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

So welcome, everyone, to the full year results for the NWF Group. This is for the year ending May 2023, and I'm pleased to present a very strong set of results. I'm joined today by Chris Belsham. And as usual, Chris and I will do a double act taking you through these results. On Slide 2, I'd just like to draw your attention to an announcement we made this morning on Board succession. I've enjoyed 15 fantastic years at NWF Group, and I'll be 16 next February. So I've announced the Board my attention to retirement and the really positive news is that Chris Belsham will succeed me as Chief Executive Officer in March 2024. In point of fact, from today, Chris will be Chief Executive Officer, Designate. Also pleased to announce that Katie Shortland will join the Board in October as Chief Financial Officer. Now move on to the results. So on Page 3, this is really for those new to the group or really just a quick refresher for those familiar with the story. So NWF is a specialist distributor of Food, Fuel and Feed across the U.K. We operate in large, stable markets. We've got a very strong track record of delivering consistent growth. In our Fuel business, we're the third largest Fuel distributor in the U.K., we delivered just over 600 million liters of Fuel last year from 27 depots strategically positioned across the country. In Food, we're a very significant ambient grocery consolidator. We've got over 1 million square foot of warehousing in the Northwest of England and is distributing ambient groceries to the supermarkets and to cash and carriers across the country on a daily basis. And on our third division in feeds, we're in ruminant animal Feed producer. So we're distributing Feed to cows, to cattle and to sheep and principally dairy cows . So 75% of our Feed is the Dairy cows and a point of fact we Feed 1 in 6 dairy cows in Britain and supply over 4,000 farmers across the country. Now I move on to Slide 4 on to the results. As I said earlier, it's a very strong set of results. They're actually significantly ahead of the initial market expectations. The revenue number is a big one for the first time in our history, it's now over GBP 1 billion, so GBP 1.053 billion, and that's actually up 20% on prior year. And the growth in revenue is principally as a consequence of the higher price of oil and the higher price of the commodities that we're using on our feeds division. The key number that I always talk about is the headline profit before tax. And the really positive thing in these results is all 3 divisions have been ahead of expectations and have grown significantly in the year. So that's delivered a headline profit before tax of GBP 19.6 million. So it had lower than prior year, but prior year's record included some significant one-off gains, particularly in our Fuel business that we talked about last year. So I mentioned a record revenue. It's also a record profit after tax for the group. And equally as important as profit is cash. And you can see on the chart, we have GBP 16.3 million of positive cash at the year-end. And that really highlights the cash-generative capability of the group and also really gives us firepower and funding to support the future development. And in terms of cash, we're then converting that into dividends. So the dividend -- the total dividend is proposed at 7.8p per share, up 4% on prior year. And that will be the 12th successive year that we've increased the dividend by between 4% and 5% each year. If I now move on to the Fuel division, and I'm going to take you through the operating highlights of each business. So in fuels, we had very resilient performance, and that's in spite of some quite challenging and difficult market conditions. We did also experience some significant oil supply issues in the autumn and winter period. And this was predominantly as a result of the restrictions on Russian oil, which was no longer allowed into the U.K. or Europe. And we have supply agreements with all of the oil majors and from each of the terminals and refineries across the U.K. And what we're able to do, therefore, was to ship product from one terminal or refinery and trunk across the country through a depot where the product was required and meet our customer needs. In terms of the market, it was also quite tough because we had a mild winter. And a large part of what we do is sell heating oil and deliver that to domestic customers. So demand for heating oil was lower as a consequence of the mild winter and also there was a cost of living crisis, and therefore, consumers were looking to reduce the amount of oil that are used in their homes. We had pretty volatile oil prices. You can see the dollar per barrel price started at $124 a barrel, actually ended the year at $74. And today, this morning is $85 a barrel, so remaining volatile. And just really for information, home heating, if you're using oil, it's the lowest cost source of home heating. It was some 11% lower