Genus plc (GNS) Earnings Call Transcript & Summary

Good morning, everybody. As next CEO, the one thing you do know is that when you come to your first set of results, you really do want a stronger set. Well, I think, team Genus, led by Stephen, have actually exceeded that considerably, with PBT up 25%. And equally importantly, the period-on-period increase is a record. So we've got 2 records presenting to you today. Not a bad start for a new CEO, is it, really? For us, we have one old face in a new role and one new face in an old role. Quite an elegant position, really. Alison joined us 6 weeks ago. And since joining us, she's met many of our people, she's demonstrated a tremendous grip of the finance function. But on Tuesday's Board meeting, it was a tour de force of finance. So we're delighted to have Alison with us and to see the new team take this business forward from here. Overall, the business has got momentum. You can tell I don't use this so much. That's supposed to be there. And that underlying strategic momentum is driven by our businesses clearly. PIC had a very, very strong first half. And China, during the half, performed very strongly. In terms of Sexcel and ABS, it's exceeded our expectations. And the IntelliGen machines, the things that produce the Sexcel, are selling very well to customers. And indeed, we're going to repeat orders from customers. And finally, over the period, we've talked a lot about investing in our product lines. I think these results, this time, you can actually see the results of that investment into the front lines shining through. And then we come to interim dividend. It's increased in line with our progressive policy, up 6% to 9.4p and 2.9x coverage. And on that note, I'd like to hand over to Alison to begin her maiden presentation.

