Genus plc (GNS) Earnings Call Transcript & Summary

Thank you for joining us this morning. My name is Jorgen Kokke, and I'm the Genus CEO. First, I am delighted to introduce Andy Russell, our new CFO, who has succeeded Alison Henriksen on the 1st of August, and a bit more about Andy will follow later. I'm also very pleased to report that we've made a significant announcement this morning related to the acceleration of our porcine joint venture formation in China. Andy and I will take you through Genus' results for the year, which will be followed by a presentation on our China JV. In summary, we have achieved strong financial results and made significant strategic progress. I'd like to take the opportunity to thank all Genus employees for their contributions in achieving these results. After the disclaimer, let me start with an overview of our strategic performance as well as our key financial headlines. Our three strategic priorities remain unchanged. Our first priority is continued growth in porcine. I am pleased to report that PIC, excluding China, achieved an 11% increase in operating profit for the full year. As for PIC China, I'm delighted to announce this morning that we're accelerating our joint venture formation with BCA. Under the terms of the agreement, Genus will receive an accelerated $7.5 million milestone payment and upon completion of the transaction, a gross cash payment of $160 million, with BCA taking a 51% stake in PIC China. This provides the best possible route to obtaining PRP approval in China. I'll take you through more detail on this later in the presentation. Our second priority is the successful commercialization of PRP, which is the biggest opportunity from our R&D program. In April, we achieved a critical milestone as the U.S. FDA approved our PRP gene edit. This important accomplishment is a testament to the hard work and dedication of numerous Genus teams over many years. We are continuing to seek approvals from other regulators around the world, and we are encouraged by the progress that we're making. Our third priority is driving greater value from bovine. As a reminder, we initiated a comprehensive value acceleration program in FY '24 which will return the ABS business to growth while improving margins, return on capital and cash generation. I'm pleased to say that VAP actions are bearing fruit with Phases I and II delivering over GBP 21 million of annualized benefit. We are now implementing Phase III, which targets an additional GBP 9 million of annualized benefit. ABS is a strong business, and we remain focused on accelerating profitable growth. Turning then to our headline financial performance in the year. You can see the strong numbers on the slide and note that this was achieved despite a significant GBP 8.5 million FX headwind. This was driven by strong growth in PIC and VAP actions benefiting ABS. Let me then look at our markets, and let me pick out a few highlights on each of the species. In the Americas, pork producers operated at positive margins throughout the year. European pork producers also made healthy margins, but our European business was negatively impacted by ongoing health challenges in customer herds. In China, the market environment for pork producers was relatively stable throughout the year. Outside of China, the Asian industry continued to face disease challenges. Looking ahead, the outlook for the first half of FY '26 is stable, albeit there are the normal risks around disease. Moving to bovine. In North America and Europe, dairy and beef producers were profitable in the period. In LatAm, demand for beef genetics in Brazil continued to be weak despite signs that the beef cycle is stabilizing. In Asia, the environment for Chinese dairy producers continue to be very challenging. In addition, in February, the Chinese government restricted bovine genetic imports from the U.S. due to Bluetongue virus being found in several U.S. herds. This actually led to a stronger H2 performance from ABS China as customers look to secure their supply of ABS' elite genetics. However, this is only a short-term boost to sales in China as there is currently no ability to replenish in-country inventories. In terms of the H1 outlook for FY '26, we believe the market environment in Europe and Americas is reasonably stable, whereas China dairy continues to be weak with restrictions on the U.S. bovine genetics posing an additional challenge for ABS China. Overall, therefore, aside from ABS China, market conditions appear relatively stable across both of our businesses for the first half. And Andy and I will discuss the full year outlook for Genus later on. Let me now update you on our sustainability progress. At Genus, our vision is pioneering animal genetic improvement to sustainably nourish the world. We know we have a significant positive impact on industry sustainability. Our genetics and services enable farmers to raise healthier animals that produce more high-quality protein per unit of input. In FY '25, through the use of our genetics and services, protein producers were able to avoid over 8 million tonnes of CO2 equivalent emissions. These so-called Scope 4 reductions that are underpinned by rigorous life cycle assessments show the powerful impact Genus advanced genetic has on improving industry sustainability. Let me now hand over to Andy Russell to take you through our FY '25 financial performance. On behalf of the entire Board, we're delighted we've been able to secure an executive of Andy's caliber. Andy joined us on the 1st of August, and before Genus, spent nearly 12 years at Smith & Nephew in operational and strategic finance roles. Prior to that, Andy spent 17 years with KPMG. I'm looking forward to working closely with Andy as we continue to advance our strategic agenda. With that, let me turn it over to Andy.