than the capped natural gas price in the year. So therefore, our consumers are able to benefit from that lower cost. We also positively completed 2 acquisitions in the year, both in the south of England, and that adds 39 million liters of Fuel to our distribution network. If I now move on to the Food division. Here, we had real continued successful development. If you look at the profit number on the right-hand side, we delivered GBP 4.2 million of operating profit, up from GBP 2.8 million in the prior period. But critically, we have the same number of warehouses, the same number of people and the same number of trucks. So we just utilize those assets more effectively. Our stored pallets were slightly higher, but the key way we improved our performance was we were shipping more ambient groceries. Our deliveries are actually 8% higher than the prior year. Through talking to the supermarkets, this hasn't been a major change in consumer buying through the cost delivering crisis. It's very much been a result of the growth of our customers with the supermarkets and cash carriers that they're delivering to. Also really importantly, for the Food division and also for the NWF group, we've been able to pass through inflationary cost increases in all 3 divisions. And I think the key to that is we provided a high level of service, and we've also operated efficiently and therefore, been able to pass through those inflationary price increases. Positively, we've continued to win new business in the year. And we've also, with the management team, developed quite an impressive 5-year growth plan for this business. But then move on to fees. Here, we've had really outstanding performance. Here, we're focused on providing nutrition advice to farmers and particularly dairy farmers. And we've been supported by a record high milk price. So therefore, our farming customers have been looking to optimize their diet to maximize the yield they get from their herd. So that very much plays to our team's strengths to improve the nutritional quality and value that we're providing as an import and that then increases the yield and the performance of the dairy herd on our farms across the country. We've also managed to manage effective volatility in commodity prices. And in point of fact, in the summer of 2022, there were some one-off gains from commodities that we bought earlier in the year. Again, a high level of efficiency and service has been able to pass through inflationary price increases. And we've continued to invest in the end of NWF Academy. Now the fifth year of the academy in this business, and these are very much the future nutritionists that we're training through a structured 18-month training program. The milk market itself has been positive with a high milk price. Milk production was up a tad. The volumes in the market and our volumes were just a shade lower, but that was purely because of a warm autumn period where cow stayed out longer and grass was growing later in the year than normal. I'll now hand over to Chris, who will take us through the financial review.

Thanks, Richard. I'll now present another strong set of results, starting with the income statement. Revenue increased by 20% to over GBP 1 billion, driven by the high oil and Feed commodity prices in the first half of the year. Sweet Fuels, which we acquired in December, contributed GBP 7 million of turnover. But more importantly to our results, our operating profit margins were very strong across all 3 divisions. In fuels, we had an operating profit pence per liter of 2p. That's lower than last year, which was 2.6p per liter. But remember, in the final quarter of last year, we benefited from extreme price volatility and supply concerns at 2p, we're well ahead of our normal guidance of about 1.4p per liter. And in our Food business, we increased the operating profit margin to 5.9% from 4.5% in the prior year. And then in feeds, you can see from the table at the bottom of the slide, that we made GBP 7.59 per tonne operating profit. And that compares to a range historically from about GBP 3 up to GBP 5. Analysts would expect us to make about GBP 5.50 to GBP 5.60 in the current year. So that difference between the GBP 7.59 and the GBP 5.50 demonstrates the level of outperformance we experienced in the year during the first half. If we move on to the bottom half of the income statement. Bank interest increased GBP 0.8 million, and that reflects the higher interest rates, which offset the lower use of working capital facilities through the year. Our other interest numbers stayed pretty similar to the prior year. Our effective tax rate was 21.2% with an underlying rate of 20%. Now that included 2 months of the higher corporation tax rate of 25%. And clearly, going forward, we'll be at that rate for the full year. So tax going forward, I'd expect to be about 26%. And our total dividend for the year increased by 4% to 7.8p, which is cover of 4x. That strong income performance is reflected in