Thank you, Bob, for those very kind words. I'm absolutely thrilled to be here, and to use a little bit of Australian slang, that's an absolute ripper of a result. It's not often one gets to present numbers like this that hit the mark in every respect. And of course, I can't take any credit at all only being here 6 weeks. And I didn't know at all, when I took the role, it would be such a strong result. But in a way, I'm not too surprised because what I did realize was that I was joining a really great team, and great teams deliver great results, as you can see. And I would like to take this opportunity to congratulate my new colleagues because it's just fabulous, absolutely fabulous. So now let's get into it and have a look at the numbers. Lots of numbers on that page, and they're all good, great numbers. But there are 3 things I'd like you to take away as we talk about this page or talk about the numbers. The first is this is a record profit growth for the period. Second is that PIC is absolutely maximizing the opportunity in China. And thirdly, 2 out of 2 businesses are growing strongly across the world. So first, on the profit itself, adjusted profit before tax grew by 25%. That's the highest the company's achieved in over 10 years, and that delivered GBP 37 million of profit. If we exclude the impact -- or the investment in gene editing, we're talking about growth of 29%, a profit of GBP 44 million. And what's really happened is that although the company rightly predicted that there would be an upswing in China, it's been greater than we thought, faster, better. And as a result, the team have been absolutely maximizing that opportunity to deliver that amazing growth in China through restock -- or through supporting our customers who are restocking. Offsetting that, there has been an adverse impact in the Philippines because the outbreak of ASF started in August last year there. So the net impact of the upswing in China and the downturn in the Philippines is growth in Asia of GBP 9 million. But it's not just a story about China. What we're seeing is strong performance in PIC in the rest of the world. And also, we've seen that with ABS continuing to deliver their double-digit growth. Just want to make a note that we've had a small impact from adverse movement in currency of GBP 400,000 in the period, primarily due to the weakening of the U.S. dollar and Chinese renminbi. And if we use or apply Monday's spot rate, that could convert to a headwind of GBP 2 million for the full year, but there's more information in the appendix that you can read. And before I go any further, I just want to let you know that from the 1st of July, we have adopted the new IFRS 16 standard in respect of lease accounting. And this had a negligible impact on profit, just GBP 200,000, for the half. And again, there are details in the appendix about that. But for the rest of the presentation, what I'm going to do is concentrate on the numbers in constant currency. Right. Now let's have a look at volume. I think this chart says it all. If we look, first of all, at porcine, exceptional growth of 18%, which compares with 0% last year. But of course, China's influenced that result. But even if we take China out, what you can see is 7% growth against 5% growth last year. So very strong. And also, what we're seeing is terrific growth in royalty revenue of 9% as well. It's also worth pointing out that in PIC, what we've also achieved is some strong growth in North America of 5%, and that's the highest they've achieved in the last 3 years. If we look at ABS, what a great chart, more than 3 years of growth now. And what's more, an increasing rate of growth in each year as well. 9% growth, terrific, with the highest growth in North America and Europe. Why? Because we've got terrific momentum in the growth of our sexed semen sales, volume up 56%; and also gaining real traction with the growth of beef-on-dairy, which supported 16% growth in global beef volumes. Now if we have a look at the divisional results, 2 businesses with double-digit growth in operating profit. PIC achieved 28% growth, including GBP 9 million I mentioned earlier. But the point is that we're responding to the demand and accelerated the growth in our supply chain, and Stephen will talk more about that later. ABS continued growth in double digits, reflecting volume growth, as I've mentioned. What they've also been doing is investing in resource to support their sales efforts, which is paying off in the various parts of the world and will continue to drive the growth of the future. But also in R&D, what we're doing is we're responding there as well, and you see that, that's increased by 22%. That's because we're investing in our elite farm herds in PIC, and we're continuing to invest in our gene editing. Lastly, just want to mention central costs. You can see they have increased. But it's important to note that within that number, we've got items of a one-off nature in total of about GBP 1.5 million. So let's have a bit of a closer look at PIC. The overall point really or the message I want to give you is that with the exception of the Philippines, we're seeing profit growth across all the regions. In Latin America and Europe, it was double-digit growth. And also, what you're seeing is a real improvement in margin as well to 39.1%, of course, supported by the performance in China where we've had very strong margins from sales of breeding stock. And as I mentioned earlier, North America really improved momentum from the second half of last year as evidenced by 5% volume growth as well as 5% growth in royalties. Europe, really strong, 18% growth. Why? Because there's been higher market prices, which have helped fund customer breeding projects and we're there to serve them. And the highest growth we've seen in Russia, Spain and Germany. Latin America, as you can see, also very impressive. And it's worth noting, particularly in Brazil, some -- a very successful joint venture there with Agroceres. Finally, in respect of Asia, I've talked about China. Philippines will continue to have a tough time this year. And in the short term, we're going to see volatility in China in prices and supply, and now, of course, we've got the added complexity of coronavirus, which is imposing restrictions on movement of people and trade, of course. And that is impacting us at the moment. But as you'll hear from Stephen, the medium- and long-term opportunities are still very attractive for us. Now if we move on to ABS. What's happening here? Well, what's happening is more customers are choosing our superior genetics and our superior sexed technology, which has been developed in-house. And I can tell you, the last few weeks I've been working with that team who did develop the in-house technology, they're the most passionate, talented and innovative