nutrition as well as agriculture. The strong growth in Animal Health & Nutrition continued from innovation and end market-driven demand.
Additionally, the current market conditions with higher soft commodity prices supported demand for high-yield optimizing solutions. Agricultural grew double digit in the first 6 months as customers increasingly focus on innovation and yield.
The second quarter organic sales growth was broad-based and in line with expectations. On the backdrop of a relatively soft compared from Q2 last year. For the full year, the indication is maintained at high single digit to low teens with double-digit growth in agricultural and solid growth in Animal Health & Nutrition. Innovation and solid end market demand are key growth drivers, coupled with a more diversified commercial model in agricultural.
And with that, I’ll hand over to Lars for a review on the financials. Lars, please?
Lars Green
Thank you, Ester. Please turn to Slide number 8 for a review of our financial performance. Despite the persistent high pressure from input and logistics costs, we continue to see solid financial performance. Sales in the first 6 months of the year grew 18% in reported Danish kroner and 10% organically. Currency has provided a 7 percentage point tailwind with another percentage point coming from the acquisition of Synergia.
The gross margin was 55.5% in both the first half and the second quarter. As expected, this was below last year’s margin, mainly due to the high input and logistics costs, partly offset by productivity improvements and operational leverage.
In addition, the second quarter gross margin was negatively impacted by around 1 percentage point due to a provision for the potential scrapping of inventory related to agriculture and came on top of a high margin from last year.
The reported EBIT margin was 26%, 2.6 percentage points below last year due to the lower gross margin and other operating income and included a slightly improved OpEx to sales ratio as well as tailwind from currencies. The reported first half EBIT margin also included around a 1 percentage point negative impact from the mentioned inventory provision and the first quarter provision related to the war in Ukraine.
The second quarter EBIT margin was 25.9%, 1.8 percentage points below the second quarter last year, including a tailwind from currencies. We expected a lower EBIT margin due to the lower gross margin, and there is also included a negative impact of around 1 percentage point for the inventory provision.
Adjusted for the two provisions, the EBIT margin for the first half and in the second quarter was closer to 27%. Free cash flow, excluding acquisitions was DKK 1 billion in the first half and DKK 600 million in the second quarter. As expected, this was below last year, due to the investment in the state-of-the-art advanced protein solutions production line at our site in Blair, Nebraska. We also had somewhat higher inventories, mainly due to the higher input costs. ROIC, including goodwill, ended at 17.5% and around 2 percentage points below last year, mainly due to the acquisition of Synergia and growth investments.
And as you might already have seen, the DKK 500 million stock buyback program was completed on June 27.
Now please turn to Slide 9 for an update on the 2022 outlook. As Ester mentioned, we narrowed the full year organic sales growth outlook to 6% to 8%, following a strong first half with 10% organic sales growth and despite the volatile market environment.
Sales reported in Danish kroner are expected to be around 8 percentage points higher than the organic sales growth rate. We increased the EBIT margin outlook to 26% to 27%. The increased outlook reflects an agreement to invest intellectual property in 21st.BIO as a related party transaction together with Novo Holdings. The intellectual property investments in 21st.BIO and the initial consideration for this agreement was described in a press release from December last year.
The agreement is expected to be completed in the second half of the year and generates a nonrecurring accounting gain of approximately DKK 200 million recognized under other operating income. The transaction has no cash flow impact, but a positive effect of around 1 percentage point on both the EBIT margin and ROIC, including goodwill.
Additionally, the effective tax rate for the year is expected to be affected by around 1 percentage point as the transaction is tax exempt.
Compared to last year, the EBIT margin will benefit from sales growth and productivity improvements, targeted price increases as well as a net positive currency effect. Significantly higher input costs and logistics costs and continued investments in the business are expected to have a negative year-on-year impact. Consequently, the gross margin is expected to decline by around 2 percentage points.
And as a result of the 21st.BIO agreement, we also increased the outlook for ROIC, including goodwill, to 17% to 18%. Free cash flow before acquisitions is maintained at DKK 1.7 billion to DKK 2.1 billion.
Following the announced sale of Albumedix, Novozymes will divest its minority ownership in the company and record a tax exempt financial income of approximately DKK 250 million. Upon closing, the transaction will generate a cash payment from the sale of our financial assets. The transaction does not impact any outlook parameters and is subject to customary closing conditions.
