ForFarmers N.V. (FFARM) Earnings Call Transcript & Summary

Hello, and welcome to the presentation ForFarmers Half Year Results 2022. Please note, this conference is being recorded. [Operator Instructions] I will now hand over to your host, Caroline Vogelzang, to begin today's conference. Thank you.

Thank you, Stefano, and good morning, all. We're here again to present to you the first -- sorry, I see mail come in -- the first half results of 2022, and I'm here with our new CEO, Chris Deen; our CFO, Roeland Tjebbes, whom you all know and have met previously; and Pieter Wolleswinkel, who joined our executive Board in April last, and as you all know, is responsible ForFarmers in the Netherlands and in Belgium. We published our interim results in our press release this morning as well as the presentation, which we will lead you through during our listing in proper English. And we also would like to point out the disclaimer statement, which is on Slide 2 of the presentation, which we all do, but always do, in which we state that all forward-looking statements are done based on the knowledge that we have today. And we all know that tomorrow, the world could look really differently. The audio webcast will be taped, and we will post the webcast later on our site. And we would like to also point out that we'll do the presentation. And afterwards, there will be an opportunity to ask questions about the explanation on the first half results. And with that, I would like to pass the floor to Chris.

Thank you, Caroline. Good morning, all. Thanks for joining us on this audio webcast. And now you see here the agenda. We had some trouble with the sound last meeting. So if there's any problem, how do we manage? Can you hear us well?

Well, if anybody -- because all of you who are on the line, I can see that you're on the line. If you have problem with listening -- with hearing, please let us know either through mail, and I can see that Daan is popping up to probably speak. So then Daan, send me a mail, whether you can hear, okay?

Okay. Well, so thank you. The agenda for today, first, myself on highlights '22 first half market developments, and Roeland will take you through the financial retails and then I'll close with the recent developments on 2Agriculture, the joint venture in the U.K., some comments and the outlook on '22. And then the questions at the end. So next slide you see, if that's correct, a photo of myself. I hope we'll meet in person soon. So I started July 1, succeeding -- well, first Roeland for the interim period when he took over from Yoram Knoop, who left us somewhere in the beginning of the year in April. So next slide, please. So there are 2 slides on highlights and developments in markets. So this is the first one. Highlights. We'll go -- I went from top to bottom and now I'll go from left to right, Caroline. First of all, left block. Of course, the war in Ukraine, which is a disaster, of course, for human drama. But also -- and I tell you nothing new that everything in the market has been very volatile, increasing prices, even raw materials that were not available, all troubles that we have all seen. So spiking prices in really all our categories and especially also in energy. So following that, prices in retail, Netherlands, but also in [indiscernible] have been rising for milk, eggs, meat with some around 10% to 15% increases. But we still see -- this is a recurring theme in this business at this moment that the pig farmers are struggling, both the Netherlands and Belgium, and Germany. They're not able to cover costs so they get in financial problems. Well, this is a recurring theme throughout the whole presentation. I think this is an important part of the volume drop that we see in the first half. Okay. So one block to the right in the green one. So the higher raw material prices in -- as you've seen in Q1, this was a struggle on passing this through into the market. But in quarter 2, we were able to, and that's why also we sent this the warning, the profit -- positive profit warning a couple of weeks ago that we were able to pass on those costs into the market and that's the main explanation of the big swing between Q1 and Q2. Then top right, total feed volume fell by nearly 8%. And this is, like I said, mainly caused by the weak performance in the pig sector. And on the other hand, unfortunately, the ruminant sector in Netherlands, which is big and important for us, was stable more or less, and we grew in Poland due to the circumstances there. We'll come back to that. Gross profit up 18.3%. You've already seen it, I think [ Roeland ] already commented on it also and we saw some reports from your end. And underlying EBITDA up, and Roeland will get back to that in more detail. So left bottom, you're all aware, I think, of the big pressure on agricultural sector -- I need to practice that a bit more -- to reduce emissions. So the whole nitrogen discussion in the Netherlands, a big debate, which is big polarization in the country. And you're probably more than aware, at least if you're based in the Netherlands. And we see the solution through innovation and partnerships and not so much just culling herds and bringing back the number of animals. Then the green block on sustainability. Greenhouse gasses okay, going down in production, stable for logistics. LTI is down, which is very important, safety first also in this company. Feed safety incidents is a minor internal thing that we have to report for [ monetary ] reasons. Then right corner, Pieter appointed to the Executive Board as a statutory Director. You're already aware. Then 2 important points, I think, and we'll get back to the second point on the joint venture. So we're quite enthusiastic that we were able to work together in a joint venture with 2Agriculture. We'll get back to that at the end of the presentation with some more details. And we are in the midst of the review of our strategy, the build-to-grow strategy that was launched a couple of years ago. We're revising this, studying it, lots of work done, and we need some time to conclude on that, especially myself. So I need some time to conclude on that. We will get back to you in Q4 with the outcomes. And the next slide, please. Developments in markets. Netherlands, nitrogen debate, we covered that. The shrinking of the pig herd. This is something happening in Netherlands, in Belgium and in Germany for several reasons for that, the profitability of the farmers -- how do you say the [Foreign Language]?

