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

Hello, and welcome to the NWF Group results presentation for the year ended 31st of May 2024. I'm Chris Belsham, the Group Chief Executive, and I'm joined today by Katie Shortland, our Chief Financial Officer. Before we dive into the results, it's probably worth just doing a brief overview of the group for those who are new to us and is a useful refresher for everyone else. So NWF Group is a specialist distributor operating across the U.K. On our purpose or our reason to exist is to act as a vital link in the supply chain, connecting essential suppliers with their customers when those 2 parties would otherwise be unable to trade with each other. We operate in 3 market segments. And in each of those, we have scale and capability barriers to entry and are a leading player. So if we start with our fuels business. Here, we're the third largest bulk liquid fuel distributor in the U.K., and we're servicing over 100,000 SME commercial and domestic customers who need fuel to power their businesses and heat their homes. In food, we're a leading ambient grocery consolidator, helping 125 grocery brands to access the major U.K. retailers in an efficient and effective way. And in feeds, we're the second largest ruminant feed distributor in the U.K., supplying over 4,000 U.K. farmers with the feed they need to feed their herds and optimize their yield. The success of all 3 of those businesses is dependent on our strategic enablers. We're dependent on the skills and capability of our people and the culture that we have within the organization. Being our best is about understanding our operating model and our detailed processes so we can constantly find ways to improve those. Change management is essential when we're looking to deliver inorganic projects, whether that's a fuels acquisition or a new warehouse in our food business, and data and technology improvement is essential to ensure and we continue to have great service and efficiency within our business. If we now move on to the results themselves. So a strong set of results, which were in line with market expectations. If we look at revenue first, you'll see that's down a bit, but revenue is not a good metric for the NWF Group. That's because over 90% of the revenue in both our fuels and our feeds business is effectively the pass-through of commodity costs. So whilst revenue has gone down a little bit, actually, our underlying activity was higher. Our headline operating profit and headline PBT are both lower than the prior year as we saw normalization in the fuels and feeds markets, and those were partly offset by a strong performance in the food business. That was all expected, and it was built into analysts' expectations at the start of the year. Following our investments in the new warehouse at Lymedale and our acquisition of Geoff Boorman Fuels last summer, we're still cash positive with a balance of GBP 10 million at the year-end. And along with our long-term funding facilities, that gives us plenty of firepower for the future. And the Board's continued confidence in the prospects of the group is reflected in the fact that once again, we've increased the dividend, I think, for the 13th year in a row. This year, it's 8.1p per share, which is 2.4x cover. So I'll now talk through each of the businesses in turn, starting with fuels. So in fuels, we're looking to make an absolute profit per liter for the delivery service that we provide. And our margins are higher when customers become concerned about the stability of supply or where there's high volatility in the oil price. So over the last few years, we have benefited from macro events like the pandemic and the Ukraine war because that caused our customers to be concerned about supply, and therefore, they became a little bit less price conscious, and that served to push up the market pricing. We knew that was abnormal, and we didn't expect it to last and that was reflected in our market expectations this year. And this year has indeed returned to normality. So we've seen a very stable oil price and very stable fuel supply. As a result, we've seen a return to normalized market pricing. That's also been compounded by the fact we have the second mild winter in a row, and that reduced the demand for heating oil. And when that happens, companies like ourselves have increased competition for commercial customers, and that tends to push down the pricing a little bit. Against that market backdrop, I'm very pleased that we actually grew our commercial volumes, whilst our domestic volumes remained flat. We also actively managed our cost base, optimizing both our sales teams and our tanker fleet, and those conditions have continued into the current year, and we undertook some further cost reductions