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

Welcome to the results presentation for our half year. I'm joined by Chris Belsham, our Group Finance Director. I'm going to take you through the operating highlights. Chris is then going to take us through our financial review of the year, and then I'm going to come back and talk about the strategy for the group and the outlook going forward. Just for those of you who are not that familiar with us, just in terms of overview of what we are at NWF. We're a specialist distributor of fuel, food and feed across the U.K. We operate in a large, stable markets, and we've got a very strong track record. In fuels, we're supplying fuel to commercial and domestic customers from 25 depots. We're the third largest fuel distributor in the U.K., and we supply just under 700 million liters. In food with a leading ambient grocery consolidator in the Northwest of England, and we're supplying ambient groceries on a daily basis to all the supermarkets, and cash and carriers across the country from a 1 million square foot of warehouse that we have here in Cheshire. And in feeds, we're a ruminant feed producer supplying ruminant feed to dairy beef and sheep farmers, up and down the U.K. We're supplying over 4,000 farmers across the U.K. And the easiest way to remember our business is we are feeding 1 of 6 dairy cows in Great Britain today. So that gives you an overview of the business. I'd now like to turn to a results summary. I'm pleased to report a very strong set of results, significantly ahead of prior year and indeed ahead of our expectations. In terms of revenue, over GBP 400 million, and that's actually up 30%. Revenue isn't a great indicator of our business because we have a lot of pass-through revenue from things like oil, oil price movements, and also the price movements on feed commodities. It's actually up over 30%. That's increased activity and increased commodity prices. And in part of fact that will mean, we would expect full year revenue to be over GBP 800 million for the first time. The key number we always focus on, and I talk about, is headline profit before tax. So you can see there GBP 4.3 million, up from GBP 2.5 million in the prior year. That translates down into diluted earnings per share up 65% to 7.1p per share. Net debt is always critical because cash is equally as important as profit. And you can see net debt is half to GBP 7.4 million, and that's 0.4x EBITDA. So a very comfortable level of borrowing. And as normal at this stage of the year, we are proposing an interim dividend of GBP 0.01. And if I look at what analysts are proposing, they're all anticipating an increase in our full year dividend. And at this stage of the year, we're comfortable with that expectation. I now move on to the individual divisions and start with fuels. Here, a very strong performance across our expanding depot network. Ahead of prior year and ahead of expectation, you see profits up nearly 90% to GBP 3.6 million. We did benefit from concerns around fuel shortages in the autumn. If we all remember back to September and early October, retail petrol stations ran out of fuel as there was increased demand and some concerns over drivers. Only 5% of our volume is with retail petrol sites, but what we found was our commercial customers across the country were concerned about the availability of fuel. Positively for us, we have no supply issues, and all 25 of our depots were able to operate normally. So we're able to capitalize on that additional demand and provide great service to customers. We increased our gas oil and diesel sales across the half year. You see total volume up 5.5%. And we also managed as ever volatile oil prices. The average oil price went up from $43 a barrel to $76 a barrel. That doesn't cause us an issue because we buy on a spot market each day, and we're selling on the spot market. We have no hedging or future contracts in place. And point of fact today, the oil price is $93 a barrel, but we still making a very good return. We've continued to expand our Priority Club. This is where we will ensure you don't run out of fuel. We'll be able to monitor usage on an app, and we'll also top up your tank. So it's a really neat system. And we've now got over 1,000 customers additionally on that system this year. We've also now got all our websites available and open for online quotation, and also ordering. If you look on the screen, bottom right, you can see Consols Oils, which start business down in Cornwall, who can place an order and get a quotation. So why not give it a go. So profit is up GBP 3.6 million and volume up 5.5% as well. We then move on to food. Really strong performance again in the first half, delivering on the investment we've made in previous years. So significant performance improvement as we expected. Remember, our total capacity is 135,000 pallets. So this is about being more efficient, and doing things really well. So first of all, we've got stock located in the key locations that we need to optimize. So we have our fast-moving full pallet's stock located in our crew warehouse, which is just adjacent to Junction 16 of the M6. And then we've got our slow-moving added value work here in Wardle, about 10 miles further west. What we've also got is the right number of people, the right number of drivers, and good communications with our customers to provide good service. So you see profits up to GBP 1.5 million. And we've also increased our e-fulfilment and Palletline operations, and that's offset slightly lower volumes in our repacking operation. I'm also pleased to report we've successfully completed the succession of our new Managing Director. He's forced to retire at the end of the year, and Angela Carus has come in as our new Managing Director with a lot of experience in the logistics space. And previously, Angela was at Culina, running their Chilled operations across the U.K. Then move on to feed. Here a little disappointing and below expectations. Our volumes were down 8%. That's against the market background down 1%. We did lose volume in the Southwest. One of our merchants was acquired by a competitor, and also lost some volume in the North, which we're now looking to recover. We've been challenged in the period also by a significant increase in commodity prices, and these have moved throughout the period to record levels for things like [indiscernible]. And what we've been faced with is playing catch-up in terms of price increases, just as we think we've got pricing right, those commodities have moved up again. So we need additional price increases. And that's also been necessary to support increased driver pay and other inflationary costs that we're now incurring in the business. In terms of the market conditions, the milk price was up to over 33p a liter. Since the year at period end, it's gone higher to now approaching 34.5p, but that is needed by farmers to support the higher cost of feed that we're supplying, but also higher cost of fertilizer, fuel and other inputs that they have on the farm. The commodities on average were up 17% year-on-year, which shows you that increases they're coming through. But we continue to invest in this business. We're continuing to invest in the academy to support future trainees and future nutritionists in the business. So I'd now like to hand over to Chris Belsham, who will take us through the financial review, but really just to point out that it's a strong set of results. And in fact, it's a record first half for NWF. Chris, over to you.

