Genus plc (GNS) Earnings Call Transcript

Well, welcome to our webcast of the Genus interim results for our half year to the end of December, and thank you for joining us today. I'm Stephen Wilson, the Chief Executive; and I'm joined on this call by Alison Henriksen, our CFO, who will take you through the financials. Let's pass over the disclosure chart. And what I want to start with really in this presentation is a business and strategic update and a few of the headlines from our performance in the half. You see from this first chart that we've had a remarkably strong performance with excellent results across all key group performance measures, consistent with what we foreshadowed in our January trading update. Our adjusted profit before tax and our earnings per share were both up 32%. Furthermore, the results that you see here are in actual currency, and they were even stronger in constant currency. And Alison will take you through that. Our cash flow was also strong with excellent cash conversion, and we're increasing the interim dividend by 10%. So Genus has certainly been resilient in the face of the challenging times we've all been living through with COVID. And I would like to pay tribute to the great efforts of the whole Genus team in delivering these results, as well as the results themselves, we've achieved good strategic progress with strength in our genetic lines, whether we're talking about dairy, beef or pork, and that's enabling us to win with leading customers around the world. In addition, we've continued to invest for the long term to seize the growth opportunities we see. And I'll outline how sustainability is at the heart of what we do in Genus. Turning to volumes, which underpin our performance. Our volume measures tell us how we're growing in the number of pigs and cows being bread from our genetics globally. I'm pleased to report that we have double-digit growth in both porcine and bovine, making this the strongest first half performance we've had for at least 10 years. In porcine, we benefited from the very strong growth in China, which I'll cover in more detail later. Excluding China, growth was still a healthy 6%, with Europe particularly strong. In bovine, we achieved 19% volume growth, led by beef and sexed genetics. We had excellent growth in many regions. For example, Latin America or Russia, Asia, where we also benefited from a recovery in India from the flooding of our bull stud in the prior year. These results show that we're clearly gaining market share on a broad basis. So let's put these results and our prospects into a market context. When we presented our full year results in September, many of you will remember that we spoke about challenges in the U.S. pork industry from the backlog of pigs that couldn't be slaughtered due to COVID. We've seen the market adjust with fewer farrowings and slaughter plants working back up to full capacity. So the market is now really normalized and hog prices in the U.S. are now favorable. Strong exports to China have also been supportive of this. And again, I'll talk more about the situation in China on the next slide. However, on the input side, and this really does affect farmers globally across all protein sectors. We're seeing some significant rises in grain prices, which will pressure margins. For example, corn is currently trading at around $5.50 per bushel, that's about 50% higher than a year ago, while soybeans are about 60% higher. So cost pressures on producers have risen. Let's dig into China then. And as we predicted in September, pig prices in China have remained really exceptionally high, and this has driven a massive wave of investment by large-scale producers. That's fundamentally changing the shape of the industry, and it bodes well for us over the longer term. Industry capacity has increased from the post-ASF low point and it's probably at this point, about 75% or a bit over the pre-ASF level. Expansion is continuing, and this is expected to lead to moderating prices over time and some potentially lower imports. In fact, China has recently launched a pig futures market, and you can see that illustrated on the price chart. However, at the same time, capacity is increasing, the industry continues to experience waves of disease infection, and January and February have been particularly harsh. It's estimated that there was about a 10% reduction in the pig inventory in China in the month of January alone. So we see some competing forces, industry expansion continuing, driven by large producers, prices moderating over the next year, but the industry is still really contending with disease challenges. So what does that mean for us? And what you see is that we've continued to have very strong demand for breeding stock. You see from the left-hand side, how we continue to grow and continued to shift to royalties. In fact, if you look at H1 to H1, we achieved volume growth of 39%. And we're growing both with our existing customers as they expand, but also winning new customers. In fact, now, we have around 1/3 of the top 50 producers using our genetics in at least part of their operations, but we continue to have a very large opportunity to grow our market share within this segment. They say a picture's worth 1,000 words. And on the right-hand side, you can see one of our customer's farms, which is stocked with PIC pigs. It's located in the southwest of China in Yunnan province, which is down towards the border with Myanmar and is producing over 100,000 pigs for slaughter per year. It certainly gives you a good sense of the scale and investment going into the industry. Our collaboration with BCA continues to make good progress, both in respect of the PRRSv program and the nongene-edited pigs distribution. In December, we were able to import close to 1,900 very elite animals from the U.S. to stock a second new BCA nucleus and more stockings are planned as the year progresses. This one was in Guizhou province, next door to Yunnan province, which