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

Hello, and welcome to the ForFarmers Half Year Results 2024 Analyst Call. My name is Laura, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to your host, Pieter Wolleswinkel, to begin today's conference. Thank you.

Thank you, and welcome from our Lochem office. We appreciate that you are joining this call in which we will present our first 6 months results. I'm sitting here with Marloes Roetgerink, our new CFO; and Rob Kiers, our COO. The next slide is known to all of you. So if we then go through the agenda, I will start with the presentation of our key events in the first half of this year. After that, we'll move to Marloes, who will present the financial results in more detail, and I'll close off with a view at our 2024 agenda. After that, you'll have the opportunity to ask questions. If we look at the first 6 months of this year, we are satisfied. We see clearly a positive trend. If we look at the volumes, we have addressed last year that we want to improve our market positions. And it is good to see that in both quarters, we have achieved this and it's a continuation of the second half of 2023. We do see that operational profitability went up significantly. But as a clear remark, the first 6 months of 2023 were disappointing. So an improvement was clearly necessary. If we look at our 2025 strategy, we have 2 clear pillars. One is a more local approach, strong local management teams, and we recognize that it is appreciated by our customer base. Secondly, in this period of time, we need to make choices. We've taken clear decisions, for example, in the sale of our Belgium compound feed activities in October last year, and we've announced in February of this year that we will divest 2 locations in the United Kingdom. We have made a deal around those 2 locations, and we assume that, that will be effective as of the fourth quarter of this year. We also want to improve our growth profile and 2 clear pillars come out also in our acquisition strategy. We announced last year the Piast acquisition in Poland, and that has been closed early Jan of this year. And we have announced in June of this year, the acquisition of Van Triest Veevoeders, a specialized company in shipping co-products from the food companies to the farmers, and that fits very nicely with our sustainability agenda, but also with the growth profile that we want to have. If we zoom in at the summary of our financial results, we recognize an improvement of the like-for-like volumes and given the divestment in Poland and the acquisition of Piast -- sorry, the investment in Belgium and the acquisition of Piast in Poland, it is very important to look at our like-for-like results. And we do recognize that the volumes went up 2% and the compound feed volumes with nearly 1%. And as I said before, we are very happy about that result. If we look at the turnover, we did see a significant decline of 15%, which is logical given the decline of the commodity prices as we recognized it in the first 6 months compared to 2023. We do see that the gross profit and the underlying profitability took a massive step up, leading to an underlying net profit of EUR 16 million versus EUR 4 million in 2023. We have given our guidance towards end of 2025, where we want to achieve a ROACE on underlying EBIT of at least 10%. And it is good to recognize that we have already achieved that in the first 6 months of this year, which is a confirmation that we're doing the right things, and we're satisfied that we have achieved that over the past months. If we then zoom in on the different clusters, we always start with the Netherlands and Belgium. On the right top of the slide, you recognize the results per cluster. And obviously, in the Netherlands and Belgium cluster, there's a massive impact of the divestment in Belgium. So let's mainly zoom in at our like-for-like results, and we also see in the Netherlands that our volume went up 2%. What is good to mention that we are satisfied with the results in all key species, ruminants pigs and poultry. And ruminants, we recognize that the surroundings become more and more complex. That has to do with legislation but also with market demand. As an example, FrieslandCampina, the milk processor is paying farmers more and more based on the reduction of the carbon footprint. It is a new way of working, where we see that with our know-how and advice power as we have it on farm, we are able to make the difference and that helps us in gaining more customers. On pigs, we recognize that we are very competitive in our approach at this point in time. And in poultry, our results -- our technical results are very good. So all in all, all have shown a good development in the first 6 months. We recognize an improvement of the gross profit. We do see that also in the Netherlands, a local approach where we especially bring our procurement activities flows through our sales activities and help to get a good gross profit result. But we also need to realize that the first 6 months in the Netherlands were weak given the decline of commodity prices as an example of fertilizers as we recognized that last year, which put quite some margin pressure on. The underlying operating expenses are getting better and better under control, that can be said for the entire ForFarmers Group and also for the Netherlands. Two drivers behind that, we have taken steps to reorganize and to lower our employee cost, and we are also supported by the lowering of the energy prices that have come in, in the first 6 months. All in all, leading to an improvement, a clear improvement of our EBIT and EBITDA in 2024. Important for the Netherlands is the step that we are taking with Van Triest, a family company that sells, at this point in time, approximately 1 million tons of residual flows, co-products and forest products. The company has 90 employees and very important, 37 trucks and trailers as well as a storage and transshipment site in the north of the Netherlands. So that helps to strengthen this business. As ForFarmers, it's not a new business. We do it ourselves under the brand name CirQlar, and we're now bringing that together with Van Triest. Historically, ForFarmers has been more strong in the pig segment and Van Triest stronger in the ruminant segment. So that comes very nicely together. Van Triest has a very good supply chain setup, so that helps also our business where we, at this point in time, rely more on third-party partners. And on the other side, our know-how in the sustainability field, how do you create feed concepts around these type of products is very well developed, so that will help the sell towards the future in an environment where we believe that these products will get more and more traction to lower carbon footprint levels. So it fits our strategy and our focus on circularity. It has a good growth potential both in the Netherlands as well as in the surrounding countries within Europe. So with that, it helps to get a better growth profile. We have received clearance from the competition authority. And with that, we are confident to close early September. Then moving to the East, Germany and Poland. We recognized a very strong results in 2023, and we are therefore happy that on an [ phenomenal base ], we were able to continue this path. If you look at the table on the right, you clearly recognize the step-up due to the acquisition of Piast, and I'll get back to that on the next slide, but let's first zoom in at the organic development, where we do see like-for-like that our volumes went up 2%. Also in this cluster, we have seen an [ phenomenal ] positive development of our volumes. The profit has improved slightly. And with that, also the results were quite stable. Obviously, we do see an improvement of depreciation due to the Piast acquisition and also we have invested in the factories in Poland and Germany to ensure that they are future-proof. So we're satisfied on these results, but we're also satisfied on the steps that we were able to take with regards to the integration of Piast in the first half of '24. As you can see on the Polish map on the right side of the slide, we have a much better footprint developed due to the acquisition of Piast with 4 factories, so that helps to optimize our feeds and reduce the logistic distances that we have to serve our customers and to get the raw materials in the factories. So that helps to be more efficient and to grow further. We have merged our procurement departments and are achieving synergies around that. And both companies have a strong profile of high-quality feed programs, and it's great to see bringing that know-how together will help Poland, that will also support our business in the Netherlands, Germany and the U.K. based on the know-how and also the patented feed technologies that Piast has in-house. We have taken this step to ensure we can grow in Poland towards the future. And to take that step up, we need capacity in our factories, and 2 factories are therefore being upgraded. One in the North Olesno. Olesno has just been reopened to make -- we have invested in it, made it future-proof and have increased the capacity, and we do want to take the same step in Golancz in the west of Poland. Then moving to the United Kingdom. 2023 was not an easy year in the U.K., but we have addressed also with the publication of our annual results that we believe in the dairy industry in the United Kingdom. And it's good to see that the volumes went up 1.5% overall, mainly driven by the dairy feed that we sold. If we look to pigs and poultry, we recognize a different picture. We do see that the processors moved more and more in an integrated model, meaning that they own their own factories and produce their own feeds. And therefore, ForFarmers has less role to play. We have also seen that, again, in the lower pig volumes that we sold and the poultry volumes went up. But from a strategic point of view, that will be difficult and as said before, also the reason that we want to divest 2 locations, and we assume that, that will be effective in the fourth quarter of this year. All in all, that step is aiming to lower our cost base. We're also lowering our overhead structure in the U.K. to make sure we are competitive and can grow, especially our dairy business over there. So it's good to see that we moved around our EBIT from negative in the first 6 months of 2023 to nearly EUR 3 million in the first 6 months of this year. And with that, I would like to hand over to Marloes, who will give -- present the results in more detail.