a very stable balance sheet. Fixed assets increased with the acquisition of Sweet Fuels. That was mainly in the form of intangibles, being customer relationships and goodwill. Working capital reduced a little bit by GBP 2.9 million, and that's due to 2 factors: Firstly, we experienced falling commodity costs across the year. And secondly, we had a short-term benefit around the year-end due to the timing of when suppliers took payment. I'll cover net debt and pension on later slides. The 2 further points on the balance sheet, we continue to have really strong assets underpin. So we have total assets of GBP 218 million. And in terms of the return we get on those assets, our return on capital employed was extremely strong in all 3 divisions this year, given an overall return of 27.6%. Moving on to our pension scheme. Clearly, the last 12 months have been an exciting and volatile time for pension schemes, but the overall impact on NWF has been pretty minimal. So you can see our assets and liabilities have both reduced in line with each other. And that reflects the degree of hedging that's built into our investment strategy. The net impact, therefore, is a slight increase in the deficit to GBP 9.6 million. More importantly, our latest Triennial valuation is well underway, and our expectation is that the current recovery plan and payment profile will continue. So as a reminder, we are currently paying GBP 2.3 million per annum, and that goes up in line with dividend growth. Given our financial position and cash generation, that isn't a constraint on group development. And you can see from our cash flow, just how strong our cash generation has been in the year. So our cash conversion was excellent at 107.6%. And I think we can see that better on the following slide and the chart on the right-hand side. So our cash flow before development expenditure in the year was GBP 16.3 million, which means we improved our cash position by over GBP 7 million after the acquisition of Sweet Fuels. You'll recall that we announced in early June that we renewed our banking facilities for another 3 years. The structure of the facilities is very similar to what we had previously. So the main facility is a GBP 50 million invoice discounting line. And on top of that, we have a GBP 10 million RCF facility. On both of those, we have a GBP 10 million accordion, which means we've got the headroom and firepower if we get the opportunity to do a larger transaction. The margins and covenants are pretty much the same as our previous facilities. So that gives us plenty of firepower for what we want to do in terms of development. As a Board, we're comfortable up to 2x net debt-to-EBITDA. So plenty of scope to work within given our current cash position. So it's a pleasure to talk through another set of strong results, and I'll now hand back to Richard to talk about the future.

Okay. Thanks, Chris. What I want to just present now is a really clear development strategy. And what we've got is a really strong platform for growth. Just in terms of summary, you need to remember that NWF has a diversified source of earnings. So we've got 3 divisions that operate in 3 separate markets, and all of them are providing basic products and services. So what we don't have is huge variability, and we have real resilience as a group. As you recall, we didn't use any support during the pandemic. We didn't furlough any staff and we performed well with tough or challenging economic conditions. We've got an experienced capable management team across the group. We've got real strength and depth in each of our divisions of people who've spent their careers in those sectors, understanding how to optimize the business, whatever the conditions. We've got a strong track record of shareholder return. And for the first time, the group is now over GBP 1 billion of revenue. We've also got a very skilled workforce, and all of those things help us set up the stage for that development platform. It fuels the strategy is very much to consolidate a fragmented market. This is what we've been doing for the last number of years successfully, and there are significant opportunities to do this more, and there's a strong pipeline that exists. In Food, we've got a very significant presence in the Northwest, and we believe that it can get larger. We have a strong pipeline of customers who are looking to join our business. And what we're going to do is expand the business with warehouses linked to customer contracts, and that's a real and present opportunity. Currently, we're actually an overflow warehouses as we have customers wanting to join the business. And in feeds, we've got a fantastic national operation platform. The key is to continue to utilize this to supply Feed to over 4,000 farmers. So we're continuing to train people through the Academy to be our future nutritionists and look to sell more products and services to those farming customers. I now get Chris to take us through the detail of each division.

