Genus plc (GNS) Earnings Call Transcript & Summary

Good morning, everyone. By my watch, at least, we're a little after 10:30, and we've got quite a few people who have joined. So welcome to the Q&A session for Genus' Full Year Preliminary Results. I hope you all had a chance to listen to the webcast that Alison and I recorded and released at 7:00 a.m. this morning. We're looking forward to your questions. A few points on housekeeping and technology. So we seem to have a slightly different technology set up each time we do something. So let's hope we can make everything work smoothly. [Operator Instructions] And I can see that, I think, first off the mark was Charles Hall, who I know has hung up quickly there. So why don't we get it underway, and Charles, if I can ask also when you ask a question, if you could turn your video on, please, for our participants.

Can we kick off just by talking a bit more about China. I think you talked in the presentation about growing the supply chain just to get a bit more feel of what quantum you're increasing by this year. Obviously, pricing has come down and that changes the dynamics of a lot of the major producers. What are you seeing them actually do on the ground in terms of investment in genetics and maybe replacing some of the less genetically advanced sales? And how do you see your competitive position in China going forward compared to some of your peers?

Yes. Okay. Well, let's dig into China a bit. So I think you started, first of all, with the supply chain. So we did, in our capital markets event, give some information on the growth of the supply chain. And I think no change to that picture would be the key message there. You would -- if you look closely at that graph in capital markets, you would see that there was some increase in 2022 in the section called the Owned Farms. That's the small piece of our overall supply chain, but we do keep some farms there ourselves. And so we're in the process of making a bit of an increase and moving some of our farms to newer, more biosecure facilities. So we've got some investment going through during the course of this year that will position us well as we go into FY '23. So that's the situation on supply chain. If I talk about where are we in the marketplace and what's happening there, I think the -- we've experienced post-ASF is really sort of extraordinarily super profit environment for a couple of due to the massive shortage of pork in the marketplace. And that encouraged an enormous wave of expansion by producers. What we've seen over the last few months has been that the price has come down. I described in the prerecorded comments some of the factors behind that. And I think over the summer, producers have now realized that this is not a temporary dip, but this is something that is going to persist for some months. And so if you look at the results of pork producers and pig producers in China, you'll see quite a lot of [ ready ] flowing right now. So the situation is that they've moved from breakneck expansion towards now we have to get cost competitive, we have to become efficient and we have to be fit for this new environment. So that does change the environment. I think -- and so we think we're in this more uncertain environment during FY '22 as we adjust to this new situation. From a competitive perspective, what they're really looking for at this point is help us be more efficient. So we are seeing the slaughter sales that have been held back going into the market and being replaced. And we're also seeing a big call on our technical services teams to get with producers and help them to run efficient operations. And that is actually an area where we have a tremendous competitive advantage compared to any of our developed market competitors. They just don't have that technical services capability on the ground in China like we do.

And one more point on China. How has BCA -- have they changed their long-term growth aspirations at all? Or how are they looking at this? Do they see this as an opportunity, or is it a risk factor?

Yes. I think BCA have very much take a long-term view here, so no change to their plans. Their perspective would be very similar to ours. In fact, we were talking with them last week, their perspective is very similar to ours, which is, look, these cycles come and go in the pig industry in China. We've seen it before. And structurally, what happens through the cycle is large-scale producers become a bigger share of the market, the market becomes more professional in the way they start to manage the industry, and that professionalization and growth of large-scale producers is the environment then that they can truly value and differentiate the genetics and that works well for us. I think Anand, I saw his hand up.

I've got a couple as well, if that's okay. Have you -- maybe it's early days, but have you noticed any change in sort of Chinese government policy following the resurgence year-to-date? Is there any greater impetus to modernize the industry?

Yes. I'd say that I don't think there has been a significant change to government policy. I think they continue to be supportive of modernizing the industry, but that policy has been in place really since ASF hit. So I'd say no particular change in government at this policy at this point.

Okay. And then on the SG&A infrastructure build out, say, sort of people and so on. When you are going through that in China, so what you'll be doing in FY '22, is it a case of investing to demand or build it and they will come?

Yes. But I think that the situation in terms of -- if we think particularly about the supply chain, then we take a very strategic view of what is the kind of supply chain and how do we want to structure that. And most of our supply chain is actually with customers in multiplication. So we're not building it. The piece that we own of the supply chain is pretty modest in total terms, but it's important that we have that as the pinnacle of the pyramid of genetics within the country.

