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

Welcome to the NWF results presentation for our first half year. This is for the period June to November. I'm going to take you through the operating highlights. Chris will then do our financial review, and then I'll come back to talk about our exciting growth strategy. So turning to just a quick overview of the group for those new to us or those who just need a quick recap, NWF is a specialist distributor of fuel, food and feed across the U.K. In our fuel division, we're the third largest oil distributor, and we distribute just under 700 million liters across the country. In food, with nearly 1 million square foot of warehousing, we're supplying ambient groceries every day to supermarkets and cash and carries across the country. And in our feeds division, we're manufacturing and supplying ruminant animal feed to over 4,000 farmers right up across the country. And the easiest way of remembering this business is we feed 1 in 6 dairy cows in Great Britain. I'd now like to turn to the results for the first half, and it's a very strong performance from all divisions. Each of the divisions has actually exceeded expectations and were significantly ahead of prior year. In fact, it's a record first half. The revenue of GBP 542 million, up 35%, is really driven by increased commodity prices. So that's the oil price, which is significantly higher, and also feed commodities, which have increased. The key number that I always talk about is the headline profit before tax, and that's GBP 6.2 million, up 44% on prior year. And you can see the last 3 years in the comparison chart below. Equally important as profit is cash. And you can see at the end of the half year, we were cash positive to the tune of GBP 1.2 million. And again, if you look at the history, you can really see the cash-generative capability of the NWF group. And finally, on this slide, as always, we've maintained the interim dividend at GBP 0.01. In the last 10 years, we've increased the total dividend by around about 5% each year. Last year's dividend was 7.5p in total, and again, analysts would expect that to increase by around 5% for the full year. So then move on to the operating highlights and starting with Fuels. Here, it's all been about marginal gains. A strong performance, outperforming our expectation on the back of higher margins offsetting lower volumes. The prior comparative of GBP 3.6 million was flattered by the panic buying we had around the fuel retail shortages last autumn. What we have seen in the first half year is some softer demand for heating oil that's been down from 20% on prior year. The main cause of that is the pretty mild warm conditions we had over the autumn, but we're also conscious of the cost of living crisis and the higher price of oil in the marketplace. Oil prices remain volatile. They're $85 today. They've moved between $124 and $83 over the period in question. The thing that hasn't really been reported much in the press is there have been some real challenges around distribution of oil. There have been shortages, particularly around diesel and also heating oil. So in our depot down in Yeovil in December, we're actually rationing customers to 500 liters to ensure we're able to supply them. Now in NWF, actually, we've got national supply agreements from all terminals and refineries across the country, and that's enabled us to trunk fuel across the country to make sure we can supply and meet our customers' needs. And finally, really pleased post-period end to announce the acquisition of Sweetfuels in December '22 for GBP 10 million. And Chris is going to talk more about this exciting acquisition later. Then move on to food, really strong performance here. You could see profits up to GBP 2.1 million, and this is really continuing the improvements and momentum that we've seen in previous reporting periods. We've actually had an increase in outbound volume up some 6% on prior year, and that's because ambient grocery demand is strong and also our customers, products and services are demanded across the country. So what we've got is an improvement in efficiency in distribution and backloads and also improvements in efficiency in the warehouse. Pleased to report that we've got our full complement of staff both in the warehouses and drivers. And in point of fact, we actually have a waiting list for drivers looking to join our program today. We've had a successful training program of training people from what we call warehouse to wheels, where people operating forklifts in our warehouses have been trained how to drive HGVs and then have joined our transport team. The picture on the right-hand side is our Crewe warehouse. And again, I'm pleased to report that, that investment that we made 2 years ago is outperforming the case that we set down at the time. There's also an exciting pipeline of new customers looking to join our business. [ Kruger ] , one of our existing customers has awarded us an additional 4,000 pallet spaces, which is starting to come in right now. So you can see overall, a 122,000 pallets stored, and that's out of a total capacity of 135,000, so a good level of utilization. And then thirdly, talking about feeds. Here, we've had a really strong recovery. You can see profits up to GBP 2.1 million in the first half. Here, we've had very good market conditions. Remember, principally 70% of our volume goes to dairy farmers, and critically, the milk price has been at record levels. The end of November, the average price in the U.K. was over 51p. What that's meant is farmers have been really focused on nutrition, and we're providing nutrition advice to optimize the yield of their dairy cows and use the nutritional advice that our team can provide. So we've also had effective management of commodity prices, and those continuing to be volatile. There's different news coming out of Ukraine. There's clearly the global economic outlook and also there are excess commodities coming from the poultry sector, a sector we're not supplying but that has been impacted by disease. It's also the fourth year of the NWF Academy. So the fourth cohort is now going into that training program. And you can see our volumes are just a tad lower than prior year, slightly ahead of market conditions. I'll now hand over to Chris, who will take us through a financial review.