Thanks, Richard. In fuels, our M&A strategy is well established, and we've been following it for a number of years. And we look at it in 2 ways. So firstly, we would love to do a larger transaction. So we're regularly talking to the smaller national players and some of the larger regional players. And we have, as I talked about the firepower to do a deal with that scale. Unfortunately, though, that does mean one of them to want to sell, and they don't at the moment, but we'll continue to pursue those opportunities. Secondly, and a bit more within our control, our bolt-on transactions like the 2 we've done in the last 12 months. So we've got an active pipeline of businesses that we're talking to that we would hope to buy over time. And as a guide, we'd look to spend about GBP 10 million per annum on bolt-on transactions. We have an established deal process, and that covers everything through from pipeline creation through deal valuation, through negotiation, through diligence, right through to the legal and integration once we bought the business. So we continue to use that as a template for undertaking our M&A activity. Moving away from M&A we are confident that there will be a market for oil for the foreseeable future, but that doesn't mean that we're not considering what some of the alternatives may be as the U.K. economy seeks to decarbonize. So a specialist in moving liquid energy, we are involved in the sale of biofuels through utilizing HVO, which could be both a solution for home heating but also for HGV operators. And we're offering that to our customers in both of those spheres, although the demand at the moment is relatively limited given the additional cost of those type of fuels. So the future will depend on technology to some extent, but we continue to keep close to that. So we're able to react and respond to that as it becomes clearer. So plenty of going on in fuels, particularly with the active deal pipeline that we're seeking to acquire. Moving on to Food. Our Crewe 240 warehouse opened in 2020 and has been incredibly successful. It increased our capacity at the time by about 35%. It's exceeded all our business plan expectations and it's giving a return on capital of employed of about 20%. It's a really, really good project and very successful. At the same time, we're enjoying a really high level of demand from both new and existing customers who really value our service proposition. And therefore, we're looking to service that customer demand through expanding our capacity through another warehouse like the Crewe 240 project. So we're actively looking for sites at the moment, and we'd hope to proceed with something in the short to medium term. And to give you an idea of scale of that, Crewe 240 costs about GBP 2 million to fit out a warehouse of a similar scale now would probably be about double that. So that type of investment I would be looking to make. And last but not least, moving on to our feeds business, we had some outperformance in FY '23, but we also had really strong underlying performance, and we're looking to build on the underlying performance and our national platform to continue to grow and develop the business. And we're going to do that in 3 ways: firstly, through continuing to manage and optimize the margin Secondly, through building volume using our trained nutritionists, that will come through our Academy program; and thirdly, through selling additional nutritional products to both new and existing customers. We're also in our Feed's division, helping our customers with their sustainability agenda. So we're designing new diets that help farmers either reduce methane emissions or eliminate raw materials such as soya. So on that appropriate note, I'll hand back to Richard to talk about ESG.

Thanks, Chris. So our ESG agenda is all about delivering sustainable value. There are 4 platforms for this strategy, it's around creating a culture of safety, investing in our people, building strong partnerships and also respecting the environment. And in terms of progress this year, you'll see a lot more detail in our annual report, as it's the first year of TCFD disclosure. So you'll see a lot of detail there. It's fair to say that ESG is now fully embedded in the group. It's part of our normal reporting process we have regular ESG meetings and actually Chris chairs, and myself and the other managing directors attend. And just out of interest, our Food division has now applied for B-Corp certification. This is post the year-end, and the team are very confident of achieving this high benchmark. And if we do, we'll be one of the first companies in logistics in the U.K. to achieve this benchmark. Then move on to the end, we have proposition the investment case on Slide 20. This is a sort of why Pick Us slide. First thing I'd highlight is the strong management team group-wide. And what we've got in each of the divisions, as I've said earlier, our real deep seated experience of those marketplaces, people who spent their careers in those sectors and therefore, know how to respond to whatever conditions and optimize the performance of the business. We've got a very clear growth opportunity. It's a strategy that Chris and I have set out today, but