Genus plc (GNS) Earnings Call Transcript & Summary

Hello, and welcome to the Genus Interim Results Q&A webinar. We're joined today by Stephen Wilson, CEO; and Alison Henriksen, CFO. If you would like to ask a question to Steve and Allison, please use the raise hand function at the bottom of the screen. You will enter a back staging area before being promoted to a panelist to ask your question. I'll now hand over to Stephen to begin.

Thanks very much, and welcome, everyone, to the question-and-answer session. I hope you had a chance to look at the video that Alison and I recorded yesterday, outlining the results that we achieved in the first half. And we're looking forward to your questions. So let's see if we have our first question.

[Operator Instructions] We'll take our first question from Charles Hall.

Good morning, Stephen, morning, Alison. Well done on the results. I can hear you now, perfect. Could we start on China and -- just give us a bit more insight into what you've been seeing over the last few weeks, obviously, with the pricing being low. How much experience have you -- has your team seen of COVID in real life and what's that done to orders? And I think you said, Alison, that there was a healthy pipeline of new business opportunities. What's the timing on those and the appetite for expansion -- if we could just start on those, that would be great.

Yes. So I think what I would say is that it's been really quite a volatile period of time. We had this severe COVID clamp downs all the way through until mid-December. And then suddenly, those were released and then basically everyone cought COVID. So we had 1 point just around about the new year when 90% of our team in China had COVID. So it's swept through, it does appear actually that it's been so comprehensive that there's no second wave appearing at this moment, which was 1 question that people had after the Chinese New Year, would that happen? So I think the life is beginning to normalize. People are coming out of hiding and starting to go to restaurants again. And I think that's going to be positive for demand. And I think the signal, the Chinese government is giving in the economy is let's get back to growth. So I think that's helpful. Now what has happened to the Chinese pig price in we saw these elevated prices in the autumn. I think that encouraged some people to say, we're going to go back to the boom, let's hold our pigs, get them, grow them out and get them even heavier, and we can make even more money in the future. Then the price starts to come down. And yes, what those pigs need to come to market. And so there's a lot of pork coming in just at the moment when demand was really depressed because everyone was stuck at home, feeling ill. So it's just been incredibly volatile. Where are we now? I think producers are sort of in a process of a little bit of wait and see of just -- are we going to start to see price recover? How quickly is that going to happen? The last couple of weeks, we've seen the price just start to move upwards. And I think once we start to see price reestablishing an upward trajectory. I think there is some latent demand there in the system to restart. There's also been a lot of ASF. It's been a very heavy winter for ASF, very cold in North and Eastern China, and that has helped the disease to spread. And that, of course, has also led to quite a lot of pigs going to market. and we'll reduce the future supply of pigs to market. We've experienced that ourselves, as we announced in the results, 1 of the joint venture farms that we had has experienced an ASF break. And so we've been part of that. We've sent some of those pigs to market. So I think the timing of this is always something that is difficult to predict. And I think you've always got to retain certain view that maybe you're going to see some surprising things in the China pig market, but all of the evidence we would see at the moment suggests we're in a period where we're going to see a recovery or stabilization and that should lead to more demand for breeding stock. And the real question is just exactly which months does that start to kick in?

And can you just remind us on the expansion of the supply chain in China? Because you've obviously put a lot of effort into that through this down cycle. And just specifically on that plan with ASF, how much capacity does that take out? And obviously, there's a cost to cleaning it out. But does it have any impact on your ability to supply?

Yes. No, we think we can source supply from other farms. We're building a supply chain there with the expectation that there are always going to be disease breaks somewhere in that system. And as I think we've explained to you and to investors over time, we want to try and establish a supply chain where we have layers of different supply. So we have a couple of owned farms where we keep really elite animals. So -- we're just in the process of stocking a new state-of-the-art farm called -- Ankang, which is replacing a legacy farm we've exited. And then we've got this layer where we've got joint venture farms, so we're sharing some of the risk with a major producer, but we've got that layer. And then the majority of the supply chain is actually in third-party multiplication. With our customers just as the situation we have in the United States.

And 1 last question on China. The royalty share of volumes was much higher in the first half. Is that because royalty contracts are now rolling through? Or was direct sales depressed because of the market?

It's basically both factors working at the same time, but do you want to comment on that.

The royalty share actually in the first half versus the previous half is quite similar. It's not too different. It is around half. actually yes. But if you compare it to the first half of the prior year, it's significantly higher. And that is the combination of things, it's PIC very deliberately striving to grow the proportion of business that's under royalty contracts, and they've proven they're doing that. And I think that's proven also through the downturn and the strength of having those royalty contracts. But also, it reflects the market as well. It is a very gradual recovery, and we haven't seen a big change in upfront breeding stock sales as yet.