Thanks, Richard, and good morning, everyone. I'll now take you through a straightforward set of financial results, starting with the top half of the income statement. And you can see revenue increased by GBP 93 million, GBP 18.5 million of that was due to higher levels of activity, but the majority was due to increased commodities, and particularly the higher average price of oil and fuel business. Moving down to operating profit. And you can see the results of the factors that Richard has talked about. So if we start with fuel, very, very strong performance, up GBP 1.7 million on the prior year. And the reason for that can be seen in the table at the bottom of the slide. And so we don't normally show this at the first half because the fuels business is very seasonal. It makes most of its profit in the second half of the year. But as many of you all know, for a year, we tend to target a GBP 0.01, profit pence per liter. And you can see in prior years that around the half year, we've been sort of around GBP 0.005 level and then moving up towards GBP 0.01 at the year-end. Well, this year, at the end of the first half, we're already at a 1p per liter profit, and that gives us really good momentum going into the busier second half of the year. If we then look at food, we have the same level of activity as we have last year, but we've dealt with that in a much more efficient and effective way. And that means the business is GBP 1 million ahead of the prior year, albeit worth flagging it is quite a weak comparative, but still a very strong result in food. And then feeds -- for the reasons Rich discussed, disappointing results. We then moved down to the bottom half of the income statement, because of that disappointing results in feeds and weak performance over the last couple of years, we have undertaken an impairment exercise in the period, and therefore, have recognized GBP 8.4 million of impairment as an exceptional noncash exceptional costs in the period. The bulk of that is in the form of goodwill, GBP 7.9 million of it, but we've also written down GBP 0.5 million of assets that were no longer in use. The financing costs in the period were in line with prior year, all slightly lower, but sort of lost in the rounding. And our effective rate of tax is similarly consistent with prior periods of 21%. So because of that impairment charge, the headline rate will be slightly odd for the year because that's not a tax allowable cost. And as Rich has already mentioned, our interim dividend will be maintained at GBP 0.01, which clearly has plenty of cover given the financial results. Moving on to the balance sheet. Not a lot of movement in this over the period. Fixed assets have decreased a little bit as a result of the feeds impairment, and because depreciation exceeded CapEx. And net working capital is back in line with the comparative period, although that's slightly high to what's been happening. So fuels, which has a negative working capital cycle, has thrown out cash as the oil price has increased. At the same time, feeds, which has a positive working capital cycle, has absorbed working capital over that period, and the 2 have effectively balanced each other out. I'll come back to net debt, and the pension on later slides. So the only other thing really to call out on this slide is the return on capital employed. It's a very strong group level at 18.9%. But we're also really pleased to see the strong return on capital employed in food at 10.5%. It's really good to see that in double digits. And I think the first time the business achieved that in the period, certainly while I've been with the group. Moving on to the pension. Again, not a lot of movement here. So the liability assumptions have moved against us in the period, but that's been more than offset by the contributions from the company, and the increased asset performance we've had. So the deficit coming down slightly to GBP 14.5 million. Also, worth pointing out that our recovery payments, which were set based on the triennial valuation at 31st of December 2019, have now increased slightly because of the dividend growth link that's in place. So from this month, actually, the annual payments have increased to GBP 2 million per annum. At that level, it's not constraining our ability to do anything. The next triennial valuation will be undertaken at 31st of December of this year. From a cash flow perspective, that strong trading has been converted into cash, particularly given the fairly tight working capital management. So we always have a working capital outflow at this time of year, but as I've talked about with fuels offsetting the feed increase to some extent, we've had good cash generation in the period. And that's meant if you look at the charts on the right-hand side, allied with the strong cash generation in the second half of last year that we've generated GBP 9.1 million of free cash flow over the last 12 months, and that's well above the GBP 3 million to GBP 4 million that we normally guide you towards our annual cash generation before development expenditure. We continue to have significant facilities available with NatWest Group, GBP 65 million, the bulk of which is an invoice discounting line at 1.25% over base. Our average net debt across the year has been well below GBP 20 million. So we've got plenty of headroom within those facilities to fund our development plans. So overall, a really strong set of results in the first half, given us really good momentum going into the busier second half of the year. So I'll hand back to Richard to talk out group developments.

