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

Good morning, everyone, and welcome to the NWF results presentation. This is for our year ending May 2022 and I'm pleased to report it's been a record year for NWF, both in terms of profit and also in terms of cash generation. The picture you can see in front of you is actually going to feature on the front page around report with a focus on our people, I'm pleased to say those are a selection of our 1,300 employees across the group. In terms of this morning, we're going to do a double act. I'm going to give you an introduction and an overview of the performance of the business in the last 12 months. Chris Belsham, our Group Finance Director, is then going to come in and give us our financial review. And then I'm going to come back and talk about the exciting strategy and outlook for the business going forward. Before we start, I just like to play you a brief video, which gives you a summary of NWF, what we're about and how we're performing. [Presentation]

Just like to move on to an overview of the group for myself. This is really for people who are new to NWF. We're a specialist distributor of fuel, food and feed across the U.K. We've got a very strong track record of delivering increased shareholder returns, that's total shareholder returns. We operate in very large, stable markets. That gives us a really solid base and platform for development. And we've got a really good history of generating cash and have a progressive dividend policy. What we'll also outline to you later is a very clear strategy, which will develop the group over the coming years. In terms of our 3 divisions, start with fuels. We're the third largest fuel distributor in the U.K., just under 700 million liters of fuel. We distribute that in small tankers from our 25 depots across the country. In Food, we're a leading consolidator of ambient grocery, we're storing things like tea, coffee and sites, that's ambient groceries and then distributing them to the supermarkets and cash and carries across the country on a daily basis. And we've got over 1 million square foot of warehouse in Cheshire. And thirdly, in Feeds, we're providing ruminant feeds to farmers across the country or with over 4,500 farmers. And we're very much focused on dairy. So 70% of our feed goes to dairy cows. And we're pleased to announce that we actually feed 1 in 6 dairy cows in Great Britain. It's a very easy way of remembering us. But then turn to the results that we announced this morning. As I said earlier, they are record results, which is very positive and significantly ahead of initial market expectations. The revenue number is a big one, and it flatters us a little as the revenue of NWF goes up or down, in part dependent on the price of commodities, things like oil, wheat and rate mill. The revenue is actually up 30% in the year, and that is because of increased commodity prices. The key number we will focus on is the headline profit before tax, and that's the record of GBP 20.9 million up significantly on GBP 11.9 million in the prior year. And just to give you a point of fact, the initial market expectations for the year were GBP 11.2 million. So that's why we've got the significant outperformance. And in fact, we've done 3 profit upgrades during the period. In terms of headline EBITDA, GBP 26.6 million, up just under 50%. And equally important as profit is cash, I'm pleased to report this morning for the first time in the group's history, we're actually cash positive. We had a GBP 9 million balance in our account at the end of May. And that's a significant improvement on prior year. And it demonstrates 2 things. First of all, the cash generative capability of the group, which is significant. And secondly, it shows that the available funds along with our bank facility to really develop the group going forward. And just as a point of reference, just over 10 years ago, the group had net debt of over GBP 50 million. So you can really see the cash that this business has generated. Finally, on this page, the dividend up to 7.5p. That's the total dividend for the year we're recommending to our AGM, and that would be the 11th consecutive year we've increased the dividend between 4% and 5%. And on the current share price, that gives a yield of about 3.5%. Then move to the individual operator divisions and start with fuel. This is where we've got significant outperformance. And in our fuel division, when there are challenging market conditions, our 25 depots really outperform, and that's what's happened this year. If you think back to the year and our year started on the first of June 2021, in September, we had the retail fuel shortages. As you recall, there was not actually a shortage of fuel, but there was a shortage of HGV drivers and that caused panic buying in retail outlets, and therefore, the retail forecourts ran dry. That didn't impact us to the extent that we had full supplies in all of our depots and we were able to maintain supplies to all of our customers' across the country. What we did have was concerns amongst our customers as to whether we would have enough drivers and fuel availability, and we were certainly able to do that through the period. And you remember at the