The warm restructuring.

The warm restructuring from a government -- with government money and what's happening and the bad situation in the sector, so low, very low prices for the meat. Some flu outbreak in the east of the Netherlands, but it was pretty much contained. It's not a very big issue. We had some cases. Increasing demand for welfare concepts in broilers as we see that especially in the Netherlands, but in more countries coming up, which is an important movement into a better life for the animals, of course. But that gives us somewhat downward pressure on volumes if there's less animals per square meter. The use of PAPs in poultry, so the processed animal protein, which is now allowed to use in the Netherlands, Belgium and in Germany. That's important. If we turn to Belgium, they're also the same thing as in the Netherlands, buying out the farmers for the nitrogen debate. And then Reudink, second point, is the biological products, and we obtained EU derogation to use some conventional sources due to the sourcing issues in Ukraine, which is good. Actually, Reudink is more Belgium -- more in Netherlands than Belgium, but didn't simply fit into the box. Too much happening. Germany, left corner. Some swine flu cases, but also they're fortunately well contained. So there were 1 or 2 cases, but this has not led to big problems. Farmers, as said, quitting due to low profitability. Robotic milking is growing in the dairy sector. The use of PAPs, as mentioned. Poland, of course, a major impact on refugees in Poland as an impact of the Ukraine war. Ukraine not being able to export poultry products. So this is an advantage for the Polish poultry market. The U.K. is the last country. Out of the EU, also their government -- new government rules and plans on sustainability. Huge labor shortages, drivers and in abattoirs due to Brexit and COVID. And layer farms squeezed in pricing. So that's for now as an overview. Roeland, I would like to pass on over to you.