Following the 2 tax exempt transactions with a combined 2 percentage points nonrecurring effects, the effective tax rate for 2022 is now expected around 20%.
And with this, I’ll now hand it back to Ester for a wrap-up before we open up for questions. Ester, please?
Ester Baiget
Thank you. Thank you, Lars. Please turn to Slide number 10.
Let me summarize our key messages today. we delivered a very satisfactory half year with 10% organic sales growth and solid financials. We see good traction with price increases being implemented across all business areas in close collaborations with our valued customers and partners.
Following the strong first half performance and continued good momentum, the full year organic sales growth outlook has been lifted to 6% to 8%. We are in a very good place with our well-diversified portfolio, broad end-market exposure and a resilient flexible global footprint providing opportunities, both for the short and for the longer term.
We raised the outlook for the EBIT margin and ROIC, including goodwill, following the nonrecurring accounting gain. As it has no cash impact, the outlook for free cash flow is maintained. We execute our strategy with key progress areas here in 2022 being well on track, namely, achieving key milestones in the construction of the new production line for the advanced protein solutions at Blair, Nebraska; we are keeping the time line and progressing very well under construction; leveraging the recent acquisitions and delivered double-digit growth in Human Health, which was a good very well on; continue to strengthen our commercial setup, including bringing in talent and capabilities and having selected locations for two of our customer corporation centers that will enable closer interaction with customers; and finally, we maintained a diligent focus on prioritizing our core business, ensuring we deliver on our short- and long-term commitments.
With those concluding remarks, we are now ready to open up for questions. Operator, please begin.
Question-and-Answer Session
Operator
[Operator Instructions] The first question comes from the line of Alexander Jones from Bank of America.
Alexander Jones
Two, if I may. The first on Bioenergy. There’s quite a big disconnect between sales growth and what the EIA reported, especially in the second quarter where production increased slightly in the U.S. Could you help us understand sort of how much of that is being driven by the increased ethanol margins and higher crop prices and, therefore, an incentive to maximize yield and how much is being driven more structurally by your innovation efforts and the market penetration gains?
And then the second question just on energy costs, so clearly seeing big increases. Could you outline for us your strategy on energy costs, your hedging policy and any impact that you expect going into next year from higher prices?
Ester Baiget
Thank you, Alexander. I will let Tina build up on the — your question on Bioenergy and guide you on the self-help with driving to capture the momentum of the trends that we see in the market. And then, Lars, if you could please follow up on the question on energy costs.
Tina Fanoe
Yes. So on the Bioenergy question, there is, as you rightly say, multiple factors supporting the very strong performance, both in the quarter and in the half year.
First of all, the favorable conditions means something to the business. But I think the key here is that what our solutions is offering is an ability to crack the corn into different components. So it means you can get ethanol, and that is more valuable, but you can also get more, for example, high-protein feeds. And that evolution is going to be continuing and remain to be important.
We do see also in the numbers, a strong performance from Latin America as well. And I think the reason why you could say we are capable to benefit from that is due to innovation, coupled with our customer closeness. We do have a very strong intimacy with customers and work very closely with them on optimizing their plans and also enabling them to diversify no matter what process conditions they have and no matter what type of product they’re going after.
Lars Green
And as it relates to our policies on energy costs, we are hedging our energy cost for a period into the future, a significant part of it and looking something like 12 months out. But this also means that we are, of course, exposed to the increasing energy costs looking into 2023 because, obviously, our hedge from last year is what we benefit from today or what we account for today. And the energy cost, we have today is what is then going to sort of impact our cost of goods sold in the future.
So we have a policy where we are not speculating about the development of energy cost, but rather want to make sure that we have transparency into the costs that we have. And so this is our policy, and this is what we have been following also here in 2022.
Operator
The next question comes from the line of Michael Novod from Nordea.
Michael Novod
Yes. Two questions from my side. First of all, to the price hikes that you’re implementing. Are they sort of broad-based across the business areas? Or are there any specific areas we should be in mind of when we try to sort of model your price hikes?
And then the second thing, maybe you could just discuss how your portfolio within Household Care is sort of structured should we go into sort of the temporary recessionary environment globally in terms of how you seem to — how you expect to be deferring in such a scenario with the composition of your current portfolio?
Ester Baiget
Thank you, Michael. I’ll take your first question and then pass to Anders for the building on Household Care.
