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

Welcome to the full year results presentation. This is for the year ending May 2021. I'm joined this morning by Chris Belsham, our Group Finance Director. I'm going to take you through the operating highlights in the year. Chris is then going to come back in and take us through a financial review. And then I'm going to come back and talk about the exciting growth strategy that we have and the business outlook. For those unfamiliar with NWF or joining us for the first time, NWF is a specialist distributor of fuel, food and feed across the U.K. We've got a strong track record of delivering increased shareholder returns. Important fact, if you compare us to the FTSE 100 as an index, we've outperformed the FTSE 100 in terms of total shareholder return over the last 3 years, 5 years and 10 years. So it's an impressive track record. We operate in large, stable markets, and we generate cash and have a progressive dividend. I will be taking you through our clear growth strategy later. In Fuels, we're supplying fuels to commercial and domestic customers across the U.K. We're the third largest distributor in the U.K. and supply just under 700 million liters of fuel each year. In Food, we're the leading consolidator of ambient grocery in the northwest of England, and we have over 1 million square foot of modern racked warehouses to store our customers' products. And in Feeds, we're providing nutrition advice and animal feed to ruminant farmers up and down the U.K. The easiest way to remember us is we feed 1 in 6 dairy cows in Great Britain. I now move on to the financial results in summary. It's a strong set of results we're presenting today ahead of the pre-pandemic market expectations. Revenue of GBP 676 million, a little lower than last year, but that's because of the lower average oil price. We've actually had increased activity in our fuel and food businesses. The key number I always focus on is the headline profit before tax. So that's GBP 11.9 million. That's the second highest that the group's delivered. And in fact, it's 23% higher than the pre-pandemic year of 2019, slightly lower than the prior year when we had significant gains from a fall in the oil price that happened. Equally as important as profit is cash, I'm pleased to report net debt is lower than expectations at GBP 5.7 million, and that represents only 0.3x EBITDA. So a very comfortable level of net debt. Finally, the dividend is actually 10 straight years where we increased the dividend as a group, and that really reflects the good underlying growth of the group between 4% and 5%. So the total dividend for the year is 7.2p, up 4.3% on prior year. Then move on to the divisions and start with fuels. Here, we've had good outperformance. We traded ahead of expectations supported by our commercial strategy to focus on gas oil, also known as red diesel, a cold winter and also extended homeworking. And we've delivered 695 million liters, up just under 5% in the year. We've managed volatile and generally increasing oil prices. It started the year at $38 a barrel that's Brent crude, end of the year at $70 per barrel. And today, this morning, was $74 a barrel. So that's slowly increased over the period, so it hasn't been beneficial. We also announced that we launched a Priority Club, the NWF Priority Club for domestic and commercial customers. And if you look at the picture on the bottom right-hand side of the screen, that's actually a screenshot of my phone and the app that's on there. And what that does is it monitors the amount of oil in the tank that I have each day and also my usage by day, by week, by month. And customers who are in the Priority Club as well as having the app or an auto top-up so they never need to worry about running out, as soon as we see that the level has dropped below 35%, we will put on an order for delivery and do it in the most effective way utilizing our logistics network. And customers were just paid by direct debit. So it makes it very simple. You never run out. And we've now got over 2,000 domestic customers in our Priority Club and also have a number of commercial customers. On acquisitions, we've got a good pipeline building, and Chris will take us through more of that later. Then move on to food. And here, we've had a very successful investment. The picture on the right-hand side was taken about a month ago of our Crewe facility. This is a 240,000 square foot warehouse with 35,000 pallet spaces, so increase our total capacity now to 135,000. It's full in Crewe, it's operating efficiently and it's a great sort of benchmark that we can measure our performance against. Our business has grown as a consequence, so the revenue is up 13%. Pallet stored up 16% and outloads up 13%. It's very much been a year of 2 halves. In the first half of the year, we had challenging conditions because we had lots of volatility. We had retailers stocking up in case of lockdowns that were happening. Retailers stocking up and then destocking because of concerns around Brexit and then restocking again. So what that creates for us in distribution was a lot of volatility and, therefore, inefficient working. In the second half, performance has improved significantly. We've significantly outperformed the prior year where we've managed good customer demand, good levels of storage, good levels of distribution and critically done it efficiently. We've also increased our e-fulfillment, Palletline and packing room operations. And there's a lot of stories in the news about HGV drivers. And positively at NWF, we took the decision just over a year ago to reduce our reliance on agency drivers and recruit our own. So we actually recruited in Food over 70 new drivers who joined the group. It is still a challenging market, and we have recently implemented a further salary increase to our HGV drivers, but that has been passed on successfully in further price increases to customers. And thirdly of this section in Feeds, very much we're focusing on the future. We focus on nutrition advice to dairy farmers in particular. And the picture on the right-hand side is a group in our academy. We've continued to train our academy members through the year, although we went virtual for parts of the year. We're now back to physical situation, and we're looking to recruit additional members to the academy in the cohort starting in this autumn. We've actually sold a greater proportion of our volume, direct to farmers. You can see our overall volumes were down 8%, but that volume reduction is principally around lower volumes to other compounders and merchants. What we've all seen in the year is an unprecedented increase in commodity prices. I track a typical basket of commodities in a dairy diet, and the pricing of those commodities have increased by 40% during the year. We found that quite challenging because it also happened sort of October, November when we had our cyber instance. So that was quite challenging. We've now recovered. We've got the pricing move through, and margins have been restored to our normal levels. It's actually quite a positive market out there because the milk price has improved to over 30p per liter. Milk production is stable, up 0.1%. And the overall ruminant market is up 5%, although that's principally grown through beef and sheet growth. If you look at dairy compound sales, they're a little lower than they were in the prior year. And just before I hand over to Chris, just to point out, that's another picture that we took a month ago of our Crewe facility. And you've got Adam there, loading some more [ flavored ] products that's going off in Tesco. So it's a great facility and working really well. But now with the financial review, over to you, Chris.

