1 REPORT Letter from the Board of Directors 2 REPORT Letter from the Board of Directors emphasized and further developed in 2010 by involving our employees in formulating a revitalized set of corporate values called Touch the World. For the benefit of shareholders, customers, and the environment We are very proud of what Novozymes has accomplished over the past 10 years. Sales have almost doubled and net profit has more than tripled. Value creation for our shareholders has been even stronger, with our market capitalization more than quadrupling in the same period. In addition, more than DKK 7 billion has been returned to shareholders in the form of dividends and stock buybacks. Novozymes’ products, when applied in customers’ industrial production processes, have also facilitated a significant worldwide reduction in CO2 emissions. The Board has been committed to developing Novozymes’ corporate governance practices over the past decade. This includes putting systems in place to ensure that Novozymes maintains high standards of performance and follows the ever-changing recommendations in this area, to the extent that this supports and strengthens Novozymes’ business. CELEBRATING 10 SUCCESSFUL YEARS A decade has passed since Novozymes was formed as a separate company and introduced on the Copenhagen Stock Exchange. The aim was to bring about a stronger focus on the exciting industrial enzyme business. Looking back, this stronger focus has paid off. Among many things, the Board makes sure that Novozymes has the means and measures in place to achieve profitable and sustainable growth in both the short and long term. One important way to achieve this is by always keeping innovation and strategic change high on the agenda. We believe that one of the reasons why Novozymes has achieved very good results over the past decade is that the company has not slipped into complacency. We will strive to ensure that Novozymes continues to focus on growth, making the coming decades as exciting as the one just ended. The strategy we embarked on a decade ago, with the emphasis on using our technology platform to create new business opportunities and looking at acquisitions where we could see a strong match with Novozymes’ core technologies, has led to greater diversity in sales and created a stronger growth platform. In 2000, detergent enzymes accounted for roughly half of Novozymes’ sales. Today, the same industry accounts for roughly one third of sales. This is not because detergent enzyme sales have stopped growing, but because innovation has enabled other industries to emerge and develop. Setting our sights for the future New long-term targets were introduced in 2009, replacing those communicated back when Novozymes was first introduced on the stock exchange in 2000. The new targets reflect a changing world where, in particular, Novozymes’ advancing R&D technologies, more innovative products, a planet in need of more sustainable solutions, higher commodity prices, and a broader geographical presence permit more ambitious expectations of the future. Welldefined targets for environmental and social performance are also included, ensuring high levels of awareness and regular follow-up in an area we consider an integral and very important part of the way we do business. Novozymes’ strong performance in 2010 confirms that we are moving in the right direction. Despite being hit by the global recession at the beginning of 2009, we came close to delivering on our 10-in-10 ambition of sales of DKK 10 billion in 2010. The year brought double-digit growth in sales and record growth in earnings. Novozymes also helped customers reduce their CO2 emissions by 40 million tons. Novozymes can look back with pride on a decade of strong and sustainable growth, and we feel confident that the means and measures currently in place will pave the way for decades of exciting progress for Novozymes, our employees, our shareholders, and the world. January 2011 The Board of Directors Novozymes A/S 3 REPORT Key figures 4 REPORT Key figures Innovation and recognition Novozymes’ ability to innovate, change, and adapt to our surroundings has put the company in a strong market position. Novozymes estimates that its share of the enzyme market increased from 42% in 2000 to 47% in 2010, while the market grew from DKK 12 billion to DKK 19 billion. This larger market share is the result of expanding the industrial enzyme market through innovation and penetrating new industries where enzymes have not previously been used. Novozymes’ unique biotechnology and optimization skills have resulted in products that have been repeatedly improved, delivering more efficient and environmentally friendly solutions to our customers. Procter & Gamble named Novozymes its “Supplier of the Year” for the third year in a row in 2010 out of more than 80,000 suppliers. This is the first time ever that a company has received the award three times and is a testimony to our innovative capabilities. Novozymes is recognized by both customers and financial institutions for our innovative products and for our sustainability efforts. We have been honored for our sustainability work numerous times over the past decade, but to be named by Dow Jones as sustainability sector leader in the biotech area again in 2010 makes us particularly proud. Novozymes’ high standards of financial, social, and environmental performance depend on the activities and actions of our employees around the world. This was KEY FIGURES 2010 Income statement (DKK million) Revenue Research and development costs EBITDA Operating profit / EBIT Financial