Yes. Thank you, Chris. Also good morning from my side. As always, I will try to guide you through the financial slides, and I will start with the underlying EBITDA development. And as you are aware, we always start with underlying results. We -- so without the incidentals and exceptionals. We will have a slide on these items later in the deck. And as you can see on the slide, we tried to do the analysis on 3 different levels. That is, on the foreign exchange effects, which is limited this half year. And we look at the effects of M&A. Last year, we acquired both De Hoop and Mühldorfer. And we always contribute 12 months for M&A effects, and then it's a running business again. So only in this half year Mühldorfer and De Hoop account for only 1 month, so that's why the effect is quite limited. What's left is the autonomous effects or the like-for-like effects and I will quite obviously [ have to ] explain those elements. Looking at the total feed and compound feed, you will see that they are more or less down with 7% to 8%. Both are going down. So both the total feed and the compound feed. That means that our byproducts and the DML products drive more -- and liquid products, the products we buy, especially from the -- predominantly from the food sector, which we trade in our more or less stable in the first half of this year. The compound feeds in total went down [indiscernible] about 8%, a bit more. Like Chris was already telling, the biggest downtrend was in pigs. We had the warm restructuring and the stoppers arrangement in the Netherlands, which, of course, has an impact. And we see there's financial distress with a lot of pig farmers throughout Europe and that made farmers to stop. And we see the effect of the loss of a client last year. We lost a client -- a big client in the U.K. It was deliberately that we -- lost the client. And it's still, of course, in the half year figures of last year. So that's why compared to last year, we are down. Ruminant volumes are quite stable, a bit down, but stable in the Netherlands, a bit down in the other countries, but more or less in line with the market. And poultry volume, good to mention that we see a good progress again in Poland. Like Chris already said, we see that because of the Ukraine crisis, less export out of Ukraine and the Polish industry is picking that part up. And what we see as well that our volumes of poultry in Poland are growing. The gross profit is up with EUR 40 million. That's about, in autonomous terms, about 17% or a bit higher, all to do, of course, with passing on the higher raw materials and energy costs. As we explained in Q1, we had some difficulties passing it through. In Q2, it was much better. Why did we need to increase these prices? Not only for raw materials but also for energy, and that's why you can see that the operating expenses went up with EUR 38 million, it's about 19%. And that is predominantly the energy cost, electricity, it's gas and it is fuel. And we see that we had to -- an addition to our provision for bad debt, we are quite prudent there. And we foresee that there could be some difficulties, given all the uncertainties going forward. That's why we added EUR 2.4 million to our provision for bad debt. And the other item for the higher operating expenses is the higher cost for labor. Let me see, wage inflation, which took place in the first half compared to last year. Although we managed again to lower our FTEs, if you look at the total cost for employees, it went up because of this higher inflation on wages. If you put it all together, then you will see that our EBITDA ends up with EUR 43.1 million, which is, like-for-like, a 5% increase. But be aware, last year, we had unfavorable contracts in Germany and with the cost of these EUR 4 million. If you take that out, then you will see that our EBITDA is a bit down compared to last year. It's also good to highlight that if you look at our margin, our EBITDA margin, of course, it's a bit down compared to last year. It has to do with the inflated revenues. And if you would correct for that, you will see that we are a bit better than the year before. The next slide, we will look at the profit development. So a bit further down our P&L, and I will point out some of the items. As you can see and maybe already have seen in the press release, our working capital has been growing and because of higher working capital, especially because of the higher raw materials, we also have higher debt and higher debt leads to higher interest costs. So that's why our net finance result is a bit up compared to last year. The share of profit of equity-accounted investees -- you are aware that is our 50-50 joint venture with HaBeMa in Germany more or less back to normal levels, I would say. We saw that there was some less fewer shipment activities, and that's why the result is a bit down compared to last year. Looking at the income tax expenses, basically 2 effects. One is a prior year adjustment in the U.K., which was unforeseen. And the other one is that we had nondeductible costs also relating to M&A, and that's why our tax expenses are a bit up compared to last year. Underlying profit a bit down because of the effects just mentioned. So in essence, higher EBITDA, higher EBIT because of the finance results and the tax expenses, lower underlying profit. But you might have seen the APM items, the incidental items, are a bit lower than last year, that's why the profit for the period is higher than the year before. The profit ratios. As you can see, the underlying earnings per share are the same, EUR 0.19, lower results. And like I said, underlying, our result is lower, but we had a share buyback program and that's why also the number of shares is lower and that's why our EPS is at the same level. As mentioned, the -- especially in the U.K., where we saw the -- the prior year adjustment and our M&A non-deductible cost is leading to a higher effective tax rate compared to last year and last year it was 26%. Now it's about 31%. Also if you to look at the ROACE, the return on average capital employed, because of the higher working capital employment of -- sorry, because of the higher raw materials, capital employed went up leading to higher -- to lower return on EBITDA and EBIT. Looking at the capital structure, starting with the equity, equity is down with EUR 17 million. Basically 4 effects over there. One is the addition to the result of EUR 11 million, which is, of course, leading to higher equity. We -- as you are aware, every -- twice a year, we do the remeasurement of our pension funds. And in the U.K., bigger