Thanks, Richard, and good morning, everybody. We'll kick off with the income statement. So you can see that revenue decreased in the year by just under GBP 12 million, and that's really a result of a lower average oil price across the year, which offset increases in activity and increases on prices in other areas. So a slight reduction in revenue. That's fallen through to a headline operating profit of GBP 12.9 million, GBP 1.4 million lower than the prior year, but again, driven by the performance in fuels. And if you look at the table at the bottom of the page, as you know, we typically say we're aiming to achieve an operating profit of GBP 0.01 per liter in our fuels business. Last year, with the exceptional conditions we had in March and April, we achieved 1.6p. This year, with the very strong demand through the wind with the cold weather and working from home, we achieved 1.4p. So still well above our normal target of GBP 0.01. The other thing to pull out on this page is the exceptional costs. So as we reported at the half year, we'd have a cyber incident in the first half. As a result of that, we've had exceptional costs of GBP 0.3 million net of insurance recoveries and we've also had some acquisition-related costs. We didn't actually do a transaction in the year, but unfortunately, we have won that fell over at the end of the process and some costs related to that. And we also hived up some acquisitions from previous years. We then move on to the bottom half of the income statement. Headline PBT of GBP 11.9 million. Our financing costs are a little bit lower, largely due to lower net debt and the lower pension deficit across the year. And it's probably also worth just pulling out the tax rate, which is very high with an effective tax rate of 28.3%. So that's a result of a one-off impact of the increase in corporation tax, which meant we have to recalculate our deferred tax liability. So there's a GBP 1.3 million noncash charge, and our real underlying tax rate was 19.4%. And typically, we'd guide at being 1% to 1.5% above statutory rate. That results in a diluted headline EPS of 20.4p versus 21.3p for the prior year. And as Richard said, that's resulted in us proposing a final dividend up 4.3% of 7.2p. Moving on to the balance sheet. And we've seen an increase in balance sheet strength again in the year, but that's really due to the reduction in net debt and the pension deficit. In terms of fixed assets, they've reduced slightly, and that's because our CapEx is a little bit lower than depreciation and probably reflects the fact that we were all working from home, and therefore, spending a little bit less money on the site. I'd expect in the current year, that CapEx will go back towards depreciation level. So it would be about GBP 1 million higher than it was in FY '21. Our working capital is a little bit lower, but I think that's a short-term impact. So the year-end actually fell on a bank holiday. And therefore, some of our suppliers took payment after the bank holiday. So we made a short-term gain, but that's effectively already reversed. Having said that, our underlying working capital has been very well controlled across the year, and our cash collection has been very strong. So we haven't seen delinquency in our customers' payments. In terms of return on capital employed, group return on capital employed of 15.8%, which is again driven by very strong returns in fuels. It's good to see Food increasing in the second half of the year, and the run rate there is probably more like 8% to 9%. And then in Feeds, clearly, that's lower than we'd like to see it, and we'd expect to see recovery in the current year. In terms of the pension deficit, that's reduced in the year down to GBP 14.9 million, and that's almost all a result of asset gains and the contributions we made in the year. So whilst there have been changes in the liability assumptions, they sort of balance each other out. The triennial valuation was concluded in the first half, and that resulted in a liability of GBP 16.8 million. And in terms of our recovery plan payments, there will be GBP 1.8 million until May 22 and then GBP 2.1 million thereafter, although there is a dividend growth link in that. So dividend growth above the May 19 dividend will increase those payments. So actually, as it stands, those payments will be about 9% higher from January '22 onwards. At that level, given our cash generation and facilities, it's not causing any issues in terms of having funds available to spend on group development. And you can see that as we look at the cash flow, it's a very strong cash generation in the year with cash conversion of 107.8%. And because we haven't done an acquisition in the year, that's resulted in net debt reducing down to GBP 5.7 million. And you can see that best if you look at the chart on the right-hand side here, so our free cash flow in the year was GBP 8.3 million. If you normalize that for the working capital gain we have and for the fact that we underspent on capital expenditure by about GBP 1 million, we still have free cash flow of about GBP 5 million. And normally, we'd guide towards free cash flow of about GBP 3 million to GBP 4 million. So very strong cash performance in the year. In terms of our facilities, we continue to have GBP 65 million available with NatWest and that runs until October 2023. The bulk of that facility is still in the form of an invoice discounting line of GBP 50 million, which is very low cost. We pay 1.25% over base for that facility. And given the higher oil price, we now have that facilities largely available to us. So significant headroom in there. As a Board, we're comfortable to about 2x net debt to EBITDA. So again, plenty of headroom above our current level of 0.3. So in summary, a very strong set of results again this year, which leaves the group with a strong balance sheet and plenty of funding headroom for our future development. At which point, I will hand back to Richard.