We will now take our next question from Damian McNeela.

Okay. Thank you, everybody for taking the questions. Sorry, I don't have my tie on. So much they charge on a new tie. I've got a few questions. Just firstly continuing the China theme. Are you able to sort of give any indication of what the sort of pipeline for the second half and maybe in the first half of next year looks like, have you got any visibility on just sort of what the shape of business could look like? I know it's volatile and it's easily dependent on where the pork price goes. But -- just if you could give us any sense of that sort of pipeline, how it looks and perhaps how it changed over 6 months? The second question is on ABS margin. Just wondering whether you could give us a sense of what degree of recovery we could expect in the second half? I know there's some one-offs in the first half, but I just wanted to find balance that with the ongoing difficult in LATAM, And then the last 1 for me for now will be on cash conversion [indiscernible] that you said you expect to be at 90% cash conversion for the full year this year. That's right, and can you just provide us some a bit more color on why you're confident on being able to achieve that.

Why don't I take the first of those on China and then ask Alison to respond to the ABS margin and cash -- so on China, I'd say that I'd regard our pipeline of new prospects is healthy, and that's both from existing customers wanting to expand their business with us and new customers. So I feel that we're making good progress in that respect. Now the question, I think, is always then, well, as with any sales process, you have a list of prospects, you then work that into a list of proposals then you get to the point of sort of verbal acceptance and then you get to the point of, well, when am I actually going to take it? And do I put money down to go ahead. And there's always, there's a variety of factors that influence that timing decision at the end. Sometimes it's dependent on new farms being commissioned and the timing of construction projects and commissioning. Sometimes it's more of a market-based decision as to when is the right time to do things. So we see those debates going on. We have -- we obviously have a clear list of the pipeline and what we're working through there. We don't want to get into specifics, but I'd just describe it as a healthy pipeline and the key consideration is just really 1 around timing.

So ABS, we're expecting ABS to have a better second half than first half. And as you would have heard me say in the presentation, the business was hit with extra production costs in the first half of $1.2 million, which will not recur in the second half. And Latin America is having a tough time, and we think they will continue to have a pretty tough time this half. But elsewhere, the regions are doing really well in North of America particularly and we expect to see that continue in the second half. So in terms of margin, what I would expect is a better margin in the second half. I don't know exactly where they land, but I would hope that their margin is similar to prior year when we get to the end of the full year. In terms of cash flow, I have confidence that our cash flow will be strong in the second half. We do have seasonality in our cash flow first half versus second half. Second half is always stronger because we have certain payables that flow into the first half. For example, performance-related remuneration. But really, what we'll see is further growth in EBITDA and we will have further CapEx, which will be higher than the first half, but down on prior year. So we should have a very healthy cash inflow for the second half.

Quick follow-up. On working capital, there's really sort of -- I think it was GBP 22 million outflow. Could we be anticipating an inflow? I know you sort of mentioned some of the improving payables and sort of the intelligent system. Would it be reasonable to expect an ounce for the full year that.

Yes. There will still be an outflow yes.

Yes, but not as large as the 1 [indiscernible].

Yes, that's right. Yes.

A couple of questions. Congratulations on the first half. In terms of an update on [indiscernible], just wanted to try and understand a little bit more about your interactions with the FDA. I know you're looking to file before the end of 2023 and approval now sometime in 2024, but interested to understand the interactions and the sort of risk assessment of a clean, quick review with the FDA? And then also just in terms of how do you roll out a launch of a genetically modified pig, it's not something I'm experienced with. So that's the first question. I mean multiple parts, obviously. And the second 1 is just trying to understand what you're seeing in terms of obviously good prospects in China. Do you think that when the China market picks up that your market share recovery that you'd had -- you gained market share quite quickly ahead of the sort of COVID coming in and that's been fairly flattish since. Do you think that's likely to start to pick up again? I just get an understanding for where you see that potential share going to as well.

