Genus plc (GNS) Earnings Call Transcript

Good morning, ladies and gentlemen, and a very warm welcome to the Genus group preliminary results presentation, the first virtual one in our history. This is my last results presentation to you after 10 fabulous years. It will be my pleasure to introduce to you my successor, Iain Ferguson, during the Q&A. Iain and I have been working together now for over 2 months, and it will ensure a very smooth transition. Iain brings a great wealth of relevant experience to the business and will be an outstanding person to lead this business into its future. Moving now to our record results, a great sign off for me. We've delivered a 16% increase in profit before tax to GBP 71 million, a first. Cash flow has also been exceptionally strong. And in addition to delivering these results, Stephen will be detailing to you our operational activities and the significant improvements in our strategic developments. This has been achieved in these extraordinary times with absolutely no compromise to our customers, to our staff and to our suppliers. In line with policy, the dividend has been increased by 5% to 29.1p. And on that note, it is my pleasure to hand over to Alison for our results -- our financial results presentation.

Thank you, Bob. So since we last presented to you, the world has certainly changed, and our entire investor road show will be virtual. There are just a handful of us in the room today. And we're sorry you can't meet us in person. But given the circumstances, we thought why not prerecord, so we hope you find this a convenient way to watch our presentation. If you are watching on the 8th, just want to remind you, we are hosting a Q&A session at 10:30. And if you wish to join and haven't already been invited, please contact the accountant for the details. Before I move into my presentation, also, I just want to mention that there are some tables we've used in the past to present the financials, which I'm going to be presenting a bit differently today, but they're available in the Appendices for your reference. So moving on to our financial performance. Before going into the great trends on the page, I just wanted to share a few overriding messages. And the first one is that the trends you saw in the first half remain unchanged. China continues to be a key growth engine for PIC in the aftermath of the African swine fever. And Sexcel, our sexed semen product, continues to be a key growth engine for ABS. Secondly, we have resilient operations, and as an essential service, continued supplying to our customers throughout the pandemic. In saying that, I don't want to understate though the efforts of our people and acknowledge the countless examples of where people have made extraordinary things happen to support our customers. And finally, we are in a very strong financial position. High operating cash flows, and we've just completed a refinance of our credit facilities. We've got plenty of financial capacity to seize growth opportunities in the future. So let's move on to the trends and those key financial indicators. As you can see, they're all high. Revenue growth of 13% and leverage of our cost base across the group meant that we delivered adjusted profit before tax of GBP 71 million, which is growth of 22%. Both of our businesses contributed to the top line and the bottom line growth as well as expansion of our margins. There's certainly been turbulence in the currency markets, and we saw a further deterioration in the LATAM currencies in the second half of the year. In fact, we had an impact against profits of GBP 3 million in the second half, GBP 3.4 million for the year as a whole. And since the end of the financial year, the Chinese renminbi and Russian ruble have also fluctuated significantly. And at last Friday spot rate, the impact of currencies on our new financial year would be a further adverse movement of GBP 5 million. But as you can see, our adjusted earnings per share of 85.4p grew 23%, and that is also due to our improved effective tax rate of 22%, which is influenced by the higher mix of our income coming from China. For FY '21, we expect our underlying tax rate to be in the range of 23% to 24%. Our operating cash flow conversion was very high, as you can see, at 127%, or 115% if we exclude IFRS 16 impact. And that compares with 84% last year, which meant we had free cash flow of GBP 35 million. Our closing net debt of GBP 103 million reflects leverage of 0.9x which is comparable with 1x a year ago. All right. Moving on to the operations. So first of all, our volume growth. As you can see, we experienced in the first half -- I should say, we experienced the same level of growth as we had in the first half despite the challenges of COVID-19. So in porcine, overall volume growth remained high at 13% compared with 0 in '19. Excluding China, volumes rose 6%, which compares with 5% in the prior year on a like-for-like basis. We found that although the impact of COVID-19 in China was profound, the recovery was very swift, faster than we expected, and generally found that China recovered quicker than other countries where we operate. Our strategically important royalty volumes increased 6%, with growth achieved across all regions. And then, of course, with beef and dairy, we achieved volume growth of 8% with growth across all regions, the highest being in the Americas. As you can see, the turnaround over the last 