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

Good morning, ladies and gentlemen, and welcome to our 149th AGM. What strange circumstances we find ourselves that we have to do it this way, the first and hopefully the last time. Thank you that you have been able to join the meeting today. And to those that have sent in their voting intentions by proxy and also the questions that we will deal with later in the meeting. We very much appreciate your support. I would like to welcome Richard Armitage, who joined the Board in July due to the Yvonne Monaghan stepping down at the conclusion of this AGM. Richard brings to the Board a wealth of experience in M&A, corporate, finance gained from senior roles he's held throughout his career. Today's meeting order is, firstly, Richard Whiting will give an update on the business by way of a short presentation. I will update the meeting on trading by reading out this morning's stock exchange announcement. We will then move on to the formal matters, followed by a question-and-answer session. Richard, I'm going to hand over to you to give a short presentation, please.

Thank you, Philip. What I'd like to do this morning is take you through an overview of our business performance and also our development strategy. As you can see on the screen, the theme of our presentation is resilience and growth, which we've clearly demonstrated in the last 12 months. I'll turn to the second slide. You can see the financial results for our year ending May 2020, and these were strong results ahead of market expectations. If you look at the revenue line, GBP 687.5 million, up just over 2% year-on-year, and that reflects increased activity in each of our 3 operating divisions, offset by lower commodity prices as the price of oil and also feed commodities. The key profit number we always talk about is the headline profit before tax. So you can see there GBP 13.2 million, a record for the group, up 36% on the year. Equally importantly is profit is cash. And if you look at the bar chart in the bottom center of the chart, it shows our net debt number of GBP 12.3 million. And positively, that additional profitability was converted into cash. Our cash conversion ratio was 113%, and therefore, our net debt is at 0.7x EBITDA, a level at which the Board is very comfortable. As a consequence of that, this meeting later on, we're recommending an increase in the total dividend of just under 5% to GBP 6.9 per share. And that will be 11 of the last 12 years where we've increased our dividend by approximately 5%. I turn to Slide 3. I just want to give a bit of an idea as to what's happened in relation to COVID-19, both the response and also the impact. Critically, we're supplying basic services, we're feeding and fueling the nation. And therefore, all employees, all 1,300 of us were identified as key workers. And we remain fully open providing full service to all of our customers during the period and do so today. We moved to safe working quickly and moved 324 people to homeworking in March. Most of those people remain there today and will do through the coming months. Critically, as a Board, we made the decision not to seek any government support, and we have not furloughed any staff or taken any support to date. In terms of the impact on our business, we saw a significant increase in food demand. This is ambient groceries going through the supermarkets. And if fuel demand increases, people move to home working. In feeds, broadly stable. And as I go through the presentation, I'll give you an update as to what's happening in the business today. I now move over to our Page 4. First of all, the operating highlights with regards to fuels. This was outstanding business performance but also very good strategic development. We're trading ahead of market expectations before lockdown occurred. We'd increased our gas oil sales as a share of our commercial business. And then what we saw before lockdown was actually a significant volatility in oil price. And if you look at the graph on the right-hand side, you can see it was tracking at around $65 per barrel. That's the price of Brent crude before. There was some discussions in OPEC, I think, between Russia and Saudi Arabia, the price then dropped very dramatically down to almost $20 a barrel. That price drop meant that we're able to pass on lower prices to our customers across all depots, but also it helped improve our margins. What we also had at the same time was the significant increase in domestic demand and we delivered 37% more loads in the period March to May than we would in the prior year. So significant increased domestic demand and improved margins. That's what dropped through to the profit line, you can see GBP 11 million of operating profit on 665 million liters sold. We also made good strategic development with 3 acquisitions in the period. That was Ribble fuel oils and Caldo in the North West, and then Darch in December and January. I'm pleased to report the acquisitions have been effectively integrated and they performed strongly through the period and into the New Year. If I move on to Page 5, give you a bit of insight into our development strategy. The large focus is on expanding our fuel business. And this really describes the market in which we're operating. If you look at the bar chart in the bottom left-hand corner, this shows BP's projections for oil demand and energy demand through to 2040. And you can see global energy demand is due to increase quite significantly over the period. However, oil demand is seemed to be stable, and that's the U.K. government's own forecast. In the U.K., we need to increase renewables and we need to increase nuclear power to meet this increasing energy demand. With projections for the markets that we're serving is that demand for oil will be stable during that period through to 2040. So there's a large sustainable market. The right-hand side of the chart shows you a pie chart with the major players in the market. And you can see we're the red bar at 2% market share. So it's still relatively small. That's doubled in the last 10 years. And then you can see there's a big gray