group I've worked with in a long time. And they're continuing to push the boundaries, which you'll hear from Stephen in due course. What we've done is really -- what we're doing, I should say, is really maximize the genetic progress of our customers' top animals as well as enabling them to utilize beef-on-dairy genetics on the rest of their herd, ultimately resulting in maximizing the value of every calf that's born. And that reflects in their demand for our product, as you can see, with 10% growth in revenue and 17% growth in operating profit. What we're also doing, though, is we're also choosing to invest in resources to maximize that sales growth. And I'd say it's an extension of this, what we're doing is we're working towards building long-term partnerships with progressive dairy farmers, a better journey. It's very early days, but -- however, the indication -- early indications are very positive. North America, you can see extremely high growth in volume in sexed semen, 70%, and also very strong growth in beef of 41%, illustrative of where the investment's been made, the growth is coming through. Europe, volume was up 12%, and that's an improvement on last year's trend, which is very encouraging, again, underpinned from very impressive growth in sexed volumes of 46%. Operating profit was slightly lower, and that does reflect the injection of investments I've talked about in that capability. Asia, a little more modest, with volume growth of 4%, which has been primarily driven by China. Just as we've responded in PIC and ABS to our customers' demand, R&D, we're doing the same thing. You can see that we've increased our investment by 22%. And really, where that's coming through is in our porcine development, which is reflecting the increased investment we've made in our elite farms, with 30% increase in the herd. We're continuing to deliver -- or I should say, invest in the bovine product development, primarily in the IntelliGen technology and capacity, and we're continuing to invest in gene editing as planned with a 39% increase there. Our relationship with BCA is progressing very well, and Stephen will talk to you about that. So really what the message here is we've got a really talented, strong R&D team, and we're backing them. And we'll be increasing our spend in the medium term so that they can support these core programs as well as work on a number of discovery areas. All right, statutory income. As you know, we really measure our performance and focus on our adjusted results because we think they give us a better view of the businesses' performance. And the statutory results are impacted by a number of noncash items, but I will talk to you about those. But I guess, if we start at the bottom line, what you can see is that our statutory profit before tax rose to GBP 30 million, and our profit after tax was GBP 24 million. In terms of tax, we had an effective statutory tax rate of 20.7% this half, which is a more normalized rate compared to last year when we had tax relief in a number of areas. Our adjusted tax rate was 23%, and our guidance is that, that will be between the range of 23% and 24% for the rest of the year, has been favorably impacted by the mix of profit we're now generating from China where we have some tax relief. Now there's an accounting standard I've never come across before until now, which is IAS 41, which is accounting for biological assets. This is a unique standard for some very unique animals. And I can tell you, I went to Ruthin, which is our site in North Wales, a couple of weeks ago and met some of these wonderful lead bulls who've got very interesting names, Jingles and Invictus and Kojak. So I hope you'll come to our site tour actually that we're organizing in July, and you can meet them as well. But back to the accounting standard, the result of the fair value accounting that we've had to apply is that there's been an increase in the valuation of these wonderful animals by GBP 13 million in the half, which compares with a reduction of GBP 9 million in the prior period. Really, the point to make is that this fair value accounting means that we do have fluctuations from period to period, but they're noncash movements. And then the other significant item was GBP 12 million, most of which is the provision for damages and legal costs in relation to our ongoing actions with Sexing Technologies, which is related to patent infringement. But as you would expect, we will -- we intend to appeal this in the courts. And then lastly, strong performances from our joint ventures, which was primarily in Brazil and China. Cash was also very strong. It's really great to see conversion of operating cash flow of 96%. And even if we take out the impact of IFRS 16, it was running at 85%. Terrific that the business is so cash-generative and can continue to invest back into the growth. And what you can see there is the impact of the stronger trading performance, lower growth in working capital, offsetting the higher cash cost of biological assets or the animals that we're buying. CapEx was GBP 17 million, and that reflects the ongoing investment, particularly in IntelliGen production, but also Genus One, which I know you've heard about before, which is our new enterprise system, and we're in the process of implementing that at the moment. And finally, strong cash flow, GBP 10.5 million for the period. Overall, a very strong financial position. Most companies would kill to have a balance sheet like this. And with net debt-to-EBITDA ratio of 0.9x, very low, and we have ample financing facilities. The impact of IFRS 16 was to increase our net debt at the end of September by GBP 23 million. And again, you can see information about that in the appendix. And then our proposed dividend for the half is a 6% increase, which is 2.9x adjusted earnings cover. And this is consistent with our dividend policy, which is to a target 2.5 to 3x coverage. So before I wrap up, I just wanted to remind you of the medium-term financial objectives that Genus has and I believe Stephen shared at -- in June 2018 at Genus' Capital Markets Day. These are very clear financial objectives, and they haven't changed. And it's great to see that in the first half, our results are in line with those objectives, albeit we've outperformed a little bit the 10% CAGR in adjusted operating profit. But as we look forward into the second half, there are stronger prior year comparatives we have to consider. We think there'll be currency headwinds and there are macro uncertainties. And of course, coronavirus is at the top of everybody's minds. However, despite all that, we expect to continue to make further progress in the second half and perform in line with our expectations for the full year. So with that, I'll hand over to Stephen to talk you through the strategic progress.