ahead of our quieter summer period. Now as you know, we've been seeking to grow this business for a number of years through M&A. And you will see now, we acquired Geoff Boorman Fuels last summer, then we then found over the winter that the M&A pipeline was a little bit quiet, which makes sense because business owners didn't want to sell the business on the back of a normalizing market. But now we've been through a year of those market conditions, I'm pleased to say that the pipeline has really picked up over the last 2 to 3 months, and we're seeing far more opportunities to continue our growth through M&A in the fuel space. We then move on to our food business. So at the half year, we highlighted that we had strong performance, and I'm pleased to say that continued into the second half. This business makes money through storing, handling and distributing our customers' stock. And therefore, the key measures are the number of pallets stored and the throughput that we have through our warehouses. Our pallets stored peaked at 146,000 in the year. Now that's 20,000 pallets above our optimal storage capacity, and 11,000 above our max capacity. So as planned, we use third-party off-site storage, and we did that in a very efficient and effective way. With that level of new business, we were also able to support our investment in our new warehouse at Lymedale, which we announced in January. That gives us an extra 52,000 pallet space, which increases our capacity by 39%, and it means we've increased our capacity by 87% since 2020. We commenced the fit-out in January, and that concluded in June. We started to store stock there in April, and we're now operating at about 70% capacity with a view to being at full operating capacity in the early autumn. Another key achievement in the year was B Corp accreditation. So some of our customers and retailers are very keen to work with partners who can demonstrate a very sustainable supply chain. So therefore, we sought B Corp accreditation because that's a rigorous ESG metric, which makes us attractive to those type of customers. And I'm pleased to say we achieved that high standard during the year. This business will grow on the back of having more and more customer demand, so we continue to focus on building our customer pipeline to fill and optimize our current warehouses and give us the opportunity for future growth. And then moving on to feeds. If you cast your mind back to last year's results, you'll recall that feeds had an exceptional market conditions in the summer of 2022. This followed Russia's invasion of Ukraine, which saw a significant increase in the price of feed commodities. And as a result of that, the milk price was increased to record levels. Now because we forward buy our raw materials, we were able to benefit across that summer from significantly elevated margins, and we guided last year that we made north of GBP 1 million extra profit across that period. We didn't expect to repeat of that in FY '24, and we didn't get one. What we saw was a very stable year with very stable commodity prices and the milk price lower, but importantly, still profitable for our farming customers. Demand saw variations across the year. So last summer was alternating very hot and very wet weather, which was fantastic for grass growth. So our customers went into the winter with a significant amount of silage to feed their herd. The flip side of that was we then had a very wet winter and spring, which extended the winter season. So we saw higher demand towards the back end of the financial year. As a result, the feed market overall was flat and we were down a little bit versus that flat market. We could have won an extra volume, but it wouldn't have been very profitable business so I'm comfortable with the volume level that we had. More importantly, the management did an excellent job of managing our gross margin and cost base through the year. And that was particularly the case as our electricity cost nearly doubled as we came to an end of our preexisting fixed price contracts, which ended in 31st of May 2023. Therefore, we had a significant increase in electricity costs that we had to manage through with our customers, which we managed to do very successfully. The longer-term growth of this business is dependent on gaining market share, and we're doing that through training the next generation of feed sales people. Generally, industry is typified by an aging sales force. And therefore, we can see the opportunity if we train the next generation that we will pick up market share as our competitor salespeople start to retire. So the latest cohort of people have joined our NWF Academy, and we continue to see success from that program. I'll now hand over to Katie to talk through the financial results in more detail.