Okay. Two more if that's all right. So you've mentioned aquaculture. What -- I guess, what's the ambition there, right? Should we be thinking, oh gosh, in 2 years' time, these guys are going to put another GBP 50 million into a facility in Iceland or could you -- what's the sort of ambition?

Yes. I think we're very pleased to have formed a partnership with Xelect, this R&D consultancy in Scotland. I think that really is -- gives us access to a really great group of people who know a lot about genetic improvement in the aqua space. I think as we just explore what potential opportunities may be, it's a very broad field. We've got some great resources to call upon to help us evaluate those. So we don't have anything further to say at this point on that.

Okay. The U.S. government has talked about meat packer consolidation in the U.S. I was just wondering whether that could have any implications on you guys indirectly, obviously?

I don't think there's anything that I could particularly highlight at this point. I think the government will always look at certain things. But for us, we -- I don't think there's anything I would highlight there.

Okay. And last one, I promise. On the non-Chinese JVs, are there any call options? Because the LatAm, I think it's the Brazilian one, is -- I mean it's clearly performing incredibly well. Do you have any option to sort of buy that back at any point -- or buy that in at any point, I should say?

Yes, that's a long-term relationship over 40-plus years with Agroceres. There are no call options. Right. I'm going to go to Max. I think I saw his hand go up next.

Yes. Just a couple of questions. Firstly, just a little bit understand the PIC, the contribution by the region. So if we look at North America, Asia, China, Europe, what were the proportions that each geographical region are contributing to the PIC operating profit? And then just a second question on China. You mentioned that you still got modest market share. I wonder what your market share was. You estimated now in China, I think previously, you talked about 4%, 5%. And then in breeding pigs, what's the stock in China now? I think you used to have a chart which showed the sort of recovery from ASF and how it's progressing to previous stocking levels. So has it sort of reached that 40 million, 50 million, I think it was pre-ASF?

Yes. Why don't I take the last question and then I'll hand over to Alison, who is with me here to deal with that, to let -- to see what hint she'll give you of numbers we don't publish. But just dealing with the stocking question. Was your question in relation to the industry or to our supply chain?

So just -- no, it was to do with the industry. You previously had a chart, which showed the -- where the breeding pigs market was in China pre-ASF, and then it had declined, if I remember rightly, from sort of 40-odd million breeding pigs in China to around 20 million. And then it was recovering. I just wondered where it got to. You're kind of implying now that the market might have -- that the market may have recovered, and that's mostly recovered, and that's why you're seeing some of the pricing issues in China. But could we then see a restocking continuing as they're still moving to improve the total herd in China.

Okay. So I'd refer you to -- can I just ask you to mute when you're not speaking maybe, Max, because there's feedback.

Yes, yes.

Yes. So let me just deal with the South herd and then I'm going to hand over to Alison on the other point. So if I refer you to Slide 8 of our presentation this morning. On the right-hand side, we did show our view of where we think the breeding herd is, the sow numbers. So at December '20, we viewed that we were in the sort of mid-30 million number of sows in the marketplace compared to a bit in excess of 40 pre-ASF. Now you may say, well, that's a bit lower. So why did we get this situation with too much supply in the marketplace? I think actually, there's been some substitution of demand into other proteins. So pork is still by far the biggest protein in China, but there has been some acceptance of some other proteins. So maybe per capita consumption of pork is a bit lower in China now than perhaps once upon a time it might have been. We think the sow herd is likely to be smaller by the end of this year, but a higher quality with an increase in the number of breeding sows and fewer slaughter gilts being retained. So then I'm going to pass over to Alison.

So Max, you might have to repeat some of your questions. But your first question about contributors to or contribution to profit in PIC. North America is the most important region, contributing around -- numbers around 40% of the regional profit. And then LatAm and Asia are about a quarter of each and the balance is Europe. Can you just -- I think you had another question, which I didn't catch.

No, I think the only other question was, what was the market share of the breeding herd in China.

Okay. So market share-wise, we'd still be mid-single digits overall in China, probably a little above 5%, maybe more than that sort of 5% to 7% region perhaps depending on how you look at it. I mean the estimates of what's the market size are a little tricky, but that's roughly where we would see it at this point. Then maybe we can go to Alistair.