Great. Thanks, Chris. What we've got in NWF is a very clear development strategy. As you recall, we've got a diversified source of earnings, and we generate cash and we're in large stable markets. In our fuel business, the opportunity is to consolidate what is a very fragmented market. I'll comment to talk about -- more about that in a moment. In food, it's all around optimizing. So you can see what improving our operating efficiency did for our profit in the first half this year, so we can do further work in terms of operating efficiency. What we could also do is optimize the clients business we're serving. So if we have business who have lots of activity and lots of complex distribution demands, we can increase the value and increase our returns. We've also got our small businesses in e-fulfilment and Palletline, which are growing and profitable. And we can also target expansion as we do in crew by working with customers to sign major contracts to expand our operations, and that's something we'll be looking to do. In feeds, it's all about utilizing our national operating platform. We've got great mills up in the North of England, here in Cheshire, and down in the Southwest. So we look to continue to develop volume growth across that network, and that's why we're investing in the academy to introduce future nutritionists into the business. We also have the opportunity to increase the range of products we're selling to over 4,500 customers. So we continue to expand the nutritional offering that we're making to those farmers through our nutritionists up and down the country. So I move on to the fuels opportunity. And first of all, the fuels market. On the right-hand side, you can see a pie chart, which shows the total market of some 35 billion liters. And you can see the small red slice of that pie is NWF. So we're #3. But we've only got a 2% market share. So it's a very fragmented market. If you look at the gray 3/4 of that pie, I've put opportunities in there because there are 150 smaller businesses in there. So those are the businesses that we could look to consolidate to grow our business here. In terms of our business, it's been stable over the last 12 months as a market, and our business is really resilient. To give you a bit of detail, over 70% of our business is involved in commercial applications, and that's over 37,000 customers across our 25 depots. 12% of our fuel is used in agriculture. And as I said earlier, less than 5% is used with retail garages. In terms of domestic, we've got 90,000 domestic customers, and that's out of a total market of 1.4 million. And as we've talked about before, we're continuing to trial some eco fuel. So HVO30 which is 30% hydrotreated vegetable oil, and that's blended with diesel. We're using that commercial applications, and that's been trialed in a number of applications across the country. And we're also working with other distributors in trialing 120 domestic customers utilizing HVO100. So this is 100% non-fossil fuel, which works really effectively in oil boilers. All you need is a slight adjustment to the nozzle. Otherwise, it works perfectly. And that trial is important because it will really demonstrate a nonfossil fuel application that clearly we could service to domestic customers. I think it's also important to remember that customers purchase fuel from local depots, and therefore, expanding that depot network is key to our growth. I'll just show you the map that shows you where our depots are. So 25 depots. We've actually acquired 5 businesses since 2019. And one thing you can see the brands on the map, we retain the local brand. Our integration model is clear. The brand is retained, the local depot is retained. The front-end operations are the same. So we don't want any change as far as customers are concerned, so we continue with supply. What we do is we integrate the back office operations, so purchasing, IT, finance and credit control to make our business better controlled and more efficient. And you can see the growth up to 700 million liters in the chart at the bottom left-hand corner. I'll now hand it back to Chris to give us a bit more of an update on our acquisition.