bar, which is sort of 3/4 of the chart, and that's other businesses. There are actually over 150 smaller oil companies in that space, distributors of oil, and those are potential acquisition targets for NWF. If you look on Slide 6, first of all, showing a map of Great Britain, and you can see the red dots are where our existing fuel depots are and the white dots show the depots that we've added in the last 12 months. We've acquired over 20% more business. That's 120 million liters, and we paid GBP 9.1 million consideration for each -- for all of those businesses. But what that's meant is that we've increased our business quite considerably. The bar chart at the bottom of the page shows about 10 years ago, we had just over 300 million liters of sales. Our run rate today is now 700 million liters and this is a clear and present opportunity that we're looking to expand further in the coming months and year. Then move on to food and the operation here. This is where the largest ambient grocery consolidator in the Northwest of England. I'm pleased to report a very solid performance. The underlying business was trading ahead of prior year. We had significant increase in demand, both from sort of earlier Brexit events and also the unprecedented demand from supermarkets as a result of COVID-19. And to bring you up to date, this week, we're also experiencing a very significant peak in terms of demand from supermarkets for products like UHT milk, pasta and canned goods, very much as a consequence of some panic buying or concerns around consumers about further restrictions. The underlying performance was ahead what we also did was invested in significant expansion. So the picture you can see on the right-hand side is our new crew warehouse. And this is a 35 pallet spec -- sorry, 35,000 pallet space warehouse that we took on in February on a 12-year lease backed by major customer contracts. And we incurred, as planned, GBP 0.5 million of start-up costs in the year. This gives us an operating capacity now of 135,000 pallet spaces, and as of this morning, we had 128,000 spaces utilized, so you can see that we're fully operational. If I move on to Slide 8 and feeds. Here, we gained very good market share and also launched a training academy. You can see at the bottom right hand of the table, of the page. Our sales were 625,000 tons of animal feed. That was up 6% in the year. And that's against a market which was actually 6% lower, so hence significant market share gains. And we've got those gains from selling more direct to farm. We sold more to other feed merchants and more to other compounders in the market. Equally importantly, we launched our training academy. And this is a structured 18-month program for a graduate coming into our business to really become a nutritionist of the future, both training in-house and training on farm to help them have the skill sets which will help us grow our business in the future. We've now got 18 people going through this academy, and we'll be recruiting further. And then to give a summary of our development strategy. I think this is very clear. And as you recall, as a group, we've got a diversified source of earnings. We're supplying very basic products, which gives us that resilience and robustness and we've got an experienced capable board. In fuels, as I said earlier, it's about consolidating a fragmented market which is there. We've done this successfully over the last 2 years and are now starting at conversations with other customers to continue this consolidation activity. In food, it's about expanding our business based on customer contracts. We've done that very effectively in the year on the basis of the crew expansion, but we also are expanding our slightly niche businesses of e-fulfillment and pallet line. And in feeds, we feed 1 in 6 dairy cows in Great Britain. We've got very strong operational bases in the north of England in Cheshire, and down in Devon. And we're looking to increase our volumes through those facilities and provide more feed to customers across the market, but also to provide more products and services to those farmers who we serve already. I also wanted to draw your attention just to our ESG framework and our sustainability policy. More details of this, you can find both on our website and also in our annual report. And there are 4 pillars to our sustainability policy. Firstly, to really focus on creating a safety-led culture across the business by investing and protecting our people, by building strong partnerships with customers and suppliers and finally, by respecting the environment. If you look at the end, we have proposition on Slide 11. It's really summarized in the blocks below. So we have a strong management team, We've got a solid track record, but we also have ambition. We've got a very clear growth strategy, which hopefully I've set out this morning. We've got asset backing in gross asset terms of almost GBP 180 million which helps us sleep at night, but also gives us a very cost-effective source of funding. We focused on return on capital, 16.7% in the year, a record for the group. And again, we generate very strong cash and have this long-term track record, which we look to continue of increasing the dividend each year, which we're recommending to the AGM today. So finally, I'd like to just like to highlight we have a strong platform for further growth. The very strong results in 2020, outperforming expectations demonstrate both delivery of strategy and also the resilience that we have in the business to cope with conditions such as COVID-19 and also conditions such as Brexit and those impacts going forward. In the trading state, we will highlight we're currently trading in line with our board's expectations. Looking to complete further fuels acquisitions as we go forward. In food to optimize the stockholding our new warehouse and in feeds to manage stable demand and pricing through the period. And as a Board, we got confidence in the future opportunities and outlook for the group. That ends the presentation. I'd like to hand back to Philip to go through the normal business of the AGM. Philip, over to you.

