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`Credibility Problem' at Novozymes Has CEO Explaining Next Steps

Novozymes Shares Sink, Pressuring CEO After Third Profit Warning

(Bloomberg) -- Investors in Novozymes A/S just woke up to a third profit warning in half a year, forcing the chief executive officer of world’s biggest industrial-enzyme maker to explain why shareholders shouldn’t panic.

In an interview, CEO Peder Holk Nielsen blamed a sharp slowdown in U.S. ethanol production. He said the company was hit by “bizarre” circumstances and that growth would return next year.

“I know that I now have a credibility problem,” Nielsen said by phone on Thursday. “All I can do is to explain what has happened and then execute on our plans.” The 63-year-old said he has no intention to step down before his contract expires in two years.

News of Novozymes’s latest profit warning triggered a sudden selloff of its shares when trading started in Copenhagen. The stock sank as much as 5.5% before recouping some of those declines. The company cut its growth and profit forecasts after the market closed on Wednesday, and now expects organic growth to be flat, at best.

Development in Novozymes 2019 outlook

Oct. 9June 6April 24April 4
Organic growth-2% to 0%1% to 3%3% to 5%3% to 6%
Ebit margin27% to 28%28% to 29%29% to 30%29% to 30%
Net profit growth-5% to 0%3% to 8%5% to 10%5% to 10%

Novozymes makes the enzymes that ethanol producers use to turn plant matter into fuel. In the beginning of the year, U.S. floods hurt producers and now they have unexpectedly cut production again, the CEO said.

“Some of our biggest U.S. clients have turned down volumes by up to 15%,’’ Nielsen said. “The underlying problem is we don’t have enough growth in the other business areas to provide a buffer for this.’’

Novozymes also produces enzymes for the food and healthcare industry. In June it presented a plan that targets annual growth of more than 5% in the period 2020-2022. The company is sticking to that plan, the CEO said.

“We haven’t yet made our budgets for next year,’’ he said. “But the way I look at it now, it’s clear that we’ll be back on the growth track.’’

What Bloomberg Intelligence Says:

“Novozymes’ 2020-22 organic-growth ambition still looks unrealistic to us, unless volatile agricultural markets calm, and this is borne out by the 2019 organic-sales forecast range again being reduced, this time to minus 2% to flat vs. from 1-3% -- at least a 5% EPS cut. A quick recovery is dependent on better weather and a resolution to the China-U.S. trade spat, which looks unlikely.”
-- Duncan Fox, BI consumer staples analyst

Analysts have turned more negative on the stock this year, even after it has lost about 3% in value so far. Of 24 analysts tracked by Bloomberg, 12 recommend selling the stock. Half a year ago, only 8 out of 24 rated it a sell.

“Expectations of a sharp turnaround were too optimistic and were overly reliant on new products being launched in tricky markets,” Annette Lykke, an analyst at Handelsbanken, said. Looking ahead, “we see high risk and remind investors that Novozymes has been overly optimistic about growth in the past,” the analyst said in a note.

--With assistance from Jonas Cho Walsgard.

To contact the reporter on this story: Christian Wienberg in Copenhagen at cwienberg@bloomberg.net

To contact the editor responsible for this story: Tasneem Hanfi Brögger at tbrogger@bloomberg.net

©2019 Bloomberg L.P.