NWF Group plc (NYY.F) Earnings Call Transcript & Summary

Welcome to the half year results presentation for the NWF Group. This is for the half year ending November 2019. I'm really pleased to present a strong set of results with a good performance from each of our 3 divisions. Also positively, in line with our strategy, we've completed 3 Fuels acquisitions, and we've also announced a major expansion of our food distribution division. Now turning to the results summary. Revenue was up 5.6% to GBP 349 million, and that's increased activity in each of our 3 divisions, offset partly by lower commodity costs in Fuels and Feeds. The key number that we always focus on is headline profit before tax. And you see that's up 25% to GBP 3 million for the period. Net debt is still at a comfortable level of GBP 14.9 million, that's 1x EBITDA, and that's after having spent GBP 4.9 million on Fuels acquisitions in the period. And finally, we're maintaining the interim dividend at GBP 0.01. Now turning to the Fuels operating highlights. Here, you can see the profit number is up over 50% to GBP 1.4 million for the period. So a very strong performance, and that's from the underlying or existing businesses in the group. Critically, volume is up, both on an underlying basis and as a consequence of acquisitions, and it's particularly gas oil and heating oil, which is significantly higher than prior year. We've had lower but stable oil prices in the period. Actually, Brent crude was down 18% compared to the same period prior year. And critically, we've continued to make investments in assets, people and systems. In terms of acquisitions, the picture there shows you Darch. That's our Fuel business down in Yeovil, a 35 million-liter fuel business we acquired just after period end. And critically, we've acquired 3 fuel businesses in the period, which adds 20% to our volume. So a significant increase in activity there. Now turning to Food operating highlights. Critically here, again, significant profit improvement, up 40% to GBP 1.4 million. And that's really all as a consequence of continued improvements and operating effectiveness as we operate across a large number of customers with a large number of retailers on a daily basis. You see our pallets stored were actually up to an average of 106,000 pallets, and we utilize overflow capacity during the entire period. We also had a significant increase in activity in the September, October period before the potential Brexit at the end of October. The additional activity there put stock into retailers, but that's now been used up in the subsequent months. We've got 7 customers utilizing our e-fulfillment facility. And critically, we've announced, as I said, a significant expansion of this Food division on the back of a major customer contract. More on that later. But in terms of Feeds, here, the market has been tougher. So the market was down just under 11% in the period. But really, positively, we've grown our volume against that lower market backdrop. Our volumes are up 6.5%. That's because we sold additional volume direct onto farm, also through merchants and also to other compounders in the period. So profits have been maintained at GBP 0.7 million. We've also aligned our prices to the lower commodity prices we've seen in the market, down some 16% on prior year. And critically, we've launched the NWF Academy to train future nutritionists in this space. Our first cohort came in, in September, and we're training our second group starting in February. So that's going to deliver additional nutritionists to help us sell feed to U.K. farmers.