we saw on the previous slide. And you can see the ceremony and the pictures for welcoming these elite animals as they arrived in the country. So I'd say both strengths of our relationship with BCA are progressing well and are in line with our plans. What underpins that work in China is our PRRSv program and development effort in the United States. And we made good progress in the period, in line with our plans, and it remains on track. We continue to work through a well-defined plan to generate, multiply and test the gene-edited pigs through several generations. And in addition, we continue to work with regulatory authorities around the world, including having a constructive relationship with the FDA in the U.S. I think there are also a number of indications that the public policy debate on gene editing is shifting in a favorable direction. And if you want a good example of that, I'll direct you towards the speech given by the Right Honorable George Eustice, Secretary of state at Defra, in the U.K. in January, where he opened up a public consultation on how gene editing should be regulated in the U.K. Moving to our next chart. So far, we've looked at market context, the significant progress we're making in PIC in China and in our PRRSv program. So let's wrap up the PIC discussion here by focusing on the significant growth we're achieving in Europe, where profit was up 42% and volumes grew 19%. We've been strategically investing in growth in Europe for several years, and we're continuing to do this. Our partnerships with Hermitage and Møllevang, both continue to exceed expectations, and we're expanding the supply of Møllevang genetics around Europe to meet demand. We've upgraded the Hermitage nucleus in Ireland to a global genetic nucleus status, enabling us to use this as a strategic export supply base. And meanwhile, we're focused on expanding our male business in key markets, including in Russia and Spain. We're going to build a new world-class bull stud in Russia, and we're pursuing multiple growth opportunities in Spain with our partners, Semen Cardona. Let's now turn to ABS. There's a very simple message to this chart. We continue to have very strong dairy genetics lineup, whether we're talking about the genomic bulls we're currently selling, the pipeline of young bulls who will come into production over the course of the next year or looking at the right-hand side of the chart, the females that will be mothers of bulls not yet born. We continue to drive a shift in the use of those genetics in the market towards greater use of sexed genetics and the linked trend we've talked about many times of an increased use of beef genetics in dairy herds to get a higher value calf to make meat. Many of our progressive customers have already made the switch to only using sexed and beef. As you can see here with evolution farming, one of the largest dairy operations in the U.K. And the real beauty of this strategy is that it's truly best for the customer, but also for our business, and you saw some of the benefit of this in the ABS results. We continue to be excited about the results coming from our NuEra beef program. We talked about the significant economic advantage NuEra demonstrated in trials last year when we spoke to you in September, and this is increasingly being noticed in the industry. We're now often leading our engagement with new customer prospects on the basis of our differentiated beef genetics. NuEra is an increasing proportion of our beef portfolio, and we recently took decisions to further accelerate the growth of our NuEra bull program to be able to capture the additional demand we're seeing in the future. So you've now heard how we've made good strategic progress in both our PIC and our ABS business, and we believe the growth opportunities remain substantial. And so we've continued to push forward with growth investments all through the COVID pandemic. We've been making a significant investment in new bull housing in the U.S. and you can see one of the barns in this picture. And we've got more under construction at our new site near Madison in Wisconsin. We've also found land in Saskatchewan in Canada, and we'll shortly start construction there of our third world-class porcine nucleus in North America. These facility investments will total GBP 50 million over a 2.5-year period and will put us in great shape for the years ahead. We're also making very good progress on our IT systems and completed the successful go-live of our entire North American business on our new enterprise system called Genus One. This has been particularly impressive as the implementation, the change management and the employee training has all had to be done through remote working. We plan to complete the global rollout over the next 18 months. So my final slide, before I hand over to Alison, is on sustainability. For us at Genus, this is at the heart of what our business is all about. The active genetic improvement fundamentally enables more animal protein to be produced with fewer resources, including less feed and fewer medications. It's why we are one of the 15 companies in the FTSE 250 to have recently been awarded the LSE Green Economy Accreditation. Our vision, pioneering animal genetic improvement to help nourish the world clearly speaks to the UN sustainable development goal of 0 hunger. And if you look at the graph in the middle of this chart, you'll see that we've been doing some initial work to measure and demonstrate the correlation between superior genetics, in this case, we're talking about beef and lower carbon emissions in protein production. What's more, these genetics are not static, we're making them better every year, so that line is extending and shifting. In addition, we've got a well-defined program to reduce carbon emissions from our own operations with a commitment and line of sight to a 25% reduction by 2030. So with that, let me hand over now to Alison to take you through our financial performance.

