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Financial, environmental and social discussion

The first section discusses the financial data in relation to Novozymes' expectations for the financial year. This is followed by a review of selected environmental and social data.

A full overview of all data can be found in Accounts and Data, while an overview of reporting in accordance with GRI guidelines can be found under Other information in The Novozymes Report 2005 online.

When comparing figures with The Novozymes Report 2004, note that Novozymes changed its accounting policies in 2005 to reflect the International Financial Reporting Standards (IFRS).

Financial discussion

Income statement and balance sheet
The financial results are in line with the expectations published at the beginning of the year and revised upwards on two occasions during the year. The results have been slightly positively affected by exchange rate movements in 2005.

Sales rose by 5% from DKK 5,988 million in 2004 to DKK 6,281 million in 2005. There was no growth through acquisitions during the year. Growth in local currency terms was 4%.

Sales of enzymes
Sales of technical enzymes grew by 5% in 2005. Sales to the detergent industry fell by 1%, but Novozymes maintained its market share during the period. Rising raw material prices impacted negatively on detergent producers and so on sales of enzymes to the industry.

Sales of other technical enzymes increased by 14% in DKK terms and just over 12% in local currencies. Sales of enzymes for the production of fuel ethanol grew sharply, there was healthy growth in sales to the textile industry, and sales to the traditional starch industry also made good progress. There was also healthy growth in several of the smaller industries, particularly in pharmaceutical proteins.

Growth within food enzymes in 2005 was 4% in DKK terms and slightly lower in local currencies. Growth was driven primarily by increased sales of enzymes for alcohol and the interest in enzymes for edible oils and fats, which rose significantly, albeit from a relatively low level. Sales of enzymes for the baking industry were slightly below the level for 2004. The main factor here was stockbuilding on the distributor side at the end of 2004. Sales to the brewing industry fell compared with 2004, mainly due to a levelling off in sales of enzymes for low-carbohydrate beer. A positive trend in sales to Asia and Latin America was not sufficient to balance this out.

As expected, sales of feed enzymes grew more moderately than before. Sales increased by 7% in DKK terms, slightly positively affected by exchange rates. Growth was primarily driven by increased sales of phytases to North America and Asia. Sales of enzymes for better utilisation of vegetable protein were on a par with sales in 2004.

Sales of microorganisms
Sales of microorganisms in 2005 rose by 3% in DKK terms and by 4% in local currencies compared with 2004. There was a positive development in all segments, the most positive being the development in sales of microorganisms for wastewater treatment. Sales for aquaculture also made a good start. There was double-digit growth outside North America, where sales were on a par with 2004.

Market share
Novozymes generated growth in sales of enzymes in 2005 which was marginally higher than the growth in the enzyme market as a whole, so consolidating its position as the world's leading enzyme producer.

Costs, Licence fees and Other operating income
Total costs excluding net financials and tax rose by 4% to DKK 5,109 million in 2005. The increase in costs was lower than that in sales. Cost of goods sold rose by 3% to DKK 2,936 million, just over half the figure for sales growth in relative terms. Continued optimisation and productivity improvements were able to offset increased volumes and rising energy prices. The gross margin rose to 53.3% in 2005 from 52.8% in 2004.

Sales and distribution costs rose by 6% to DKK 748 million. These costs accounted for 12% of sales, on a par with 2004.

Research and development costs rose by 2% to DKK 793 million. This includes costs related to research projects within biopolymers and pharmaceutical proteins, and costs related to research into increased productivity. R&D costs were equivalent to 13% of sales in 2005, which is marginally below the level in 2004.

Administrative costs increased by 5% and were equivalent to 10% of sales, the same as in 2004. Employee costs totalled DKK 1,846 million, compared with DKK 1,745 million in 2004. The average number of employees increased from 3,928 in 2004 to 4,023 in 2005.

Depreciation, amortisation and write-downs fell by 7% in 2005 to DKK 462 million, compared with DKK 495 million in 2004. The decrease was due to the low levels of investment in recent years.

Licence fees and Other operating income totalled DKK 34 million in 2005, compared with DKK 31 million in 2004. This trend is due primarily to increased earnings in 2005 from the collaboration with Solvay Pharmaceuticals established in November 2004. 

Operating profit
Operating profit rose by 11% to DKK 1,206 million, of which DKK 1,184 million relates to enzymes, etc. and DKK 22 million to microorganisms. The operating profit margin was 19.8% for enzymes and 7.1% for microorganisms.

Net financials
The net foreign exchange losses were due primarily to realised and unrealised losses on the hedging of exposure to the USD and JPY in particular.

Net interest costs fell in 2005 as a result of one-off tax-related interest income.

(DKK million)     
Net foreign exchange gains/(losses)
Net interest costs
Other financials
Total Financials

Profit before tax and net profit

Novozymes generated profit before tax of DKK 1,150 million and net profit of DKK 861 million, corresponding to a rise of 9% and 11% respectively. The effective tax rate was approximately 25%. The low tax rate is due, among other things, to a reduction in the rate of corporation tax in Denmark.