So why don't I take the first one, and then Alison, I'll ask you to take the follow-up question on China. So look, we have a very constructive relationship and dialogue with the FDA, you can see from the presentation on Page 11 that we've been submitting the different phases of information that we need to send to the FDA and that the first 3 of those have been accepted. So this is Think of this as the continuous assessment rather than just 1 final exam at the end. Also, you can see that items 4 and 7, the phenotypic characterization in the food safety and food and environmental safety. You can see there that the process we're in is we submit drafts to the FDA, they give us back comments before we make our final submission, which then provides the basis for them to formally accept. So you can see this is a very collaborative process where they're helping to guide and steer us as we go through. And so we would expect items 4 and 7 on Page 11 within the next few weeks that we'll be formally submitting and expecting in the spring time to have those accepted. And then the last 2 items, phenotypic and genotypic durability. These are ones where we need more generations of animals. So -- we're on the E2 generation, we're giving birth to E3. -- we'll be characterizing the E3s and testing the E3s. And there are quite a lot of details around exactly how you do some of the final tests. And so we're in the process of discussing with the FDA, all of those details as a scientific experiment, lots of design details, you need to get correct for the final regulatory submissions, and we're in a dialogue with them on that. In terms of other markets, we highlighted that we're making some nice progress actually in dialoguing with regulatory agencies in quite a few other jurisdictions. And that's important because if you think of pork, it's a globally traded commodity. And so if we're introducing a gene-edited pork in the U.S., for example, we need that to be accepted by export destinations for U.S. pork. So we're working in parallel in international markets. To the question of then how do we do market introduction. You mentioned the word genetically modified -- so I'm just going to say, no, we're not introducing a genetically modified pig, right? These are gene edited vision is gene editing, something different. So we've just taken a little snip out of the DNA. We've introduced no foreign DNA into the organism. That's something that we're quite active also working with the industry. So we have a whole set of work streams going. We dialogue with industry associations with producers, with packers, with retailers. We're doing several studies around life cycle assessment of what is the impact of PRRSv, both from an economic perspective in the industry, but also -- what is the carbon cost of PRRSv. And so we're trying to get a third-party validation around the real environmental benefits of being able to have PRRSv-resistant pigs. So this is all part of then framing what is the proposition we're bringing to the industry. From a technical perspective, we also have to then think about how do you distribute this gene through the population because we need to move from having hundreds, perhaps a few thousand animals in a nucleus that have this gene in a homozygous state, to then how you're going to impact, for example, in the U.S., 55 million pigs per annum being slaughtered. So there's a big biological and logistical process involved here. As we get closer to the point of finalizing our FDA submissions, then it will probably be appropriate for us to spend some more time with investors and analysts. And we may, at the appropriate time, hold dedicated Capital Markets Day on some of the rollout thinking and plans. But we think at the moment, the right frame is to just stay focused on let's make sure we get through the regulatory hurdle first.

Okay. Great. Maybe just before Allison, you joining the other question, it was just maybe a little bit about have you got multiple other genetic traits classical genetic traits in these herds? So you talk about homologous PRRSv, but -- do you have different genetic traits classical genetic trades within that herd as well? .

Well, what we've tried to do is to take the most elite animals we had and use those as the starting population for the PRRS edit. And we're seeking to obviously move the PRRS edited pigs up the normal genetic progression curve in the same way we would do with a nonedited pig. There's a little bit of a challenge in terms of population size. So you have to over time, we'll have to sort of work on that, but we want to select the gene-edited pigs for all the same traits that we do with the nongene-edited pigs, litter size, feed efficiency, piglet survival, carcass traits. So all of these traits, we want to manage in just the same way. And what I can tell you is that we're seeing just sort of similar performance from a gene-edited pig as we're seeing from a non-gene edited pig, which is part of what item 4 phenotypic characterization is actually about in terms of our submission to the FDA.

So moving on to China. So what I would say is if I compare where the team are at now with a year ago, it is different, in terms of their visibility of where the opportunities might be. And they do have a -- a defined pipeline by customer and opportunity. And I think if we hadn't seen the recent decline in the peak price, we would be saying something quite different today about how that's progressing. But -- at the moment, what we're seeing is a bit of a pause really from our customers. And I guess what they're doing is watching to see what happens to the price. So we're a little, I guess, cautious about what will happen over the next few months. And it is going to really depend on what happens in the market at large. But what I can say is that, as Stephen said earlier, the supply chain is very robust. So we will be able to meet the demand, certainly that we can see in our pipeline and more than that. So there isn't a constraint on our supply. But it's very difficult to call the phasing and the speed of the growth that we'll see there.

Because your market share is still about 6%. And I think you're talking about a herd size of [indiscerbile].

It's certainly -- it's low single digits, yes, yes. We've held all our customers. We've held all our customers through the last 2 years. And in the pipeline, we can see opportunities with new customers as well.

The breeding herd was about 35 million or something like that. Is that still.

We've stopped putting it in the presentation because it's just so hard to get clear data.

What number would you like to believe?

Thank you, Max. I can see that Charles Hall has a follow-up question. So Charles, whenever you're ready, please go ahead...

Thanks very much. Yes, Nate would be very upset if I don't ask a question about ABS at this time. So the question on ABS is the bit that really struck me from the first half was the significant increase in price and mix. and that hasn't really been a feature of ABS previously, except when you're increasing sales of Sexcel. So can you just talk a little bit about what's been happening on pricing and how you see that dynamic moving forward?