half year, our results in fuels were ahead of expectations. What we then had in March was the Ukraine conflict, which caused a significant change in the market for oil. So first of all, the price spiked, it went up to $137 a barrel. It's still really volatile. So yesterday, it was $110 a barrel. This morning, it's $100. So you still have significant volatility in part as a result of that conflict. What you've also had really from March onwards, although less so today are some real supply issues in the U.K. So as you know, the U.K. and European governments want to reduce reliance on Russian oil, and that has meant there's been some shortages. So at times in the Southwest in our depot in Cornwall, there was lack of supplies coming out of the Plymouth terminal, and we were [ trunking ] fuel down from Bristol all the way down to Cornwall ourselves. Similarly, there were some issues in the Northwest of England, we were trunking fuel from Immingham across to the Northwest. So we've been very much focused on our customers in our local markets, making sure that we can provide supplies in what have been very volatile conditions, and that's led to additional margin and profitability. The best way of describing that is our pence per liter of net profit, you can see 2.6p per liter, that's higher than the 1.4p in the prior year. And a large part of that is one-off, analysts do not expect that to be repeated going forward. We also had a mild winter, so heating oil demand was down, and we supplied less to online brokers. We've also continued the development of our Priority Club. This is where you sign up as a consumer. We will monitor the fuel in your tank. We will automatically top up your tank and you get a little app on your phone, which not only tells you how much fuel you've got, but also your usage. It's like a very much a smart meter. And that's been successful. We've now got over 2,000 consumers using that on a daily basis. It spreads the cost of their oil purchases and really gives them a peace of mind. And finally, in terms of fuels, we've got a really continued focus on acquisitions. We're disappointed that our acquisitions have been completed in the period, but we're very busy, and we'll talk more about that later. Then we went to food. The headline says it's a solid performance improvement. It's actually a great result because if you look at the profitability, last year, we delivered GBP 1.9 million, and that's increased to GBP 2.8 million this year of operating profit. Now we did anticipate an increase, but what we've done is we've exceeded our expectations here. If you look at activity levels in the division, fairly stable. So the pallets stored 118,000 plays against 120,000 in the prior year. A number of outloads is similar as well. And our warehouse has, therefore, been reasonably full to a good effective level. In point of fact, we've got 126,000 pallets sold this morning. But the key to the profitability improvement has been efficiency. So what we've got is the right stock and the right warehouses and we've been able to manage supplies into all of our warehousing to our customers and to the supermarkets and cash and carries on an effective basis. What we've also done is really demonstrated the benefits of the Crewe expansion. So as you recall, a couple of years ago, we opened a Crewe facility, which you can see on the photo there, which increased our business capacity by around 40%. And that's outperformed its investment case. So it really gives us an opportunity to do more of this in the future. Also pleased we've managed the transition of Managing Director. So Keith Foster retired after 20 years in the business, and Angela Carus joined in January, really experienced operator who's doing a great job taking on this business and developing it further. And then thirdly, in this section on feeds, very pleased to report a very strong recovery in the second half. As you recall at the half year, we had a disappointing first half result. And the reason for that principally was we were seeing increased cost and increased commodity costs, but we're unable to pass on prices quickly enough through into the market. Basically, we've learned how to do it in the second half and have been able to pass through all those inflationary cost increases whilst managing the business effectively. There has been volatility here. The price of commodities kicked up dramatically once the Ukraine conflict happened, and that was clearly because of things like wheat and barley and concerns about availability. Prices have come down a little, but still remain volatile, but we've been able to pass on the appropriate prices into the marketplace to cover both the commodity cost increases and other inflationary cost rises. Positively, it's been supported by a high milk price. The milk price in the year is now over 40p and lots of analysts would expect it to head towards 50p in the year. So that more than covers the cost of additional feed, fertilizer and fuel that dairy farmers, our core customer group, are having to suffer. So therefore, a good level of profitability for our customers and a very good level for profitability for us as well. I'll now hand over to Chris, who will take us through our financial review.