Thank you, Pieter. Also on my side, a very good morning from Lochem. Following on what Pieter shared with you, I would like to take you through our financial overview. We look at the results of the first half of 2024 compared to the first 6 months of 2023. We start with a look at the underlying financial results. These results have been adjusted for incidental items. I will discuss these incidental items separately later in this presentation. As management, we play close attention to the underlying results because those provide a better insight in the group's business development and financial performance compared to previous periods. On this slide, you can see 2 delta columns next to the first half year data of '24 and '23. The first delta column indicates the percentage development of the reported numbers. The second delta column has been adjusted for the divestment of the Belgian activities in 2023, the acquisition of Piast in early '24 and for foreign exchange effects. First, let us look at the volumes. As Pieter indicated, we strengthened our market position, which resulted in organic growth of the total volume in all 3 clusters and in almost all segments. Our selling prices are highly correlated with the value of raw material purchases. We, therefore, see that the decline in commodity and energy prices resulted in a 15% reduction in revenue. Gross profit increased by 5.4%. This increase is reflected in all clusters, the execution of our strategy clearly contributes to a more effective purchasing and sales approach. Underlying operating expenses increased slightly, like-for-like by 0.5%. This is partly driven by indexation of wages, largely compensated by FTE savings and by lower of the production costs like energy. The underlying overhead costs had also decreased. This leads to an underlying EBIT of EUR 22.7 million for the first half of 2024 compared to EUR 8.6 million over the same period a year ago. Like-for-like, this is an increase of almost 130%, a nice improvement. Underlying depreciation and amortization increased in the first half of 2024 compared to the first half of 2023. This is largely due to the Piast acquisition and increased leases in transport. Underlying EBITDA over the first 6 months of 2024, therefore, stands at EUR 42.6 million compared to EUR 26.5 million for the same period last year. All clusters show an increase in underlying EBITDA. Underlying EBITDA as a percentage of gross profit developed from 11.3% in half year 1 '23 to 17.3% (sic) [ 17.1% ] for the first half of 2024. The next slide shows an explanation of the underlying profit development. We start with the underlying EBIT, as I explained in the previous slides. Underlying financial cost increased slightly as a result of high interest costs due to an increase in leasing. The underlying income tax amounts to EUR 3.7 million and results in an underlying tax rate of 19.4%. The increase in absolute terms is mainly caused by the improved financial results. This leads to an underlying profit of EUR 16 million and an underlying earnings per share of EUR 0.18. Including incidentals, we arrived at a profit attributable to the shareholders of EUR 4 million over the first half of 2024. The return on average capital employed, the ROACE, is calculated on a 12-month basis. ROACE continued at 10.7% for the first half of 2024. As you know, we set ourselves the target to achieve 10% ROACE by 2025. We're, therefore, very pleased with our current performance, although we realize that the market in which we operate is volatile. On the following slide, we will find an overview of the alternative performance measures, APMs. These are mainly one-off items for which we make adjustments to arrive at underlying figures. During the first half of this year, we incurred EUR 12 million in incidental items. As all of you are aware of, we have a call/put option liability regarding our Polish joint venture, Tasomix. EUR 10.5 million out of the EUR 12 million APMs is related to the call/put option. The valuation of this put option is recognized in the balance sheet as long-term debt under IFRS. It is a noncash item. If the value of the business increases, the value of the call/put option will be higher. Due to the acquired Piast business, we need to recognize the additional value in our books. This is purely an accounting treatment and does not mean that the option will be exercised. In half year 1 '23, we had almost EUR 6 million in restructuring costs as a result of reorganization. These restructuring costs were considerably lower at EUR 600,000 in the first half of this year and were mainly related to our business in the U.K. Next, on the business combination and investments, we show an amount of EUR 2.4 million over the first half of '24. This relates to a positive valuation of balance sheet items for Piast, which we acquired at the beginning of this year. In addition, costs were incurred for M&A activities and divestments. The impairment charge in the first half of '23 is related to the sale of Belgian operations. Amortization of intangible assets is in line with previous year. Together with tax effects on the APMs, it brings the total to EUR 12 million negative for the first half of '24. On the next slide, you see an overview of the capital structure. The value of the assets increased to EUR 875 million. The increase in assets is explained by the acquisition of Piast. Shareholders' equity is EUR 10 million lower at the end of December than at the end of December '23. This is driven by the dividend payments for '23 that took place in '24. The solvency ratio is slightly above 35% for the first half year of '24, which is an excellent position. Working capital has increased, mainly driven by the acquisition of Piast and there's also the seasonal impact compared to the full year '23. If we compare on a 6-month basis, we see that the net working capital has decreased. At the end of June last year, working capital amounted to more than EUR 30 million. There has been a slight increase in receivables that have just passed the due date. It is a timing effect and mainly driven by the fact that the last 2 days of June were weekend days. We do not see a structural deterioration in accounts receivable position. The net debt amounts to EUR 55.7 million, which represents a net debt-to-EBITDA ratio of 0.71. This is an increase compared to the end of last year, but it should also be noted that Piast has been paid. Compared to the last year at the end of June, net debt improved by more than EUR 30 million. The underlying cash flow that led to the movements are explained on the following slides. More than EUR 25 million cash was generated from operational activities. The underlying increase in EBITDA is partly offset by Piast working capital increase. There was also a positive effect on working capital last year due to falling raw material prices. This year, prices are much more stable, so we don't see that effect. The cash flow from investing activities is more than EUR 30 million negative. The increase versus half year 1 '23 is related to the acquisition of Piast and Thunderbrook. Together with the financing activities of minus EUR 20.8 million, this results in an increase in net debt of EUR 34.5 million. Net debt position was EUR 21.4 million on January 1. If we add the increase of EUR 34.5 million in debt over the past 6 months, it results in a net debt position of $55.7 million. In summary, we had a good first half of '24 in which both volume growth has been achieved, a strong growth in profitability, partly due to effective cost control. We look with confidence to the second half of '24. It should be noted that the market in which we operate is and will remain volatile. Our focus is on an excellent execution of our strategy and a smooth and solid integration of our acquisitions. With this, I would like to hand over again to Pieter.