items, net Profit before tax Net profit Balance sheet (DKK million) 9,724 1,360 2,796 2,117 6 2,123 1,614 8,448 1,207 2,252 1,688 (67) 1,621 1,194 8,146 1,096 2,060 1,504 (85) 1,419 1,062 7,438 995 1,971 1,481 (96) 1,385 1,042 6,802 880 1,809 1,340 (122) 1,218 911 2009 2008 2007 2006 RESOURCE EFFICIENCY IMPROVEMENT % ROIC AND INVESTED CAPITAL DKK million % Non-current assets Total assets Shareholders' equity Non-current liabilities Current liabilities Invested capital Net interest-bearing debt Investments and cash flows (DKK million) Cash flow from operating activities Cash flow from investing activities, net Of which investments in property, plant and equipment, net Free cash flow before acquisitions 7,057 12,593 7,836 2,249 2,508 8,182 346 5,991 10,890 5,841 2,528 2,521 6,790 949 5,641 9,925 4,476 2,563 2,886 5,856 1,380 5,218 8,871 3,667 2,810 2,394 5,436 1,769 4,379 7,965 3,393 2,634 1,938 4,548 1,455 2,324 (1,349) (1,323) 998 975 (737) 238 1,817 (978) (972) 839 839 (523) 316 1,697 (942) (885) 755 755 287 1,042 1,714 (1,467) (721) 963 247 (631) (384) 1,534 (953) (463) 1,058 581 (851) (270) Water efficiency improvement Energy efficiency improvement CO2 efficiency improvement ROIC (%) Invested capital (DKK million) Free cash flow Cash flow from financing activities Net cash flow Key ratios Research and development costs as a percentage of revenue EBITDA margin Operating profit margin Net profit margin % % % % % % % % % % DKK DKK 14.0 28.8 21.8 16.6 24.0 62.2 23.6 22.2 23.7 5.6 25.75 8.00 14.3 26.7 20.0 14.1 26.3 53.6 23.1 20.3 21.8 7.0 19.24 5.75 13.5 25.3 18.5 13.0 25.2 45.1 26.1 19.5 21.2 7.4 17.17 5.25 13.4 26.5 19.9 14.0 24.8 41.3 29.5 21.7 23.4 8.1 16.93 5.00 12.9 26.6 19.7 13.4 25.2 42.6 25.4 20.2 21.1 7.5 14.46 4.50 RESEARCH AND DEVELOPMENT % DKK million FREQUENCY OF ACCIDENTS AND AVERAGE DAYS ABSENT Frequency of accidents Average days absent Effective tax rate Equity ratio Return on equity Return on invested capital (ROIC), including goodwill Return on invested capital (ROIC), excluding goodwill WACC Earnings per share (EPS) Proposed dividend per share Environmental and social data Water efficiency improvement (compared to 2005) Energy efficiency improvement (compared to 2005) CO 2 efficiency improvement (compared to 2005) % % % % No. % % No. 29 30 38 43 0 7.5 2.1 0 4.1 27 27 24 45 0 6.7 2.3 0 5.1 23 21 14 45 0 11.3 2.2 0 4.9 13 13 3 43 0 9.0 2.2 0 4.8 10 12 9 42 0 8.0 2.3 0 3.7 R&D costs (DKK million) R&D costs (% of sales) Frequency of accidents (per million working hours) Average days absent (per accident) Total waste recycled Significant spills Rate of employee turnover Rate of absence Fatalities Frequency of accidents with absence per million working hours 7 REPORT Company profile 8 REPORT Company profile THE FIRST 10 YEARS A REMARKABLE SALES STORY Novozymes has been at the forefront of the industry’s development, taking it into new areas and new markets. Today, Novozymes commands 47% of the global enzyme market, compared to 42% in 2000, and our sales are spread across more industries; the detergent industry accounted for 32% of our sales in 2010, technical and food industries 32% and 22% respectively, and feed enzymes 8%. Novozymes has also added activities within microorganisms and biopharmaceutical ingredients. This increased diversity has also led to decreased customer and market concentration. Our top five customers accounted for 28% of sales in 2010, as opposed to 38% a decade earlier. In 2000, North America accounted for 28% of Novozymes’ sales; in 2010, this figure had increased to 37%. During the same period, sales in Europe, the Middle East & Africa went from 43% to 36% of sales. Emerging markets’ share of sales is unchanged overall, but China has been a strong growth engine and has been Novozymes’ second-largest national market after the US since 2005. as innovation leader. We have brought more than 85 new products to market, and we have extended the range of applications and customers for enzymes through innovation. The technological advances we have made during the period help us do things today that we could only dream of a decade ago. transform the marketplace in favor of biological solutions. It will be exciting to see how our technology and insight can help customers develop new and improved ways of making more from less and so help change the world. Novozymes’ sales have almost doubled over the past decade. At the same time, the company has developed into a more robust business with a wider range of markets, a more diverse geographical footprint, and a broader customer base. Novozymes was born as the world’s leading enzyme producer with the largest market share, the widest product portfolio, and a technology leadership position. However, the enzyme industry was very different a decade ago than it is today. Although enzyme technology was recognized, the range of applications was smaller. The industry relied heavily on the detergent and food industries – in Novozymes’ case, these two accounted for more than 70% of sales. Detergent enzymes alone provided roughly half of our sales, the Group’s sales were concentrated in Europe, and our largest customers were a small number of leading detergent producers. Today, Novozymes is still the market leader, and the detergent business is still our single largest segment, but many other aspects have changed. Regulation can create markets Novozymes always strives to develop markets through innovation, but sometimes customer trends or regulatory changes lead the way. Enzymatic solutions have increasingly been favored by regulatory initiatives over the past decade. In