I'll get used to this some time. Probably now that lockdown's finished, great time. Got a couple of questions. The first one is just in terms of what we're seeing in the marketplace in China. Do you need to be aware of any impact on demand levels outside of China? So for instance, sales from LatAm into China, export sales from Europe into China, is there a risk we see some softness in some of those portions of the business? And I was hoping you could talk a bit more about ABS and moving towards long-term contracting there. Just to get a sense of how the economics work on those contracts, what does that mean for profitability or maybe working capital? And what's the level of penetration you'd hope to achieve for those contracts over time?

Yes. So again, why don't I take the first piece of that, and then Alison, do you take the ABS piece. So in terms of the situation regarding exporters and knock-on impacts into other parts of the world, imports into China have grown quite a bit. I think we were at about now 5 million tonnes being imported was the last figure that I saw. And if you went back pre-ASF, it was maybe a couple of million tonnes. And that's in the context of total pork production in China being more like 45 million tonnes. So imports is still a modest portion of the whole. I think there is still going to -- despite the price falling, there is still going to be demand for imports into China. It might ameliorate a bit, it might soften a bit, but there's still going to be demand for import. And you may say, well, why is that? And a couple of reasons. Firstly, the imported pork is actually still very cost competitive with China even at these now lower price points for pigs in China. So there's a cost competitiveness piece. Secondly, who is doing the importing? The people who are doing the importing are firms that are typically putting this frozen pork then into food service, for further processing. And the consistency of product, the sort of the availability in frozen form, that -- there's going to be continued demand from these food service processes for that type of product. So we would expect that there are going to continue to be imports. There might be a bit of a softening, but we don't imagine that this is just like a tap that's going to be turned off.

Yes, in terms of ABS and their relationships or the contractual model, I think everybody knows the market is and has been very transactional. So very much selling per store and a cost per store. And actually, as we've become better and better in providing a better product with Sexcel, it's actually not in our favor in that farmer needs less draws to achieve the outcomes he's looking from the frequencies. So we are looking to move away from that and move to an outcome price model where we're sharing in some of the value that's created from our genetics. We're not at a place where we have royalty contracts like we have in PIC. But certainly, the first step towards that is having a multiyear contract with the customer, which is a price per month or contract amount for a year and isn't tied specifically to the store, if you like. And we're focusing on those large customers, particularly in the U.S. and U.K., and there are a couple of examples of that in our presentation. That is still a small part of the market, that top 100 producers. So we still have to cater to the other part of the market. So we are looking at different ways to market to them, and digital is a key part of that. And I think you know in letter, that's proven very, very successful. On the beef side with NuEra, the pricing that is reflected in the straw at the moment doesn't really reflect all the value we're creating for the customer. We're getting adoption of the product, for sure, and you can see that in the growth rates of NuEra. But what we want to do is earn more from the supply chain and have a contract with players further up the supply chain. And we've talked before about the example [ staying true ] in the U.K. And we're building relationships with a number of key players in the U.S. to copy that sort of model.

Okay. Good. Should we then move to Damian? I saw Damian's hand up.

Yes, a couple of questions. If we start with the sort of the guidance, just to make sure I totally understand this that your pricing assumptions for Chinese pig prices for the next set to the end of June next year is that we're not going to see any real improvement barring perhaps some seasonal fluctuations around the sort of festivals. Is that right?

Yes. Broadly speaking, I think that -- I think we may see a little bit of a pickup from where we are now, but we're not banking on prices going back to CNY 30 or CNY 40 per KG. We think we're in the sort of teens, high teens, maybe CNY 20 on a good day, but that's sort of the environment that we're anticipating over the next several months.

Yes. Okay. And therefore, by implication, that sort of -- If you look at the first half, second half split, first half profitability is going to be down versus first half of last year.

It might be, yes. It might be.

Yes. Okay. I think that was -- Alison, was that, that was right, is that what you said?

Yes.

Yes. Okay. And then sort of the second question is on Xelect. And I sort of appreciate that you sort of don't want to sort of show us what your ambitions are today. But can you talk about what it was about Xelect, you really like and whether there were other options that you considered and discounted in favor of Xelect?