Thank you, Stephen. Now let's have a look at the numbers. So as you heard from Stephen, all our financial trends have been very strong, underpinned by terrific growth in both our businesses. In actual currency, adjusted profit before tax was GBP 48.4 million, and that was up 32%, and that included also unfavorable exchange rate impact of GBP 3.7 million, which was predominantly due to weaknesses in the Latin American currencies. In constant currency, adjusted profit before tax was up 44% on last year. And you can see both PIC and ABS contributed double-digit profit growth. Now there were some COVID-19 impacts to our businesses, particularly in North America, and I'll talk more about that. However, we also benefited from cost savings, mostly in travel, and that meant that, overall, there was a modest effect on the group's profit. You can see there that R&D investment was a little lower than prior year, down 2%, but I want to point out that, that trend is temporary, and we will be investing more in R&D going forward, and I'll talk to that later. Central costs were broadly in line with prior year. And you can see that excluding the investment in gene editing, gene has achieved growth in adjusted operating profit of 35% to report GBP 54.7 million. And as you can see in the graph on the right, the group continues to achieve robust growth in operating profit and margin, absorbing the investments made in gene editing. In the second half of the year, we do expect R&D investment to increase and the operating profit margin to remain stable for the group. However, currency continues to provide headwinds for the business. And if we apply today's spot rates, the full year impact will be around GBP 6.5 million, which is up from GBP 4.5 million that we guided back in September. And there are more details of this in the appendix to the presentation. So for the rest of the presentation, I'll refer to constant currency growth because I think that's a better indication of underlying trading performance. So as you can see, PIC's profit growth has been great at 17%. Key contributor was China, of course, helping Asia to grow 56% on prior year, although Europe wasn't too far behind with 42% profit growth. Royalty revenue grew 7%, which was very good, given that North America's royalty revenue was down 4%, and that's due to the COVID-19 impact on bringing volume to producers. And it was what we were expecting. Margins were also very good. Adjusted operating profit margin grew 210 basis points to 41.2%. And that's because we've had strong margins from breeding stock sales, particularly in China, but also the business has leveraged its cost base as it's continued to grow. In North America, operating profit was down 6% on prior year, which is consistent with our expectations. And as you heard from Stephen, the slaughter volumes in North America have recovered, although high feed prices and lower exports to China are now causing new concerns for producers. And we expect there will continue to be various uncertainties for our customers, but the impact on PIC should be moderate. In North America, 97% of volumes relate to long-term royalty contracts, and we don't expect this mix to change in the future. We are gaining further market share, both on the down lines and the side lines, which positions PIC very well for the future. Now we have strong management in all of our regions, but I particularly wanted to highlight Europe's performance, which was really outstanding. What you can see in their results is the culmination of 5 years of excellent execution, with a very smart strategy. And the expansion in Russia was particularly notable, where profits nearly doubled. Royalty revenue was up 15% and now represents 73% of volume in Europe. And I'm quite sure we're going to see more impressive growth from this region in the future. Latin America also performed very well, with profit up 13% and royalties up 9%. Brazil continued to be a very buoyant market for us. And with our joint venture partner, Agroceres, the team growth drove very strong growth of 30%. Lastly, as you've heard, China performed very well, and progress has been made in expanding the royalty contract business, which now represents 26% of China's total volumes. So as you heard, ABS had excellent volume growth, and that meant that revenue growth was 17%, and there was 37% growth in operating profit. COVID-19 has created some challenges, in particular, for our sales team when they're trying to engage with new customers during the lockdowns. But despite this, sexed volumes grew very strongly at 42%, beef volumes at 22%. And as good progress made with margin as well, adjusted operating profit margin grew 210 basis points to 14.5%, and that reflects the ongoing shift in product mix towards Sexcel and further leverage of the business' cost base as it grows. Although there were some cost savings in relation to travel, which will return when things get back to normal. In Asia, volumes were up 52%, with operating profit up 16%, and that's because we're seeing strong growth now in China, India and Australia. And there's been a period of vertical integration in China's dairy market, with processes acquiring farms, and the ABS team has done a great job of positioning themselves so that they can serve these customers as they grow. Latin America continues to have great success with their digital sales campaigns, and they're making the most of strong beef markets, particularly in Brazil and Argentina, where they've achieved revenue growth of 35% and profit growth of 68%. EMEA and North America have certainly had more challenges during the pandemic. We've seen little or no growth in these dairy markets. And as I mentioned, winning new customers has been harder when unable to meet face-to-face. However, both regions still achieved good profit growth, with EMEA up 28% and North America up 5% on prior year. As I mentioned earlier, R&D spend dropped a little to GBP 29 million. And you can see on the chart there that porcine product development was down 11%, but that was because it was particularly high spend last year, as we expanded our porcine nucleus herd. And GBP 10.3 million, it's still quite high spend compared to historical trends. Our spending on gene editing, which is primarily in relation to the PRRSv resistance program, decreased by 12%, but this has nothing to do with the progress of the program as such. It reflects the fact that we have internalized some of the capabilities required to produce the gene-edited pigs and through doing so, we've made some savings. Other spend in research and development costs was up 23%. And