4 years has been profound, and there's been an increasing rate of growth in the business. The shift to sexed and beef genetics continues, and NuEra, our beef-on-dairy product, is gaining traction. Okay. So now we'll have a look at the divisional operating performance within our group results. And as you can see, PIC achieved 25% operating profit growth, and I've already talked to you about China. But I wanted to make the point that we view 2019 as the outlier year when growth in China was stalled because of multiple catalysts in the Chinese market, and the investments we're making, we expect to see China continuing to be a very important driver of our future growth. And Stephen will talk more about this. ABS continued to grow operating profit in double digits, reflecting continued volume growth and more performance improvements from our IntelliGen technology. We continue to invest in R&D. The net increase of 17% includes a recognition of our first milestone payment through our -- from the BCA through our collaboration in China on the PRRSv resistance program. And this meant that we recognized income within R&D expense of GBP 3.2 million. However, we also incurred GBP 4.4 million of one-off costs in porcine product development. So without these, R&D spend would have increased 15%, which was planned. Central costs include a number of items that we don't expect to recur annually related to executive hires, a swing in the valuation of a listed investment and higher bonuses associated with our company's performance. In total, these items are around GBP 2.7 million. Now I wanted to point to the chart, which shows Genus' adjusted operating profit. And you can see that that's grown to GBP 76 million. But the point really is that we've achieved consistent growth in operating profit and margin over time, absorbing the investments made in gene editing. And our -- excluding the investment in gene editing, our adjusted operating profit grew 12% to GBP 81 million. We're absorbing the cost of investment we're making in gene editing, and we expect this to continue to be the case as we invest further in gene editing as we progress the program and also as we explore other R&D opportunities. Now moving on to PIC. As previously mentioned, China, certainly a key driver, but all regions other than North America achieved double-digit growth. There were strong margins from breeding stock sales as well as further leverage of the business's cost base, which meant we saw an improvement in their margin as well to 37.9%. And PIC strategically important royalty revenue grew 11%. This compares with 7% last year. In North America, operating profit was flat on prior year, as you can see, but the underlying trends in the business remain strong. There were further gains made on the sireline through the introduction of PIC 800. Offsetting that were some specific customer credits related to a historic issue that dampened the performance in the year. We did see in the second half that customers were very challenged by volatility in their distribution channel due to the closure of the meat processing plants. But the impact on PIC was moderate. 96% of volume in North America relates to long-term royalty contracts, and we don't expect to see a change in that mix going forward. We're well positioned to gain further market share, but we do believe our customers will continue to face volatile trading conditions for at least the remainder of 2020, and Stephen will talk more about this later. We had a strong performance in Europe, with profits growing 27%. All key countries in the region performed very strongly, reaping the benefits of our Møllevang and Hermitage partnerships. Royalty revenue was up 13%, now representing 17% of volume in the region. What we've seen really is that in EMEA, we've continued to benefit from proven strategy of focusing on key accounts. And through that approach, Russia has become the most important country in EMEA for Genus. Latin America also performed well with profit up 23% and royalties up 9%. And we continue to see a very successful joint venture in Brazil with Agroceres. Finally, I did want to just mention our Philippines team. They were in the midst of dealing with the impact of the outbreak of ASF when COVID-19 happened. And they're going to -- they've had a challenging time, and they will have a challenging time for a while adjusting to both those circumstances. Now moving on to ABS. As you can see, grew strongly with 9% growth in revenue, 12% growth in operating profit. Customers there did experience volatility in prices in the early months of the pandemic, particularly in the U.S. The lockdowns meant that it was harder in some countries to engage with customers. But demand for our genetics remained high, and we experienced growth of 47% in fixed volume. Beef volumes, too, have grown strongly at 17%, with beef-on-dairy genetics becoming a real sales differentiator with very demonstrable value to the beef industry. In North America, it is now the lead product with our new customers, and with NuEra growth as well as high Sexcel volumes supporting operating profit growth of 12%. In EMEA, whilst the U.K. saw strong growth in fixed volumes, up 41%, overall profit performance was flat with the lockdowns in the major markets, including France and Italy being impacted in the second half. In fact, our Italian operation is based just 15 kilometers from Codogno where the pandemic