Regarding the efforts on price. First, this is what we — the efforts we’re driving on price are a continuum of an initiative that we have already started a while ago, and we’re now starting to collect the fruits of the efforts of the training and the discipline and the capabilities we have built in the sales force. We’re coming from a heritage that you know of 1% to 2% price erosion year-on-year when now we see a positive contribution on price.
We are in a place on comfort, a place of comfort that we see sequential gross margin expansion — underlying gross margin expansion quarter-over-quarter where price is a contributor, our contributor coupled with the strong growth, the strong penetration and volume growth for our solutions and also with the efforts of the productivity.
Then to your second part of the question on other broad-based. Yes, they are broad-based. We have — we’re very pleased with the constructive conversations with our customers where we seek for the prices conversations on ensuring we get our fair share of value in the [Indiscernible] environment with a stronger commodity prices, with a stronger energy cost, with a stronger pool of sustainability solutions and that we get the fair share of value that we deserve.
And then we see also those ones to materialize as the contracts onset. And maybe that makes a little bit of a difference on the implementation from one business to the other. But the strong momentum is the same, are consistent across the whole portfolio. Anders, I’ll pass it to you.
Anders Lund
Thanks, Ester. And on resilience in Household Care, I actually think our Household Care business is a very resilient business from the perspective that consumers will still watch that close in any scenario.
Now the outlook that we sort of have in the next couple of quarters is that we believe volumes will sort of remain fairly stable with the logic that people will still wash. There will probably be some down tiering. We already see that now. Consumers trading down to lower tiered products and private label products. We expect pricing to be a positive contributor full year. And then, of course, we continue to expect positive momentum in emerging markets. And also expect that our Freshness platform will continue to deliver growth. So the guidance we have on Household Care, we think, looks right and quite solid with the 0% to 2% for the full year.
Ester Baiget
And you stay committed for the long-term guidance, correct?
Anders Lund
Absolutely.
Operator
The next question comes from the line of Georgina Fraser from Goldman Sachs.
Georgina Fraser
I’ve got 2, please. The first one, I wanted to ask on ingredient substitution, which has been a strong trend since the pandemic in 2020. I was just wondering if you could give us an update how this is progressing. Have you seen any changes in buyer behavior as the supply changes are normalizing?
And then my second question is just about the volume drivers into the second half in 2023. It’s been an incredibly strong kind of volume performance in the first half and your guidance implies somewhat of a slowdown going forward. So I just wanted to know if there are any tangible reasons for that or some [changes] given the macro backdrop.
Ester Baiget
Thanks, Georgina. I’ll cover both questions a little bit, and then I’ll let Anders come with a further deep dive on the examples and tangible proof points of the ingredient substitution.
First and foremost, we are in a good place, in a very good place with 10% growth year-to-date and 10% growth in the second quarter. Then we also are in a place of comfort that allows us to upgrade or to put — to increase, to narrow upwards our guidance to 6% to 8%. We’re aiming to the high end of our guidance. And also the range that we’re putting on — that we are bringing in, it shows the uncertainties. It covers the uncertainties of the market that we live in, including disruptions in supply chain.
So we feel comfortable on the demand, the strong penetration of our solutions, the pull for sustainable solutions, the pull from our customers for solutions that they lead to, yes, healthier, more sustainable, lower energy consumption and higher yield and the strong pull from our solutions and penetration in emerging geographies, coupled with innovation. That happened in the first half, and we continue to foresee that trend stay firm in the second half of the year.
And with that, Anders, I’ll pass it to you.
Anders Lund
Yes. Thanks. And on the ingredient substitution, if we take the 2 segments and then look at Food and Beverages, to a very large extent, the ingredient substitution were driven by 2 factors. One was a shortage of raw materials. So a very immediate need and the other one was pricing. We actually see also looking ahead that, that will continue to be contributing to growth. We continue to see a lot of customers that are moving away from ascorbic acid to our solutions — wheat gluten to our solutions.
On Household Care, the drivers have been a little bit different, but very much driven by price. Here, we have very good conversations with customers, but the transition has been a little bit slower because the need has been a little bit less immediate than it has been in the food and beverage area.
Operator
The next question comes from the line of Chetan Udeshi from JPMorgan.
