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Strategic update

Novozymes’ strategy and financial targets have been unchanged since 2009. Executive Management and the Board of Directors confirm that Novozymes will continue its strategy to deliver sustainable growth through innovation, market presence and operational excellence. However, it has been decided to update the financial targets due to improved visibility regarding future sales growth drivers and earnings capacity.  

Novozymes previously excluded future sales of enzymes for biomass conversion from its long-term sales targets. However, there is now better visibility regarding growth opportunities in this emerging field. Furthermore, visibility has improved for several projects in the pipeline for sales of microorganisms to the BioAg industry and solutions to the biopharma industry. In terms of earnings, the previous long-term target for the EBIT margin has been outperformed in the last couple of years and the outlook remains supportive of current levels.

Sales growth

Growth is expected in all industries during the five-year period, with sales of Household Care Enzymes among the strongest contributors. Sales of enzymes for biomass conversion and sales to the biopharma industry are expected to materialize slowly in 2013 and 2014, and to contribute significantly to sales growth by 2015, enabling Novozymes to achieve on average more than 10% organic growth from that year onward. The sales growth target is based on the assumption that the global economy stabilizes without any major fluctuations.

Biomass conversion

Novozymes’ long-term target assumes that the company will have sales to at least 15 biomass conversion plants by the end of 2017. The first cellulosic ethanol plants will come onstream in 2013-2014 and, as they start production, more players are expected to commence construction of plants.

Novozymes is collaborating with Beta Renewables, which is expected to contract the design and planning of 15-25 cellulosic ethanol plants in the next 3-5 years. As Novozymes is Beta Renewables’ preferred enzyme partner, these contracts are expected to generate enzyme sales for Novozymes once the contracted plants become operational around two years later. In 5-7 years, these contracts are expected to contribute up to DKK 1 billion to Novozymes’ annual enzyme sales.

In addition, Novozymes is collaborating with other partners on the development of cellulosic ethanol technology and other means of converting biomass to fermentable sugars for the production of biochemicals and other materials. These partnerships are also expected to result in sales of enzymes toward the end of the five-year period. 

EBIT margin

Novozymes’ new long-term target for the EBIT margin is more than 24%. This level is expected to be achievable, while at the same time keeping the desired flexibility in the business to pursue opportunities for long-term growth.

ROIC

The long-term target of more than 22% for ROIC incl. goodwill is unchanged, as it remains ambitious yet achievable. ROIC incl. goodwill has decreased over the last couple of years due to acquisitions. As investments normalize and sales grow, Novozymes is expected to reach the target and remain above 22%.

Novozymes expects to continue to make productivity improvements in both Enzyme Business and BioBusiness. This ability is important for offsetting increasing raw material prices and for reaching the EBIT margin and ROIC targets.

Innovation

Novozymes’ future success relies on innovation, so the company will continue to spend 13-14% of sales on R&D. Novozymes will always focus on investing in projects that will secure growth for Novozymes and benefit customers. Currently, Novozymes is changing internal structures to improve the flow of products in the R&D pipeline toward better-qualified solutions and to speed up the idea-to-market process. The success of these efforts will be measured by the increased commercial impact of new products.

Investments

Novozymes has invested relatively heavily in recent years in order to be ready for future growth in both Enzyme Business and BioBusiness. It is expected that an investment level of not more than 8% relative to sales will be sufficient going forward to cater for 10% sales growth. Should future growth opportunities that require up-front investment be identified, Novozymes will allow investments to exceed the targeted level. R&D facility expansions are not included in the 8% target.

Acquisitions and partnerships

Novozymes continues to be interested in companies and technologies that fit strategically with its overall objectives and can balance the portfolio in terms of risk, future value creation, market access and resource utilization. Novozymes is always searching for new opportunities and will continue to acquire and divest activities as required to ensure a balanced portfolio.

Strategic partnerships are an important element in reaching and servicing new customers. Novozymes will continue to look for partners that complement its strengths in bringing its technology to the market.

Sustainability

Sustainability is an integral part of Novozymes’ business. The nature of Novozymes’ technology enables customers to optimize their use of raw materials and energy. This has become a competitive advantage as more customers look to use sustainability as a differentiator.

To support the ambition to drive sustainability around the world, Novozymes works closely with all players across the business value chain: suppliers, customers and society. Novozymes mitigates risks and taps into supplier strengths by requiring suppliers to balance reliability, quality and efficiency with a focus on sustainability and innovation. Work is being carried out, and investments are being made, to increase CO2 efficiency by improving our production processes and by helping customers achieve further CO2 reductions through the application of our products. Novozymes is a member of the Dow Jones Sustainability World Index and the Dow Jones Sustainability STOXX Index. Several external stakeholders have recognized Novozymes as one of the world leaders in sustainability.

The sustainability targets have been updated to reflect Novozymes’ sustainability ambitions and activities across the value chain, and to ensure the long-term development of Novozymes as an international, inclusive and successful company.