Thank you very much, Marloes, and great to have you on board in our company. With that, I'd like to close over the look at our agenda 2024. I've shared this with you during the publication of our annual results. So it's an update where I'll express where we stand. We have a strong focus on our sustainability journey where we believe that this is the way forward and also a way to create opportunities. We're focusing around the reduction of our carbon footprint and at this point in time, obviously, spending all our time on the CSRD implementation where we are on track. We are increasing the level of co-products in animal nutrition as a key part of our circularity strategy. And in the second half of this year, all attention will be done on the integration of Van Triest and CirQlar. We look critically at the protection of our biodiversity, especially what raw materials are we using in our feed and at this point in time, has been working on the implementation of the European deforestation regulation. We're working on it, yet we know it is a complex supply chain, and it's not all clear at this point in time, for example, with regards to the soy imports, but we do believe that it's an important step forward in the way we look at raw materials in feed within Europe. Our ambition to win market share is still high on the agenda, and I'm very pleased to see the progress we've made over the past 12 months. Focus on cost control will still be there. Inflation is still on its way and the uncertainty, macroeconomical, geopolitical, politically are still there. So we really need to make sure that based on our cost base, we are flexible to move. The U.K. reorganization will be finalized in the second half of this year, making sure we are ready for the future in the U.K. And we're working on the integration of Piast very well on track, but also Thunderbrook, the horse business that we've acquired in the U.K. is leading to a growth platform in an important horse market within Europe. And closing off with the remark, we do believe we play an important role in the establishment of strong agri food chains within the countries that we're active in. We cannot do that on our own as ForFarmers, but we're actively looking for interaction with all the chain partners. I described the example how we cooperate with FrieslandCampina, those type of cooperations are vital for us towards the future. And with that, I'd like to close off and hand over for the opportunity to ask questions.