started in Europe. And I just want to recognize the enormous efforts that our team there went to continue operations when there was a 10-kilometer lockdown around most of our team. But they did it. There were just a few days where they couldn't supply. Moving on to LATAM. Revenues grew 20% and profit grew 35%. The LATAM team adjusted very well to the impacts of inflation and currency devaluation and maintained robust pricing. They also showed great agility in changing their sales approach using digital campaigns that have been very successful. And lastly, in Asia. China and India have been key drivers of growth. The operating profit growth of 59% reflects growth in fixed volumes of 98%, and that's despite having a serious flood in the first half and dealing with COVID-19 in the second half. India itself has become a very meaningful contributor to group profits now, achieving over 300% profit growth compared to last year. Moving on to R&D. You can see that R&D spend has grown to GBP 65 million. The key driver of growth in overall spend was in porcine product development, as you can see, up 55%. And that's because we've made a large investment to expand our nucleus herds to continue to fuel the growth in our supply chain. However, as I mentioned earlier, we did have a few nonrepeatable costs, and there is a relation to the closure of a farm in Canada and lower byproduct margins from pigs that went to slaughter in the U.S., reflecting the drop in prices in the U.S. market. Our spending on gene editing, primarily in the support of the PRRSv resistance program, increased by 14%, excluding the impact of our first milestone payment from the BCA. The investments to expand our nucleus herds and one, of course, in porcine development made it -- this particularly high-growth year for our R&D spend. However, that was intentional, and we expect to continue to grow R&D investment in the next year in the low double digits as we continue to ramp up the investment in gene editing and other research areas. Now before I get onto the statutory income, I just realized I didn't mention bovine product development on the previous slide. And actually, this handsome fellow you can see here is a member of our proprietary NuEra T15 nucleus herd, which is in the U.K. And Lynx here and his friends are from the British blue breed. And as you can see, they have excellent muscling qualities. So Lynx himself is contributing straws to breed the T15 herd and to sell to our dairy customers who are interested in buying our beef-on-dairy product, NuEra. And this is what Stephen will talk about more later. Back to the numbers, we consistently measure our report-adjusted results as we think these give a better view of our business performance. Our statutory results are affected by a number of noncash items, and I'll talk you through those. Statutory profit before tax rose to GBP 51 million and profit after tax was GBP 41 million. We returned to effective statutory tax rate of 20.6% this year, which is lower than last year, which was affected by an exceptional item for the U.K. pension expense. So those of you who are familiar with our accounts will know that we are required to report in our statutory accounts accounting for biological assets. And the effect of that this year was an increase of GBP 15 million -- GBP 16 million compared with a GBP 15 million reduction in the prior year. At as those of you have been following us for some time, you'll know that these fair value calculations can fluctuate. But I guess the most important thing to remember is that they're noncash movements. And then the other significant item on the page is GBP 16 million for litigation and damages cost. Almost GBP 11 million of that is a provision which is the damages related to our ongoing actions with Sexing Technologies relating to patent infringement. This hasn't played out yet. The legal process is ongoing, and we'll carry on for some time as we vigorously challenge these verdicts. And then lastly, you can see joint ventures is up. We've had strong performances, particularly in Brazil and China compared to prior year. Now moving on to our balance sheet. As you can see from the chart, we broadly ended the year as we started with net debt of GBP 103 million or GBP 78 million if you exclude the impact of IFRS 16. And our -- as I mentioned earlier, our leverage has remained very low at less than 1x EBITDA. Cash generated by operations of GBP 83 million reflected the strong conversion I mentioned earlier. And I want to recognize the great focus across the group on working capital management, which meant we reduced our working capital by GBP 3 million despite the growth in our business. In the second half, we also gave support to PIC's North Americas customers by extending payment terms, which had a negative impact of GBP 3 million on cash flows. Overall, the cash released in working capital funded the increased investment in biological assets. Capital expenditure of GBP 35 million is consistent with our rate of investment in the first half. We've continued to invest in the IntelliGen production capacity, expansion of our bull housing for ABS and Genus One, which is our enterprise system. I'm very pleased with the degree of interest that there was in our refinance. You can see the details there. We expanded our syndicate to 8 banks and attracted 5 new lenders in the process. At year-end, we had headroom of GBP 125 million, and