Yes. So that's been very deliberate on the part of ABS and they've done a great job actually. I mean, price increase has always been a feature in high-inflation countries in Latin America. But in Europe and North America, the industry at large had not sought price increases. We benefited from better prices with the switch to Sexcel. But we, like all businesses, we've had some inflation. We've had to manage and ABS also then PIC. And yes, so they have sought price increases, particularly in Europe, as well as North America, and the customers have accepted that. And you can see that in the revenue line.

And is that probably a different theme going forward because, as you say, it hasn't been previously done in those markets. Does that now give greater confidence that you can be a bit more on the front foot on pricing?

Yeah, I think so. yes. Inflation hasn't stopped. You might have stopped the peak. It might have peaked, but it's still there. So we're going to have to continue to manage that.

And on the genetics side, you've obviously got a strong pipeline of bills coming through. Just give an update on where you sit in the rankings and how broad spread your bull rankings on...

Do you want me to take that? Yes. I think we've got a really good genetic lineup. We put a chart in here in terms of the balls that are currently being marketed and the average of our balls is very, very competitive. The pipeline fluctuates from week to week, every Tuesday, you get a new list. And some weeks, you're feeling really good. In some weeks, you're feeling less good, and that's -- it changes week to week. But I think we feel very good about the strength of the program. One of the things that I think differentiates us is that we've got a very, very broad range of siestacks and families within it. So the process here is that bulls are also continually being re-ranked as new data comes in about milking daughters, then that changes the genetic evaluations of genomic bulls. And so you need that sort of breadth of portfolio to stabilize and ensure that you're always going to be in a good position. And I think that is one of the things that we've benefited from a lot in ABS, where you've seen us consistently being very good in terms of the genetic profile, whereas with some of our other competitors, 1 year, you'll see one of them very strong. The next year, you see one of the others very strong. And it's that variability that we've managed to, I think, deal with very well by having that breadth. The other area that I'd say, I think we are in a really unique position at the moment in the industry is around genetics. So as I mentioned, these are the gene that enables the car not to grow homes -- and we have just an extraordinarily unique position here. We've been able, over the last 4 or 5 years to fundamentally change the way Paul genetics are regarded in the industry. Because historically, if you wanted a poll bull, you were always going to make a very significant sacrifice in terms of the net merit of the animal versus the best in the industry. Something like 2 years' worth of progress would be given up to drop down to accept a polled animal. We've eliminated that. And in fact, some of the highest ranking sires in our entire lineup are actually pull. And if you look at the top pole genetics in the industry today, I think the stat I was seeing is 31 of the top 33 polled balls in the industry sit at ABS. I'm pretty remarkable...

And one of the things we're talking about up in Resin was that how you are working hard to retain the IP, and that probably fits in well with what you've been doing in. Do you see this as a much longer-term competitive advantage because of where you sit now on that retention of IP than it would have been, say, 5 years ago?

Yes. I think retaining IP is something that we've always tried to take a leadership position in. And so we've introduced contracts to help us to do that. And certainly, we're definitely thinking about the poll here as this is something where we seem to have got real step forward compared to the rest of the industry and how do we maintain that going forward.

Thank you, Charles. We will take our next question from Seb Jantet. Seb, whenever you already, please go ahead -- can you hear me?

I haven't got a tire. I'm sorry, but I have got a branded Jersey. So actually, most of my questions have been asked. I've only got one left, which is just on the cyber attack, obviously, that had an impact on the kind of cost in ABS and the margin in ABS. I was wondering if you could expand a little bit on the steps you've taken to kind of to stop that going forward?

Yes, sure. I mean the first thing I would say is I don't think it's unusual what happened to us. It's incredibly common now. And our team recovered the situation very quickly at the time when it happened. But there were lessons learned. And we've made some further investments, both in the team itself that manage our IT security and also software, surveillance software, particularly, so we're not resting on our laurels at all, but I think we feel that we're doing everything we should be doing to protect against that happening again.

Thank you, sir. We've also had a question coming from Alistair Smallwood. Please, could you give some color around the net debt position. Specifically, it would be good to understand covenants and expectations for finance costs for the full year?

Yes. Sure. So our leverage at the moment is 1.8x. And I expect by the time we get to the end of the year, that will be lower, around 1.6x. That's well within our covenants. Our interest costs have gone up, and that's reflecting the market, obviously. Part of our debt is hedged from an interest perspective, but we do have exposure. And so essentially, our costs have gone up by about 200 basis points compared to a year ago, and that will be the case for the full year as well.

[Operator Instructions] It appears we have no more questions. So I'm now going to pass back to Stephen for any additional closing remarks.

No, okay, nothing further really to add, but just to thank you all for participating for your questions, and we look forward to continuing the dialogue with you in the coming days. Thank you very much.