[Operator Instructions] We will now take our first question from Fernand de Boer of Degroof Petercam.

A couple of questions on my side. First of all, if you deduct the underlying expenses from your gross profit, then I arrived at a little bit higher number. So is there something in this gross profit, which also should be adjusted? That's the first question. And [Technical Difficulty]

The line of Fernand has been disconnected from his side locally. We will wait for him to dial back in.

I think we will connect with Fernand de Boer one-on-one then. I think he's having trouble dialing back in.

Well, then there are no further questions in queue. I will now hand it back to Pieter for closing remarks. One moment, please. I see that there's one line coming in. Is it okay for us to wait? So Fernand is back in the line.

I'm not sure what happened, but the line was disconnected. I have three questions. One is on the gross profit minus the underlying expenses, then I arrive actually at a little bit higher, EUR 1 million higher. So could you tell me is there some adjustments also in the gross profit line? Then the second one is on Piast. It looks to me that volumes in Q1 were, I think, a little bit below what I expected. But maybe that was hampered by the upgrades of the facilities. So could you tell us a little bit about that? And the last one, I remain puzzled on this put option, call and put options, with the acquisition, you get the full payment in your cash flow, but then you still have, I think, an EUR 11 million charge for the put option liability. So how does that work in accounting because I'm not sure how to understand that?

Fernand, thanks for your question. Marloes, on the first question, you want to respond now or first...