Thanks, Richard. We'll start the financial review with the income statement. So firstly, as Richard has already mentioned, we saw a big increase in revenue of 30% as a result of the increase in oil price and of the commodities combined with the fuel mix in -- which was weighted towards diesel, which comes with a higher duty. Activity was actually down a bit in fuels and feed. So the driver of performance this year was all about margin. So if we start with fuels, historically, we've targeted an operating profit of $0.01 per liter. At the half year, as some of you will remember, we were already at a penny, whereas normally would be at about $0.005 of profit. And then with a very strong quarter 4, we ended the year at 2.6p per liter. Analysts would have us doing about 1.1p to 1.2p per liter for FY '23. In food, the efficiency Richard talked about, drove a really strong margin and in feeds that price and margin management in the second half supported the turnaround in performance. So those 3 things combined drove the headline operating profit of GBP 21.8 million versus GBP 12.9 million in the prior year. Consensus forecast for FY '23 is currently GBP 12.9 million. The exceptional items we saw in the year was mainly the feeds impairment that we recognized in the first half and talked to you about then, plus there was a small insurance credit in the second half, which related to the prior year cyber incident. If we move on to the bottom half of the income statement. Finance cost is consistent with the prior year. That reflects an increase in interest rates, but a decrease in our average debt balances across the year. So we've ended up in a similar position to the prior year. In terms of tax, our underlying rate is 19.4%. Normally, we'd guide that our tax rate would be the statutory rate plus 1% to 2%. But with the additional profit that brings down the underlying rate to some extent. We have a proposed final dividend of 6.5p. That would give a full year dividend of 7.5p, which is a 4.2% increase and very high cover clearly of 4.6x. Moving on to the balance sheet and the movements here are really very simple. So the reduction in fixed assets reflects that impairment of goodwill and fixed assets in feeds at the half year, plus the extent to which depreciation is slightly higher than CapEx. Right-of-use assets have increased, and that reflects the additions to the vehicle fleet in the year. And working capital is a little bit higher, which reflects the increased commodity prices and also the mix of fuel product. I'll return to net debt and pension on later slides. So the only other thing just to highlight on this page is the return on capital employed, which was an overall return of 30.3%, which is clearly excellent. I'm particularly pleased to see that food is very, very near to 10% and also the recovery in fees, which was 1.9% at the half year are coming back up to a more respectable level and fuel is clearly an exceptional result there. Moving on to the pension scheme. Again, very straightforward. We've had a significant reduction in the deficit in the year of GBP 5.6 million. So the deficit is now GBP 9.3 million, which is certainly the lowest it's been in the time I've been with the group. And that's all driven by the discount rate, which increased by 1.45%. Our next triennial valuation is to December '22. That work will take place next spring. So we'll probably be talking about the outcome of that at the next annual results. Until then, our recovery payments of GBP 2.3 million per annum and those increased in line with dividend growth. At that level, it's no constraints on group funding or our development plans. And from a cash flow perspective, the extra profit we've made in the year has dropped through into cash flow. So our headline EBITDA at GBP 26.6 million was up just under GBP 9 million with a cash conversion of 97.7%, that's effectively dropped through to extra cash generation. So if you move over on to the following slide and look at the chart on the right-hand side, you'll see that we've generated GBP 14.7 million of cash in the year, and that's moved us from a net debt position of GBP 5.7 million to a net cash position of GBP 9 million. Clearly, that gives us significant firepower when it's combined with the GBP 65 million of facilities that we have with NatWest until October 2023. The majority of that's in the form of a GBP 50 million invoice discounting line, but we can use that for M&A under the development activity. The bank is very supportive of the group, and we will be looking to refinance those facilities in the current financial year. So we're doing that in plenty of time in advance of October '23. So after excellent set of results for the year, the group is left with really strong funding and firepower base to fund our future development plans, which Richard will now talk about.