Thank you for the introduction, Jorgen, and good morning, everyone. I'm very excited to be joining Genus at this stage in its journey. Before joining, it became clear to me that the group has very strong IP and significant growth opportunities. In the last few weeks, I've been impressed by the people I've met and their passion for the business and our customers. I'm looking forward to working with Jorgen and the team to deliver these initiatives and drive profitable growth for the group. I'm pleased to say I've inherited a strong set of FY '25 results. My 4 key takeaways are: First, PIC continued to demonstrate the strength of its business with good growth ex China and continued progress winning new royalty customers in China. Second, ABS has delivered VAP 1 and 2, driving significant profit growth. VAP 3 has commenced, which we expect to drive significant benefits in FY '26. Third, we generated record free cash flow that covers our dividend and expect strong free cash flow in FY '26. And finally, we have a strong balance sheet with debt leverage now down to 1.5x EBITDA. With that, let's now dive into the detail. Let's start with volume growth. I'm pleased to report that PIC volume was strong with total volume up 10% or 9% excluding China. Ex-China volume growth was broad-based with the Americas being particularly strong. Moving to ABS. It's pleasing to see more stable volume after a challenging FY '24. On an underlying basis, we continue to see the mix shift to sexed continuing with sexed volume up 11% for the year. There's one point to note, however, when looking at the chart, over the course of the year, a significant proportion of ABS' dairy volume growth came from India, where units typically sell at a lower price point. Excluding India, volume growth in the year was about 1%. Looking to FY '26, this creates a tough volume comparator, albeit the profit impact of this is less material. Moving to our trading performance. Group adjusted operating profit increased 30% in constant currency and 19% in actual currency to GBP 93.1 million. Adjusted operating profit, excluding PIC China, was GBP 84.7 million. PIC China adjusted operating profit also improved significantly to GBP 8.4 million for the year, driven primarily by stronger byproduct revenue. PIC adjusted operating profit grew 16% in constant currency and 8% in actual currency. It's important to note that PIC's adjusted operating profit included a net GBP 3.7 million milestone receipt following the U.S. FDA's approval of the PRP gene edit. ABS adjusted operating profit increased 53% in constant currency and 39% in actual currency, driven primarily by benefits from the VAP initiatives. The increase in central costs is largely driven by variable costs associated with underlying group profit growth, including performance-related employee rewards. Group operating profit margin increased 210 basis points from 11.7% to 13.8%, reflecting better leverage achieved in both businesses and the planned optimization of R&D investments following the strategic review in FY '24. Net financing costs increased slightly to GBP 18.8 million as a result of higher interest rates and average borrowings over the year. Overall, the group achieved adjusted PBT growth of 38% in constant currency. As you know, Sterling strengthened, particularly against LatAm currencies, resulting in a significant GBP 8.5 million FX translation headwind during the year. As a result, adjusted PBT grew by 24% in actual currency to GBP 74.3 million. Let's now look at the divisions in detail, starting with PIC. PIC's adjusted operating profit increased 16% in constant currency, on revenue that was 8% higher. As mentioned, adjusted operating profit includes the GBP 3.7 million milestone receipt. The chart on the right shows the building blocks of PIC's profit growth. I'll cover the performance of our trading regions on the next slide, but you can see that PRP costs came in GBP 2.5 million lower year-on-year, but remember that this includes the GBP 3.7 million milestone receipt. On an underlying basis, PRP costs were up GBP 1.2 million for the year. The last point to flag is that FX was a significant headwind for PIC during the year with a GBP 7.9 million translation impact due to Sterling strength, particularly relative to the Mexican Peso and the Brazilian Real. This next slide presents our normal regional view of PIC performance. PIC North America continues to deliver very resilient growth with constant currency profit growing 3%. Royalty revenue accounts for a large proportion of this region with growth of 2%. Latin America performed well with operating profit growth of 14% in constant currency, supported by a very strong 11% increase in royalty revenue. That was broad-based across the countries within the region. PIC Europe had a tougher year with full year profit down 4% in constant currency. We made good progress in Spain and Germany, but this was more than offset by lower sales in Russia due to challenging market conditions. In Asia, profits were 70% higher, albeit from a lower base. Within this, PIC China