Thanks, Richard, and good morning, everyone. I'll now talk you through the strong financial results for the first half, starting as always with the income statement. So revenue increased by GBP 139 million. As Richard has already referenced, that's mainly the pass-through cost of higher commodities, both at the higher oil price and feed commodities. But importantly, the increase in revenue that has come from higher selling prices and mix offsets lower volumes. And we see the benefit of that in our headline operating profit, which increased to GBP 6.8 million versus GBP 4.7 million in the prior year with the biggest increase in feeds but also an increase in food. In fuels, headline operating profit dropped back a little to GBP 2.6 million, but this still represents 0.9p per liter, which is above the historical norm for the half year of about GBP 0.005 per liter. And you can see that in the table at the bottom of the chart. There's been no exceptional items in the period. Last year was an impairment charge. If we then move on to the bottom half of the income statement, you'll see that finance costs are a little bit higher in the period. That's because bank interest has seen higher interest rates, which more than offset the lower average net debt that we had across the period. And the IFRS 16 interest was slightly higher as a result of an increase in fleet and new leases coming on at a slightly higher interest rate. Our tax rate is 21.9%, and at the moment, we'd expect that to be our rate for the year. As usual, our interim dividend is GBP 0.01 per share. And clearly, at this level of profitability, that's extremely well covered. Moving on to the balance sheet. We've had limited change in fixed assets as depreciation has exceeded CapEx. The main movement on the balance sheet has really been around working capital. And there, we've seen about an GBP 8 million increase, and we can sort of split that in 2. So half of that has been the result of higher commodity costs in feeds. That's a longer-term thing. It will obviously move up or down, depending on the movements in commodity costs. But we've also had a very short-term working capital outflow, which reflects the supply constraints in fuels. So in November, we had to pay a supplier about GBP 4 million early in order to ensure supply. That short-term outflow reversed in December, and we don't expect to see that again. I'll come back to pension and net debt on a later slide. But a couple of other things to pull out from the balance sheet. So firstly, we continue to have very strong asset underpinning with total assets of GBP 227 million and net assets of GBP 70 million, and our return on capital employed has been really strong over the last 12 months at 28.8%. And it's really good to see all divisions recording a double-digit return on capital employed, particularly feeds, which I've been promising we'll do this since I joined the group nearly 6 years ago. So really good to see that. Moving on to the pension. Clearly, the autumn was a very interesting time for pension schemes following the mini budget, and we are invested in LDI as part of our investment strategy. Positively, I can confirm that it didn't cause us an issue. So the aftermath of the mini budget was successfully managed within the scheme. There was no cash call on the group. And as a result, what you see is that our hedging strategy has effectively worked. So as interest rates have gone up, our liabilities have come down. That's how our assets have come down in a corresponding manner. So therefore, we see a slight increase in deficit over the period from GBP 9.3 million to GBP 10.5 million. Our next triennial valuation is to the 31st of December 2022. So that work will take place across the summer. Historically, our accounting deficit has been very similar to our formal valuation, so that would be our best guess at the moment of where the formal valuation will come out. Until then, we will continue to have recovery periods of GBP 2.3 million per annum, and those grow in line with dividends. At that level, and given our financial firepower, it's not causing any constraints on group development. Moving on to cash flow. Key thing to pull out here is really that profitability flowing through, offset by the working capital factors that I've talked about. So as a result, we have a small outflow in the period had we not had that GBP 4 million short-term working capital outflow in fuels than we'd have had a small inflow. And our cash generation is best shown on the next slide. If you look at the chart on the right-hand side, then our rolling 12-month cash generation before development expenditure was GBP 8.4 million. And if we haven't had that short-term fuels working capital outflow, it would have been over GBP 12 million. In terms of our banking facilities, we're in the process of refinancing those at the moment as planned as they mature in October 2023. Until that concludes, we continue to have GBP 65 million of facilities with NatWest, the bulk of which is in the form of an invoice discounting line of GBP 50 million, which is charged at 1.25% over base rate. Both our invoice discounting line and our GBP 10 million RCF facility can be used for M&A activity. And therefore, we have significant firepower for both M&A and other development expenditure. So in summary, a really strong set of results, it sets us up really well for the second half. And I'll now hand back to Richard to talk about our strategy.