Investments, free cash flow, acquisitions, etc.
Net investments totalled DKK 335 million in 2005, compared with DKK 207 million in 2004. Net investments in 2004 were positively affected by one-off items relating to the termination of dollar-hedging transactions of DKK 131 million. Once adjusted for this, investments in 2005 are in line with the figure for 2004.

Free cash flow came to DKK 991 million and was used to pay the dividend for 2004 and for share buy-backs.

(DKK million)   



Cash flow from operating activities
Investments before acquisitions  (335) 
Cash flow before acquisitions
Free cash flow
Dividend paid
Purchase of treasure shares

Return on invested capital
Average invested capital as a percentage of sales fell from 79% in 2004 to 74% in 2005. The return after tax on invested capital (ROIC) rose to 19.3% in 2005 from 17.4% in 2004.

(DKK million)
Average invested capital after tax
– as a percentage of net turnover
Return on invested capital (ROIC)

Movements in shareholders' equity and holding of treasury shares
Shareholders' equity amounted to DKK 3,794 million at the end of 2005, compared with DKK 3,947 million at the end of 2004. Shareholders' equity was increased by the net profit for the year and currency translation adjustments in respect of subsidiaries' net assets, and reduced by dividend payments and purchase of treasury shares.

At year-end 2005 the holding of treasury shares consisted of 5,688,900 B shares, equivalent to 8.2% of the share capital. Novozymes spent DKK 1,053 million on share buy-backs in 2005. The nominal share capital has also been written down by DKK 30 million, equivalent to 4.1% of the total share capital, as approved by the Annual Meeting of Shareholders in March 2005. Following this write-down, the nominal share capital is DKK 696 million.

(DKK million)
Shareholders' equity, at January 1
Net profit
Dividend paid
Purchase of treasury shares, net  (927)
Currency translation adj. of net assets, etc.
Shareholders' equity excl. minority interests 
Minority interests
Shareholders' equity at December 31


Incentive programmes
A share-based incentive programme for the Executive Management was introduced in 2004, covering the period 2004-2006. A pool of 185,955 B shares has been allocated from Novozymes' holding of treasury shares for this purpose. The release of shares from this pool is dependent on the level of growth in the financial value added which Novozymes generates for its shareholders over the period 2004-2006. If the total value added is less than DKK 500 million, no shares will be released. Above this level, shares will be released in proportion to the value added generated up to a maximum of DKK 1,500 million, at which point the entire pool will be paid out. The release of any shares to the Executive Management will take place in 2007.

Environmental and social discussion

Eco-productivity indices (EPIs)
There was an improvement in 2005 of 7% and 5% in the eco-productivity indices for water and energy respectively. The targets of 4% and 5% were thus met. The improvements in both indices in 2005 should be seen in the light of the big improvements achieved in 2004. 

To sharpen the focus on efficient use of water and energy, which account for a large proportion of cost of goods sold, the targets for 2006 are a maximum increase in actual consumption of water and energy of 7% and 9% respectively. The targets are based on anticipated growth in sales and will be adjusted in line with any changes in expectations for sales.

Recycling of waste
The percentage of total waste recycled increased from 14.8% in 2004 to 30.6% in 2005. The increase in recycling was due to a number of new initiatives at the factories, including increased recycling of wooden pallets and pallet tanks. The factory in Hongda, China, now also uses biomass as a fertiliser for agriculture, whereas previously it was simply sent for destruction. Biomass from the Hongda factory is therefore no longer included in waste but in the biomass data. The figure for recycling in 2005 was positively influenced by recyclable waste from the demolition of buildings. Based on calculations from the individual production sites, the target for recycling has been doubled to over 30% in 2006.

Emissions of ozone-depleting substances
Emissions of ozone-depleting substances fell from 6.7 tons in 2004 to 5.4 tons in 2005. A target for reducing HCFC emissions was set for 2005, which was unfortunately not met, due primarily to the leakage of HCFC from a refrigeration chiller at Novozymes North America, Inc. It has therefore been decided to replace existing large refrigeration chillers with a view to reducing emissions in the future, and investigate use of a less environmentally harmful HCFC.

Emissions of greenhouse gases
Emissions of carbon dioxide, including emissions from externally generated energy, rose to 377 t. tons in 2005, compared with 363 t. tons in 2004. As part of the implementation of Novozymes' energy strategy, an analysis has been carried out of the possibilities for making further energy savings and so reducing carbon dioxide emissions. A target has been set for 2006 of evaluating and prioritising the opportunities for energy savings identified in 2005.

Compliance with environmental standards
There were 21 breaches of regulatory limits for groundwater in 2005, all concerning groundwater wells at Novozymes North America, Inc. Six other breaches were registered in 2005, primarily relating to wastewater. Novozymes received 17 complaints from its neighbours in 2005, mostly about odour and noise problems.