profits increased GBP 5.2 million, driven predominantly by higher byproduct revenues as well as modest royalty revenue growth. It's pleasing to report that Asia ex China also grew profits 29% with good growth in Vietnam, the Philippines and South Korea. Moving to ABS. We're clearly seeing the benefits of our value acceleration program coming through. In constant currency, revenue increased 2%, but adjusted operating profit increased 53% to GBP 19.5 million. As a result, ABS' margin improved 190 basis points to 6.3%. As you can see from the chart on the right, that was the key driver of profit growth. In FY '25, the annualization of VAP Phase I initiatives achieved GBP 3.8 million of benefit. This brings the total benefit from the VAP Phase I to GBP 11 million. VAP Phase II achieved a further GBP 8 million of in-year benefit. We continue to expect these initiatives to deliver an annualized benefit of GBP 10 million. We've also pulled out ABS China, where profits were up GBP 0.7 million year-on-year. I'll discuss ABS China in a bit more detail on the next slide. The increase in performance-related pay reflects both the significant progress made under VAP and the fact that there was minimal payout last year. ABS was also impacted by a GBP 2 million FX translation headwind over the course of the year. The next slide shows our regional performance in ABS. As you can see, we saw strong profit growth of 26% in North America and 21% in EMEA. And these are the regions that have been key markets for the VAP initiatives. In North America, volume grew 8% with very strong sex growth of 25%. In Europe, volume growth of 2% was more stable with sex volume growing 11%. In contrast, ABS performance in Latin America was fairly weak with profits down 6% in constant currency and down 20% in actual currency. The key volume factor remains a relatively weak market for beef genetics in Brazil, which led to ABS LatAm's beef volume decreasing 6% year-on-year. The regional dairy market was stronger, and there was a notable 7% increase in sets volume, albeit off a relatively low base. ABS Asia profits were down 4% year-on-year, an improvement from H1's 22% decline. The improvement was primarily driven by China's decision to halt bovine genetic imports from the U.S. in February after the Bluetongue virus was found in a number of U.S. herds. Paradoxically, this resulted in a strengthening of ABS China sales in the second half as customers look to secure their supply of ABS' elite genetics. This was a short-term boost for sales, however, and ABS China faces a challenging FY '26 with the import ban still in place and a continuing tough underlying market for dairy producers. ABS Asia volume growth was primarily driven by good progress in India, albeit at lower -- relatively lower price points. In aggregate, ABS volume growth of 5% comprised sex volume growth of 11%, a beef volume decline of 3% and dairy conventional volume growth of 6%. Let's now move to research and product development, where I'm excited by what I've learned about the innovative work and capabilities of our scientific teams. We've made one change on this slide, and that's to show you the combined research and product development spend as a percentage of group revenues. And you can see that in FY '25, this was 11%, which demonstrates our significant financial commitment to R&D initiatives to continue our profit growth over the long term. Moving to research specifically, our spend decreased 24% to GBP 16.5 million as a result of the actions taken from the R&D strategic review that was initiated in February '24. Our more focused research spend represented 2.5% of group revenue. And going forward, we expect this spend to be relatively stable and to remain below 3%. Moving to porcine product development. The reduction in PRP costs is driven by the milestone receipt. Excluding this, PRP costs increased by GBP 1.2 million for the year. Bovine product development costs meanwhile were broadly unchanged on the prior year, although we did make a substantial investment during the year through the buyout of the De Novo genetic herd. The acquisition is progressing well, and we've already seeing stronger KPIs in our genetic program. We're expecting higher bovine product development in FY '26 due to higher bull depreciation. Moving to our statutory income statement. So we consistently measure and report adjusted results as we think these give a better view of the group's underlying performance. Our statutory results can be significantly affected by noncash items, in particular, IAS 41, which can give a misleading picture of the group's underlying performance. Picking out the key line items, the movement in the IAS 41 valuation for the year was at GBP 13.3 million decrease compared with the prior year valuation, primarily driven by bovine assets. Exceptional expenses were significantly lower year-on-year at GBP 11.4 million as expected and comprised 2 main elements, approximately GBP 9 million in relation to VAP restructuring costs and GBP 2 million in relation to other corporate transactions. Based on what