Okay. Thanks, Chris. So what I now want to do is take us through our exciting growth plans. So in terms of our strategy, just remember, in summary, a few key things about NWF. First of all, we have a diverse source of earnings. So we've got 3 divisions operating in 3 markets. And therefore, what you can see over a 3-, 5- or 10-year period is really solid, steady growth. And that gives us a good solid underpin, but we're also ambitious to move further and faster. We generate cash, as Chris has just taken us through, and we're having an experienced and capable Board. We focus on shareholder return, and we also pay a good dividend and have a good track record. In terms of the divisions on fuels, I've got a few more slides to go into this detail, but our strategy here is to consolidate a highly fragmented market. In food, it's about optimizing the customer mix finding customers who will utilize our added value propositions of e-fulfillment, packing room and Palletline, but also continuing to work with customers to target contracts, which enable the business to expand. The crew expansion of 35,000 pallet spaces this year came about through working with customers who wanted to go into long-term contracts, which backed our growth plans. And in Feeds, we've got opportunities to further consolidate the market. Remember, we're #2 in the ruminant feed market. And we've also got the opportunity to utilize our excellent operations platform. We've got great facilities up in the North of England, here in Cheshire and down in Devon, and we can utilize that facility. And what we're doing is training additional nutritionists to our academy to utilize that strength. We're also working with over 4,500 farmers up and down the country, and therefore, providing additional products and services to them is always important. So now move on to a bit more focus on fuel. First of all, the fuel market. It's a very fragmented market. If you look at the pie chart on the right-hand side, you can see the top 10 players, which we've named, including ourselves, represent just under 25% of the market. So more than 75% of the market is represented by over 150 smaller players. So it's very fragmented. We're #3 with just over 2% market share. And the market hasn't really changed in the last 12 months, it's been stable. Everyone has been performing pretty well, but the consolidation opportunity exists. In terms of the fuels market, the markets that we're serving are pretty resilient. Over 30% of our fuel is used in heating applications, be it domestic or commercial, 12% used in agriculture and less than 5% actually goes to retail garages. And when we're selling diesel is predominantly for HGV and LGB users. We are looking at some future fuel types, and we're working actually on an exclusive basis with Esso, looking at HVO30. This is a diesel containing 30% hydrotreated vegetable oil. So it's a nonfossil fuel. And in the case of the 30, it uses a 30% additive, and therefore, reducing emissions and actually quite fuel efficient. So those are trials that we're doing across the country. And then on a more limited basis, we're doing trials with domestic customers on HVO100. So that's 100% renewable oil, which is used to power oil boilers, which works with just a few minor adjustments. So those are trials that we're undertaking. The key that I'd point out is NWF has 90,000 domestic customers. And whatever fuel category is being used in the future, if it's a liquid fuel, NWF will be here to provide it. In terms of our customers, you need to remember that customers purchase fuel from local depots, and therefore, expanding the depot network is key to our growth. If you look at the acquisition activity since 2019, that's what we've shown on the map on the right-hand side. Each of the white squares is a depot that's been added since that period. We've actually acquired 5 businesses, over 150 million liters of business has been added and spent over GBP 14 million. We've got a clear post-acquisition integration plan. And you can see our track record there on the bottom left-hand side of the slide, where 10 years ago, we were doing about 350 million liters, now just under 700 million liters and accelerating. And in terms of the map, apologies to anyone in the North of Scotland, the area we're looking at is within Great Britain. We have been to Inverness in the last year or so, and we continue to look at opportunities. So Chris, just give us a bit of background on the activity that we're doing there.