Okay. Thank you, Chris. And positively, what we have with NWF is a really clear development strategy and there are probably more development opportunities today than they've been for many years. And just as a recap, NWF is a very cash-generative business, and we operate in large, stable markets. So that gives us the positive position of the resilience that we demonstrated as a group, but also says if we want to continue to grow, we need to invest in organic growth, in CapEx and also in M&A. And what we've got is a very strong track record in terms of developing total shareholder return. So that's what we're looking to continue to do. In fuels, the key opportunities to consolidate what is a highly fragmented market, and I'll give you a bit more detail on that in a moment. And in food, we're winning new customers and I have this exciting pipeline of new business that wants to come into our warehouse. If we don't expand the business, we'll actually be in overflow position by the summer, which really demonstrates the capability of the business to win new customers. So there's an opportunity to target step change expansion very much along the lines of the Crewe warehouse to have expanded a couple of years back. And so what we're looking to do is expand our warehouse infrastructure but also link that to customer contracts. And that can give us a step change improvement in business, probably in the Northwest in the first instance because we have a number of customers locally who'd like to come and join us. So notwithstanding that, we're always looking to optimize the customer mix and utilize our value-added niche businesses. So this includes a repacking operation, our refulfillment and also our pilot line network. And in feeds -- we are feeding 1 of 6 dairy cows in Britain working with over 4,000 farmers but we've got an excellent operating platform. So we've got a mill up in Cumbria, here in Cheshire and also down in the Southwest and that enables us to supply dairy farmers up and down the country. So we're looking to leverage that operating capability. We're continuing to invest in the NWF Academy with our fourth cohort joining us and also, there's a further opportunity to increase the range of products and services that we're supplying to our farming customer base across the country. Then move on to the fuels market in a little bit more detail. And a number of you have seen this before, the pie chart on the right-hand side. So what we've detailed there are the top 10 players in the market, and you can see us NWF with that little red slice that you can see -- so in spite of doing nearly 700 million liters, we've only got a 2% market share, and we're the third largest player. So clearly, there are a top 10 that we've detailed there. All of whom we'll be having conversations with because there is an opportunity to consolidate this market. But also we're talking to the 150 smaller players in that 3/4 of the pie, which is in the gray area, and that's where we've made a number of acquisitions in the last few years to continue to operate. So there is clearly an opportunity to consolidate this market. In terms of our demand, volume is pretty resilient. Over 30% of our volume is utilized in heating applications and less than 5% is actually sold to retail garages. The key market for us is really this domestic base. So we've got over 90,000 domestic customers across the country from our 26 fuel depots and that's out of 1.4 million homes that use oil as their source of heating. And clearly, the cost of living crisis is impacting all homes, but it's positive that oil is the lowest cost form of home heating. Even with the cap on gas, it's still 11% lower than the cost of natural gas for a household. So it's certainly something that our customers are able to benefit through these tough times. And the way that customers operate is they purchase from local fuel depots, who provide local service to them, and that's how we operate. Now clearly, in the longer term, there will be an energy transition as we move away from fossil fuel and think of us as supplying energy to the rural consumers and the royal community. And the key opportunity here is something I've talked about before, which is HVO, an HVO100, which is hydrotreated vegetable oil. And this has 80% less emissions than a conventional kerosene, which is heating oil. There have been significant trials across the country using this and domestic boilers and the boilers have worked perfectly. All you need to do is adjust the pressure through the nozzle very slightly, at very low cost adjustment and then it works perfectly. And George Eustice actually tabled in the House of Commons this month, a motion that says that the duty on HVO should be put to the same as heating oil and therefore removed. That was supported across the House of Commons. It will take time for that to go into legislation, but certainly there are support to remove the duty, which should mean the cost of HVO100 would be similar to heating oil and therefore, the rural community, including ourselves can use HVO as a source of home heating. We're actually using it on our vehicles that operate on the Wardle side, that's our main operating site and also from our Broadland fuel business, which is out of Great Yarmouth supplying consumers across Norfolk and East Anglia. Now I'll just move on to acquisitions and let Chris take you through the proven acquisition process and what's happening currently.