we can see today, we expect similar exceptional costs in FY '26 with the principal component being onetime restructuring costs in relation to VAP Phase 3. Reported operating profit was GBP 42.4 million, a significant improvement on last year's GBP 6.4 million. Net finance costs were similar to last year, resulting in statutory profit before tax of GBP 28.5 million, a GBP 23 million improvement year-on-year. Our adjusted tax rate was 27.5%, consistent within -- with our expected range, and our statutory tax rate was 36.7%. With that, let me now turn to our cash flow performance. FY '25 was a strong year for free cash generation, and we both covered our dividend and reduced debt. Looking first at the chart on the left, you can see that improved working capital was the biggest driver of our increase in free cash flow. Improved working capital has been a key focus area within our ABS VAP program. And during the year, we made significant improvements in inventory management as well as receivables. The year-on-year reduction in biological asset outflows was a function of a sizable outflow last year as PIC restocked its Aurora nucleus farm in Canada after completing a refurbishment. Lower capital expenditure was expected and a function of the group moving into a period of stable CapEx spend. We expect FY '26 CapEx to be slightly higher and in the region of about GBP 21 million to GBP 23 million. We had a significant exceptional cash outflow in FY '25 as expected. The total exceptional cash outflow of GBP 24.2 million included approximately GBP 8 million in relation to the ST settlement agreed in FY '24, GBP 9 million in relation to VAP restructuring costs and GBP 7 million in relation to potential corporate transactions in FY '24 that are no longer active. Looking forward, we expect exceptional cash outflows to be much lower in FY '26. We have one final GBP 4 million payment in relation to the ST litigation settlement and expect further restructuring costs in relation to that. The chart on the right shows our progress in relation to cash flow generation and cash flow conversion over the last 5 years. You can see that FY '25 was a standout year in terms of operating cash flow, free cash flow and cash flow conversion. Looking to FY '26, I expect that cash conversion will remain strong. But I'd just remind you that first half cash flow is normally lower than the second half, and we expect this to be the case this year. Moving to our balance sheet. I'm pleased to report that we have reduced our net debt and leverage. Net debt decreased to GBP 228 million from GBP 249 million at June 2024. As shown on the chart, our free cash flow of GBP 41 million covered GBP 21 million of dividend payments in the year as well as GBP 4 million of equity investments. There were broadly 2 offsetting impacts in the year, a GBP 10.6 million increase in deferred consideration relating to the acquisition of the De Novo minority interest and an GBP 8.3 million reduction in lease liabilities, primarily related to PIC's Luodian farm being sold into a joint venture. As a reminder, the De Novo deferred consideration is payable in 4 equal installments over 4 years ending July 2029. We also had a GBP 7.3 million favorable reduction in debt on the translation of our U.S.-based debt. As a result, our net debt to EBITDA at the end of the year calculated per our financing facility was 1.5x compared to 2x last year. The 0.5 turn improvement was predominantly driven by higher EBITDA and strong cash flow as well as improved lease liability terms in our new RCF. Our targeted leverage range remains 1 to 2x, and we expect to continue deleveraging in FY '26. We completed a refinance in June, and our new facility is for approximately the same size with maturity extending out to June 2029. We had headroom of GBP 119 million at year-end, and our covenant remains at 3x. Our return on adjusted invested capital increased to 14.7% in FY '25, and we are focused on improving this further in FY '26. I'd also remind you that in our appendix, we have a technical guidance slide, which outlines expected impacts in our FY '26 accounts for various line items that should help you with your modeling. Let me now take a moment to remind you of Genus' capital allocation framework, which will be a key focus area for me going forward. As you know, our balance sheet is in a strong position. Our leverage has now been reduced to 1.5x EBITDA, which is the midpoint of our targeted range. We, therefore, wanted to share our disciplined framework for capital allocation, which we divide into 4 categories. Supporting organic growth opportunities such as investments in facilities, innovation and commercial capabilities, continuing to strengthen our balance sheet, value-creating inorganic growth opportunities, which must meet strict financial and strategic hurdles and additional shareholder returns over and above our current dividend. With that, let me now turn the presentation back to Jorgen, who will give you more detail around our strategic progress, the porcine JV in China and our outlook for FY '26.