Yes. A very short answer, Fernand, that other operating income is in between. So there's a small deviation. I think that's the answer to your question.

That's not important but my worry is for Germany, Poland, because actually, it is primarily feasible in that segment, but you don't give the other income anymore in the breakdown.

So the question is in what cluster is it because you cannot really reconcile from the different clusters, but maybe it's good to take a look and then we'll get back to you, Fernand, on that one if that's okay for you.

Yes. No, fine for me.

And then, Polish questions, I would like to hand over to Rob. First one is on Piast volumes.

Thanks for the question. And indeed, you certainly answered the first question yourself. So indeed, we have shut down one factory for a while, the factory in the north, as Pieter indicated, because we invested into that factory that had effect on the volumes in the first half of 2024. So indeed, that is why it's a bit below the [indiscernible] that was announced, let's say, on a full year base. That factory has been reopened. We will invest into another factory in Golancz, as Pieter also explained, which might also have some effect. But overall, we're very satisfied with the integration of Piast and the development of that business.

And then the third question was on the put option.

Yes. So basically, indeed, Poland is a 60%, 40% joint venture between ourselves and local shareholders. There's a call/put option in place, which has agreed potential exercise dates. So no fixed date that it can or should be exercised, but there are potential dates. We consolidate 100% of the results of Poland into our books. That means it's 100%, let's say, in the balance sheet and the cash flows and everything and basically, because there is a liability if the put option is exercised that we would have to buy the shares, we need to recognize today how much that potential could mean on the exercise date. And basically, we make assumptions there on when we -- it could be exercised and also what the value that would be. Because of the acquisition of Piast value of that business increased and basically, that also increased the value of the 40% share, and that is now reflected into our books in the first half of 2024.

But then you actually said that if you take 40% of that EUR 11 million, EUR 12 million that the part for you, this 50%, is around EUR 16 million, which, at the end of the day, creating value. And looking at the debt you paid for, I feel it's not that much or do I make some wrong calculations very quickly without really thinking about it?

Yes. So the difficulty here is -- without getting too technical, the difficulty here is this is discounted, of course, because it is something which might happen in the future, which is viewed today, but your basic assumption is correct in this. This is the 40% value of the put option that is valued here. And basically -- and it's not only about Piast, that's the majority of the change we'll have, but we have indicated what we have paid for Piast earlier this year. So that is the value that we have paid, which was partially in cash, as you could see it also in the press release, and partially as to take over of debt. So that is the way our acquisition of Piast has been structured.

But to be clear on that, at this point in time, we are satisfied in the JV structure as we have it. There's a strong local management team that are still in the game of our partner. So with that, it's not on our agenda to exercise.

From both sides, not from our side and also not from the local shareholder side.

If I look at the minority stake in the balance sheet, it remains very stable. Does that mean that Tasomix is paying all its profits in dividend? Or is that profitability is close to euro.

Yes. So -- but that is because we consolidate Tasomix. So that is what is related to other joint ventures based in Germany, in the Netherlands area and [ Flotr ] in the Netherlands is a big company that we have with the families of [ Flotr ] as a joint venture.

Yes, to make it clear, we fully consolidate Piast on every level. So it's treated as 100% ForFarmers' company, but because it's not and because there is the put option, that is why we assume a debt liability, long-term liability in the case that we should buy the 40% that is already recognized in the balance sheet. That's the way it would...

If I simply look at your noncontrolling interest in your balance sheet, then it was 8.5% at the end of June, 8.9% at the end of December. So actually, it goes down, which actually says it's kind of loss-making or that they have returned quite a lot of dividend to its shareholders. At the end of the day, at this moment, then Tasomix, maybe including Piast, bottom line has been negative there.

But I think the noncontrolling part is related to HaBeMa in Germany.

No, because that's an associated line. That's okay. We can take this offline.

Yes, I think we should take it offline. So I think we're looking at different things.

Yes. And related to the other income, Fernand, that is in the cluster of Poland, Germany.

I will now hand it back to Pieter, once again, for closing remarks. Thank you.

Okay. With that, we come to the end. Thank you very much for your attention and the questions have been asked. If there are any questions in the coming period, and we'll follow up on the JV discussions with you, Fernand, but if there are other things, please contact [ Swierkula ] and he can guide you to the ForFarmers organization. With that, I'd like to close off. Thank you all and wish you a good day.