Genus plc (GNS) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for joining our Q&A session this morning and for having spent time looking at our webcast and results. We've got a hybrid event today. So it's a warm welcome to those of you in the room, particularly on a morning like this, and it's great actually to be having our first in-person Q&A session. We've also got some people joining us on the web. So we're going to have a few instructions in a moment as to how that's going to be handled. But I'm Stephen Wilson. I'm, as you can see, the retiring Chief Executive, but I'd warmly like to welcome and introduce Jorgen, our new Chief Executive.

Thank you very much, Stephen.

And Alison, our CFO.

Hello, everyone.

And [ Scott ], do you want to just say a few words on procedures, and then we can get going?

Of course. Thank you for that, Stephen. Today, we'll be taking questions from the room and then from the webinar. [Operator Instructions] But we will now take our first question from the room. So if you'd like to raise a hand for the question, Verity will hand around the microphone. Thank you.

Charles Hall from Peel Hunt. Can we kick off by maybe talking about customer wins? Because quite notable in the presentation was the number of customers where you're either totally new or you're gaining share. What's driving those customer wins? And I know it's a whole load of different things, but is there a feeling that you're gathering momentum on customer wins and that's the rate of genetic progress that you've been achieving that's really delivering that?

Yes. Look, I think great question, happy to respond. I think we have seen some really good momentum and share gains across many of our markets in both businesses, in porcine and ABS. And we highlighted in the presentation strong share gains in the ABS business, for example, in the U.S., in Brazil, despite it being a down market in China, France. In the porcine business, I think wherever you look really in the world, we're seeing share gains. And what drives it? I think it's really a combination of factors. And we try to highlight that on our chart when we talk about the strategic platforms for growth is the combination of genetics, having really good genetics; the strong supply capability, so the supply chain is really important. The technology that underpins it, the way we approach the market and focus on large -- customers who are progressive in their thinking and are willing to enter into long-term arrangements. And then really, the key ingredient then on top of all of that is great team. And this is a business where it's a classic B2B relationship sell. It takes time. We engage with customers over a long period of time, and the quality of the team you have is absolutely fundamental.

And what's really notable is that a number of end markets were particularly challenging over the course of the last year, whether that was European pork or Latin American beef. But actually, the business performed pretty well during that, and you seem to have built a lot more resilience into the model. I guess China is obviously the one area where there's still a lot of volatility. Do you want to just comment on how you build resilience into that part of the business?

Yes. I think you're right. The business is always actually -- if you look over time, the business has managed to grow through many ups and downs in the agricultural cycle. China has, in porcine, has been a challenging market. It was certainly challenging particularly in the second half of last year. But I think a fundamental drive that we must do is continue to really push on growing our royalty base in China. We've done that pretty successfully over the last several years. We started from basically 0 royalty in China back in about 2019, and we're now at about 60% roughly, 55% to 60% of our business in China on royalty. We've had compound growth of 50% in royalty over that time period. But we need to double down and just go even faster. And then, Jorgen, you're new into the business. Any observations you'd make on what drives customer wins? You've been visiting a number of customers.

Yes. I mean one of my observations would be that Genus is very well respected by its customers, very strong relations. The people at Genus are very much appreciated by customers, and customers also very much recognize that Genus has been making investments in technology. It's clearly a leader. I think the PRRSv-resistant pig is a case in point on the porcine side. But on the bovine side, it's a sexing technology. And as a customer, you want to partner with vendors, with suppliers that invest for the future and that bring new technology to the market so that you have early access to those technologies. But it's not only about technology. It's also about the supply chain, which I would say is absolutely world-class. Both from the bovine side, I was blown away by just the facilities in Wisconsin, for example. Genus puts animal welfare very high on the priority list and is a leader in that regard. And customers see that and they appreciate that, and they want to partner with a supplier like that.

And specifically on China, obviously, the pork price in China has picked up a little bit recently. But given the depth of the market over the last 18 months or so, I guess, Chinese producers are going to be pretty wary about starting to order genetics in the short term.