margin was added, EUR 13 million, because of higher interest rates leading to lower obligations. And that's why we have a positive effect on equity. This is, as you are aware, not leading to any P&L effects or cash effects. This is just bookkeeping, but it increases our equity. There are 2 trends on lowering the equity. One is, of course, the payment of the dividend, which is EUR 26.3 million, and we had the share buyback program which we stopped in Q1 of EUR 17 million, which is in this year. And that's all leading to the lower equity of EUR 17 million. The solvency ratio a bit down because of the higher total assets, which is higher because of the higher working capital. Working capital, as you can see on this graph -- on this slide is EUR 42 million higher, 2 effects: one, higher because of the higher raw materials; and two, we see that some of our clients we negotiated longer -- they negotiated longer payment terms. That's why our DSO, our days sales outstanding, is a bit higher. Also has to do with the growth in Poland. Poland, by definition, has lower payment terms than the other countries we're in. That's why we see this increase in working capital. Despite all the turmoil our clients are in, we are able to keep good track on our overdues. Our ratio of overdue receivables again declined. It's 10.6%. Be aware, a couple of years ago, it was about 17% or 18%. So this is still a good work by our sales departments and credit controls. Because of the higher working capital and the share buyback program, you will see that our net debt increased since the end of last year. If you would compare it to -- so this is compared to the 31st of December. If you compare it to the 30th of June last year, the effect is a bit lower last year, the net debt was about EUR 45 million at this time. Cash flow development. Not much to mention anymore as we talked about the working capital, maybe good to look at the investing activities. Last year, we had Mühldorfer and De Hoop. This year, no acquisition has been done. And that's why the number is a bit lower. So basically, what you see in this line is our regular CapEx, our capital expenditures and that's why the number is lower than the year before. The incidental items, the exceptionals, APMs, the alternative performance measures, is more balanced, I would say, than the year before. Last year, we had quite a lot of items. Now we only have a couple, and I will pick out the biggest one that I missed, the only 2 or 3. As you are aware, we divided it in impairments, business combination and divestments, restructuring and other. And in the column business combinations and divestments, I have 2 items which we always take into account as APM item, first one being the -- on EBIT, the EUR 4.2 million is with the amortization of previously acquired intangible assets. If we buy a company, we need to evaluate the clients, and we amortize on that, and that's what you see over here. That's the same -- or basically the same number as last year for this element. The other one is the option of Tasomix. It's on the net financing result. This is also a normal one. And now, compared to last year, on the restructuring -- that's the next column, you can see it's only -- it's below EUR 1 million. Last year, a bit more and this has to do with the implementation of efficiency programs that [ soaks up some of the ] cost. In total, EUR 6 million, whereas last year, it was EUR 7.5 million. The last 3 slides are clusters. You will see the Netherlands, Belgium, Poland/Germany and the last cluster is the U.K. In the cluster of the Netherlands/Belgium, we see a decline of 8% on volume again, especially on the pig fix side, both in the Netherlands and Belgium, we see a declining herd. We see the -- as the effect of the stoppers arrangement, warm restructuring and the pressure on our clients when it comes to the pig industry. There are still overcapacity and overproduction in Western Europe because of the closure of China as a result of the African swine fever in Germany. And that's why we see a lot of people stopping their business. On Dairy, like we said, it's quite stable. And, as you see, both the Reudink and Pavo -- we sometimes tend to forget to stipulate that, but Pavo and Reudink are biological operations and our horse feed operation, Pavo, contributed quite nicely with higher volumes. Gross profit for this cluster went up with 11%, which is EUR 16 million, if you do the math, but it's not enough because the operational expenditures increased with EUR 21 million. So the higher energy and higher cost for energy, so basically electricity and gas and fuel was higher than the increase in gross profit. That's why our EBITDA for this cluster is down compared to last year. Next, looking at the ROACE set, they're always -- return on average capital employed for both EBITDA and EBIT for this cluster is at a very acceptable level. Germany and Poland, a mixed bag when we look at the feed volumes. On the one hand side, we see decline in volumes for the pig farmers, and they are stopping their business. On the other hand, you see increased volume in Poland in the poultry sector because of the higher demand. But in total, you will see that the total feed volume is down with 8%. Looking at gross profit, be aware, last year, we had this loss of EUR 4 million of the unfavorable contracts, which is in here. That's, of course, also leading to higher gross profit in 2022 first half, with EUR 14 million higher. And that's also the reason why you can see that the ROACE increased quite strongly from 0.3% of EBIT last year to 7.7% this year. Our last cluster is the cluster in the United Kingdom: from the three clusters, the one with the smallest decline in volume. In total feed volume, it's 4.5% down, but it's down for all species. Last year, again, we had these new clients in the U.K. [ On pigs ] which we lost, that is, of course, is not helping this number. And we saw that in ruminants, it was difficult to pass on higher raw materials. Don't forget, that in the first quarter, there was still a lot of COVID regulation floating around, and that's why it was hard for us to pass on all raw materials to our clients, and that's why we had some customer loss over there. Gross profit went up with EUR 9 million and the underlying expenses, again, because of higher energy and fuel, was up about EUR 10 million. So there's 1 million difference. That's the main driver for the lower EBITDA for this cluster. And that is the highlights of the result of the first half 2022 of ForFarmers. And with that, Chris, I would like to hand it over to you again.

