Our production requires relatively large amounts of energy, and fluctuations in energy prices will therefore affect the cost of the goods we sell. The risk of a negative impact from rising energy prices is managed by optimizing the production process, for example by using gene technology, and by partially hedging energy prices for a future period. In the long term, this risk is offset by the positive impact on sales when energy prices go up, as it becomes more profitable for our customers to replace oil-based ingredients with enzymes and to use energy-saving enzymes in their production.
A significant proportion of Novozymes’ raw materials is derived from agricultural produce, and fluctuations in prices for these commodities will therefore affect the cost of the goods we sell. Novozymes seeks to reduce the risk of a negative impact on costs by optimizing the production process, for example by using gene technology, and by ensuring the greatest possible flexibility in the use of raw materials.
Novozymes operates in many markets via sales companies and distributors, while production takes place in a small number of countries. This leads to transactions between Group companies. Novozymes follows the OECD principles in setting internal transfer prices for these transactions, but this is a complicated area and entails a tax risk, partly because the area is subject to political judgment in each individual country. Novozymes regularly enters into dialogue with the tax authorities to reduce this risk, and we have entered into advance pricing agreements with the tax authorities in the countries where internal transactions are most significant. For Novozymes, such agreements create predictability in relation to taxation and reduce the risk of Novozymes becoming part of the ongoing transfer pricing debate around the world. However, some countries, including India and Brazil, have yet to introduce legislation permitting agreements of this kind. All in all, a major part of internal transactions in the Group is covered by advance pricing agreements.
The risk of personal injury, material damage, and other events beyond our control, as well as other losses that Novozymes may cause, is covered by an extensive insurance program to the extent that this is feasible and possible. Cover in different areas is subject to a premium based on Novozymes’ claims history. The current price of the policies and the cover provided may be affected by external circumstances, such as natural disasters and similar events.