Thanks, Richard. It's important to remember with our acquisition process that we're trying to buy small family businesses. And that what we're trying to do with our acquisition process is combined, the most efficient standardized way of doing things because we're trying to do a number of transactions, but maintaining that human element. Because actually, it's the only time these people will oversell our business, and it's critically important to them. It's their life work that they are selling. And that has been a little bit more difficult over the last year or 2, not least because the businesses are all performing really well. That being said, that doesn't get rid of the longer-term dynamics that are driving people to sell the business, which is you have a group of business owners here who are at a certain age and looking to make a capital gain in order to set the rest of that family up with the wealth that they've created in the years they've been running the business. In terms of our process, what we're trying to do is be a standard as efficient as possible. So we have a very clear valuation methodology, which is valuing the sustainable EBIT that we would expect to make from the business. And so you can pay at a lower multiple of -- or much as possible. But as you'll know from previous of these meetings, we're looking to pay about 6x EBIT. We then get into due diligence where we're using the same advisors who understand the risks, issues that we're looking at and how to report those to us. We used to say [indiscernible], who have a standard suite of legal documentation for us that's more efficient. And all of that helps move the transaction along. And then once we bought the business, we have a very detailed integration plan to ensure we can move the business on to our financial systems and put in the financial and operational controls while still maintaining the really valuable bit that we bought, the front end bit, in the format that it's always operated. So for a customer dealing with that business feels exactly the same as it always has. In terms of our pipeline, we've been very active, and have a number of live discussions taking place. I would love to be sat here today talking you through the latest acquisition. Unfortunately, not able to do that, but working very hard at ensuring that the next time with together, we hopefully can be doing that. Richard?