Three new sustainability targets

Novozymes’ long-term targets increasingly focus on improving the external impact of the company’s sustainability efforts. Novozymes has therefore added three new sustainability targets:

  • We aim to have all suppliers comply with our program for commercial, quality and sustainability performance in 2015. This target will help increase the sustainability impact of our partnerships
  • To further strengthen our position as a preferred employer, we have broadened our employment target by aiming to draw on a global talent pool and further cement ourselves as an inclusive employer. A diversified, balanced workforce is vital to improving innovation capabilities and global insight
  • We want the U.N. to recognize biofuels as a high-impact opportunity area in its Sustainable Energy for All (SEFA) initiative, which aims to make sustainable energy universally available by 2030 by activating all sectors of society. The success of the initiative depends on the involvement of many key players, so Novozymes and other stakeholders must work together to make the potential of biofuels more widely known


 

A tough year for biofuels

Peder Holk Nielsen explains why Enzyme Business returned strong growth in Household Care, why Bioenergy sales were disappointing, and discusses future prospects for the business.

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Long-term targets and strategy

Our integrated business approach is reflected in our long-term targets. In addition to our ambitions for sales growth and financial returns, we aim to use our resources as efficiently as possible, reduce our environmental footprint and continue to lead the way within sustainability.

Long-term targets

As of January 21, 2013, we have updated both our long-term financial targets for the next five years and our sustainability targets. The financial targets have remained unchanged since 2009. However, a clearer picture of Novozymes’ future growth drivers and earnings calls for an adjustment to the long-term financial targets. The new long-term targets, listed below, are contingent upon no major acquisitions being made.

The long-term sustainability targets have also been amended, reflecting Novozymes’ consideration of the entire business value chain. The new targets, which are integrated into our business strategy and concrete business initiatives, emphasize our engagement and collaboration with business partners and other stakeholders. 

Read more about the long-term financial and sustainability targets in the Strategic update section.

Novozymes’ long-term targets

Financial targets for the next five years:
Average organic sales growth of more than 10%
EBIT margin of more than 24%
Return on invested capital of more than 22%
 
The average organic sales growth target is expected to be reached from 2015 and onward, following a ramp-up from current levels.
The targets are based on the assumption that:
The global economy stabilizes
The biofuel market in the U.S. moves toward E15
Novozymes will sell enzymes to at least 15 biomass conversion plants by 2017, with a ramp-up in 2015-2016
 
Sustainability targets:
Ensure 100% supplier adherence to our supplier program for commercial, quality and sustainability performance in 2015
Enable a 75 million ton reduction in CO2 emissions in 2015 through the application of our products
Improve water efficiency by 40% in 2015 compared with 2005
Improve energy efficiency by 50% in 2015 compared with 2005
Improve CO2 efficiency by 50% in 2015 compared with 2005
Increase energy supply from renewable and CO2-neutral sources to 50% of total energy supply in 2020
Be recognized as a global leader within sustainability
Be a globally preferred employer, attracting global talent as a diverse and inclusive workplace
Champion the inclusion of biofuels as a high-impact opportunity area in the U.N.’s Sustainable Energy for All initiative in 2015

 

Key developments in bioenergy

Novozymes is the world’s leading supplier of enzyme technology for conventional biofuels. Through innovation and strategic partnerships, we are also playing a key role in enabling the commercialization of advanced biofuels produced from agricultural residues and waste.

The production of conventional biofuels in the U.S., Novozymes’ largest bioenergy market, has become well established over the last decade and today accounts for 10% of gasoline consumption in the U.S. transportation sector. However, growth in the U.S. bioenergy industry has leveled off over the past couple of years, as the increase in the upper blending limit for ethanol in gasoline from 10% to 15% is only slowly penetrating the market. Additionally, volatile corn prices are putting pressure on ethanol producers’ margins, making bioinnovation all the more important for producing more with less.

Launched in October 2012, our latest product, Novozymes Avantec®, enables producers to squeeze up to an extra 2.5% ethanol out of corn. A typical U.S. ethanol plant uses around 900,000 tons of feed-grade corn each year to produce 100 million gallons of ethanol. With Avantec, it can obtain the same output from 22,500 tons less corn. If all ethanol plants in the U.S. used the new product, they would need 3 million tons less corn, a gross saving of some DKK 5 billion a year.

Exciting developments in advanced biofuels
It was an important year for advanced biofuels, as the first commercial-scale facilities opened in China, with Europe and the U.S. set to follow in 2013. In October, Novozymes made another significant move to further the commercialization of advanced biofuels by entering into a strategic partnership with Beta Renewables, a leading supplier of biofuel production technology, to jointly guarantee production costs and processes.

The deal is unique in that it offers a combined solution that reduces the financial and technological risk in customers’ projects and will help accelerate the large-scale commercialization of the industry. Novozymes expects Beta Renewables to win contracts for 15-25 new facilities over the next 3-5 years, potentially boosting Novozymes' annual sales by up to DKK 1 billion. These first commercial-scale facilities are a critical step in demonstrating the viability of the market.