this has since increased by around GBP 20 million with our new credit facilities. So this, along with the optional accordion we have of GBP 100 million, gives us the firepower to pursue growth opportunities, which are part of our strategy. And our total debt financing costs are expected to be in line with our previous facility. As Bob mentioned, we've increased our dividend by 5%, which is 2.9x adjusted earnings coverage, and that's within our policy to target the range of 2.5x to 3x. So lastly, just wanted to remind you of the medium-term financial objectives Genus has. I'm really humbled by the achievements of our people in what's been quite an extraordinary year. Their ingenuity, determination and sheer hard work is illustrated in these results and continues to enable us to invest in the business upwards of GBP 119 million this year, and Stephen will talk more about that. As we look forward, we expect some customers will have a challenging time, caused by COVID-19 and economic circumstances. It's really still unclear how things will play out. However, despite currency headwinds, we anticipate further growth in constant currency and to perform in line with our expectations for the new financial year. So thank you for listening, and I'll now hand over to Stephen to give his update on our strategic progress.

Thank you for joining us on this presentation today. And thank you, Alison, for walking us through our financial results. And as you can see, we had a strong financial performance last year. Now what I really want to address with you is what kind of strategic progress have we been making, and what's the market context in which we're operating. I'm pleased to report that we've been making good progress despite the challenging times we're living in. What I'd like to walk through is, first of all, let's dig deeper into the impacts COVID-19 has had for our customers and what are the implications for us in Genus. Despite the challenges, our business has been resilient as you've seen, and its broad global presence has been a great benefit. Secondly, at the heart of our business is genetics, whether it be dairy, beef or pork, we're continuing to extend our leadership and differentiation. Finally, throughout this year, we've remained committed to investing to support further growth, and I'd like to outline that for you. Turning first then to the impact of COVID-19. What you see from this chart is that our customers have experienced unprecedented volatility. Now the situation is different country by country, month by month, but as an example, our focus on the U.S. market. You can see, back in December, milk and meat producers were looking forward to a nicely profitable year. If you look at the dotted gray line on this chart, you'll be able to see that. But as COVID hit, then food service outlets closed, and there were some very significant shifts in buying patterns and demand. The milk price, for example, dropped very sharply. It recorded an all-time record 1-month fall. Some farmers had to dump milk and take cows out of production. However, what you can also see is that as those food service outlets reopened and as capacity had been taken out of the market, then a couple of months later, there was an even sharper price bounce back, which at the time we were in the depths of the COVID lockdowns was quite unexpected. Clearly, it's been good news, though, for our dairy customers. In pork, however, what you can see here is that there were very sustained and significant falls in prices, pushing producers into very, very significant losses. And that looks like is a situation that's continuing. So why is that? Let's explore that a little bit more. You may have seen in the news that meat processing plants have been particularly affected by outbreaks of COVID amongst their staff. We've seen this in the U.S. We've seen it in Germany, in the U.K. and a number of other places. In the U.S., where slaughter plants were already very heavily utilized, the loss of slaughter capacity as plants closed or reduced staffing caused some severe industry disruption. It led to a rapid buildup of a backlog of pigs waiting slaughter, and that's what caused the collapse in prices. You can see from the chart, even though capacity has been gradually returning to normal, there remains a significant backlog, and that's going to continue to weigh on prices at least for the remainder of this calendar year. So what's been happening in response to that? Producers have been taking action to reduce the number of piglets coming into their farms. So if you look at the latest United States Department of Agriculture report, you'll see that producers expect to farrow 5% fewer sales in the remainder of this year compared to the prior year. This will clearly have an impact on our U.S. royalty revenue stream. So let's sum up the market situation and outlook. What I've described to you and shown is that protein producers have seen some severe impacts and a lot of volatility. And some of these, as we've seen from the U.S. pork industry, will result in production being reduced in FY '21. In addition, we can expect the global recession caused by COVID-19 to weigh on consumer spending, and this will also have an impact on our customers. However, on the other side, what you've seen from Alison is that our genetics business has been very resilient. We've been able to absorb the impact of these market headwinds