Yes. I think it's actually a pretty special capability and group of people in the marketplace. There are rather few groups on a global basis that have got a real capability and skill in genetic improvement in aqua. So we identified Xelect an interesting group and got to know them over a period of time and felt that there would be a good opportunity for them and for us to collaborate. They work with companies all around the world on multiple different species of fish, very broad-based. It's a true genetic improvement business. And so it looks very much like the kind of R&D groups that we have running porcine R&D and bovine R&D. And we felt we'll look if we want to really understand opportunities in aquaculture, then the first step is to get linked up with people who really know and understand the industry and the species.

Yes. Okay. That's very clear. Thanks, Stephen. I think I'll ask one more before -- I know other people have got their hands up. Just looking at the Sexcel growth in North America, it looks like it slowed to about 1% in the year. Is that an indication that you've reached sort of full penetration of the products? Or is there something going on within the marketplace that sort of meant that, that growth was lower than perhaps other markets?

Yes. Look, I think we've always said that there's a point beyond which it doesn't generally make sense for someone running a stable herd system to use more Sexcel. That's probably somewhere between 30% and 40%. And with the very rapid adoption we've had over the first few years in the market and many herds, we've bumped up against that. So I think we saw that in a number of sort of more mature markets. And so the growth that we saw in Sexcel this year was a lot being driven by markets where penetration is still pretty low. And there's a lot of those markets around the world where penetration is still very low. So we saw strong growth in places like Russia. We saw strong growth in China. We saw strong growth in some of the Latin American countries. And I think there's still a number of other places. Continental Europe would still be pretty low in terms of its adoption of sex genetics. So that was a situation, I think, that we saw there. I think Ken's may be next in the queue.

I wanted to -- I was looking at a couple of the charts from the half year and the full year, the ones of the kind of Net Merit bull values. And it seems like compared to -- I appreciate these kind of rankings move around and bulls kind of come in and out, but it seems like from the first half to now that some of your pipelines come through, and you've kind of moved up to kind of neck and neck with the main competitor in proven bulls and active. What's -- the 2 questions were, firstly, you do note that actually we sell a majority of our semens comes from bulls outside the top 100. So what are we really taking from this? Does that apply to everybody? Is that a beef-on-dairy thing? Because I guess this is just about Holstein's. So yes, so what kind of message are we going to take from this? Where would you aim to be? And the other one is -- and you make a reference to it, I think, in the -- in this presentation, that you'd kind of -- it seems like you've been making a number of moves to try and strengthen your position there. So doing a deal on buyback clauses, new terms, looking at patenting and so on. So the 2 questions really are kind of what's the strategy and what drives the changes, what's the benefit of that? Is it different from what competitors are doing? And what are these new kind of commercial practices that you have been pursuing?

Yes, yes, yes. Okay. So first, the question around really where we're at in terms of dairy genetics. The first thing without getting too much into the weeds here, the first thing to note is actually the Net Merit Index itself is not something that is stable and immutable. And the CDCB, which runs this, actually made some pretty significant changes to the composition of the index in August. So they changed the weightings of certain traits and they introduced some different criteria, which are actually a little controversial because they're trying to find a way of measuring feed efficiency, but they're doing it in an indirect way, which several geneticists will say actually is the wrong way to do it. So the index itself has changed, and that has had an effect. That actually has an effect on ranking. So a bull that, in the April rankings, might have looked good, could now, in the August rankings, look not so good. And the reverse happened because of this change in the nature of the index. So there's always a question about what do we mean by good genetics. And we show the Net Merit because I think it's the best overall indicator we've got to try and illustrate are we doing well or not. So that's the first point. Secondly, in terms of what's the relevance of the top 100. Well, of course, we sell a much broader range of bulls. The industry as a whole does. There's only so much semen the top 100 bulls produce. And that doesn't go very far in the global dairy industry. So bulls down to probably within the top 1,000 might still be commercially relevant somewhere in the world. Certainly, the top 500 would still be commercially relevant. The relevance, I would say, from a strategy perspective around the top of the tree, is that's where you're going to breed the next generation. So if you're thinking about what drives genetic progress, it's the most elite. And so when we look, say, is it relevant to really think about do you have a good position at the top, then that's going to reflect the strength of your genetic lineup all through the rankings and it's going to affect it, not just today with what you sell today but what you have available to sell tomorrow because you're going to take your most elite animals, the top 20 or 30 perhaps, breed them to the most elite. At first try, make lots and lots of sons, and that's how genetic progress is driven. So that's really the relevance of that. Now I'm losing track of were there other questions.