many cases, new regulations have forced customers to make significant changes. One example of this is the banning of bone meal in animal feed, where it was a key source of phosphate. This made our phytase enzymes competitive as an alternative technology with unique and safe characteristics. Phytase enzymes not only help animals make use of the phosphate in their feed, but also help the environment by reducing the amount of undigested phosphate in their manure. Innovation drives sales Our customers turn to Novozymes for solutions that can help them improve their business. In many cases, we save them money by providing the tools to make better use of raw materials, energy, and water. In other cases, customers turn to us for technology that can help them develop a more differentiated product. As the marketplace is constantly evolving, the only way to compete as an enzyme producer is to stay at the forefront of technology and deliver groundbreaking solutions, which is exactly what Novozymes has done over the past decade, consolidating our position The future is bright We look forward to another decade of expansion in the global enzyme market. Rapid growth in emerging economies is expected to fuel demand for products made using enzyme technology, and we will continue to develop the larger, developed markets in Europe, North America, and Japan by building on our technology leadership position. We also look forward to seeing how governments will shape future demand for our products. The increasing focus on the sustainable use of natural resources, environmental protection, and climate change has the potential to radically Global market growth The global enzyme market has expanded over the past decade from a total value of about DKK 12 billion to an estimated DKK 19 billion in 2010, even with the headwind from a lower USD. Growth has been global, but the North American market has grown particularly fast, due mainly to the emergence of the biofuel industry. ENZYME MARKET AND NOVOZYMES' SHARE DKK billion DISTRIBUTION OF SALES BY INDUSTRY % DISTRIBUTION OF SALES BY REGION % TOP 5 CUSTOMER CONCENTRATION AS % OF SALES % 9 REPORT Company profile 10 REPORT Company profile Novozymes Rest of market Detergent enzymes Food enzymes Microorganisms Technical enzymes Feed enzymes Biopharmaceutical ingredients Europe/MEA Asia Pacific North America Latin America Top 5 customer concentration Rest THE FIRST 10 YEARS A HISTORY OF TECHNOLOGICAL INNOVATION individual strain, while at the same time retaining a fairly standardized production setup, enables significant further improvements. We also make great efforts to find cheaper raw materials and minimize energy and water consumption. THE FIRST 10 YEARS SUSTAINABILITY AS BUSINESS DRIVER food and other consumables. Many different factors have helped us come this far, but two key priorities have been particularly important in making us an attractive partner in sustainability today: our decision in 2005 to build up inhouse life cycle assessment (LCA) expertise and our continuing commitment to integrating sustainability into our organization and strategy. In our quest to deliver more from less, Novozymes invests heavily in technological innovation to improve both the strains that produce our enzymes and the performance of the enzymes themselves. Novozymes is a growth company with a difference. Rather than simply building new factories to accommodate rising sales volumes, we use biotechnology to increase output from existing facilities and reduce consumption of raw materials, water, and energy. This benefits both Novozymes and the environment, as we are able to produce more from less. Continuous efficiency improvements have ensured that the construction of new production capacity has lagged growth in sales volumes, and will continue to do so in the future. The technological innovation that makes this possible also plays an important part in the discovery and development of new enzymes. State-of-the-art technologies Novozymes strives constantly to improve the properties of our enzymes. An enzyme is a protein consisting of a string of amino acids, and it is the sequence and positioning of these amino acids that determine the enzyme’s properties, such as stability and activity. By using our technologies to make our enzymes longer lasting or more powerful, we can lower the dosage of enzyme required in customers’ applications. One of the techniques is crystal structures showing how all the components of the enzyme molecule are positioned in 3D, enabling us to modify the amino acid composition of an enzyme. Using computer programs that simulate the function of the enzyme, we get ideas for how the amino acid composition can be modified to improve the enzyme’s performance. These ideas must then be tested. In the best case, we only need to test hundreds of enzymes with different combinations of modifications to get the desired result. Often, however, the task is so complicated that we have to spend months testing hundreds of thousands of modified enzymes. In this case, robotic equipment is used to carry out high-throughput screening to find the “needle in the haystack.” This is only possible thanks to the advances in robotics over the past 20 years. Novozymes has exploited the potential of this technology from its very infancy and has in many cases developed in-house robotic solutions. Other technological developments have also helped transform our work on optimizing enzymes. Twenty years ago, only a few protein 3D structures were known, and very few tools were available for exploring the function and dynamics of these