I think we should expect that the Chinese market is going to continue to have ups and downs and be volatile. There's a lot of capacity that is being put in place since ASF originally hit. And producers, I think, will have to learn to operate in an environment where you have to be really, really efficient to make money. And that should be an environment that as producers get accustomed to that, they have to realize that you've got to optimize every part of your business, and that includes the genetics. And we highlight in the presentation how our genetics are performing in China, and it's really good and that is opening up new conversations for us. So I think we're encouraged by the conversations we're having and the wins that we've had in China and -- but we need to do that on a royalty basis. And as you're well aware, those royalty revenues build over time.

And those customer opportunities are coming from players that have integrated supply chains rather than having to supplant a competitor?

I'm not quite sure I understand the question...

If they have their own [ breeding ] operations.

Yes, they're from producers. Some of those producers also have slaughtering capacity, so they're fully integrated. Others don't.

It's Max Herrmann from Stifel. So just first question, again, on China and in terms of the guidance that you're giving for FY '24. I think previously, you'd said you'd expected a recovery in China. Now you're talking very much about volatile markets in China remaining. I mean they have been volatile over a long period of time now. I guess why the change now? Is it more of just a history that now -- or do you feel that something has changed in the market since you last updated? That would be the first kind of question.

Yes. I think we recognize that the extreme movement in the market post-ASF was a onetime event. We're unlikely to see that degree of change in the market, either to the positive or the negative, depending on which part of the cycle you're talking about. As Stephen said, there is still -- there is lots of capacity in the market. And also, the Chinese economy is not in great shape. So consumer demand for pork, we believe, is also being impacted. But we can't control those things. What we can control and focus on is how well we serve our customers. And as Stephen said, that's about providing the best genetics and growing through the royalty model, which has proven to be a superb model everywhere else in the world. There's no reason why that can't be the model for China, but it takes time to achieve that. And so the growth that we're expecting in FY '24, we're assuming it will be modest.

And then just onto the PRRSv opportunity. Obviously, you've now filed with the FDA. I think you said previously about a 6-month review period, which, I guess, brings us into the first half of next year. How do you see the rollout of the PRRSv pig in the U.S.? And then what's the timing in China? And how does that -- also just on PRRSv, I know we talked earlier about how that impacts the investment in R&D because, obviously, R&D is up hugely in FY '23. How do you see that progressing as well as part of that coming to fruition?

Yes. Do you want to comment on PRRSv and I'll comment on the cost?

Yes. Yes. So firstly, I think we're really encouraged by the progress. I think it's a massive achievement on the part of our R&D and PIC teams to have completed all of the submissions to the FDA. All of those have been prereviewed by the agency. So we've had their initial comments. We've responded to those. There's now a 6-month period for them to give us a final determination on it. So we're very confident in all of the data that we've submitted. So I think we can look forward to the FDA approval with a good degree of confidence. In terms of how we will move forward in the rollout of the product and commercializing it, of course, we also are working on regulatory pathways in a number of other countries. Pork is a globally traded commodity, so it's important that we deal with a number of other jurisdictions. We've given information on how we're doing that. And then I'd highlight that there's a Capital Markets Day event scheduled now for the 1st of November when there's going to be opportunity for a much more detailed discussion to take place around our commercialization plans.

Yes. In terms of R&D and gene editing as part of that spend, as you'll have seen, we spent about GBP 14 million on gene editing costs in FY '23 and expect to spend a similar amount in FY '24. In terms of R&D as a total spend, we've, as you know, significantly increased our spend in the last few years. And going forward, I would expect that to stabilize, so the growth overall to be modest and slower than the growth in revenue.

Damian McNeela from Numis. I can't remember what chart number it is, but you show the improvement in your genetics in terms of the index, and it looks like the improvement has slowed in the last year. I'm not diminishing the efforts that you're putting into that genetic. But can you explain to us what perhaps was in that slowing rate of improvement, how we should interpret that graph is the first question?