during the period, work was initiated in the areas of reproductive biology and scientific data. And during the half, we hired leaders for these 2 exciting fields, and I'm sure there'll be more to talk about in the future. External collaborations were at a slower pace than we planned, and we did highlight that in January. And that's due to institutions that we interact with rightfully prioritizing COVID-19 research and vaccines. We expect R&D investment to grow in the second half and increase by around GBP 5 million to GBP 7 million compared to the first half because we're going to continue to ramp up investment in gene editing and our other research areas. And there's some catch-up on short-term delays in some of our external collaborations. Now before I talk about the statutory numbers, I did want to refer to the chart you can see on the slide. This is one of our Jersey bulls. And Lawson was born in July and named after our Chairman, Bob Lawson, who retired last year. And Lawson seems to have a very promising future. He is now ranked in the top 10 for his age group, and we think he will be a winner for ABS, just as Bob did great things for Genus as well. So back to the numbers. We consistently measure and report adjusted results because we think that's a better way to view the underlying performance of the businesses. And our statutory numbers do reflect a number of noncash items. However, they've been lower than they were last year, and I'll talk you through these. So statutory profit before tax rose to GBP 38.7 million, and profit after tax on a statutory basis was GBP 30.3 million, with the effective tax rate of 21.7%, which was up 100 basis points on last year. And this compares with our adjusted tax rate of 22.9%, which was down 10 basis points. The differences between the 2 are simply due to the tax treatment of IAS 41 accounting items and also exceptional items. So those of you that are familiar with our accounts will know that we are acquired in our statutory accounts to apply IAS 41, which is accounting for biological assets. And the effect in this half was an increase of GBP 3.5 million, and that primarily reflects the fair value of a higher number of animals in our porcine herd. And those of you who follow us know, these fair value calculations can fluctuate, and they are noncash in nature. Last year, we had a significant increase in provisions in relation to the ongoing litigation with sexing technologies. And that legal process is ongoing, and we expect that to continue for some time. But as you can see, our costs were significantly lower in this half. And we had to recognize an additional noncash expense of GBP 3.3 million for the GMP equalization charge in respect of 2 legacy pension funds. And that's because there was a High Court ruling in November last year, which ruled that individual transfer payments made since 1990 would need to be recognized. So moving on now to look at the financial position. You can see that on this chart, we ended the half year with net debt of GBP 92 million, which is down from GBP 102.6 million at the end of June. And leverage has remained low at less than 1x EBITDA. Cash generation from operations was really strong at GBP 45 million, and that, of course, reflected in strong conversion as well at 100%. We've just had an ongoing focus across the group on working capital management. And despite some very real practical challenges during the pandemic, the teams have been brilliant at collecting cash, and our collections have been very strong. Capital expenditure was GBP 11.9 million, which is lower than prior year, but that's primarily due to spend last year on new intelligent facilities. And as you've heard from Stephen, we've continued to invest in our infrastructure, and CapEx will increase in the second half to more than double the first half spend. With the commitments we're making, in particular, our investment in PIC's new Canadian nucleus farm, I expect capital expense will also be higher in FY '22. Now I did want to remind you that we refinanced last August for 3 years with 2 1-year extension options for our multicurrency facilities, which in total are around GBP 242 million. And we have plenty of headroom at the end of December, it was GBP 136 million. Our proposed dividend for the half year is an increase of 10%, which compares with 5% last year, and that's 3.3x adjusted earnings cover, and this is a little over our targeted adjusted earnings cover range, which is 2.5 to 3x. So on my last slide, I just wanted to remind you of the medium-term financial objectives that Genus has. As you can see, we have significantly overperformed against our targets of 10% profit growth and 90% cash conversion in the past 18 months. But I still feel these are appropriate objectives. You've heard how well our business performed across the regions, and we intend to continue to pursue strong growth. However, it's important to acknowledge that the growth experienced by PIC in China during the recovery from ASF has been exceptionally high. And we can't continue to see that level of growth after the Chinese porcine industry has fully recovered and when demand for breeding will continue, but the rate of growth won't be as high. We manage our balance sheet conservatively and have been outside our targeted leverage of 1 to 2x for a while, but we like having the flexibility to invest, and we believe there'll be plenty of opportunities to do so in the future. So I've just clocked up my first year at Genus, and I have to say it's been a truly extraordinary year for so many reasons, but not least of which has been the fact I've joined 3,330 people that are all really passionate about pioneering animal genetic improvement to help nourish the world. And I just hope it's not too long before I can finally say, I've spent time on our farms, met lots of people in our business face-to-face and, of course, our animals as well. So I'll now hand over to Stephen to wrap up.

Thank you, Alison. Well, we've covered a lot in this presentation. So I'm going to summarize very briefly. Our performance has been very strong, and we've been making good strategic progress while investing for the future. The external macro environment is mixed, and no doubt the path towards normality with COVID will have challenges. However, we've seen that our business and our people have been very resilient. And while we do expect growth to be lower in the second half than in the first half, and as Alison mentioned, currency headwinds are growing, we do anticipate performing in line with our expectations in the full year. Thank you for joining us for this webcast.