Thank you, Andy. I'll now discuss our strategic progress during the year in more detail. Let me review each of the 3 strategic priorities that I defined 2 years ago. Firstly, I'd like to take a deeper look at PIC's royalty revenues. The chart on the left shows PIC's 4-year royalty revenue CAGR by region. You can see robust royalty revenue growth with a CAGR of 5% in North America, 11% in Latin America and 6% in Europe. PIC continues to demonstrate it can grow with both existing and new royalty customers. In Asia, our 4-year royalty revenue CAGR is negative 4%, which highlights why we increased our commercial focus on royalties in China 18 months ago. I'm pleased to say that in FY '25, royalty revenue growth in Asia was 12%. Adoption of PIC's royalty model is high and continues to be led by 97% penetration in North America. This underpins the stable growth of PIC. The chart on the right helps demonstrate this stability. It shows U.S. pork producer profitability over time. There is no doubt that U.S. pork producer profitability is cyclical and yet PIC North America has demonstrably grown royalty revenues throughout these cycles. Let's now move to PIC China. Our goal is, of course, to grow the business, but also to improve its stability. The first chart shows the pig price to corn ratio in China. This is a proxy for corn -- for pork producer profitability. When this ratio is above 6, Chinese pork producers are making a positive margin, which was the case during the year. Moving to the chart in the middle, you can see that it was the increase in non-royalty revenue that was the primary driver of our profit improvement. As Andy explained, the increase in non-royalty revenues was predominantly a result of higher byproduct revenues. That being said, there was a 6% increase in royalty revenue in China as well, and we continue to expect strong royalty revenue growth going forward. The chart on the right is the same one we've shown before and illustrates that royalty revenues from new customers can take up to 4 years to reach financial steady state, with revenues and gross margin in the first 2 years typically being fairly limited. The point of this chart is to highlight that PIC China's commercial success, winning 25 new royalty customers over the last 2 years, hasn't turned into significant royalty revenue or margin yet, but it will. Moving now to PRP. I am delighted to say we made significant regulatory progress in the year with the U.S. FDA granting approval for our gene edit in April. This clearly represents a very important milestone for Genus. In order to commercialize PRP in the U.S., we believe we need approvals in major U.S. pork export markets, namely Mexico, Canada and Japan. We continue to advance with the regulatory authorities in these jurisdictions as well as with other international regulators, including China. In addition to FDA approval, we also secured favorable determinations from the Dominican Republic and Argentina. These determinations further expand our PRP regulatory footprint, and we will continue to pursue further approvals in FY '26. Moving now to bovine and our value acceleration program. We initiated this program 2 years ago with clear objectives to accelerate growth and improve ABS' margins, returns and cash generation by embedding commercial excellence and deploying our resources more effectively. We can now see the benefits of our actions, and we remain committed to building a better bovine business. Let's then move on to the achievements of VAP Phase 1 and Phase 2 and our areas of focus for VAP Phase 3. To recap, Phase 1 initiatives were completed in FY '24. We unified dairy, beef and IntelliGen under one leader and started implementing stronger pricing governance and value capture, achieving annualized benefit of GBP 11 million. In Phase 2, we've created global product management, global marketing and global supply chain teams. The work on supply chain has already achieved significant working capital gains, and we see further potential for improvement. Across Phase 1 and Phase 2 together, we've achieved GBP 21 million of benefit, which is a significant achievement. We've now commenced Phase 3 of VAP. We're focusing on reshaping ABS' go-to-market and enhancing commercial excellence. Fundamentally, we're concentrating on bringing the right product to the right market, providing value-creating service to our customers and delivering the product to our customers in the most efficient manner. We're already in the process of implementing material changes in our biggest markets, and we expect the profit benefit of