I think the way you should interpret it is that we had a record level of improvement that we were able to achieve in our nucleus and will be delivered to producers over the next 2 or 3 years. So our customers are going to see fantastic performance coming from PIC genetics. Remember, what you're looking at here is the dollar improvement in economics for a producer over the prior year. And if you think about what is the cost of a pig, what is the profit margin of a producer on average, these numbers are extraordinary. We're looking here at over a 3-year period a cumulative gain of about $11. So genetic improvement is delivering incredible value to our customers, and it's going at a very rapid clip. So I think you should feel very satisfied by that. Our customers are seeing the benefit of that, and I think it's what is helping us to win in the marketplace.

In terms of -- yes, the calculation is relating to the profitability that the customer is achieving, which is related to pig prices, so that can move. Yes.

And then just on PRRSv, I know there is a Capital Markets Day in November. But just in terms of where you -- I think you've previously commented about the fact that you're talking with the wider supply chain in terms of making sure people understand the benefits of your product. Have you got any comments you can add at that stage and how those conversations are going?

There's a lot of interest. A lot of interest, yes. We'll say more on November 1, yes. Anything you want to add on that?

No, I think the philosophy that we have is the quadruple bottom line, so working with all of the players throughout the whole chain. So that is the producer. It's the packer, sort of branded manufacturers. It's the retailers, and it's the consumer and articulating what the benefits are to all of those players in the chain. Very thoughtful and comprehensive approach, which, yes, we can share more on November 1.

I think there's a question on the webcast, I saw. Is that right?

[indiscernible] Yes, we have got Seb Jantet from Liberum who's going to be asking a question on the webcast today.

Just checking if you can hear me right?

We can hear and see you, Seb.

Right. So just 2 questions, if I may. One, just on China and the royalty. I think I picked up from the prerecorded session that you were looking to make some changes to our royalty model in China. And I was wondering if you could just kind of give us a little bit more detail on those changes?

Yes. So we've really been thinking about how we can adapt the royalty model that we've been pursuing in China to the growth of the industry there. There's a -- I think there's always been a variety of ways in which we frame the royalty. You do it on a sow usage. You do it on a weaned pig. You do it on a slaughtered pig. There's a whole variety of ways in which we've constructed those prices and then how do you frame those for different scales of operation. So we've taken a thorough look at that. Our intent is to really drive penetration of royalty in the marketplace. And so we're launching over the autumn some refreshed approaches there, which we think will be very compelling and attractive for producers in China.

I guess you're not going to give us any detail on what those might actually be.

I think it's a complex subject. So you could spend a lot of time going into that. I think the key point is that our royalties in China are at levels which are comparable with the rest of the world, and we intend to maintain and grow on that basis in China.

Second question then was just around ABS. So obviously, one of the longer-term investment stories have been around the margin growth in the ABS business. And that felt like it was probably a little bit slow this year. I was wondering if you could give me a sense of kind of some of the levers that you think you can pull in that business to move the margins forward.

Sure, Seb. Yes. There were some factors which impacted ABS' margin in FY '23. We did have a onetime impact of around GBP 1 million in the first half, which related to the cyber incident we had a year ago. So that's not repeating. And Lat Am didn't grow, and that had an impact as well. But going forward, we still believe that there's margin improvement that we can drive in the business. A lot of good work going on in looking at our go-to-market strategy and segmenting our customers in far more detail than we've done before and really looking at how we approach them, underpinned by, in the main, long-term contracts. That's the direction that we're going, and we do talk -- or Stephen talks in the presentation about that. We believe that that's key, and I think there are further efficiencies also that we should be able to drive in the business as well. So we've talked in the past about the aspirational goal of 20% margin, and we still have that.

Jorgen, do you want to comment on the opportunities you see in ABS?