Thanks, Richard. So this is very consistent with prior periods. So we continue to look for U.K. oil distribution businesses. And we have a significant pipeline that we're working through with both larger and smaller transactions. As we've discussed before, we've got an established method for valuing businesses. And as a reminder, we're looking to pay 6x the sustainable EBIT that NWF will be able to make from that business. We're finding, discussing what the sustainable leap it is. It is a little bit more challenging at the moment as most of our acquisition targets have performed well over the last couple of years. But once we've agreed a deal, then we have a standard due diligence and legal process and which we continue to refine and improve every time we do a transaction. Then once we bought the business, we have a well-trodden path for integrating that business. So if you then look at the Sweetfuels deal, specifically, if you excuse the pun, that's very much a sweet spot deal for us. It was an approach from a corporate finance adviser who was acting for the Sweet family. They were looking to retire and go on and do other things. It's a business that has a very strong domestic customer base and brand in the area. So it is about 20 million liters in the Cotswolds, so an affluent area. And in FY '21, the business recorded profits of GBP 1.3 million EBITDA, and it's got net assets of GBP 2.8 million. We bought that business on the 21st of December, an NWF depot manager is in there running the business and we're already well progressed with the systems integration. So that will be on the NWF financial systems in the next few weeks. So pleased to report that transaction is performing very well so far under NWF ownership.

Okay. Thank you, Chris. Just now I want to move on to how we're getting on with delivering our ESG framework. What we've got is very much embedded in the business now are measures and targets for reporting across all the ESG parameters that we've got in the business. There's a steering committee that meets each month. Chris [indiscernible] and I'm attending along with each of the managing directors of the business to really bring ESG to life across the group. In our food division, we're actually applying for B Corp certification. This is quite a tough level of certification and if we achieve it, we'll be one of the first distributors in the U.K. to get this accreditation. It's actually winning us customers because a number of our food customers, ethical customers are also looking for B Corp certification themselves. And therefore, this is a way of winning business on the back of driving our ESG agenda. And also pleased to report the preparations for our first full U.K. CFD disclosure are on track, and that will be reported for our year ending May 2023. On this slide, we're talking about the NWF proposition, the why pick us slide, the investment case? And what we've got is a strong management team with detailed knowledge and experience of the markets in which we operate. We've got a really clear growth strategy, which we continue to reiterate. We've also got very strong asset backing. Our total assets of GBP 228 million allowed Chris and I to sleep at night, but also give us that very cost-effective source of funding that we talked about earlier. We're focused on return on capital. And clearly, 29% return on capital is outstanding. We also convert our profit into cash and as a consequence of that, we're able to maintain a progressive dividend policy and deliver total shareholder returns. So finally, in summary, it's a very strong result, and we're also delivering on strategy. It's clearly a record ahead of expectations and ahead of prior year and again demonstrates that NWF performs really well and is very resilient whatever the market conditions. There's also good momentum. We're actively involved in a number of discussions on additional fuel acquisitions. In Food, as I talked about earlier, we're looking to expand the business with new customers coming on board. And in Feeds, we're managing Farmers Nutrition through the key winter months that we're experiencing, and that's going well. So in summary, we've got confidence in the future development opportunities and the outlook for the group. Thank you very much.

And we've got a question from Adrian Kearsey from Panmure.

Congratulations on an impressive first half. A few questions for me, if I may. Talk about sort of expansion of your position within food. The Crewe investment has proven a huge success. Before you pushed the button on Crewe, you built up a body of sort of excess demand almost from clients. So that, therefore, when you did push the button, it was at a very low-risk strategy. What sort of level of new business pent-up demand would you require before you push the button? And sort of linked to that is, if you were going to have a third warehouse, would it be similar to the Crewe location?