Okay. Thank you, Chris. So what we have, as we've said before, is a very clear development strategy. What we highlighted this morning is probably more so than any time in the last 5 years, the significant opportunities present themselves to us today. Just for way of summary, remember we're cash generative. We've got experienced capable board, but we operate in large, stable markets. That gives us the real resilience. And what we're always trying to communicate to the stakeholders is the balance we end up with is were solid, stable and resilient, but we're also ambitious and we have some exciting growth opportunities. In terms of the opportunities in fuels, it's about acquisitions, and we've got a couple of slides covering that. In food, as I mentioned earlier, we've very successfully expanded into the crude facility with an initial 35,000 pallet spaces, and there are additional opportunities for step-change expansion in this division. Now we're not going to just go and take on a warehouse and see if customers will come to us. We're in discussions today with a number of large FMCG manufacturers as to whether we could take on their product range and back to back that with the warehouse. So nothing is immediately going to happen, but it's really on the back of Crewe. We've now got real confidence that this is a way of expanding this business quite significantly. And thirdly, in feeds, the focus here is on increasing the number of nutritionists we have. So as we said in the video, we've taken another 10 graduates into our academy. That's an 18-month training program. And that's very much the focus over the next coming years. It's now the third year we've run the academy. And we've now got the first academy cohort that's come out and graduated. They're now delivering real volume into our business. So this is a real opportunity for growth in that sector. Then move on to fuels and just slide really on the fuel market and the opportunity. If you look at the pie chart on the right-hand side, that shows the 35 billion liter market in which we're operating. We're the third largest player, but as third largest, we still only have a 2% market share with that little red slice that you can see. And the ones that we've named up and they're the top 10 players, even they represent less than 25% of the market. So this is a hugely fragmented market. There are some 150 smaller players than those that we've identified on the list. And we're actively involved in discussions with a number of players. In terms of the market itself, it's stable. And our business, 30% is around heating, 12% agriculture less than 5% is to do with retail forecourts, and it's really HGVs and LGVs, which are the dominant uses of our diesel. The key market for us is home heating. We've got some 90,000 customers who heat their homes using NWF fuel, and that's out of 1.4 million homes in the U.K. There is clearly energy transition that's going to happen in this space as a whole of the U.K. and the world moves towards net zero, and we're actively involved in working in this area. In terms of transition with those key home heating customers, there is an opportunity with a product called HVO100. This is hydrotreated vegetable oil, which is a nonfossil fuel-based energy source, which reduces emissions by some 90%. Now we and other distributors are involved in trials in the U.K. There's actually 150 homes, which have been heating their home in the last 12 months using HVO100, and there haven't been any reported issues in any of the heating systems deployed. And this simply replaces the kerosene that we have in our tanks, you adjust the nozzle slightly to change the pressure and the boilers work perfectly. So this is a real potential future solution to home heating. And we're talking to the government about this and other solutions because currently, there are high levels of duty in this area, which make it nonpractical but we're looking to change that over time. In the next 10 to 15 years, potentially, there are significant additional supplies of HVO and therefore, this could operate in this space. We're also continuing trials of HVO in terms of haulage. So our tankers that operate out of Great Yarmouth and supply Norfolk and Suffolk, they're running on HVO. And very shortly, all the trucks that we're running on site at our main operating base in Wardle are also going to use HVO as their source of energy. Then move over to the acquisition process. Chris, do you want to just take us through where we're up to here.