Chetan Udeshi
Can I ask on the 1 percentage impact on gross margin from inventory scrapping. Can you maybe give us more color on what exactly happened? And is that something you expect to continue in second half? Or is that really a one-off?
The other question was, it’s interesting to see that the organic sales growth is 10% yet for first half as a whole. R&D expenses are down 7%. Maybe I’m just curious here, is this probably the — or is this more an indication that there is clearly behind the scenes work going on in terms of rationalizing the R&D to some extent to make sure that it’s contributing to growth of the company rather than just being spent on some projects, which may not be economically viable? Just any color on R&D will be useful.
Ester Baiget
Thank you, Chetan. And yes, you can make the question. I will let Lars both answer the gross margin and the efforts on R&D. And let me reassure you, our commitment to R&D. We are a science-based company. We continue to invest in R&D. And R&D and science continues to be the pillar of the fundamentals of long-term growth.
Lars Green
So thanks for the questions. And on the provision, this is something we do consider a one-off. We have simply reviewed our inventory in ag, like we do across our businesses at regular intervals and made a provision for goods that we may not be able to sell. We believe this is a prudent accounting and time will then show if this provision turns into a write-down, so that our provision was real, or if we will have the opportunity to sell some of it. It doesn’t change our outlook for BioAg, still double digit as part of the Animal Health & Nutrition and Ag business area. And so this is sort of a one-off and not something we consider to be structural or to continue.
So when it comes to our R&D cost relative to sales, so it’s true, we have had organic sales growth of 10%. When you look at our R&D costs, remember that we, last year in the first half, included a cost where we were reorganizing our R&D efforts in global sensors. And therefore, when you look at the underlying R&D costs in absolute terms, we are maintaining our investments. So we are not sort of consciously reducing our efforts in R&D. We are maintaining it in absolute level. And at the moment, we just see our organic sales growth very, very high at 10%. And therefore, obviously, we will have a ratio between the two that is going down from R&D, but it’s not because we are actively reducing it. It’s simply because we see very strong organic sales growth.
Operator
The next question comes from the line of Sebastian Bray from Berenberg.
Sebastian Bray
I will have 2, please. The first is on the 21st.BIO revaluation impact. I haven’t understood what this is yet. Am I right in saying that Novozymes at the time of the investment by Novo Nordisk at the end of 2021 invested IP that has now been positively revalued upwards but is not an equity partner in this company? That’s my first question.
And my second one is on the Nebraska plant-based facility. Are you willing to give any guidance on when exactly in 2023, this ramps up, if it’s at the very end of the year.
And related to that, there are quite a few lawsuits going on at the moment related to consumable proteins in plant-based meat. If your undisclosed anchor customer loses the right to have exclusivity around the proteins that it’s producing or at Novozymes is involved in, is Novozymes not bound by any type of exclusivity and can go and sell to competitors?
Ester Baiget
Thank you, Sebastian. I’ll let Claus bring color on how we’re sweating out the — and extracting the value of intangible assets. And then Amy to build up on our products on protein and also the progress on our Nebraska plant.
Claus Fuglsang
So it’s a little bit complicated, Sebastian, but let me try to explain. So as you rightly said last year, it was announced the formation of 21st.BIO with an investment of a related party Novo Holding. And now we are actually merging the IP on which it’s built into the company. And with that, Novozymes will also have shared ownership with our related party. So this is why we now have to realize the value, as Lars was explaining. And that’s pretty much a simple story.
Amy Byrick
Great. And just regarding your questions on the advanced proteins investment, yes, I mean, so the investment in Blair is exciting to see on track and on time, which would be for coming online at the end of 2023. So we still have quite a bit of way to go in terms of commissioning that, but it’s really coming along well.
In terms of — obviously, we can’t comment on specifics related to our anchor customer or specific lawsuits. I think what we see is we remain really confident about our anchor customers positioning both in the market and their ability to commercialize and bring the products that we’re developing to the market. And I think as we see the developments in the alternative protein market, particularly in the U.S., what we see is the increasing need for improved products, improved taste and texture. Those are the products which are winning, and I think really aligned with the value proposition of the work that we’re doing in the protein space. So we remain really excited both in terms of where the project is tracking. Also in terms of our anchor customers performance and the relevance of the product portfolio.
Operator
The next question comes from the line of Charles Bentley from Jefferies.