Okay. Thanks, Adrian. In terms of building up, the perfect thing is as you open a new warehouse, you want customers that will come in and fill that warehouse. When we opened the Crewe facility, things were a bit tight. We probably had more customers than we require. So we've got people in very quickly. I think in outline terms, what we'd look to have is something like 10,000 pallets of business to move into a warehouse straightaway. That will enable it to bed down. But I think critically, what we'd need to see is that we have the capability to fill 90% of that space within a 12-month period. So that will be contracts that we need to have sight of with customers or potential customers that would give us that confidence to make that move. Crewe itself, 250,000, 240,000 square feet, delivers 35,000 pallet spaces. That's a perfect size because once you're over 30,000 pallet spaces, the warehouse is what we call self-consolidates and, therefore, you can create full loads from that environment. So I think the minimum size we'd look for would be about 30,000 pallet spaces. And in terms of locations, we've got customers already that would be operating effectively from the Northwest. So I'd say the Northwest would be the most likely place that we'd look to expand into in the first instance.

Okay. May I ask a question on fuels, if I may? I suppose 2 questions. One, have you seen anybody enter the market in terms of competing M&A acquirers? Then also in terms of what's the optimum range for a depot in terms of the area it covers for selling into? Because obviously, if you go too far, it becomes less efficient.

That's correct. So just to deal with the first question, we've not seen any significant entrants into people competing to buy assets. What we tend to find is if there is competition for an asset, it will be the larger regional players in the specific region we're looking to acquire something. So we have had competition on deals, and we have occasionally been outbid on things, but it tends to be by the business next door, protecting their own territory. In terms of the sort of optimum depot range, we tend to think about a radius of about 30 miles. I mean clearly, that depends on the locality and the transport infrastructure. But you're right, if the tankers have to travel too far, then the cost of actually delivering the product is eating too much into the profit we make from actually selling it.

And we'll go to Andrew Ford at Peel Hunt.

Well done, again, on a really strong start to the year. Couple of questions from me. Firstly, in fuels, obviously, we saw a bit of lower volumes in the run in to Christmas because of milder weather and maybe some people with an eye on the cost of living concerns coming through. In demand over the last couple of months, has there been any indications as to sort of a normalization of that volume? Or what are you seeing just in general demand over the last couple of months? Next on foods, sort of following on maybe from the last question, thinking about the current footprint, how close do you think you are to being, I guess, perfectly optimized from a margin perspective. Obviously, there was still quite a nice uplift this year. On the current footprint, do you think that could go further? And then with the addition of the new site, where would you see that margin possibly settling? And then lastly on feeds, I know dairy has been particularly strong this year. We've gone to 50p per liter for milk, and maybe it might be coming back to the 40s. What benchmark price do you look at that really sort of drives that strong uptake on the value-added feed?

Okay. Thanks. So -- just running through those. In terms of fuel demand, yes, the 20% reduction in heating oil was the period, June to November. And from what we can see, that was experienced across the market. The thing that's hard for us to identify is how much is -- because of the warm weather, how much is the cost of living crisis and how much is the fact that oil is a higher price than it was a year ago. What we saw in December was demand was much more normal, so clearly, we had a couple of weeks of very cold weather and usage will have increased. But most consumers had actually placed their order for Christmas before that really cold weather have bitten. And the same in January, I think December and January look like more normal months, not outstanding demand, but normal winter months. And I think the key for all consumers is in the autumn and in the spring, you can probably turn the heating off when it gets cold, the heating is on and you're using it. I think the positive for our customers is the cost of oil is still the lowest cost of home heating. In terms of food and the footprint, I think the margins have improved, there will be an optimum level of this. And I think the easiest way to look at it when we work with our team in food is if you get to that sort of 5% return on sales, that's a really strong performance. And we can't necessarily see ourselves going much above that, but that still gives us an opportunity to improve from where we currently are. And the way we can improve that return is all about deploying more of our added value services to customers' business and also customers with a faster stock turn. So therefore, they can use more distribution, and we can get more backloads. But I think that 5% is probably a sweet spot that we're looking to achieve in the longer term in the business. And the third question-- on dairy volume, 50p is an outstanding price for milk. A positive there is that our dairy farming customers are not looking to massively expand. A few years ago, when the price was high, most farms I went on to were looking to expand the herd, put in a new parlour and expand the sheds. They're not doing that today, which gives us confidence of the long-term sustainability of this market. In part is that it's difficult to import cattle from Europe, but it means that, therefore, we won't have the sort of boom and bust that we saw in previous times. I think for us, as long as the milk price is ahead of 40p a liter, that's a good level to support the current cost base that U.K. farming is enjoying. So I think that's a reasonable balance for us.