Thank you very much. It sounds still good. Just checking, no complaints? Okay. Good. And now we would like to talk a little bit about 2Agriculture and ForFarmers. We've been announcing this joint venture on July 1, and we're quite enthusiastic about that. I know there's been comments, what do we do with U.K., so this is what we think is best for U.K. A lot of hard work has been going into this joint venture, not always easy, but we think this is the best way forward. Still under competition markets authorities approval, so not yet final. But if we go to the next slide, a little bit of background of why this would be good. For us, for ForFarmers, this is a stronger position in the promising poultry sector, like we made a couple of other investments in the last couple of years because we believe this sector is a growing sector within the meat sector. On 2Agriculture, and of course, the synergies, we'll get to that and 2Agriculture, they have more exposure to other species and shared investment opportunities. So what we do in effect, is create synergies around geographies, species, expertise and customer base. As the U.K. is, of course, a big country, transportation costs are high. This will help us in achieving a more efficient operation, together with focusing more on the poultry sector. As said, still pending approval for U.K. Competition and Markets Authority, CMA. We're currently in the phase of answering questions to the CMA. And when they will take a certain period of time to come to a conclusion. For the time being, we operate separately, of course. Then the next slide, who is 2Agriculture. You can read this faster than I can speak. But an important player in the market linked to 2Sisters. So it's the largest customer to them. Of course, the European -- on a European level, also important, like Roeland also already pointed out. With extensive experience, a large feed range around broiler, broiler breeder, layer, duck and turkey feed. And mostly into this integrated poultry market. Next slide, please. Five mills, 250 people. Fleet of owned vehicles for transportation. And we think this -- it fits very well in the combination. So this is about to 2Agriculture. And again, we're quite enthusiastic about it, still operating separately, and we look forward to a positive notification by the CMA. Then on general market outlook, you're all aware, I think we are in a highly volatile market on raw materials, on energies, on geopolitics, on Ukraine. So there's many, many uncertainties. We see inflation going up, consumer confidence down, disposable income down. So lots of things happening, pressure on the sector. Of course, the nitrogen debate but also more EU regulations. And what's happened to us -- what's happening now with the drought in the Netherlands leading to extremely low water levels. And as you are aware, our transportation into the mills is with water by ship. So this gives us extra troubles and extra cost on getting our raw materials in. So in view of those uncertainties, we refrain from issuing guidance on the results in the second half year as, simply put, all those elements, there's too much volatility and too much uncertainty to say anything sensible. So that's how -- so far for the presentation. So I hand back to Caroline and hope for the questions, I think.