Thank you, Richard. I will now read out the following trading statement, which was released to the stock exchange this morning at 7:00 a.m. I'm pleased to give shareholders following update on trading for the first quarter of the new financial year that commenced June 01, 2020, our quietest trading period. Overall, trading in the first quarter has been consistent with the Board's expectations with net debt reflecting the normal seasonal fluctuations. Looking at each division in detail. Fuels has traded in line with expectations. With effective management of lower levels of commercial demand but in the prior year, reflecting the reduced economic activity across the U.K. and acquisitions performing as planned. The Board continues to look at acquisition opportunities for further expansion of the business in line with our strategy. Food has been trading behind prior year as stocking is repositioned to fill the new crew warehouse. There has also been significant demand volatility in the short term, with increased orders from supermarkets and lower levels from the foodservice sector. We are anticipating continued volatility of demand in the coming months as a result of the ongoing COVID-19 and Brexit uncertainty. In the Feeds division, the business has performed as planned with stability in the dairy market and relatively little change in commodity prices in the period. The Board's outlook for the financial year remains in line with its previous expectations. And we continue to focus on ensuring we provide high service levels to all our customers whilst keeping our people safe and secure. We are also well prepared for the future impacts of COVID-19 and Brexit as the fundamentals of our markets are unchanged. Overall, the Board continues to have confidence in the group's future prospects and we continue to target development opportunities supported by our strong balance sheet and banking facilities. As is established practice, the group will provide a further trading update in December, for the end of its half year on 30th of November. Turning now to the formal business today, where there are 11 resolutions for consideration. Before the voting, I would like to point out that ISS has reviewed the resolutions and has given a full recommendation for them all. As set out in the notice of the AGM, the only voting this time is through the proxies that have been sent in. And as you can see from the table, the votes cast are overwhelmingly in favor of all resolutions. I will now go through each resolutions dealing with the first 8 ordinary businesses. To receive and adopt Resolution 1, to receive and adopt and approve the company's annual accounts for the financial year ended 31st of May 2020, together with the directors' report and audited report on those accounts. Resolution 2, to declare a final dividend of 5.9p per share for the year ended 31st of May 2020, payable to shareholders on the register on 6th of November 2020. Resolution #3, to reelect myself as a Director of the company. Four, to reelect David Downie as a Director of the company. Resolution 5 to reelect Richard Whiting as a Director of the company. Resolution 6 to relet Christopher Belsham as a Director of the company. Resolution 7 to elect Richard Armitage as a director of the company, who having been appointed since the last AGM is proposed for election in accordance with the Articles of Association. And Resolution 8, the final ordinary business to reappoint PriceWaterhouseCoopers LLP, as auditors to hold office from the conclusion of this meeting to the conclusion of the next at which the accounts are laid before the company and that the directors be authorized to set the auditor's remuneration. There are 3 special businesses. #9, Resolution #9, is directors authority to allot shares, 9.1 gives authority up to an aggregate number of 1/3 of the issued share capital and 9.2, as is common with most listed companies, this is extended by a further 1/3 of the issued share capital in respect of a rights issue only. Resolution 10 give general authority for the issue up to 5% of the issued share capital without preemption rights. And finally, Resolution 11 additional authority for up to a further 5% of the issued share capital, again, without preemption rights for specified capital investment purposes only. So those are the 11 resolutions, and as mentioned, all have overwhelming proxy voting support and are, therefore, duly passed. So that concludes the formal business of the meeting, and it is now time for questions and answers. And similarly, through the method outlined in the notice of this meeting, we have received 6 questions, which we will now take and provide answers, myself and Richard. Question one, who is Richard Armitage and what does he bring to the Board? As I mentioned in my opening remarks, Richard joined the Board in July, is CFO of Victrex and brings wide-ranging strategic M&A and finance experience gained in a number of senior financial roles. So we welcome him to the Board. Question two. What does the future of NWF look like in relation to COVID and Brexit? Richard, would you mind answering that one?

Yes. So as we've illustrated in the presentation, NWF has great resilience. We're serving large basic markets. It's about food, feed and fuel all of which are required by the country and very much, demand is linked to the population size. And the key for us is to continue serving our customers through safe working and homeworking as we did back in March and as we continue to do today and going forward.

Thank you, Richard. Question three, are you still committed to pursuing acquisitions in the fuel business? And if so, how do these sit with the sustainability part. Richard?