Yes. Thanks, Rich. So this is very consistent with prior years and there's probably 5 key points to make. So the first is we have very clear fixed criteria for M&A. We're looking for fuel distribution businesses in Great Britain. We would like to do one of those larger ones if it became available. But that's slightly out of our hands if one of them wants to be able to sell. So therefore, the bit that's within our hands is targeting the slightly smaller acquisition opportunities. Once we found those, we have a standard valuation methodology and model. We look at the EBIT, EBITDA that NWF will make from the business, and we're seeking to buy the business at about 6x the NWF EBIT. That's a bit more difficult to discuss at the moment because everybody's had a very positive couple of years of performance and normalizing that to get to a sensible valuation is a slightly more difficult conversation. Once we've agreed a deal, we have an established deal process. So we have the same due diligence providers, same legal advisers, and we have a house position on the key issues, and those tend to be the same issues on every transaction. So we have a very clear way of proceeding and dealing with those. Then once we bought the business, we have a standard integration model, largely driven by the financial systems that the target company is using. And what we're seeking to do is to immediately integrate the back office and have the business up, whilst maintaining the front-end customer-facing element. So as far as the customer of the business is concerned, nothing has changed. And the last point to make is around the pipeline, which is considerably more active and healthier than it's been for quite some time. And that's come about from a combination of proactive and reactive work. So we have a number of opportunities and a number of live conversations that are taking place at the moment. We are frustrated we haven't managed to buy something in the last couple of years, but the pipeline is considerably healthier than it was. Richard?

Okay. Thanks, Chris. Now let's just cover how we're delivering on our ESG framework. So as you recall from previous years, we've got a culture of safety and that's one of our pillars, investing in people, building strong partnerships and respecting the environment. And we've also in the year established the goal of being net zero by 2040 for our own emissions. We've developed a road map reflecting on the progress to date, and we've now got lots of measures and metrics in our business that Chris and I and the Board are reviewing on a monthly basis. And you'll see a lot more detail of this in our annual report that we published shortly. We've also got an ESG Steering Committee comprising the directors and MDs of the business. And we meet monthly, Chris chairs, I attend them. And we're very much looking at focusing on each of the pillars and how we're making progress. It's fair to say as a specialist distributor, vehicles are pretty much front and central to that because that's where most of our emissions are made. And we're doing a lot of work in terms of focusing on vehicle utilization. We've got 3 full-time driver trainers to make sure we're maximizing the MPG and therefore, minimizing emission of vehicles. We've also got preparations well underway for our first full disclosure, which will happen next year, and there's a number of activities across the year. Just in interest, we are looking at electrification of trucks, and we're taking delivery of our first Volvo HGV in January to be all electric. That's in our pilot line fleet. Fair to say working with Volvo, they see the future in the longer term being hydrogen rather than electric and Volvo actually are producing their first hydrogen-powered vehicle in January 2023. So we'll continue to monitor developments and work with our suppliers here. Then move on to Slide 19, the NWF proposition sort of why pick us in the investment case. Firstly, we've got a strong management team. It's not just at the group level. Critically in the divisions, we've got really long-seated experience of each of the marketplaces in which we operate, whether it's around logistics, whether it's around fuel, whether it's around nutrition to dairy herds, we've got real good experience. But a very simple growth strategy, which we've outlined today and the asset backing of gross assets of GBP 214 million gives us access to cost-effective sources of funding that Chris took us through earlier. We focused on return on capital, got a great record of generating cash, and we've got a progressive dividend policy. Then finally, on Slide 20, really delighted this morning to be announcing a record set of results, significantly ahead of initial market expectations and significantly ahead of prior year. And critically, as Chris outlined, we've converted that into cash and therefore, have a very strong balance sheet. In terms of the future, we're currently trading in line with the Board's expectations. In fuels, we've got a very exciting pipeline of acquisitions. So Chris and the team are very busy. So we're looking for news there in the future. In food, there's genuine opportunities to step change, expand this business and we're working with the team in terms of proposals in that area. And in feeds, as I said, it's all about the academy training our youngsters are coming through to develop our future nutritionists. So finally, just to highlight, we have confidence in the future development opportunities and the outlook for the group. Thank you very much.