Thanks. Well, good morning to you all, and thanks very much for spending some time with us. And thank you, Alison, for taking us so clearly through the first half numbers there. It's great to have Alison on the team, really delighted she's joined us. I think the broad business experience and deep finance skills she have -- she has is going to be a real asset to the team. And I think you'll actually really enjoy getting to know her over time. So what I would now like to do is to take you through a little bit of the strategic and operational drivers behind the very strong set of results that have been shared with you. And the way we'll do this is I'll start with porcine and then move on to bovine. And while in porcine, clearly, the rebound in China has been a major driver of our results, it's notable that we've been growing across all regions. And what's really been underpinning that growth has been the strength of our product line. Of course, you will want to hear a bit more about what's happening in China, so we'll dig into that, both on ASF and coronavirus. And we'll also touch on how the PRRSv resistance program is moving along, in particular, how our relationship with BCA, our partner in China, is developing. So that's what we'll cover on porcine. And then on the bovine side, we've been achieving some exceptional growth, as you've heard, in terms of Sexcel and our volumes there. So we'll talk about that and how we're increasing our capacity and improving the performance of the technology. We'll talk about how our genetic lead is continuing to strengthen and, overall, how we're also starting to build a business in the beef area. So that's what we want to take you through. Turning then to PIC, and let's start with royalty revenue. I think those of you who've been following the company for some time know that the royalty model is at the heart of PIC's business. And it's that way because it really aligns our interest with those of our customers. It also gives rise to long-run predictable revenue stream. So it's really a win-win for us and for our customers. So it's really encouraging to see 9% growth in our global royalty revenues. And also notable is you'll see, as you look around the chart, that we've been experiencing growth in all regions. If we were to go to Europe, for example, you would see, as Alison has pointed out, Spain and Russia were important drivers, Germany also. And what we're also seeing is that the Møllevang genetics, which we acquired around 18 months ago, those are now enabling us to sign up new contracts with customers in Europe that value those genetics and that bodes well for the future continuing growth of royalty in Europe. In Asia, you can see 34% growth in royalties. It's notable that royalties in China are actually more than doubled in the period, although we did suffer some reverses in Philippines as they started to experience the initial outbreak of ASF there. And then if you look at North America, you see an accelerating trend of royalty growth. That's coming from 2 places. Firstly, we're winning share and growth with our customers on the female side, but in addition, we're now starting to see growth coming through on the male side of the business, the sire line, as we've launched the PIC 800. So I'd like to just spend a little bit of time on the PIC 800, specifically. You may recall that we launched this handsome red-looking fellow here in spring time last year, and this is a very popular offering in the U.S. It's targeting a segment of the market, those customers who are really looking for a strong blend of both performance, robustness, but also meat quality. So it's very much -- a little bit like the Angus brand, I would say, in -- on the beef side of the business. So this is a strong segment of the market. We've introduced the PIC 800 in spring time last year. And what we're seeing is strong uptake from our customers. We're also seeing that -- the results of trials in our customer systems. And what we're pleased to be able to show is that, actually, if you have this bull in your operation, then you're going to get higher growth rate of the offspring, you're going to get a robust animal and you're going to get better feed conversion. And overall, that leads to an economic advantage versus competition. Customers have noticed that, so we're winning new business. Protein sources here is an example of an existing customer who's growing, bringing on more farms and transitioning those farms to PIC genetics. But if we look in aggregate then since we launched the PIC 800, we've won about GBP 300,000 sales worth of new business from competition and growth business in -- with this product. And most of the benefit of that is actually still to come because royalty revenue and weaned pig fees tends to lag putting the boars actually into the system. Let's talk about China then, obviously being a huge driver for our business. First of all, what's happening with ASF? ASF continues to be very present in the marketplace. Farms continue to be infected. The number of breeding animals in the country has roughly halved. You can see pork production is down significantly. And the impact of that is we saw roughly in the summertime last year was that prices started to rocket. There's a real protein shortage in the country. And despite increasing imports, despite substitution into other protein such as beef, lamb, chicken, then it's having an impact on price, and that is driving then a change in the marketplace. So what has the impact been in the genetic sphere? And where we find ourselves today is that there's very high demand for breeding stock. With prices so elevated, you can make a lot of money raising pigs in China today, and so there's strong demand for breeding stock. And we expect, over the medium term, that, that is going to persist because rebuilding the herd is going to take a significant amount of time. Now we obviously face currently also some volatility associated with the coronavirus outbreak, as Alison has mentioned. You can imagine that it's been difficult to move pigs around in the last month simply due to the transport restrictions that have been in place. So this is a very fluid and active situation. Our view is that there remain very significant medium-term opportunities here for restocking the industry, and we'll just have to work closely through over the next weeks and months to continue to take advantage of that. In fact, as we think about how ASF is structurally going to change the industry, the widespread view is that we're going to see a significant growth in the proportion of pig production in China that is done by large-scale farming operations. ASF is a catalyst to accelerate that growth. And we see that on the ground with many large producers putting in significant investment to build new farms, which have got high bio security, high health potential, and then they want to put high-quality genetics into those operations. And so the most important thing from our perspective to take advantage of this is actually, can we grow our supply chain quickly enough such that we're able to supply this demand in the marketplace. We laid out before a plan to grow that supply chain. We wanted to do that primarily through what we call third-party multiplication where customer systems can then become supply -- part of our supply chain and what we call closed herd multiplication, where we supply animals near the top of the pyramid to a customer and they use that to then build out a broader system. That's very similar to what we do with our royalty customers all around the world. So we wanted to build our supply chain that way. What you can see from the chart is that we're making very good progress, and we're actually accelerating the rate at which we're building our supply chain so that we expect by the end of next fiscal year, FY '21, our capacity to supply the market in the following fiscal year will be roughly 3x what it was as we entered this fiscal year. That should position us very well to drive further growth over the medium term in China. And then finally on the porcine side, in terms of our PRRSv program, we're continuing to make progress here. We've taken in-house our capability to produce these gene-edited animals, and we're continuing to create founder generation animals that we can evaluate, both