Yes. Yes. I would say that if I think about the priorities for the business, clearly, we spoke about the PRRSv commercialization, which is very important. We already covered China, right, how do we build a predictable, profitable, growing franchise model in -- or business model in China. And then you go to ABS and you say, look, ABS, we need to drive more value from ABS. So how do you do that? Clearly, we're reviewing our go-to-market approach. And so kind of homing in on this theme of commercial excellence, right, which is around how do you segment your customers? Which are the customers that we should give a lot of service? Maybe others don't appreciate that service as much. So it's a little bit more of a transactional sale. How do you price, right? How do you keep -- set the right guardrails for your sales organizations? How do you think about that? And then there's the efficiencies also that Alison highlighted. So for me kind of coming in, clearly, driving the margins in ABS and driving the profitability of ABS features among my, let's say, top 4, 5 priorities.

We're going to questions in the room now.

Doriana Russo from HSBC. Coming back to profitability, my questions on ABS has been already just answered. But on PIC, there was an improvement in profitability in the year by about 200 basis points, if I'm not wrong, reaching pretty much an overall high. So what is the driver of that improvement? Is that royalty? Or is there anything else? And I mean, have we peaked? Or do you think there is further scope for improvement moving forward?

It's a great business to leverage. So a comparatively fixed cost base. And with the kind of growth that they're achieving, we will achieve margin expansion, and I expect them to continue to do that.

So it was only a positive leverage? Or was it also driven by the increase in royalties...

It's positive leverage, leveraging higher volumes.

Okay. Could you talk a little bit about the maturity of your royalty contracts across the different businesses in PIC geographically and if there is anything to say on ABS as well?

Yes. PIC is very progressed in having penetration of royalty contracts across the globe. We have, in the appendix of the presentation, the degree of that penetration. You can see each year, it's just getting higher. The U.S. is at 97%, North America only. ABS is still quite a way to go. In EMEA, quite high penetration, about 25%, 30%. Rest of the world, lower than that. So a long way to go compared to where we are with PIC.

I think let's go to Max, raising his hand there.

Max Herrmann again from Stifel. Just maybe a question for Jorgen, actually, on the NuEra opportunity here. I know you wanted to get some more pull on one of the issues when we had the visits to North Wales. One of the issues was trying to get people to distinguish between 2 black cows, one being NuEra and therefore having better meat cuts compared with potentially another cow and trying to get people like Sainsbury's to taste the difference and other customers to appreciate the value [ that offers ]. I don't know whether from your background that there are any things that you can see that can help Genus achieve that kind of objective.

Yes. Well, I think it's clearly a very important point within our ABS is to leverage the beef on dairy technology and also our beef-on-beef genetics. This pull-through, so working with retailers or other partners further down the chain to create a pull for our genetics, is going very well. You highlighted Sainsbury's. I mean there is a test going on in the north of England where, I believe, our NuEra-based beef is in about 150 stores for a test. And I think a clear benefit that we can offer is in the area of sustainability. And so we're completing an LCA, a life cycle analysis, to further quantify that and reduce the environmental footprint for our customers. And so that's another value proposition that we can bring to the chain. Maybe you want to add here?

Yes, when you started your question on NuEra, I wondered if you were talking about the CEO of NuEra. It's beef genetics. But we didn't actually highlight very much in the presentation this time around the theme on pull-through. But actually, the progress we're seeing is really encouraging, and that's true whether you're looking in the U.K. market. The North American market actually have started. There are some new dedicated supply chains and programs in Spain, in the Netherlands, in some of the Scandinavian areas. So actually, there's growing momentum. It takes time to build because you have to create those supply chains. And of course, beef animals, how long does it take to get a beef animal to market? You have to create the calf. That's a year. Grow the -- so these things build over time, but I think we're encouraged by the momentum.