I'll now take you through the financial results for the first half of our financial year. Starting with the income statement, revenue increased by GBP 18.4 million, which was the impact of increased activity in all 3 divisions and acquisitions in Fuels offset by lower commodity prices in Fuels and Feeds. That increased activity fed through to the headline operating profit, which was up to GBP 3.5 million, an increase of GBP 0.9 million. We saw our increases in Fuels and Food with that increased activity, and Feeds stayed at the same level, albeit on the back of slightly higher volumes. Finance costs in the period increased by GBP 0.3 million, albeit GBP 0.2 million of this was due to the introduction of IFRS 16. Therefore, the increase in underlying bank interest was only GBP 0.1 million. Overall, a strong set of results for the first half, but bear in mind that typically 60% to 70% of our profits come in the second half of the year. On the back of those strong results, though, we will be maintaining our half year dividend at GBP 0.01. Moving on to the balance sheet. We've had no major projects in the first half of the year, albeit with the new warehouse, we will see some capital expenditure in the second half as we start to develop that facility. The increase in fixed assets, therefore, has largely been through replacement, capital expenditure and through the acquisitions we did in the first half. Normally, in the first half of the year, we would see a significant working capital outflow. This year, that has been reduced with falling commodity prices throughout the period. As a result, the net working capital balance has reduced and we've benefited from a short-term working capital inflow. Overall, net assets have increased by GBP 1.7 million, which reflects retained profits in the period and total assets have increased to GBP 183.9 million, reflecting the acquisitions we've undertaken. Return on capital employed has stayed at a stable 13.7%, with strong performance across all 3 divisions. The pension deficit over the period has reduced slightly to GBP 17 million as the increase caused by the change in liability assumptions has been offset by our contributions and the asset performance. Our next triennial valuation is to the 31st of December 2019, but for the moment, we continue to make contributions at GBP 1.8 million, which is no constraint on the development of the group. Our movement in net debt over the last 12 months has been impacted by expenditure on acquisitions and net working capital inflow. You'll see from the bridge that we've spent GBP 8.9 million on acquisitions over the last 12 months, been the GBP 8.2 million plus higher purchase acquired of GBP 0.7 million. That has been offset to some extent by a working capital inflow of GBP 5.7 million, albeit because that's driven by commodity prices, I would expect that to unwind in the future as commodity prices increase. Overall, our facilities remain the same. We have GBP 65 million of funding available until October 2023 with RBS. So we have plenty of funding available for continued growth. The costs and benefits of our recent investments are likely to balance each other out in the current year. So our 2 acquisitions in Fuels are expected to add around GBP 0.5 million of profit in the current year, but this will be offset by our setup costs for the new warehousing crew. Both the acquisitions and the Crewe warehouse will have a positive impact on profit next year and beyond. In terms of net debt, the cost of the acquisitions and that capital expenditure on Crewe is expected to increase net debt by GBP 7 million by the year-end. So overall, a very strong set of results, providing a good platform to continue with our growth program.

Now turning to development strategy. A few key things just to remember about NWF. We operate in large, stable markets that gives us a really solid underpin, but we're growing as a business, and that's because of the actions and initiatives we've taken as a management team. We focus on total shareholder return, and we're looking to develop each of our 3 divisions. And now look at each of the divisions in summary, in Fuels, what we want to do here is consolidate a very fragmented fuel distribution market. In Food, it's about optimizing the business against the pallet spaces that we've got and also expanding the business on the back of new customer contracts. And in Feeds, it's about optimizing nutrition for the 4,500 dairy farmers that we supply across the U.K., but also developing new products and services to sell across that customer base. If I now look a bit more specifically at the Fuel acquisition activity, you can see in the last 12 months, we've acquired 5 businesses across the U.K., which adds 30% to our volumes, so 150 million liters. And in terms of consideration, we paid GBP 13 million for these businesses. So you can see what we do is we retain the front end of the business. So the brands, whether it's Ribble or Caldo or Darch, retain the front end of the business and then we integrate purchasing, finance credit control and IT. In terms of our track record here, you can see in 2010, our volume is about 350 million liters. On an annualized basis, our volume is now 700 million liters. There has been a very significant acceleration of activity here, and there are further opportunities to consolidate this market, which we're on with today. Now turning to the Food development strategy, what we've got is a major expansion backed by customer contracts. We're opening a new 240,000-square-foot warehouse just adjacent to Junction 16 of the M6, which is near Crewe. You can actually see on the map here how well located it is for the U.K. motorway network to distribute food to the supermarkets and cash and carries across the country. The picture is an artist impression, but just to prove that it has actually been built, there's a picture a couple of weeks ago of our management team operating within the warehouse. But critically, as you can see, we've got to put in 30,000 pallet spaces of racking and all the electrical products to make this work. That will be completed within a 6-month period, and this business will be earnings enhancing in the next financial year and, critically, will add over 30% to the capacity of this division. So finally to the summary and outlook, very pleased to report a strong performance in the first half. But as you'll all remember, the second half has the key winter months, which are the largest for NWF. Clearly, we've delivered on strategy, with the 3 Fuels acquisition, also the significant expansion of our Food division. Remember, we've got a strong balance sheet with funding capability for the future. And in terms of current trading, we're in line with the Board's expectations. On Fuels, it's all about integrating the acquisitions we've made and investing in systems and capabilities. In Food, it's about establishing the new Crewe warehouse that we showed you earlier and also investing in equipment and people. And on Feeds, it's all about managing farmers' nutritional needs on the back of good forage stocks. And finally, we have confidence in the development opportunities and the outlook for the future of NWF. Thank you.