for disease resistance and commercial performance. And we continue to be on track to make the first of several FDA submissions that we'll have to make over the life of this program in 2020 calendar year. We signed last year a strategic collaboration with BCA, the Beijing Capital Agribusiness group, and they're going to take on the task of developing this technology and taking it through regulatory approval in China. I'm pleased to say that they obtained approval from MOFCOM, the Ministry of Finance and Commerce, to formally enter into that relationship with us. And so that took place very recently. And they have been building up their team to get going on this development effort. So that's progressing well. And then in addition, we deepened our relationship with them further in October when we signed the distribution and supply agreement with them. So they're going to, themselves, build out several nucleus farms around China, stock them with PIC genetics and then become a distributor into the market of PIC genetics. And that will further extend our reach into the market in China. So you've seen we've been making pretty substantial progress in porcine. Let's turn then to the bovine business, ABS. We continue to see very, very strong growth for our sexed genetics across all regions, with 56% volume growth on a global basis. In fact, demand has really exceeded our expectations, and it's provided a pretty good challenge to our IntelliGen production team to ramp up supply fast enough. What's really encouraging, I think, is to see the growth that is being achieved in the U.S. as a result of the investments we've made in focusing on key accounts there, and we're now starting to replicate this approach in other regions, as Alison outlined. And as we've noted before, this growth in sexed genetics really goes hand-in-hand also with the use of beef genetics on the dairy herd. So let's look at that trend specifically in the U.S. So this chart shows you our sales to our U.S. dairy customers in North America. What you'll observe is that just a few years ago, sexed genetics made up only a little over 10% of our sales to those customers. And now in this fiscal year, in this half, we're already at 31%, and we expect that, that trend will continue to accelerate. In fact, we're now projecting that we think as much as 45% of our genetics sold in North America will eventually become sexed genetics, and that's an increase to the estimates that we've previously shared with you. So this trend continues to grow. At the same time, you'll notice beef, which was really a marginal component of sales to U.S. dairy farmers, is becoming very significant, 24% in this half year with the potential to go to at least 30%. We're actively driving this shift. You may say, why are you doing that? We think it's, first of all, best for our customers. It makes sense for them. This helps them to optimize their genetic progress and their overall farm economics. It also, by the way, makes the business more sustainable because we're producing them high-quality beef animals out of the dairy herd. So we think it's good for customers, but it also plays to our strengths. Well, I mentioned that to support that kind of growth, we've had to ramp our production very aggressively. And during this period, we actually inaugurated 2 new facilities for production of sexed genetics. The first of those was in Wisconsin. So we now have 2 sites in Wisconsin, and that's focused on producing Sexcel genetics for our global sales force to sell around the world. And the second site that came online was in Uttar Pradesh. This site is a third-party customer site. So there, we're producing sexed genetics for the state of Uttar Pradesh based on the bulls that they have in their government bull stud there. That's the second external customer site that we have in India up and running, the third in total. So now in total, around the world, we've got currently 8 sites running, and the performance from all those sites is very good. At the same time, as we've been growing our physical capacity, we've actually been improving the efficiency of the process very considerably. So if you look at the graph on the right-hand side of this chart, you can see that our expert in-house engineering team has been driving substantial process improvements since we launched the technology such that we've now got over 40% more straws coming from the same machines as we had at the point of launch of the technology. And what I'm pleased to also say is that we can see a pipeline of further improvements to come, so we expect this trend of improving productivity to continue. From a genetic perspective, if we look at our dairy genetics, we've had a strong leadership position in dairy genetics really since we formed De Novo Genetics. And we've been leading the industry here. I think I've explained this chart on a few occasions, but the yellow bars here, effectively, they're a look through the rearview mirror. These are proven bulls that are at least 4 years old. It's telling you how good was our product development in the past. The green bars here are our bulls that we've currently decided to market. So they're producing semen, they're what we call genomic bulls. The majority of our sales today come from the genomic bull portfolio. But I think the really salient point here is what about the orange bars? This is a look into the future. Because here, you're looking at bulls of all ages, ones that are so young they're just babies, right the way up to adults. And here, if we look across all ages, including these very young bulls, you can see we have a very, very strong position here, with over 50 of the top 100 bulls on the net merit index now ABS bulls. So our genetics are strong, and the genetic future looks bright in the dairy industry. And then if we look at our beef business, you may recall that we started to develop our own in-house program several years ago for beef genetics. And we wanted to develop genetics that were really what we call sireline genetics that would focus on total economics over the life of their progeny and very much with the same model that we have in mind when you look at the PIC 800 Duroc bull here. So we're learning from the porcine business and applying that in the beef business. We -- structurally, we think the beef market is actually underserved from a genetic perspective. There's a lot of untapped potential. And so consistent with our vision of pioneering animal genetic improvement to help nourish the world, we thought this is an area where Genus can add value, and so we decided to invest in this area several years ago to establish a differentiated value proposition here. And we're making good progress. What this chart shows you is we're able to introduce our first bulls into stud in FY '18. So there were just a few of them, and we were making a small contribution there. And we're growing that rapidly now. So this year, we expect that 25% of our beef genetics will be coming from these new era bulls that are the ones we've been creating ourselves. Next year, 35%. So that's going very well and the strong demand for the new era genetics. If we're really to have a differentiated value proposition, though, you've got to demonstrate value in the customer system. And so we have several large trials underway with significant U.S. feedlots where we're going through that full life cycle evaluation of what are the economics and performance of our genetics in their system. And so we're still in the midway through those trials, but I can share with you that the initial results from those trials look very encouraging, and that's giving us confidence to actually further expand this program. So let's just summarize where we're at. I think you've seen that we've performed very strongly in the first half, and that's been both from a financial perspective and also from a strategic perspective. Our genetics are really leading in both porcine and bovine, and I think you can see there are good growth opportunities for us over the coming years. So despite the significant macro uncertainties that there are around at the moment and some of the headwinds that Alison shared with you, we expect to perform in line with the Board's expectations for this fiscal year. So with that, I think we can invite your questions and move to Q&A.