We've got another question from the webinar, which is from Jens Lindqvist from Investec. [Operator Instructions]

Following on from Charles' question earlier, I think, with regards to the share gains in PIC across all of the major geographies really, may I just ask who, in general, you are taking share from? I mean is it the likes of [ top PICs ] within the premium segment? Or is it more from regional payers? And then secondly, I was wondering if you could share any detail, please, for the planned changes of the PIC royalty model in China? And then finally, with regards to the gene-edited pigs that will be imported into China, will they be housed in BCA's facilities or in yours? And is it still the case that the development will be exclusively funded by BCA as per the original agreement?

Yes. Okay. So quite a few questions there. Let me take them in reverse order and see if we remember them. So in terms of the PRRSv pigs in China, yes, those will be housed in BCA facilities. And yes, BCA is funding and progressing that work on gaining regulatory approval in China, and we're actively working very closely with them, as you can imagine, to support them in that process. So that was the question around BCA. In terms of the China royalty model, I don't -- we already had a question on that. I think I don't have a lot further to add on that at this point. Just to reiterate that our royalty pricing in China is very much at similar levels to the rest of the world. And then your third -- your first question, I guess, answering them in reverse order, was around who are we gaining share from. I think it does vary around the world. And so you have -- I think you have a whole variety of things going on. Internal programs, right, would be one of the places that we're gaining against. So think of what we did with Smithfield with [indiscernible]. So that will be one theme. The growth of the sow line in North America, the PIC800, being super competitive and growing our sow line share. That will be very much actually against DNA, which previously was the distributor of DanBred genetics in North America. If you are looking in Europe, I think it would be broad-based. There's quite a few cooperatives operating in Europe and smaller regional players. And so those would typically be the people that we would be winning against there. So it's quite a broad-based picture. I think we're happy to compete against anyone anywhere in the world.

[indiscernible] We'll take next question from the room. Maybe Charles.

Just going back to ABS. Can you just talk a little bit more about the progress in Sexcel, how the market is operating, how the competitive environment for that product is maybe in terms of pricing in different regions and maybe specifically on India and whether you're getting any more intelligent contracts?

Yes. Do you want to talk about...

Yes. Yes. Look, we're achieving strong growth in Sexcel. You would have seen that, 18%. And even the markets which we would classify as more mature, still achieving strong growth. North America, for example, 25%. And it's a very competitive environment, but ABS had real success in rising -- increasing prices actually across all product groups. So competitive environment, but I think ABS is competing well and gaining share.

And actually, specifically on that pricing point, historically, ABS wasn't very good at getting pricing and there's a change of mood over the last year or so. Is that now sort of part of the culture is to be going for price and effectively collecting on the genetic improvement that you're actually providing?

It's definitely changed, I think, the confidence of the business to be able to push on price, having had the success that they've had. And yes, they're seeking to achieve more value, definitely. So we expect that they will achieve further price increases. But they've got to grow volume as well. So it's a fine balance between the 2, and we'd like them to push on volume just as much as they're pushing on price.

You also raised India as a point then. I think we're encouraged by the progress in India. The Government of India contract has -- that -- we were successful in winning a good share of that business during the course of the year. I'd say, like all of these things which are government-initiated, it's sort of sticky to get the ball rolling. But I think we were pleased overall with the progress we made there. We think that there's plenty of growth opportunities still there in India. Anything you want to add on pricing in ABS?

Yes. I mean that is something that we're studying very carefully. We're putting additional resources into that. And we're clearly looking, as I mentioned earlier, in terms of the service levels and focused on making sure that we get compensated adequately for the very high added value services that we offer. And I think there's just -- with many businesses, I think, around the world in this inflationary environment, the need to do so, I think, has increased. And as a result of that, I think we have learned at ABS. And so that will continue to be a focal area going forward.

Thank you. We have no further questions from the webinar at the moment. So if there's no further questions in the room, then we'll go back to Stephen for his closing remarks.

Just to check to see if -- no? Okay. Very good. Well, thank you all very much for coming. It's been great actually to have some face-to-face. And also, nice to see we're able to work with the remote webinar as well. We're looking forward to visiting with investors and others over the coming days. Thank you for your support here and look forward to continuing the conversation. Thank you.