really through 2 factors. First has been market share gains, and the second has been the strength and diversity of our global presence. And we expect these 2 factors to continue to support us through FY '21 despite the market headwinds. What I'd like to do now is just to go a little deeper into the global diversity of our business. You see from this chart how in all these major markets that are illustrated here on this chart, we've achieved significant growth, whether that be in PIC or in ABS, and that has been achieved as a result of market share gains in each of these countries. Furthermore, it's not been easy during this last fiscal year. We've had some big challenges to overcome. If I take India, this time a year ago, our bull stud and sexed semen processing facilities were literally underwater. There was a flood of historic proportions, and our facilities were flooded. We were able to recover the site in record time. We brought on some new IntelliGen customers in different states in India, but we also had huge logistical challenges to overcome through the lockdowns on COVID. Nevertheless, despite all of those things, we were able to very significantly increase our profit in India by 300%, as you can see. If I take Russia. We had to deliver several planeloads of elite pigs to the largest pig producer in the country in the month of April. And there was major difficulties organizing that transport in the midst of the COVID lockdown. Or Brazil, our ABS team's innovative spirit led them to create digital sales campaigns so that we could reach hundreds of new and existing customers when we couldn't travel to meet them. And we're continuing to drive a lot of new business through these approaches. In China, you can see that our ABS business had a great year, almost doubling profits. But I think you'll all recognize that porcine business in China has been a standout performer for us. And so let's dig a little bit deeper into what's been happening in China as that country recovers from African swine fever. I'll talk first of all about what's happening in the market. And you see on the left-hand side that the sow herd is starting to rebuild. Large producers are driving this trend and growing their share of the overall market. We've talked about this before. What I want to also highlight is that because of the great shortage of breeding stock animals in China, over half of that sow herd is now made up of slaughter pigs that have been held back to rebreed. These animals are much less productive than breeding sows, and therefore, this is at best, a stop gap measure. So even as the total number of sows is growing, the need for more high-quality breeding stock remains very high and is going to be sustained. So as we've highlighted to you a number of times, what we're intent on doing is rapidly growing our capacity to supply the market. We more than doubled it this year, and we're projecting to double it again in the year ahead. The result in our business is that we're achieving growth, but the opportunity still remains very substantial. We've been able to grow with our existing customers as they expand their activities and operations. We've won new customers in the large producer segment. Our royalty business was up over 150% and now represents 25% of our volumes in China. Just a few years ago, it was nothing. In FY '17 and '18, it was about 8%. So we're making big steps there in our royalty business. And we're growing our relationship with BCA and investing in people and our supply chain to ensure that our growth is sustained, and we're able to capture the very significant opportunity going forward. So we've addressed how COVID has affected our markets, how we've been able to manage through it and how our broad global footprint has really been a strength for Genus. Now let's turn to what's at the core of our long-term success, the strength of our genetics. And let's address first porcine. In porcine, we're continuing to drive accelerated genetic gain. I think there are 2 ways that you can see proof points for this. The first is we continue to do trials with our customers against competitor genetics. For example, we continue to do trials of the PIC 800 against competitor genetics in North America, and we're seeing very strong results from those trials. The second proof point is in market share gains. And we're seeing those gains, both on the maternal side, that's with the Camborough sow, and on the terminal side, for example, with our PIC 800 sire. Examples of these market share gains would be some of the partnerships for distribution of the Møllevang Genetics. So for example, Otrada in Russia, or Gesing in Germany. But we're also seeing some of the very largest customers in the world, the largest pig producers in the world committing increasing proportions of their business to PIC. And that's a vote of confidence in the PIC genetics. What about dairy? While we continue to sustain a leading position in the bulls being marketed and in the pipeline of young bulls, what you don't see underlying these numbers is also how diverse our portfolio is. And that's very important because you need a very broad range of these bulls from many different families that are going to give you that strength in depth to continue to succeed. In addition, we have also a very strong portfolio of female genetics, and these heifers will be the mothers of the next generation of bulls to come. So our dairy