Financial discussion
With one exception, the financial performance in 2007 met the expectations announced with the publication of the Group’s financial statement for 2007. Non-recurring items had a positive effect on the financial performance.
Sales
Sales grew by 9% to DKK 7,438 million from DKK 6,802 million in 2006. Approximately two percentage points of this growth can be attributed to acquisitions. Growth in local currencies was 14%, equivalent to organic growth of 12%.
Sales of enzymes grew by 9% in DKK terms and 14% in local currencies. This development was driven primarily by increased sales of enzymes for the detergent and bioethanol industries. The overall growth exceeded expectations at the beginning of the year and is highly satisfactory.
Sales of microorganisms fell by 11% in DKK terms and 5% in local currencies, which was due mainly to Novozymes closing down an unprofitable product line as well as low overall growth in the business area.
Sales of biopharmaceutical ingredients grew by 67% in DKK terms and 64% in local currencies. This development is related to the effect of the 2006 acquisitions.
Please see Sales and markets for a detailed description of the developments in our specific industries.
Market share
Novozymes achieved organic growth in sales of industrial enzymes in 2007 that was higher than the growth in the enzyme market as a whole. Our own estimates suggest that Novozymes improved its position as the world’s leading producer of enzymes in 2007 increasing its market share to approximately 47%, an increase of one percentage point from 2006.
Calculation of the market for microorganisms was expanded in 2007, so that the global market is more accurately represented. However, due to the market’s character, the market share analysis is still somewhat uncertain. The global market share within industrial microorganisms is now estimated to be 30-40%, which reflects a slight fall compared 2006. Novozymes does not provide estimates for the market share of biopharmaceutical ingredients.
Costs, License fees, and Other operating income
Total costs excluding net financials and tax grew by 9% to DKK 6,080 million in 2007.
Cost of goods sold rose by 11% to DKK 3,489 million. Continued optimization and productivity improvements offset partly the growth in raw material and energy prices. The gross margin fell from 53.7% in 2006 to 53.1% in 2007. This was due mainly to the relatively low sales margin on products from 2006 acquisitions as well as negative exchange rate movements through 2007, in particular concerning the USD and JPY.
Sales and distribution costs rose by 9% to DKK 921 million and compromised 12% of 2007 sales. The rise was due to a higher level of activity. Research and development costs rose by 13% to DKK 995 million or 13% of 2007 sales, an increase of approximately half a percentage point. The increase includes more research spendings in several projects, but particularly in enzymes for the production of second-generation fuel ethanol. Administration costs rose by 4% to DKK 675 million in 2007, which corresponds to 9% of sales. Employee costs totaled DKK 2,147 million, compared to DKK 1,958 million in 2006. The average number of employees increased to 4,684 from 4,272 in 2006.
Depreciation, amortization and write-downs increased by 4% to DKK 490 million in 2007 from DKK 469 million in 2006, which can be attributed to increased investments and acquisitions.
License fees and Other operating income totaled DKK 123 million in 2007, compared to the previous year’s DKK 59 million. This was due to Novozymes receiving DKK 75 million in compensation from Danisco in 2007.
Operating profit
Operating profit rose by 11% to DKK 1,481 million from DKK 1,340 million last year. Movements in exchange rates in 2007 significantly affected earnings growth negatively. The operating profit margin was 19.9%, compared to 19.7% in 2006. Excluding non-recurring items, operating profit was DKK 1,406 million, representing growth of 5%.
Net financials
Net financial costs were DKK 96 million compared to DKK 122 million in 2006. The fall in the level of costs was due to a net foreign exchange gain of DKK 5 million in 2007 compared to a net foreign exchange loss of DKK 50 million in 2006. Overall, the net interest costs increased in 2007, since the company’s net interest-bearing debt increased as a result of the acquisitions in 2007 and higher interest rates.
The net foreign exchange gains were due primarily to realized and unrealized gains on the hedging of exposure to the USD and JPY in particular.
Net interest-bearing debt grew to DKK 1,769 million from DKK 1,455 million in 2006.
| (DKK million) | 2007 | 2006 |
| Net foreign exchange gains/(losses) | 5 | (50) |
| Net interest costs | (78) | (26) |
| Total financials | (23) | (46) |
| Total financials | (96) | (122) |
Profit before tax and net profit
Novozymes generated profit before tax of DKK 1,385 million and net profit of DKK 1,042 million, corresponding to an increase of 14% for both. The effective tax rate was just below 25%.