Yes. Thanks, Richard. So it's important, I think, in looking at the buy and build process that we're pursuing to recognize that we need to combine a very efficient, repeatable process, but to recognize that we're buying mom-and-pop type businesses were a personal element. It's really important. And I think COVID lockdowns have shown how difficult that personal bit was when you can't actually go and meet people. So we have found it's taken a little bit longer to build back the pipeline over the last few months. But we have -- now that things have eased up a bit, we have been very successful in going out meeting businesses proactively again and building back up the pipeline. So there are a number of opportunities there, and active discussions are ongoing. I have talked through our process with you before. But just to recap, we have a very standard valuation and pricing process. And as a reminder, we're looking to pay 6x EBIT for businesses. About 6x the EBIT that NWF expects to make, but we don't build any significant synergies into that valuation process. Then once we're in process, we work with the same advisers. We have standard documentation. We're aware of the type of issues that exist on these businesses, and our advisers understand what our approach to those are. So that's a very efficient process that we work through. And then once we bought the business, we have an integration process that we go through. And the aim of that, as Richard touched on, is to leave the front end, the customer-facing elements in place because that's the value of all bid that we bought, but to centralize all the back office functions. So we put it onto our systems. We put our compliance measures in and, therefore, have the efficiency and control over the business. So as I've said, we've got a strong pipeline again, and we're, therefore, looking to deploy about GBP 10 million per annum on our acquisition strategy.