Charles Bentley
So I’ve got 2, please. So one is on margins. If I take the 26% margins in H1, assume 27% underlying in H2 and then the kind of 100 bps one-off, and if I get to kind of 27.5%, is there anything that we should be considering as a kind of margin headwind or offset to get to the margin guidance for the full year?
And then secondly, I mean, Food, Beverages & Human Health had a pretty meaningful slowdown in Q2, and then — but the guidance would imply kind of an acceleration in the second half. Can you just kind of give us the kind of context around why you expect this to improve through the second half? And what was kind of holding the division back in Q2?
Ester Baiget
Lars, if you can take the question on margins, and then Anders on food.
Lars Green
Yes, happy to do so. So when you look at the development of our costs and, in particular, the cost of goods sold over the year, because of the time lag between procuring the raw materials and selling the products and, therefore, recognizing the cost in our cost of goods sold, we are seeing a continued increase in our cost of goods sold per unit between first and half year. And that is why we sort of consider the 26% to 27% margin, including the 1% nonrecurring from the accounting gain also appropriate for the full year. So we see an increasing cost of goods sold, but also a positive contribution from price in the second half. And therefore, we believe that the full year outlook is very well aligned with those underlying developments.
Anders Lund
And on the Food & Beverages, yes, you’re right. We came from a very, very high growth level in Q1 of 18% down to 3%. Now I actually think there’s some pretty good reasons behind that. First of all, we called out a significant sales of one product. Also, our comps are quite different. So we came out of a ’21 comps of Q2 of 18%. so that also made it a little bit difficult.
If you look at run rates, they’re fairly equal between the 2 quarters if you discount the one-off we have. And if that brings any comfort, we are actually a little bit ahead of our plan in the segment totally for the half year. So we remain quite confident that the guidance we have for the segment is realistic and is the right one. It’s driven by health and, of course, also raw material substitution as we have sort of expected all along for the year. So all in all, I think we remain quite confident.
Operator
The next question comes from the line of Charles Eden Sedan from UBS.
Charles Eden
First one is on the price increases you mentioned. Can you quantify the contribution in Q2. If I remember, it was broadly flat in Q1. And then if you could comment on how much you expect pricing to contribute to the 6% to 8% organic sales growth for the full year that would be helpful.
And then the second one is just a follow-up on the Household Care and your comments on down-trading. Is Novozyme’s enzyme content in lower tier and private label products similar to the premium Tier 1 brands? Or would it be lower? I’m just trying to understand whether there’d be any impact that down-trading would have on mix or not.
Ester Baiget
Thanks to you, Charles. I’ll cover your first question and then pass it to Anders. We see, year-to-date, a slight positive contribution on price on our results. And as mentioned before, price is a contributor of the sequentially underlying gross margin expansion, but one contributor coupled with the strong growth, volume growth and coupled with the productivity improvements and the mix efforts that we’re driving.
We’re very confident and we’re very comfortable on the conversations with our customers, and we’re expecting and aiming the contribution on pricing to continue to materialize and see more tangible as the year progress, and we’re aiming for also a slight positive contribution on pricing on to the year-end. This is improvement or a shift on the trajectory that we used to have in the past of 1% to 2% decline in price. And it’s the simple collection of the fruits of the work done in these last years and then coupled, yes, with an environment of strong commodity prices that accelerates or encourages or gives even more momentum on ongoing conversations with our customers.
Anders Lund
And on private label for us and in the Household Care categories, to a very large extent, the European phenomenon and a little bit in the U.S. And then generally, we see penetration being very good and our position being very strong in that segment.
We also see that private label penetrations are often higher than the mid- and low-tier detergents. So a transition from those to private label will actually benefit our business. We also see that there are some very high-end brands that has a slightly higher penetration. So it depends on where you take and who will win. But net-net, we should be benefiting from higher private label penetration.
Charles Eden
That’s great. And just a follow-up on the pricing. When you talk about slight contribution, is that in absolute terms? Or is that net of your assumption on the impact on volumes? I think with Q1, you talked about it being sort of net of implied volume elasticity. So I just wanted to get a sense of whether that slight contribution for the full year is including an assumption of a negative drag on volume.
Ester Baiget
The contribution on price, like contribution price is on price. And then overall, we’re aiming to the high end of our guidance on 6% to 8%, where volume is going to be the strongest contributor of that growth.