Yes. Thank you, Chris. [Operator Instructions]

The first question comes from the line of Daan Arends of Kepler Cheuvreux.

Three questions from my end. Maybe firstly, on the nitrogen crisis. I understand -- yes, on the nitrogen crisis, I understand that you would prefer a future where these nitrogen reduction targets are met through innovation rather than herd size reductions. But for now, both the Dutch and also the Belgian government seem to be sticking to their herd size reduction targets. So can you explain a little bit what your planning assumptions are going forward from a strategic perspective in a sense? Are you working towards a future where herd sizes are [ getting ] smaller? Or are you still hoping that, that will not materialize? And what levers do you think you can pull to keep profitability up if herd sizes do reduce by such an amount? That's the first question.

Thank you, Daan. Of course, we don't stick our heads into the ground, and we estimate that the herd sizes will drop. And so one thing is what we take into our models calculate in the future. And also strategically, this is part of the strategic strategy review, of course, but we don't stick our heads into the ground. But on the other hand, we still want to fight for a better solution than the governments are currently proposing. But maybe, Pieter, you can elaborate a little bit on how you look at the situation going forward.

Yes, sure, Chris. Thanks for that. Well, indeed, I think let's not be naive. It is very likely that the Dutch herd sizes will go down. We just don't know to what extent. And let's also be very clear that, that is not clear at this point in time. There's still a lot of work to do by the Dutch provinces that need to look how to implement the guidance from The Hague. But also if we look at the current situation at The Hague, we already see that they realized that their, let's call it, ambition, how they express it is impossible to execute, especially on a short notice. So with that, we do foresee some decline, but not to the extent as we -- every now and then hear it in the Dutch newspaper. If we go back to your second question, if you end up in a market that is in decline, how do you deal with that? It is quite -- here, if you look at the structure as we have it with [ trucks factory, ] that is a major important part to manage, partly by increasing market share, making sure that we win volumes to stay up in the market. So as an example, we -- via the acquisition of De Hoop, we strengthened our position for the welfare concept in the Dutch market. That helps. So that is one step, look at it organically. Secondly, if we look at partnerships, that has always been a strength of the company to set up relations with other compound feed parties and not directly via M&A. That can be, but does not necessarily need to be the situation. But via toll mill agreements where we produce for other parties or other parties produce for us, there is also a way to deal with our OpEx in this situation. So with that, we are quite comfortable to have a very healthy business in the Netherlands. And obviously, that is a thing that comes back in strategy, as Chris also elaborated on. Does it answer your question, Daan?

Yes. I think that's pretty clear. Then maybe secondly, since the start of H2, we've seen gas prices trending up again. If I'm correct, your main source of power in the mills is gas. So are you hedged now going into H2? Or is that something we need to be concerned about? And maybe as a third question, tangibly related. Can you give a bit of color on the pricing developments we've seen into H2? Because it looks like some agriculture input commodity pressures are coming down. Does this mean that you have more leeway for pricing? And how comfortable are you with going into H2?

Yes. I will start. Thank you, Daan, for your questions. You are aware here last year, we discussed it a bit also in this community that we were not able to pass on our -- the higher -- sorry, the higher raw materials, but also the higher energy cost. Since then, indeed, we amended our policies. So basically, had a look at hedging again, but it goes too far to -- for this group. And also, as we noted, our competitors are listening as well to talk in depth about our hedging policies. But indeed, we amended our policy so that -- so we are better equipped to deal with prices going forward. And the second question on raw materials, Pieter will take.

Yes. We've seen, as of early July, some relief in the commodity prices, especially on the grains. On the other hand, we still see the soy, as an example, and in general, the proteins are still at extremely high levels, but also the grains are still at levels that are unpreceded. So feed, as a whole, it's still at extremely high prices and some relief has come back in that. But one thing is what we know is that we are in a world that is so unbelievably volatile that tomorrow, things can be different. The same can be said about energy prices that go up and down with fluctuations that we did not see until end of last year and the same can be said about the commodities. So for us, working according to the policy at this point in time is vital, and we are confident about that, that we can manage the current situation, but it is extremely difficult to give forecast on a commodity cost price developments.

The next question comes from the line of Guy Sips from KBC Securities.