it's one that we've consistently presented over the last number of years and our shareholders understand it. We've got strong asset backing the GBP 220 million of gross assets does 2 things. It helps Chris and I to sleep at night but it also fundamentally gives us the cost-effective source of funding that we detailed earlier. We generate a very strong return, 28% return on capital employed last year, which is good and we also converted 107% of our profit into cash. And as a consequence of those things, we have a progressive dividend policy, which, again, is increasing by just under 5% to 7.8p per share. And in terms of total shareholder return, we're pleased to report that over the last 10 years, our total shareholder return has increased by 10% in each of those years. So it really shows that strong development we have as a group and the whole thing we try to communicate is incredible resilience, but also a business and a Board that is ambitious to grow. So the final slide, it's great to present another strong set of results but also to reiterate our clear strategy. We've got a succession plan in place that we've taken you through this morning and that should be a smooth transition over the next several months as I retire after a great career here at NWF, Chris takes over and Katie joins the Board. Also pleased to report we're currently trading in line with the Board's expectations. There's a significant pipeline of potential acquisition opportunities in fuels. As Chris said, we're looking for warehouses in the northwest of England, as we have customers wanting to join our business. And we've got another cohort of Academy students starting off on the progression to big future nutritions in the business. So I'm pleased to report we've got confidence in the future development opportunities and outlook for the group. Thank you very much.

And we've got a question from Andrew Ford at Peel Hunt.

One for each division, if I can start, on fuels, I know we're talking about now an average price per liter of GBP 1.4. That's crept up in recent years. I wonder if you could explain sort of what's driving that gradual improvement on the underlying level, I know it was sort of an exceptional year the last couple of years. On Food, you talk about the out and back benefit. Are you able to sort of quantify that? And maybe how much further that could go if you're able to find that warehouse in the sort of areas that you're looking? And then on the Feed, obviously, an exceptional year here with some margin benefit, thanks some opportune purchases. But you mentioned there was that underlying improvement as well. Can you talk a little bit more about what's driving that underlying improvement in Feed?

Okay. Well, I'll start off and then we get stuck, I'll hand over to Chris. It's probably the way to it. I guess in terms of fuels, if I wind the clock back about 5 years, we were talking about trying to get about $0.01 a liter of operating profit. And now yes, you're right, that is now looking at an average of around 1.4p per liter. And there's 2 key reasons for the all 3. First of all, there's inflation. So therefore, our profitability needs to improve. But probably more importantly, what we've done is we've improved the leverage of the business. So in essence, we've got a head office in our Fuel business. And then as we add depots to it, we don't need to increase the size of that head office. So our pence per liter should improve. We've also been focused in the last few acquisitions on domestic businesses, and the gross margin of those domestic business is higher, and that also improves the overall PPL. So that's the sort of level we retain today. In Food, in terms of loads and backlogs, our out loads , the number of loads we shipped was actually 8% higher than prior year. As I said, we've asked a number of supermarkets has that been down to the cost of living and the likes of [ Alden ] saying has said, no, we haven't seen a growth in ambient, they've seen a reduction in fresh Food and an increase in frozen. And therefore, the growth we see in Ambient is very much down to the mix of customers we have and the supermarkets that we're delivering to. So whilst out loads have been up 8% we also get a benefit in backlogs because overall, for every 10 loads that goes out, we have 9 backloads. We have over 90% backload fill. And therefore, each activity going out, generate extra revenue and likewise, additional revenue coming back. And that's really why the additional profitability has come through. In terms of Feed, yes, we had some exceptional gains in the year from commodities but we've also improved the management of margin in the business. And that's a lot of detailed focus in terms of the contracts that we have with our customers because some customers like a fixed price over a summer or winter period, and some customers like variable. So we very much become more effective at managing those contracts and communicating and managing with our farming customers. We've also recognized again, inflation is coming through. So our gross margin needs to improve to reflect those inflationary pressures that we've had, and we've managed to achieve both of those features. So hopefully, that covers it, Andrew.