You want to go first, Charles?

Charles Hall from Peel Hunt. Can we just start on the coronavirus situation, what you're actually seeing on the ground in terms of your operations being able to operate in China, what you're actually planning in terms of short-term customer deliveries, whether you're seeing any customers changing their plans for the medium term? And obviously, we've also got the outbreak in Italy and what that -- implication that has for your relatively small operations there? And finish -- wrapping it all up, do you see yourselves as any different to your competitors? Or is there a potential competitive advantage to appear here?

Yes, yes. Lots of points there. This is obviously a fast-moving situation and one that can change from today to tomorrow, but let me describe to you, first of all, what's happening in China. So I'm pleased to say our people are safe. Our office there was closed, our offices in Shanghai. Our office was closed for several weeks in line with the government's instructions. We did actually reopen our office on Monday, and so people are coming back into the office. They've been working at home. And there are quite elaborate procedures for coming into the office, having a temperature check, your hands sanitized and all of those processes. In terms of what is happening to customer demand, we see no change in terms of demand. Our order book is strong in China, but we have faced challenges actually shipping animals and fulfilling orders because of significant restrictions on transport. Our expectation is that, that is going to ease, and we are going to be able to start moving animals. And so we would expect in the month of March that we would recommence some animal shipments. But clearly, we have to watch what happens day by day there. So that's the situation in China. Italy is, again, very fast-moving. The outbreak in Italy is actually quite close to where our operations are located, and we have a handful of employees that are actually inside the exclusion zone. They're all well, but we have to watch that carefully. And I think it's too soon to say what will happen there.