Operator
The next question is from the line of Søren Samsøe from SEB.
Søren Samsøe
First, a follow-up question on the question regarding plant-based. I was just wondering who actually owns the IP rights for the protein you’re producing for this undisclosed customer. Is it the customer or is it Novozymes?
Ester Baiget
Amy, do you want to take that one?
Amy Byrick
Sure. I can take it. I mean, again, we can’t comment on the specifics. I mean, I think what you can assume is sort of a shared IP development where we have and contributing particularly both on the background IP, jointly develop foreground IP and then also very much on the know-how. So this is really a joint venture, but obviously a lot of the IP resides within Novozymes.
Søren Samsøe
But if the customer can no longer sell this protein, what would you have left to sell basically is my question.
Amy Byrick
I think that we get into the details of contracts, but I think we feel very confident that what we are building is the plant that is based on Novozymes know-how and capabilities. Again, this is an anchor customer. It’s an important contract, but it’s not the — it’s not fundamental. We have — we bring a lot to the table as well and other products as well.
Søren Samsøe
Okay. And then a different question regarding your impressive organic growth. I was just wondering how much of the 10% kind of growth you had in the first half is related to countries with hyperinflation like Turkey and Argentina. If you exclude those countries, what would the growth have been then?
Ester Baiget
Lars?
Lars Green
Yes. Thanks. I can take that question. So we invoice many of our customers in those regions in some form of hard currency, be that U.S. dollar, Danish kroner or euro. So there is a very limited impact, if any, from hyperinflation in those numbers.
Søren Samsøe
Okay. Great. And then finally, the guidance implies quite a deceleration in growth, which it doesn’t seem — it sounds like the momentum into Q3 is quite strong. So what is the reasons aside from, of course, top of comparable — comparison in the second half? What is the reasons for the deceleration you think?
Ester Baiget
We take this as your final, final question. Lars?
Lars Green
Yes, I can take that. So as Ester said, we are upgrading or narrowing the range to 6% to 8%. And like we have said all along, our aim is to arrive at the upper end of that range. I think as you also realize, we are standing in a world that is looking at some risks both from a macroeconomic and geopolitical perspective. But we feel confident that our business will continue to grow despite those circumstances, but we have included risks in our outlook in that 6% to 8% range so that we can cope with what we believe and what we can see at the moment.
So you can say we have called out a small timing effect in the Food and Beverage & Human Health business area from Q1. That’s a little component. But other than that, it is the comparators of, in particular, Bioenergy, which were very different between first and second half. That sort of makes, I would say, the numbers add up and sort of reflect that a continuation of our trend from the first half, resulting in a 6% to 8% for the full year.
Operator
The next question is from the line of Lars Topholm from Carnegie.
Lars Topholm
Yes. Congrats with another very strong quarter. I also have a couple of questions, and one of them goes a little bit also to guidance. So when I look at Q1 and Q2, clearly, some of your businesses benefit from higher soft commodity prices because you offer yield improvements to your customers trade up. So I wonder what the effect of that has been and what you can do to maintain customers on those higher-yield solutions. And of course, implicitly leading to the question, what the assumption is for defending the current mix in your guidance and maybe also what the exit rate of the quarter has been?
And then I have a very small second question. So your share buyback is finalized now. You’re hopefully getting DKK 250 million in cash from the Albumedix sale. Are you going to send that back to shareholders? Or are you just going to consolidate?
Ester Baiget
Thank you, Lars. I will let Lars answer your second question. And then on your first one — and thank you for your nice words. And yes, we are aiming to make a trend here on our trajectory to sustainable growth. We’re having a little tiny dot with this quarter, and we feel very pleased of that.
Building on your own question, how we’re going to make that sustainable and how much of that is the tailwind. Yes, there are tailwinds of higher commodity pricing. Yes, there are tailwinds of a strong pool for sustainability and solutions that enable a healthier planet, lower CO2 emissions and healthier foods. We capitalize on those tailwinds with a lot of self-help. We capitalize on those tailwinds with, A, a strong innovation, a very robust and resilient asset footprint that enables us to flex, that enables us to swing, that enable us to capture the growth where it is and bring solutions close to our customers, and then with a very strong team that once more has proven that condense, that can deliver in a very volatile market.