Following up the nitrate issue in the USA
Additional testing of groundwater in selected areas beyond our property boundaries has been conducted. The data are being compiled. A report will be submitted to the regulatory authorities during the first quarter of 2006. Novozymes is maintaining a dialogue with potentially affected neighbours to seek mutually acceptable solutions.

Following up the discharge at Novozymes in Salem
In 2005 Novozymes Biologicals, Inc. (Salem, Virginia, USA) had a discharge of products and raw materials. Some of the material ended up in a nearby creek. Novozymes took immediate action cleaning up the discharge and implementing structural and procedural control measures at the leased facility. Novozymes continues to work in full cooperation with regulatory authorities for a successful closure of this issue.

Animal testing
Tests on animals are used in the development of new products. These tests are a requirement for the approval or development of products. 2,230 animals were used for testing in 2005, which is a relatively large increase on 2004. Novozymes constantly strives to reduce the number of animals used for testing, but the number used depends, among other things, on the number of new product types to be analysed. The reductions that can be achieved will therefore often be only relative, i.e. fewer animals per product to be analysed. In 2005, analyses of Novozymes' new antimicrobial peptides (AMPs), which are being developed to treat infections caused by resistant bacteria, required several animal tests. To reduce the number of animal tests, Novozymes is working on replacing animal tests and refining test methods to maximise animal welfare. In 2005 Novozymes was chosen to head a European research project where experts from universities and industry will work together on the development of new methods for testing products without animal testing.

Phasing out antibiotic resistance markers in existing production strains
In 2005 we continued phasing out antibiotic resistance markers (ARMs) in existing production strains in line with our target. ARMs are being phased out as existing strains are improved, and this process will continue in the future. No ARMs have been used when developing new production strains for several years now.

Employee turnover
In 2005 employee turnover rose from 5.5% in 2004 to 6.6% in 2005 but remains low, and the target of not exceeding 7% was achieved. Low employee turnover results in lower expenditure on recruitment and training of new employees, and is also an indicator of our ability to retain employees and their expertise. The target for 2006 is for employee turnover to be less than 7%.

The rate of absence was 2.5% in 2005, which is within the target limit of 3%. Absence results in reduced efficiency and increased costs for temporary staff, etc. Each percentage point is equivalent to around 40 employees not working for a whole year. Keeping absence as low as possible is therefore a priority. The target for 2006 is again for the rate of absence not to exceed 3%.

Occupational health and safety
The frequency of occupational accidents fell from 7.1 per million working hours in 2004 to 4.6 in 2005, thus meeting the target for 2005 of a maximum frequency of 7. The number of accidents requiring professional first aid fell from 36 in 2004 to 26 in 2005.

The frequency of occupational diseases rose from 1.1 per million working hours in 2004 to 1.8 in 2005. This was probably due partly to closer monitoring of occupational health and safety in connection with the implementation of the new project to prevent enzyme allergy, which meant that more occupational diseases were identified at an earlier stage due to more stringent procedures. See the article Changes in behaviour benefit safety.With regard to the work situation of employees involved in an occupational accident, 29 out of 30 have returned to their original jobs, and one case is still pending. Where occupational diseases are concerned, 10 out of 12 employees have returned to their original jobs or taken other jobs in the company, and two have found employment outside the company.

Gender distribution
The percentage of female employees in the organisation as a whole rose from 34.4% in 2004 to 34.8% in 2005. The proportion of women in management increased from 28.3% in 2004 to 28.7% in 2005, and the proportion of women in senior management from 13.6% in 2004 to 14.6% in 2005.

In 2005 it was decided to work more actively on diversity management in the coming years. The main focus will be on raising awareness of the benefits of our diverse workforce when it comes to creativity and innovation, and on training managers to exploit this diversity. See also the article Development keeps employees and company in shape.


2005 working climate survey
In 2005 Novozymes carried out a working climate survey where all employees were asked to answer 40 questions in areas such as job satisfaction, development and management. The survey revealed that generally employees are content, believe that they have good development opportunities, and feel that their managers live up to our values – The Novozymes Touch – and our seven Leadership Competences. Read about these in the article Development keeps employees and company in shape.As in the previous survey in 2003, stress achieved a relatively low and therefore poorer score compared with the other questions. Equivalent surveys at other companies also reveal a clear tendency for stress to achieve the lowest score. This underlines the importance of our continued efforts in this area. Compared with 2003, the results for 2005 indicate a small improvement in employees' view of their work-life balance, which is another area on which we have been working actively for several years. Find out more about the results of the survey in the article Development keeps employees and company in shape.

The survey also asked employees whether they consider Novozymes to be an environmentally and socially responsible company. On a scale of 1 to 5, where 5 is the best, the question about environmental responsibility had the highest average score in the whole survey with 4.4, while the question on social responsibility achieved a score of 4.1.


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