Yes. Can I also just ask, is it the -- I can't remember the initials, the CDCIB (sic) [ CDCB ] or whoever they were.

CDCB.

Yes, who decide on the index. Presumably, there are customers who do want different criteria. And certainly in different countries, there are some criteria. People want more fat or drought resistance or whatever. So part -- in sense, you wouldn't expect necessarily their definition of what works to be what every farmer wants [ to have ], I guess?

No, you're absolutely right. Okay. If I can, when we take an example of some of these longer-term contracts that we're putting in place, what we do is we agree a genetic program with the producer. We agree what's important to you and we develop a custom index for them. And that custom index drives a specific selection of bulls that tie in with their objectives. And then we measure genetic progress over a number of years in those herds to say, are we going in the direction we expected and you wanted? And because we're then driving a genetic improvement program, it no longer makes sense to shop around for semen from different buyer, from different vendors. Now you want to work with one partner in a dedicated way. So we agree a long-term contract, we agree a price per annum to serve your herd, to meet your genetic needs and then we're partners in driving genetic improvement. And that's, I think, a big change in terms of the way the industry has operated in the past, but one that's being well received as we start to roll it out in customers.

Okay. And my second question has really been about the kind of protecting our genetics part of Slide 11, the terms, the deals for bulls, pioneering -- patenting and so on.

Yes, I think it's shift that we've been driving and others in the industry have also been making some moves to tighten contractual terms and conditions, but we've moved from really open source genetics, everyone could get each other's genetics, to very much now more of a closed proprietary system here where genetics are pretty fiercely guided. And we've taken an additional step actually of a -- and first in the industry of patenting our bulls. Okay. I think I see Charles Hall again.

Stephen, on your presentation, you're obviously pretty excited about the progress being made in reproductive biology. And given that, that's a pretty new team, it'd just be interesting to hear what progress you've seen so far? And I understand the long-term opportunity, but it feels as though you see some opportunities in the shorter term that may have advanced faster than originally expected?

Yes. Look, we've built, I think, a super team here. I think this is a really high class group of about 15 scientists that we've put together over their own dedicated laboratory and the 3 collaborations with external parties who are really leaders in this space. I think as I outlined in the presentation, there are benefits that we see short term, medium term and long term. And we've got specific goals around each of those areas. If we think about the short term, it's going to be -- the first payoffs are going to be in terms of improvements in the embryo business. And we're seeing already opportunity coming from that with reformulations of media recipes of our protocols, our approaches, which I think can bring some pretty near-term benefits in terms of improvements in that business. Okay. I think we're back with Damian. Yes, let's go to Damian.

Yes. I hope I've got the number right, but [ pig 39567 ] being 6 standard deviations ahead of everybody else. I mean just to give us a sense that if the average is -- are we seeing more pigs being bred that are accelerating fast in terms of genetic improvement. Is that what you're trying to say with that super pig or was it just sort of a one-off freak that sort of -- is that a sort of indication of what could happen? What is the sort of -- what is the sort of -- to be taken from that sort of slide?

I think this will -- the slide that Stephen shows of the genetic index. If you look at the gradient of that line, what it's saying is that we -- there's no slowdown in the genetic improvement that PIC is achieving each year. In fact, if you look really carefully in line, the gradient is actually a little bit steeper over the last couple of years. The chap I was talking about is a complete outlier. Even so, he's highly unusual. And I guess I was having a little bit of fun talking about him. So no, I can't say -- he's unique, he's unique because he is off the chart. And that happens. That just happens in genetics.

Yes. We didn't change the laws of statistics. So 6 standard deviations is still pretty rare. We just happened to have one.

Yes.

Understood. And one last one for me. CapEx is expected to peak this year, Alison, are you able to give us a number, please?

Yes. I think our CapEx will be around GBP 50 million this year. And that really is reflecting the programs that we've talked to you about at -- principally Atlas, the new nucleus farm to PIC in Canada. That will be our largest spend, it will be around GBP 17 million of CapEx this year. And then it will be the ascent in relation to completion of Leeds to [ operate areas ] in Wisconsin. And then there's spend that we'll have in relation to continuing the rollout of Genus One. They'd be the key buckets, if you like. But we really will peak this year. That spend is not something that we do frequently and really is investment to support our capacity for future growth in both of the businesses. So FY '23, we will be quite a bit lower. We'll be back down to a CapEx around GBP 25 million.