Okay. Thanks, Chris. Just moving on, I want to talk about our ESG framework. So most of you have seen this framework before. We've got 4 pillars: We want to create a culture of safety, invest in our people, build strong relationships, and also respect the environment. And across the group, a lot of activities has been undertaken in the first half. We're working with advisers at KPMG. We've had workshops in each of the divisions and several group really to get under the skin of this to work out what are the key operation measures, targets and goals that we should be adopting with a group. And what I look forward to do is in the summer, giving you a lot more detail on that, give you lots of metrics so you can see how we're operating and how our framework comes to life. I think it's also fair to say, if you think we're a specialist distributor. So fleet utilization, utilizing that fleet properly with minimum emissions and maximum MPG is going to be key. We've also got 1,300 people in the group. So operating safely and developing our people will also be critical themes. If I move on to the last couple of slides. First of all, I just want to recap the proposition, the NWF [indiscernible] slide. So first of all, we've got a strong management team with really deep seated experience in each of our markets in each of our divisions. What we have is a very clear strategy, which gives us a growth opportunity. We've got nearly GBP 200 million of gross assets, and that helps Chris and I sleep at nights, but it also gives us a very cost-effective source of funding. But we focus on cash and return on capital. We see a return on capital of 19%. And if we don't find development opportunities, we generate net cash of GBP 3 million to GBP 4 million per annum. All that translates into is a growing dividend. So 7.2p per share last year, we've increased the dividend in each one of the last 10 years. As I said earlier, analysts would expect a similar increase of 5% in the full year dividend this year, and that's an expectation that we're comfortable with. So now the final side, what we have in under there is a significant opportunity for growth, a very strong first half ahead of expectations from prior year but positively, we're able to report good momentum and broad confidence as we move into the bigger second half. In fuels, we're meeting demand for heating oil, and targeting acquisitions, as Chris talked about a few minutes ago. In food, we had a very busy run up to Christmas as customers stocked up with ambient grocery. We've got lower-than-anticipated stock levels, so that's now rebuilding. And in feeds, we're implementing the price increases to make sure our returns are at an adequate level, and also now looking to target volume growth. So I'm pleased to report confidence in the future opportunities and outlook for the group. Thank you very much.

And we've got a question from Anne Margaret Crow at Edison.

I've got a couple. One in the Food division. And wondering if you could give us a bit more detail about the reduction in repacking work, and whether that's just sort of a one-off or something which is perhaps representative of a broader trend? And then in the Feeds division, hoping you could provide a bit more color on what's happening in north of your territory, with the loss of volumes and therefore, how you hope to recover those? If you could provide a bit more detail on the merchant that was acquired, would just be interesting background information. And if you could perhaps provide a little bit more information on your decision to actually write down the value of the assets. That would be very helpful.

Okay. Thanks, Anne. If I take 2 of those 3 and then hand over to Chris for the third one. First of all, in terms of Food and the reduction in repack work, it wasn't significant. What we did have in -- around sort of September, October, we did have some shortages of direct labor in that operation. So weren't able to do the normal amount of business that we'd look to deliver. Having said that, we've now recruited that labor. And post period end, we're running at the normal sort of levels. Our customers value the repack work we do. What we're doing in that operation is if you want to have a mixed case, which is going to smaller retailers, we can provide that. If you want to do a promotional line of buy 2, get 1 free, we can do that. We also supply, as an example, several thousand sort of end gondola displays of sweets, which go out for Halloween, and we ship those direct to stores. So it was a small reduction and doesn't mean that the long-term future of repack has any issues at all. If I take you into feeds, first of all, in the North of England, some of our nutritionists left to set up their own business. So in the short term, that means a volume reduction. However, pleased to report we've recruited an equal number of nutritionists into our business, and with our academy trainees going up there, we're now focused on recovering that volume, and looking to grow. In the South, I'm not going to name the merchant, but it was a merchant that we and another national player were supplying. The owner was getting towards retirement and wanted to realize value, much like the fuel depots that we've talked about. And our competitors decided to make that acquisition, and now supplies all of that volume. So that's really what's happened in terms of volume. Chris, do you want to cover the impairment?

Yes. So impairment testing is done through a value in use calculation, which is effectively discounted cash flow, and that's done on a market discount rate, which has been evaluated by -- evaluation of advisors and also by [indiscernible] auditors to be about 8.5%. So in very simple terms, we need to be generating an 8.5% return or more on the capital base that the division has in order to support the balance sheet that was carrying. And as you all know from our performance in recent years, we haven't been delivering a return in the Feeds division at that level. So therefore, it became harder to justify that, that was going to be the case in the near future. And as such, really, we have to bring down the level of the balance sheet.

And we'll go to Charles Hall at Peel Hunt.