structures. Today, much more structural information is available, and general understanding of enzyme function has greatly improved. Computer power has increased enormously, enabling the use of new simulation techniques such as molecular dynamics to help understand the determinants of enzyme stability and activity. New technologies are constantly improving our understanding of enzyme molecules and ways of working with DNA, making optimization increasingly efficient. Of course, these technologies are only as good as those who use them, which only serves to emphasize the need for highly talented people. Human creativity and interaction have always been, and will always be, the key to our ability to innovate. Sustainability has increasingly become a business driver for Novozymes over the past decade. We have been able to turn it into a competitive advantage in our relations with customers in recent years as more customers look to use sustainability as a differentiator. Thus, the original focus on sustainability as a matter of risk and cost management has broadened to also include and even create business opportunities for Novozymes. Interest in Novozymes’ biological solutions has soared in recent years. Our technology can help save raw materials, reduce the use of chemicals, and bring about energy and quality improvements. Our solutions have always had these benefits – the difference today is that demand for sustainable solutions is being stimulated by national regulatory initiatives and retailers’ tougher sustainability criteria for suppliers in response to consumer preferences. Customers recognize that sustainable solutions can be better and more profitable in the long run. They are keen to differentiate themselves through the reduced environmental impact made possible by our technology. It is a major step forward for Novozymes that we can now promote sustainability together with more of our customers, and this was reflected in our new ambition launched in 2009. We aim to drive the world toward sustainability together with our customers, which means making better use of the world’s resources to meet people’s needs for In-house life cycle assessment expertise The decision to build up in-house expertise in life cycle assessment has been crucial for our ability to use sustainability as a true business driver. Our LCA specialists work with colleagues in Sales & Marketing and with our customers to compare the environmental impact of conventional technologies and our biological solutions, covering products’ entire life cycles ”from cradle to grave.” This enables customers to back up their claims with solid data, and Novozymes to document our carbon footprint. Since 2008, Novozymes has also used rough LCA estimates in R&D to assess and compare the environmental impact of new products as an important element in prioritizing our pipeline. Continuous improvements Novozymes has produced enzymes by microbial fermentation for more than 50 years, first as part of Novo Nordisk and since 2000 as an independent company. The first genetically modified (recombinant) production strain was launched in 1988, and our product portfolio is now dominated by enzymes from recombinant microorganisms. Enzymes are produced by microorganisms such as bacteria, fungi, and yeasts throughout nature. To produce enzymes on an industrial scale, however, we have to stimulate and improve the microorganisms so that they yield more of the desired enzyme, release fewer unwanted by-products, and generally perform better and more efficiently in the production environment. This is an ongoing process, and we are constantly developing new technologies that push the boundaries of productivity. Increased understanding of the biology of the microorganisms that we work with has dramatically accelerated this process. Twenty years ago, even minor modifications of our production organisms could take a team of scientists several months or even years. Today, a single scientist can design and implement significant genetic modifications in just a few weeks – and with a much more predictable outcome. Ten years ago, the genome sequences of our strains were largely unknown. Today, sequencing an entire genome is standard procedure. Once developed, a new production strain opens up new possibilities in our production processes. A constant focus on optimizing our processes to get the most out of each Integration of sustainability At Novozymes, we integrate sustainability into our everyday business activities. It is how we do business and part of who we are, because we truly believe that this is the right way to do business. Sustainability is also key in our relations with stakeholders. In 2002, we were one of the very first companies to publish an integrated report combining traditional financial information and sustainability data, as is now considered best practice. SUSTAINABILITY DURING NOVOZYMES’ FIRST 10 YEARS Sustainability integration as part of Novozymes’ vision First integrated sustainability report In-house LCA expertise Sustainability as key driver in Novozymes’ new ambition THEN Previously, companies were seen as causing unsustainable development. This led to a regulatory push with the focus on risk minimization and compliance. NOW 2000 2001 2002 2003 2005 2008 2009 Today, companies are increasingly seen as contributing to sustainable development. This is creating a market pull with the focus on business opportunities. Novozymes’ commitment to UN Global Compact Establishment of crossfunctional Sustainability Development Board Use of pipeline LCAs in R&D www.blacksunplc.com © Black Sun Plc 2011 37