Okay. Thanks, Chris. Just move on now to cover our ESG framework. And in terms of this for governance, NWF has adopted the QCA 10-point guide, which the Board regular reviews and updates. In terms of our ESG framework, you could find more details on this on our website or in fact on our annual report. What we have are 4 pillars in our framework: Safety, people, partnerships and the environment. And I'll take each of these in turn and give you a little bit more detail. In terms in creating a culture of safety, as a specialist distributor, clearly, we're on the road a lot using lots of vehicles, and therefore, safety on the road is critical. We've actually in the year installed 360-degree cameras into all of our food and feeds vehicles, and envision all 123 fuel tanker drivers have been through an externally accredited course and have passed. For people, obviously, this has been a critical year as the pandemic is carried on, and we've carried on with homeworking and safe working. We've got HR business partners in each of our divisions, working with our employees and doing poll surveys to understand where people are and how we can best support them. At the same time, we've actually got 17 apprentices and graduate placements in the group. And as I said earlier, we're continuing to expand the Academy in our Feeds division. In terms of partnerships, a good example is probably in fuels where when the pandemic struck, a number of our fuels customers asked for extended credit, which we supported them with. And at the same way, our suppliers, major fuel companies also supported us with additional credits. So very much working through the supply chain. In our Feeds division, working with universities and other nutritionists, we've come up with diets, which utilize 0 soya and 0 palm kernel, but still provide the same nutritional benefits to farmers. And in terms of the environment, as you can imagine, again, with vehicles, the focus is very much on fuel efficiency and emission reduction. And that's why we have a policy lender. We have to be replacing all our vehicles after 5 years to make sure we have the very latest truck or tanker to deliver fuel efficiently with the minimum of emissions. We've also, in food, been trialing a gas-powered truck, which has actually been quite efficient in the year, and we may look to roll that out further. A couple of more slides, just the NWF proposition. So why pick us? So we've got a strong management team. And as well as at the group, what we've got are people in each of the divisions who've got really deep-seated experience of each of the businesses in which they work. So whether it's working with major food manufacturers and the supermarkets working with dairy farmers up and down the country or supplying fuel in all sorts of weather conditions and with high and low prices of oil, we've got people who spent their entire careers in those businesses learning how to work with them and to optimize them. And we've complemented that with additional hires into those businesses and promotions to support the development of each group. We've got a very clear growth strategy, which hopefully I've outlined today, and we've also got asset backing. The gross assets of the group were GBP 187 million. So that helps Chris and I sleep at night, but it also gives us a very cost-effective source of funding. We focus on capital return. You can see our capital return in the year is 15.8%, and we also consistently generate cash over 100% in the last 12 months. One of the results of that is we're able to pay an increasing dividend, 7.2p is the total dividend this year, 10 years of straight dividend growth from NWF. So the final slide is, at NWF, we've got a significant opportunity for growth. Very pleased with the strong set of results in 2021. Critically, they outperformed pre-pandemic market expectations. And we're now 2 months into our new financial year, so pleased to announce that we're currently trading in line with the Board's expectations. In Fuels, Chris has been very busy targeting additional fuel acquisitions. In Food, we're efficiently meeting customers' needs to deliver good service in spite of some variable demand levels. And in Feeds, we're managing farmers' nutrition during the quieter summer months. We thought we're going to have a dry summer. Now we might have a wet summer, but we'll manage nutrition come what may. And so finally, pleased to report we've got confidence in the future development opportunities and the outlook for the group. So that finishes the presentation. I'm now happy to pass it over to our Q&A session.

And we have a question from Andrew Ford, Peel Hunt.