genetics are in good shape, but we need to be also able to sex these genetics. That's very important in the market today. And so you can see we continue to rapidly increase both the sales of Sexcel and our service to third parties through IntelliGen. At the end of FY '20, we had 8 sites in operation, and I can tell you that as we speak here today, that is now 9 sites in operation. Furthermore, our highly talented engineering and production team have also substantially improved the productivity and effectiveness of our technology. And so you can see that, in fact, now each instrument is now producing roughly double the number of units they did just about 2 years ago. But the area of our genetics I'm actually most excited about is our beef genetics. We've just wrapped up the very first full life cycle trial in the U.S. of beef-on-dairy animals bred with our proprietary NuEra genetics against competitor genetics. Now these genetics in the U.S., they're not the white British blue bulls that you saw on Alison's chart, they're these black hide animals here. The trial that we've been running has taken over 2 years, and the ink is still wet on the results. Now the result of the trial is that you can see a very material economic benefit for producers in using our NuEra genetics. And that's whether it's versus an Angus sire, a Limousin sire or generic beef-on-dairy offerings. You may say, "Well, why is this?" It's because we design and select the NuEra genetics solely for the traits that are of value in a beef-on-dairy terminal animal. And we're also improving those genetics at a rapid pace. We're already increasingly seeing that dairy farmers want to talk to us first not about dairy genetics, but about our beef genetics. And I think these great results are going to be a springboard for many more of those conversations. So you've seen that our business has been resilient through COVID and that our genetics are strong. So now finally, I'd like to then talk about how we've continued to invest throughout the pandemic. And we've done that because we're committed to laying the foundations for even more long-term success. In March, we went live with our first major implementation of our new enterprise system called Genus One. We did that in PIC North America, our largest unit. We're progressing well with further stages of the system rollout that will be implemented during this fiscal year. We've been building, as Alison mentioned, best-in-class new facilities for our animals. And we're going to continue making more of these investments, both in ABS and in PIC during FY '21. But I'd like to dig a little bit deeper into 2 areas as we wrap up the presentation. Firstly, focusing on our PRRSv resistance program. This is a long-term program, as you know, but we've continued to make good and steady progress, although there were some challenges keeping certain externally located activities running during the COVID lockdowns. As planned, we made the first of several submissions that will be required to the Food and Drug Administration, and we'll continue to progressively make more of these over the coming years. We made good progress initiating our collaboration with BCA. And despite not being able to travel to China, through running virtual training sessions with the team that BCA have put in place, we're able to bring that team up to speed. And we further strengthened our internal capabilities to drive the program forward. So our PRRSv program is making good progress. Lastly, while we're a genetics business, it's really the skills and talent of our people that truly make a difference. Here in this picture, you can see our PIC China team gathered together. During this year, we've continued investing in recruiting and developing the most talented people we can find, whether from our industry or other industries. And we've also been creating and continuing to create an environment where they can thrive. So I'd like to thank the over 3,000 Genus colleagues for all that they achieved in FY '20. So to wrap up our presentation today. You've seen that we performed strongly in FY '20 despite the challenges of COVID-19, and that growth was very broad-based. You've seen that our genetic offerings are leading in their respective markets and that we've continued to invest in the business. That all positions us well to deliver further growth. And in constant currency, we expect to perform in line with our expectations in FY '21. Well, that concludes the formal part of our presentation. But as this is Bob's last results presentation, I want to also just recognize publicly how much the company has been transformed over the 10 years in which he has been chairing the business and to thank him for the great part he has played in that. The culture, market position and level of technology in the business is in a dramatically different place. That's been recognized in our share price. Back in FY '10, the market capitalization of Genus was below GBP 500 million, and we were about around about 190 -- positioned 190 in the FTSE 250. Now after more than 350% total shareholder return over those 10 years, we're valued in the region of GBP 2.2 billion, and we're about #45 in the FTSE 250. I think that's testament to the work that Bob has led and overseen in his role as Chairman, and we wish him well and thank him sincerely for all that he's done for Genus. With that, I conclude and welcome you to our live Q&A.