And the competitive position?

I think it would -- I don't think I could tell you that it would be a competitive advantage or a disadvantage at this stage.

And secondly, on China, you mentioned that BCA is starting to ramp up their business outside the gene editing space. Are you able to give some insight as to the scale of what they're planning in the short term?

Look, I think they're quite ambitious as a group. I don't think it would be appropriate for me to quote their scale, but I'd say they're quite ambitious. But it does require them actually to put in place quite a bit of physical capital to build out farms in a variety of places around China. So I'd say that will progress over a period of years.

And just lastly, the -- do you see any delay in the developments of the gene editing program in China because of coronavirus?

Not at this stage. No.

Sophie and then James.

Just sticking on China, if I could, 2 questions. First of all, just in terms of what you've reported today, in the first half performance in PIC, the GBP 9 million improvement in profits, I just wondered whether you could help us just break that down a little bit in terms of what you're seeing with the split between just direct sales, breeding stock sales, whereby you recognize that profit immediately and royalty sort of customer interest and how you see that, I guess, split between royalty business and breeding sales sort of evolving. And also how the Philippines fit into that GBP 9 million as well would be helpful. And secondly, just more broadly, on the charts you've given on the supply chain in China, and you've shown obviously the structure of the industry shifting towards larger scale producers. Do you -- I mean, how swiftly do you expect to see the large producers in China sort of take over, really? How do you see that sort of chart on the left-hand side evolving over the next 5 years? And second, in terms of your supply chain, which has trebled, what does that allow you to do in terms of number of sort of market pig equivalents or however you look at it in China? And what's the competitive situation like at the moment?