Okay and then Anand?

A couple more for me. Just what's the actual step-by-step process you would now expect in China? So big producers, they're not going to probably shrink but they'll consolidate and become more efficient. Small producers, if they have to, I guess, invest in biosecurity or consolidate or disappear. And therefore, that rate of change in production mix shift that's coming from the large producers, does that accelerate? And the second question is, I think you've talked a lot about male-female supply in North America, particularly. Could you talk about the progress you're making on the male side in PIC? And would you be able to give us a split of genetics you're providing between male and female in North America? I think last time, you said you just won a large customer on the male side.

Yes. So firstly, in terms of China, I think you actually sort of answered your own question in a way because I think you described the process pretty well. And I would say that the more severe the downturn, the more rapid change that takes place as a catalyzing event. So I don't have a lot to add to that. In terms of the North America and what's happening there. So I think there's a couple of things. Firstly, there's this trend towards using the Duroc sire that continues to have momentum behind it in North America. And there's a sort of sense around meat quality and other reasons why and robustness as producers move towards lower antibiotic usage and other things. So those are driving the Duroc to be -- become the sire of choice in North America. The 800 is performing very, very well. And you can see the competitive trials that we've highlighted in the presentation. If I look at the top 45 producers in the U.S. today, then 30 of them would either be using the 800 actively in production or trialing it. And that includes -- that 45 includes some who don't use Duroc at all, okay? So that's -- So we're really getting very widespread interest and quite a number of wins, which are still feeding through in terms of adoption of those genetics. On the female side, then we highlighted that we've been taking share from internal programs. So there is a large customer that made the decision to move 2/3 of their female program to us in the United States over the summer last year. So we highlighted that in last year's road show. What I can say is that they had a number of third-party customers, both in the U.S. and in Latin America for their internal program genetics. And so those companies also needed to make a choice as to where the future supply of genetics would come from. And again, that -- cumulatively, that's a pretty reasonable number of sows. Cumulatively, you're talking order of magnitude, 300,000 sows across that customer base. And I'm pleased to say that all of those third-party customers who were previously using the internal program genetics have decided to move to PIC.

So if I can just -- if I can just push you on that. So you've given us, on the male side, let's say, 30 of the top 45 producers were in the door or will have a foot in the door. What would be the figure on the female side?

I mean if you -- I was just talking -- when I said 30 out of 45, by the way, that was just the Duroc. So if you say what is our sire line penetration of sires across the top 45, it will be a lot higher than that. I mean we do business with almost all of them. Similarly, on the female side, we do business with almost all. If I look at North America, probably 18 out of 20 of the top producers we would do business with. I think we'll just go with one last question from Alistair.

Just a quick one for me. And it was just really on PRRSv. You obviously flagged that there's been some outbreaks in the U.S. with a more virulent strain. Can you maybe quantify the extent of the outbreaks that hit the U.S. market from that viral outbreak? And has that triggered any sort of increased incoming or increased interest in how you're progressing with the geos and programs?

Yes. I can't -- I could find out. I can't give you -- sort of now, I can't quote you a number in terms of the PRRS impact this winter. What I can tell you is that it was regarded as a very heavy year for PRRS in the U.S. It was unusually severe. And we could come back and I can try and get some data for you in terms of the level of impact relative to prior years.

There's a handful of our customers who were affected.

Yes, we had a number of our customers take a hit, which obviously also has an impact, which we absorbed in the results that you saw. In terms of does it increase interest in our PRRS-resistant pig, of course. Then one doesn't wish to profit from adversity, but we have a product which is resistant to the very strain that hurt producers during this winter. So yes, we would expect it does keep it front of mind that this is a real problem. Great. Well, we've had a pretty full list of topics being asked questions about there. We're going to put a recording of this webcast, of this Q&A session up on our website so it will be available for playback. And meantime, I will probably engage in further discussions with quite a few of you over the coming days, and we look forward to that. So just thanks for your interest in Genus, and we look forward to continuing the dialogue.