Well done on a positive set of results. On Food, you mentioned that you were slightly ahead of optimum utilization. If you were to achieve sort of that better utilization rate, what would be the expected margin improvement in that division? And how that help there? On Fuels, the increased price per liter in '21, you sort of -- it's partly down to volatility, partly down to increase in home use. I wondered if you could give a bit of an indication as to the split between the two. So how much is sort of increased home consumption help? And lastly, on Feeds, what are the sort of the factors that are giving you confidence in the sort of feed ingredient costs stabilizing over the next 6 months?

Okay. Thanks, Andrew. I'll work my way through those and shout if I get one of them wrong. In terms of Food, whilst I mentioned, we're slightly ahead of optimized position at the moment. That's very much short term. So we've got 132,000 pallet stored today. We've only got 135,000 slots. So realistically, being 132,000 is a bit full. The reason we're a bit full today is short term. It's frankly we've got enough drivers, but I think the supermarkets have got issues with isolations in their distribution centers and also in the supermarket. So we'd expect that to recover shortly, or our manufacturers will reduce the amount of product that they ship into us. So I'm not expecting any margin improvement from that. The key in Food is actually being full and efficient, but not too full. I'm not being too greedy with bringing in extra customers. But the margins that we've got at the moment, I'd see the second half margins being sustainable and consistent, which is positive. In Fuel, on pence per liter, Chris sort of highlighted GBP 1.4 million is higher than we'd normally expect. So GBP 0.01 a liter is what we would normally guide as being our normal sort of business. In terms of domestic usage, it was higher this year, but frankly, it's difficult for me to understand how much of that was from usage because of home working or because it was cold. We're getting good data from our Priority Club, so we can see usage there. We can see very high usage in January. But frankly, it was very cold in January, and that then reduced. So it was a combination of both, which really gave us a benefit. But I think going back to GBP 0.01 a liter is a reasonable assumption going forward. And third, if I got it right on Feeds. Commodities will always move. We don't have a view on commodity prices. Positively where we are today, pricing is aligned to those commodity prices. And I think if it was to change further, we will change prices again, be it up or down. I think the issue that we had in the last 12 months is that price accelerated mid-winter, which is always hard to change prices. And just for us, it happened when we had our cyber incident. So it reduced our visibility. But I'm confident with the actions that we're taking, whether, frankly, the cut price of commodity stabilizes or goes up or down, we should still have a good business performance.

Just can you give us, Chris or Richard, a bit of an update on the acquisition environment. Obviously, the sort of gradual increase in fuel prices was a slight challenge for you. I wonder how that's affected some of the smaller players and if that's open up any opportunities. Or just in general, unlocking of lockdowns, et cetera, how that's changed the landscape.

Yes. So the reality is everybody in the fuel factor who's servicing domestic customers has had a good COVID period. So they've done well through that. But it doesn't really change the dynamics of what's driving M&A activity. So you have a lot of businesses who have owners who are past or close to retirement age, so what's really driving their desire to exit is the desire to retire. The fact that they've had a good year or two because of homeworking just means they're quite happy that they've had a good year or two. So on the whole, it's not really changed the dynamic. Positively, it also hasn't changed multiple aspirations. We are the most active person actually in the M&A market for these type of businesses. So we are sort of setting the pricing agenda really. So we're not seeing huge competition for assets. And most of our pipeline comes from proactively going out and meeting businesses, so they tend to be off-market conversations as well. The one challenge, I guess, from a valuation perspective is that both had a good couple of years, and are they expecting to be valued off that higher profit level. And certainly, when we're doing the valuation exercise, we are normalizing out what we perceive to be the COVID boost that they've had in their numbers. So that makes that conversation a little bit more difficult. However, it's the sector that generally accepts you have up years and you have down years. So it's an easier conversation than it would be to have with other sectors.

And we've got a question from Adrian Kearsey from Panmure Gordon, who asks, "Last year, CapEx was behind its normal run rate. Will CapEx need to be higher than normal in the current year or have projects simply been moved out to the left?"