Novozymes announced first quarter results today, with positive sales and earnings in line with expectations: 8% organic sales growth, 18% growth in Danish crowns, and an EBIT margin above 27%. The company remains positive about the year ahead, and increases its outlook due to the continued appreciation of the U.S. dollar. Sales in Danish crowns are now expected to rise by 16-18% compared with 13-15% at previous guidance, and expectations for EBIT growth are increased to 15-17%, up from 12-14%


The flipside to the strong dollar
During the last 12 months, the U.S. dollar has increased by 27% when compared to the euro.  The Danish crown is pegged to the euro and therefore follows the depreciation the euro has experienced versus the dollar. One dollar now costs 6.95 crowns up from 6.41 crowns at the beginning of 2015. The exchange rate was 5.45 crowns to the dollar one year ago.  Novozymes has hedged 100% of the expected dollar/crown net exposure for 2015.

“The rising dollar is a two-edged sword,” explains Benny D. Loft, Novozymes CFO & Executive Vice President.  “As we have more sales than costs in U.S. dollars, the strong dollar has a positive impact on our numbers, but there can be a flipside to this. Our U.S.-based, internationally oriented customers who sell their products in local currencies on the global market suddenly receive less for their goods in U.S. dollars. There is a risk that the strong dollar could result in these customers changing their short-term course, focusing on costs, and holding back on innovation initiatives.”

Fluctuating commodity prices
Coinciding with these unusual currency fluctuations are the prices of global commodities on grain and energy markets, which have also seen extraordinary movement.  The ever-changing commodity prices can affect more than just the other players in their sector.  The current drop in oil prices combined with strong grain markets create a challenging market environment for the U.S. ethanol industry – a period with low ethanol margins and a strong focus on reducing costs.

“Commodity prices can impact Novozymes’ business in many ways,” says Benny D. Loft. “Of course, it has a direct impact on our own costs as we spend billions of crowns every year on energy, raw materials, and other commodities, but prices and trade flows also impact our customers’ business. Some win, others lose and it is something which is constantly evolving. We have seen volatility before and we expect to manage it well again this time thanks to our diversified setup and global presence.”

Hedging is the act of entering into a financial contract to limit loss resulting from fluctuations in the prices of commodities, currencies, or securities. Currency hedging is used by financial investors and businesses to eliminate risks they encounter when conducting business internationally.

Novozymes’ hedging positions for 2015
100% of the expected USD/DKK net exposure for 2015 has been hedged. Around 45% of the exposure has been hedged via options at 5.65 USD/DKK. Around 55% of the exposure has been hedged using forward contracts at an average of 5.89 USD/DKK.