Novozymes Says Efficiency Boost to Keep Margins High

21.01.2013 -

Danish industrial enzymes maker Novozymes said it aims to keep margins at the current high level over the next five years through production efficiency measures, helping send its shares to an 11-month high.

Posting higher-than-expected quarterly earnings, the company whose enzymes are used in making consumer goods from detergents to biofuels said it aimed for profit margins of above 24% in each of the next five years, in line with last year and above analysts' expectations.

"We have invested heavily in research and development and have built platforms which make it difficult for others to come in and push our margins down," Peder Holk Nielsen, named as the company's new president and chief executive from April 1, told Reuters.

Nielsen, previously head of the group's enzymes business, said the firm would keep investing 20% of research & development to optimise production.

"We have been able to optimise first, to get more out of our factories and constantly make more effective enzymes," he said.

"The outlook for 2013 earnings is really strong ... This is also reflected in the fact that they dare to lift the long-term expectations for a profit margin of over 24%, where they have previously guided for 20%" said Morten Imsgard, an analyst at Sydbank.

Novozymes, which sells to consumer goods giants like Procter & Gamble and Unilever, has enjoyed strong demand for enzymes used in detergents which allow for low-temperature washing.

It said its main growth driver this year will come from its household care enzymes, the biggest part of its business at 30% of revenue, thanks especially to higher sales to Germany's Henkel, maker of the Persil washing powder brand in parts of continental Europe.

Still confident

Novozymes's positive comments on margins outweighed a slowdown in sales growth which the company blamed on the economic downturn.

"We are still confident that we can reach the long-term average sales growth target of more than 10%, although not until 2015," outgoing Chief Executive Steen Riisgaard said.

Novozymes, which shares the biofuel enzymes market with U.S. chemicals group DuPont, has been hit by low ethanol production in the United States.

Data from the Energy Informational Administration last week showed U.S. ethanol production plunged to the lowest in 2-1/2 years, with supplies tight due to low corn production in the drought-stricken U.S. plains and western midwest.

Corn is the main feedstock used to produce ethanol in the United States and enzymes are used to break down that raw material into sugars that can be fermented into ethanol.

Bioenergy enzymes accounted for 16% of Novozymes's turnover last year and Novozymes said new product launches could help lift earnings this year.

It recently launched a new product which enables producers of corn-based ethanol to increase their ethanol yield by up to 2.5%. That product was already selling well, it said.

Earnings before interest and tax rose to 671 million crowns ($120 million) in the fourth quarter from a year-earlier 496 million, against an average forecast of 577 million in a Reuters poll of analysts.

Novozymes forecast operating profit growth of 4 to 7% this year, sharply lower than the 17% result in 2012. It also said it would pay a 2.20 crown dividend per share against a forecast 2.10 crowns.