Novozymes also launched a new enzyme solution, Novozymes Cellic® CTec3, which further cuts costs and increases yields in the production of advanced biofuels, putting the cost of producing a gallon of ethanol from biomass on par with conventional ethanol and gasoline.

Mitigating risk in a politically regulated industry
Unlike most other industries in which Novozymes operates, the transportation fuel industry is heavily regulated. The bioenergy industry in the U.S. was founded on a political initiative to use domestic agricultural resources to improve energy security, reduce carbon emissions and support rural economic development. The same three drivers apply globally, but political support varies due to its dependence on regional and geopolitical developments.

A number of new and existing bioenergy regulations were discussed in 2012. Prompted by a major drought, the Renewable Fuel Standard (RFS), a key legislative tool in the U.S., was challenged, as a number of states filed requests with the Environmental Protection Agency to lower the mandated blending of biofuel in gasoline; however, all waivers were denied. We expect the RFS to be challenged again in 2013 but remain confident the industry will continue to advocate for and defend the success of the RFS.

In China, progress was made as the National Development and Reform Commission announced its decision to increase bioenergy production by 5 million tons per year by 2015, a considerable increase from the 1.75 million tons produced in 2011. Meanwhile the European Commission proposed capping conventional biofuels at 5% and providing additional incentives for advanced biofuels. Finally, the global debate about the use of agricultural resources for energy production was reignited as global prices for agricultural commodities experienced another volatile year.

Novozymes works actively across regions in close collaboration with industry partners, key opinion leaders, NGOs and intergovernmental organizations to promote a balanced public debate and ensure that policy is scientifically based, all with a view to long-term sustainable development. We also invest continuously in innovation to advance technology, minimize political risk and ensure commercial viability. Further information on our position on bioenergy can be found at www.novozymes.com.

2012 – A glimpse of the future
Developments in 2012 illustrated what Novozymes does best: deliver innovative solutions to increase the sustainability and viability of customers’ businesses. Novozymes has around 150 scientists and researchers, plus a full commercial team, dedicated to bioenergy innovation. We realize the bioenergy industry will remain dependent on political regulation, creating both opportunities and challenges. Going forward, we will continue to improve enzyme technology to increase yields in the conventional ethanol industry, bring down the cost of advanced biofuels and work to have biofuels included as a "high-impact opportunity" on the Global Action Agenda of the U.N.’s Sustainable Energy for All initiative in 2015.

A clearer picture of Novozymes’ future growth drivers and earnings capability calls for an adjustment to the long-term financial targets.

BUSINESS STRATEGY

By driving innovation, expanding opportunities, and improving our own and our customers’ productivity, we aim to establish profitable new business areas while making the best use of our own and nature’s resources.

Strategy

Novozymes is a business-to-business company providing biological solutions. We compete by understanding customers’ business needs, turning insights into cost-effective and innovative biological solutions. We aim to drive the world toward sustainability together with our customers by making better use of the world’s resources to meet needs for food, feed, fuel and other consumables. Our technological foundation is biotechnology, enzymes and microorganisms. Wherever we choose to do business, our aim is to be the market leader. We operate with a triple bottom line approach and are thus committed to continuously improving our financial, environmental and social performance.

Our strategic agenda is three-fold: drive innovation, expand opportunities and improve productivity.

Drive innovation

As the world’s premier industrial enzyme developer and producer, we drive the industry forward by rethinking how and where enzymes can be applied. We regard sustainability as an integral and significant part of our business model and a vital element in building long-term customer relationships. Our solutions address the need to improve industrial processes and products, enabling our customers to produce more with less. We are committed to research and development, in which we invest 13-14% of annual sales and employ over 20% of our global workforce, and we are one of the world’s most active patent filers in our field with a portfolio of 7,000 patents granted or pending. Our innovations drive our top line, allowing us to grow in existing markets and reach new markets alike.

Expand opportunities

Novozymes aims to build on its foundation in enzyme technology and explore biological business opportunities in other areas as well. Biological solutions, such as microorganisms and proteins other than enzymes, can also address the need for safe and cost-effective solutions, improving industrial processes and reducing the consumption of raw materials, water and energy. We lead the way in several fields where our technological platforms and organizational capabilities give us a competitive advantage and our solutions benefit society at large. Novozymes seeks to turn opportunities into significant business that can sustain the company’s growth and returns over time.

Improve productivity

We aim to deliver sustainable returns on our innovations by constantly improving the use of both our own and nature’s resources throughout our business and especially in our production processes. We use sophisticated technologies to improve the efficiency of our fermentation production processes, the strains that produce our enzymes, and the performance of the enzymes themselves. This enables us to increase output from existing facilities and reduce consumption of raw materials, water and energy, making for a flexible production setup that improves our margins, returns and environmental footprint.

BUSINESS STRATEGY

By driving innovation, expanding opportunities, and improving our own and our customers’ productivity, we aim to establish profitable new business areas while making the best use of our own and nature’s resources.

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