these changes to be substantial. We're targeting GBP 9 million of benefit from Phase III, of which GBP 6 million is expected to be achieved in FY '26. I'd now like to take a moment to commend our ABS teams on the progress we're making through VAP. We can see the benefits come through, and it is increasingly clear that we are positioning ABS for accelerated growth. Let me now remind you of the background to our partnership with BCA, Beijing Capital Agriculture (sic) [ Beijing Capital Agribusiness ]. Back in 2019, Genus and BCA announced a strategic foresight collaboration to jointly research, develop and secure regulatory approval for PRP in China. As a reminder, PRRS remains one of the biggest disease issues for Chinese producers. As a leading Chinese state-backed agribusiness with wide-ranging interest in animal genetics, we chose BCA as a partner to commercialize PRP. Upon regulatory approval of PRP in China, a joint venture would be formed, whereby BCA would acquire 51% of PIC China. On this slide, we've laid out the key financial terms of the updated agreements and the original agreements. The first box shows the upfront consideration payable to us on formation of the joint venture. Under the original agreements, this gross consideration was subject to a cap and collar of $120 million to $160 million. Under the new agreements, we will receive gross proceeds of $160 million, i.e., the top end of the range. After withholding tax, transaction costs and potential working capital and net debt adjustments, we expect to receive net proceeds of around $140 million. We expect to receive this upfront consideration in the second half of FY '26. The second box shows milestone payments from BCA to Genus. Under the original agreements, these totaled $20 million. Since the signing of the original agreements, we have already received $12 million. Under the new agreements, the trigger points for the remaining $7.5 million have been brought forward, thereby accelerating our value crystallization. The third and fourth boxes show the IP royalties and dividends that we expect to receive from the JV on an ongoing basis. Under the new agreements, both future earnings streams are consistent with the prior agreements. We believe the new agreements are very positive for Genus, both strategically as well as financially. From a commercial point of view, this should accelerate our ability to capture the long-term growth opportunity for PIC in China. Forming the joint venture also cements both parties' commitment to achieving PRP approval and commercialization in China. The terms we've agreed accelerate value crystallization for Genus shareholders while retaining our future economic rights. The transaction is expected to complete in 2026, subject to regulatory approvals for a Chinese state-backed entity. And our current expectation is that the deal proceeds will be used for balance sheet deleveraging and potential additional shareholder returns, in line with the capital allocation framework that Andy talked about earlier. Before I conclude, let me briefly remind you of our PRP progress in China and the scale of the porcine opportunity. China is the largest porcine market in the world with approximately 37 million cows. That's around 6x larger than the U.S., which is currently PIC's largest individual business. In relation to PRP, we continue to make good progress with the Chinese regulatory authorities. We have PRRS-resistant pigs in China, and we have successfully bred a new generation of PRP animals. Testing is underway in preparation for regulatory assessment. Again, we believe accelerating the joint venture formation will strengthen our position with regards to obtaining Chinese regulatory approval for PRP. Lastly, let me now turn to Genus' outlook. FY '25 was a very good year with strong financial performance and excellent strategic progress on multiple fronts, including the PRP FDA approval, the accelerated PIC China joint venture and the ABS value acceleration program. We generated record free cash flow, and our balance sheet is deleveraged. Looking to FY '26, market conditions appear relatively stable. We, of course, continue to monitor potential geopolitical and disease challenges around the world. FX rates are currently trending relatively neutral vis-a-vis FY '25. We expect significant growth in FY '26 adjusted profit before tax in constant currency. This compounds on the strong growth achieved in FY '25 and is in line with market expectations. That concludes our presentation of Genus' FY '25 results. Thank you very much for your time and interest.