It is also true that when we are coming in and we’re capitalizing on the tailwinds we’re seeing from the market, we leapfrogging the penetration of more sustainable solutions. I’ll give you a small example. I think that Anders also mentioned ascorbic acid. Part of that growth that we have seen maybe has been catalyzed by the strong commodity prices or by the shortage of supply. But then when we are in and we qualify our solutions, then our customers move to clean label breadth, to clean label solutions and with there for good. And that solution, those products continue to be a strong contribution of the future growth.
It’s that concept, the one that we see, coupled with a diversified portfolio, coupled with our diversified market and the capability to respond to the volatility, the ones that make us very confident that we’re going to continue to be growing. And then we continue to invest for the future. We continue to invest in capabilities. We’re moving ahead on plan for Blair. We’re moving ahead with investments on customer corporations, and those will be the pillars also for future growth.
Lars Topholm
But Ester, it’s probably just me being silly here, but implicitly, you guide 2% to 6% organic growth for the rest of the year. And I understand you all aim at reaching the high end of that, of course. But on this call, you’re also telling us this will mainly be volume-driven. There will be some positive pricing. But I would also assume your mix right now is a lot better your mix was this time last year. So how on earth do you get down to 2% to 6%? Do you have an assumption and then just deduct a buffer because of uncertainty, which would make sense? Or what sort of the math behind the 2% to 6% for the second half of the year, given you have better mix, given you’re saying you have good volumes and then given you have pricing?
Ester Baiget
I really love your question, Lars, and it does show that you do seek and understand our numbers and you read very, very well behind on what we do. We have provided the guidance of the individual segments where we show our expectations of where we’re aiming to grow. We have shared that we’re aiming to the high end. And also, you heard that Lars, Amy, and Tina and Anders mentioning about that range of the guidance today. It covers the uncertainties of the wall that we live in, including further disruptions on supply chain. With all of them, we’re confident on the guidance that we’re putting in and we’re also confident of a continued trajectory of growth.
Lars Topholm
Okay. And then the DKK 250 million?
Lars Green
Yes. On the DKK 250 million, Lars, as you know, we have a capital structure strategy where we are looking to have a ratio between our net debt and EBITDA of around 1. On that background, we started the DKK 500 million share buyback program because that represented the excess cash we would generate during the year in our plans. So obviously, DKK 250 million when arriving would come on top of that. It’s not enough to sort of start a new share buyback program in its own right. But when we look at our future capital structure, this will be part of the considerations. And of course, it will be cash on our accounts. And therefore, we would consider future return of cash in that context.
Ester Baiget
One last question, please.
Operator
The last question comes from the line of André Thormann from C&I.
André Thormann
Yes. Thanks, Lars. So my first question is in terms of Agriculture & Animal Health. You had 14% organic growth in the first half and still doesn’t upgrade your guidance in this segment. Can you explain a bit what you see in the second half for this business? That’s my first question. Yes, let’s just take that one, I guess.
Ester Baiget
So first of 2 questions, Tina, please?
Tina Fanoe
Yes. So in the segment, it’s — we are maintaining the guidance at high single digit to low teens. We upgraded it earlier in the year. And already back then, we were having, you could say, a view on how it is the rest of the year would pan out, and that is what we are sticking to. So we do see a strong performance in both segments. We expect double-digit growth in the agriculture side and solid growth in the Animal Health & Nutrition side. So we are comfortable with the indications we are having here.
André Thormann
All right. And then my second question is in terms of the currency impact on your EBIT margin guidance. So can you maybe give an indication of how much in percentage points the currency tailwind that you get is benefiting your EBIT margin guidance.
Ester Baiget
Lars, please?
Lars Green
Yes, I can do that. So in particular, due to the appreciating U.S. dollar relative to Danish kroner, we are having a currency tailwind also sort of for the full year. It is a marginal positive contribution and not enough to sort of change the overall guidance that was sort of underlying 25% to 26%, and then there’s 1% accounting gain on top of that.
André Thormann
But I think you mentioned previously 0.5 percentage point. So are we talking 1 percentage point now or still 0.5 percentage point?
Lars Green
So of course, it all relates to what the starting point is. The change since last guidance is a marginal positive contribution.
Ester Baiget
Thank you, Lars. Yes, we — thank you, André. So with this concluding the call, thank you very much for all your questions, looking for continued conversations with many of you in the next forth coming days, and I wish you a beautiful rest of the day. Thank you.
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