Yes. Yes. Okay. So quite a bit to unpack there. Let me have a go at some of it. So I'd say that, firstly, we did see a strong level of upfront business in the first half. I think that when you're dealing with customers sort of wanting to rebound quickly and react quickly to the increase in prices, then it's sort of easier to, if you like, just buy the animal upfront. It takes a little more time to put in place royalty arrangements. So I think as we go through the second half and into next year, you'll see a stronger shift towards growing the royalty contract business. Nevertheless, just our royalty revenue, as I've said, did more than double, and we think there's a strong track there to see that royalty revenue continue to grow. So I think that answers -- that maybe helps on the first piece of that question. Then leading to the supply chain and how does that fit in the extent to which the industry will evolve, I think we have to acknowledge that we're -- we can see the trend towards more technified production very clearly. Where that we'll get to in 5 years' time, I think, is art rather than science. So I would prefer that third-party forecasters take a view on that, and there are a number who are doing that. We're confident that you're going to see a significant increase in that proportion. And that increase in the proportion is going to keep us plenty occupied in terms of trying to serve that segment of the market. We -- if we could go even faster than the 3x increase in the supply chain, we would because we think the demand in the marketplace will be there.

James? Sorry.

It's James Mainwaring from Stifel. Three questions, if I may. I'll take them one at a time to try and make it easier to break down. So just in terms of China and obviously the kind of big volume growth you have seen there, I mean, there's been lots of talk out of the Chinese government about financial grants and supporting the kind of restocking in larger farms. They've also talked about larger farms helping smaller farms with the bio security to try and stop ASF going back. Just be good to get your view on kind of what you think has kind of given that real big confidence to start coming back and whether actually you've seen those big farms such as New Hope being a prime example of actually kind of completing that big expansion projects.

Yes. Look, I think that the government clearly wants to support the growth of the technified pig industry, and so you've cited a number of these things that the government is doing. And I think those are all very useful additions. But I would say that the single biggest factor is that price chart. You can just make a lot of money these days producing pigs in China. So that is the fundamental driver. We shouldn't be distracted by other things. In terms of are these expansion plans real and are people like New Hope, that you cited, one of our customers, moving ahead very aggressively to actually put physical infrastructure in place, so the answer is yes, that's happening.

Okay. And then secondly, just kind of building on Sophie's question about a very strong growth in royalty from China. Just good to get a sense of sort of how much is that just kind of rebound in kind of stock levels in kind of existing customers you already signed up to royalty models. And how much is kind of new customer signed onto the royalty contracts within that period?

Yes. So the nature of royalty is lagging. So anything that we earned in terms of royalties in the last half year, we'd signed up the year before, at least.

Okay. And then just in terms of China, again, I mean, some companies have issues with receivables from China. And kind of looking at royalty model, I mean, how do you kind of view that sort of going forward in terms of further contract royalty signs?

Yes, yes. And maybe Alison would like to comment, but our -- it's obviously something where you want to do the appropriate diligence on, who you make these contracts with, but our experience has been good.

Fair. And then very lastly, on the Page 25 chart, which is your U.S. sort of dairy kind of customers, you also have a great proportion of Sexcel and beef in there. I mean that looks like kind of like a base number of your customers because it looks like sort of out of 100% as opposed to having your own Sexcel technology and that beef kind of led to you winning more customers. Or is it just you're growing your share of different streams within current customers?

We're definitely winning new customers. I think 14% growth in the U.S. market is a substantial market share gain.

Okay, Sally.

Sally Taylor from Numis. Just a few questions actually on, obviously, a very healthy balance sheet. But in terms of your investment, as you go into H2 based on the R&D side and also CapEx, how should we think about the phasing in H2, please?