Earnings per share (diluted) were DKK 16.47 in 2007, compared to DKK 14.09 in 2006.
Investments, free cash flow and acquisitions
Net investments excluding acquisitions totaled DKK 735 million in 2007, compared to DKK 476 million in 2006. The increase was due partly to the expansion of research facilities in Denmark and India; a new customer center in Iowa, USA; and investments in cGMP production facilities in Lund, Sweden.
Free cash flow before acquisitions was DKK 963 million, corresponding to a fall of 9% from 2006. The cash flow was used for acquisitions, payment of the dividend for 2006, and share buy-backs.
In 2007, Novozymes made two acquisitions totaling DKK 716 million. In October 2007, Novozymes purchased the enzyme activities of Biocon Limited. This acquisition will give us a very strong position in the Indian enzyme market, good distribution channels, local application knowledge and a global position in enzymes for the wine and juice industries. In December 2007, Novozymes purchased the Canadian company Philom Bios Inc., ensuring Novozymes access to and greater knowledge of the North American market for sustainable agriculture – a new market for Novozymes’ microorganisms business.
| (DKK million) | 2007 | 2006 |
| Cash flow from operating activities | 1,714 | 1,534 |
| Investments before acquisitions | (735) | (476) |
| Purchase of minority interests | (16) | 0 |
| Cash flow before acquisitions | 963 | 1,058 |
| Acquisitions | (716) | (477) |
| Free cash flow | 247 | 581 |
| Dividend paid | (278) | (255) |
| Purchase of treasury shares | (500) | (1,107) |
Return on invested capital
Average invested capital as a percentage of sales was 69% in 2007 and 70% in 2006. The return after tax on invested capital (ROIC) rose to 21.7% in 2007, compared to 20.2% in 2006. After adjustments for non-recurring items, ROIC was 20.6% in 2007.
| (DKK million) | 2007 | 2006 |
| Average invested capital | 5,142 | 4,767 |
| Return on invested capital | 21.7% | 20.2% |
Movements in shareholders’ equity and holding of treasury shares
Shareholders’ equity amounted to DKK 3,667 million at the end of 2007, compared to DKK 3,393 million at the end of 2006. Shareholders’ equity was increased by the net profit for the year and reduced by currency translation adjustments in respect of subsidiaries’ net assets, dividend payments, and share buy-backs. Shareholders’ equity amounted to 41% of the balance sheet total, compared to 43% at the end of 2006.
At year-end 2007, the holding of treasury shares consisted of approximately 3.2 million B shares, equivalent to 4.9% of the share capital. Novozymes spent DKK 500 million on share buy-backs in 2007. The company’s share capital is DKK 650 million.
| (DKK million) | 2007 | 2006 |
| Shareholders’ equity at January 1 | 3,359 | 3,761 |
| Net profit | 1,048 | 909 |
| Dividend paid | (278) | (255) |
| Purchase of treasury shares, net | (388) | (996) |
| Currency translation adjustments, etc. | (84) | (60) |
| Shareholders’ equity excl. minority interests | 3,657 | 3,359 |
| Minority interests | 10 | 34 |
| Shareholders’ equity at December 31 | 3,667 | 3,393 |
Incentive programs
Novozymes achieved the financial targets defined for the employee stock option program in 2007, but did not achieve all non-financial targets. The Board has therefore approved a pro rata allocation of the year’s stock options to employees. Regarding the Executive Management’s incentive program, the non-financial targets were partly achieved and the targets for economic profit in 2007 were achieved 100%.
Incentive program for Executive Management
The Board will submit the general guidelines for the 2008 Executive Management incentive program for approval at the Annual General Meeting. The recommendations will follow the incentive program for 2007-2010 that was previously presented and approved.
The exercise price is calculated based on the average of the closing price on the OMX Nordic Exchange Copenhagen on the first five working days after publication of the annual report for 2007. This determines the underlying number of shares in the program. The stock options have a qualifying period of one year and a vesting period of three years, followed by an exercise period of five years. Based on Executive Management’s current basic salaries, the value of the program for 2008 using the Black-Scholes model will total a maximum of DKK 29.9 million. The stock option program will be accrued and expensed over four years, equivalent to the program’s service period. The carrying amount for 2008 is approximately DKK 8 million.
The recommendations for the Executive Management incentive program is available at www.novozymes.com from February 8, 2008. Moreover, a complete description of the environmental and social targets can be found in the Board of Directors' report.