Thank you, Chris. I will now present the financials, starting with the income statement. Overall, revenue finished the year at GBP 951 million, which was 9.8% lower than the prior year. This variance was driven by lower commodity prices in the year. As Chris has already mentioned, and a product mix movement that was offset partially by higher volumes in peers, including the acquisition of Geoff Boorman. Our headline operating profit was GBP 14.2 million compared to GBP 21 million in the prior year. If I take each business in turn, fuels reported an operating profit of GBP 7.9 million in the period compared to GBP 12.9 million in the prior year. This reflects the normalization of market prices as oil price and concerns over supply stabilized. The PPL in fuels for the year was 1.2, which is broadly in line with the average PPL prior to more recent black swan events, as you can see in the table below. And this reflects the lower demand for heating oil and that mix change towards commercial volumes that Chris referenced. Food continued with its strong trading position seen at H1. I have finished the year with a headline operating profit of GBP 3.7 million versus GBP 4.2 million last year. This performance includes the absorption of year 1 costs associated with the new Lymedale investment of GBP 1.2 million at operating profit level and GBP 1.7 million at PBT. Finally, in feeds, a full year operating profit of GBP 2.6 million has been achieved compared to a prior year profit of GBP 3.9 million. As we mentioned previously, this reflects the continuation of low and still commodity prices as well as higher rate costs in the year. This contrast with the first half of full year '23, which had significantly elevated margins on the back of record high milk prices. The effective cost and margin management resulted in a full year profit per ton of GBP 5.21, which is 16% above the 5-year average. As mentioned at the half year, we have a positive position on our exceptional full year '24, which reflects GBP 1.3 million of income associated with the legacy legal claim that was settled in the year. That's partially offset by costs incurred to scope a new IT solution across the business. Whilst this latter cost will be a multiyear project, the costs are exceptional in nature. Total operating profit is GBP 14.3 million versus GBP 20.6 million in the prior year. Moving on to the bottom section to the income statement. Our finance costs in the year were GBP 2.1 million compared to GBP 1.7 million in full year '23. Within these costs, our bank interest has reduced from GBP 0.8 million to GBP 0.4 million, which is a result of lower debt levels across the group, partially offset by higher interest rates as we use our facilities at Paris through the month and the year. IFRS 16 interest has increased from GBP 0.6 million to GBP 1.3 million in the year. The majority of this movement relates to our Lymedale warehouse investment. As our fleet lease terms come up for renewal, we do expect this cost to rise due to the higher capital and interest rates from the prior lease period. Analysts would expect the IFRS 16 interest for full year '25 to be approximately GBP 2.5 million. Our pension scheme interest remains largely unchanged, and our effective tax rate in the period was 25.4%, which is marginally above the corporate tax rate and reflects business-related nondeductibles. The company recommends a final dividend of 7.1p per share, which equates to a full year dividend of 8.1p, this is 3.8% higher than the prior year, and reflects the continued dividend growth of the business whilst remaining at an acceptable COBA level. Moving on to the balance sheet. Our fixed assets have increased in the year with the acquisition of Geoff Boorman in July '23 and the fit-out of the Lymedale warehouse. Our right-of-use assets have increased along with a corresponding increase in lease liabilities, with the majority of which relates to the Lymedale property lease as well as plant in vehicle leases taken out in the year. Working capital reflects the reversal of a short-term timing difference at the last year-end, slightly higher inventory and an overall mix change in both customers and suppliers. The increase in tax provision relates to the deferred tax impact of our fully expensed CapEx in the year, which relates predominantly to Lymedale, as well as an adjustment in our deferred tax asset due to our pension deficit reduction. I'll talk a little bit more about net cash later on in the presentation. Overall, net assets increased in the period and with total assets of GBP 238 million, we continue to have a strong asset base to support the business. Return on capital employed in the period has gone down year-on-year, which reflects that normalization in profit as well as the strength of investment in our asset base, though it is pleasing to see Food maintain its double-digit return despite the end year cost associate with Lymedale. Moving on to pension. At the end of the period, our accounting deficit reduced by GBP 5.1 million from GBP 9.5 million to GBP 4.5 million. This is driven by the continued company contribution as well as positive investment returns increasing the value of the assets. As I briefly touched on at the half year, the triennial valuation for the period ended 31st of December 2022 is now complete, and supports the continuation of a company contribution of GBP 2.1 million, the increases in line with dividends. This continues to support the recovery of the deficit over the next 3 to 4 years. Given the current cash position of the group, this is not seen as a constraint to group development. Moving on to cash flow now. Headline EBITDA for the period is GBP 19.4 million. As a reminder, this is stated before exceptionals and excludes IFRS 16 depreciation. Our working capital movement is largely driven by the short-term timing of mind that we saw from last year-end. Development spend relates to the acquisition of Geoff Boorman and our Lymedale CapEx investment. And our cash conversion in the year stands at 77.5%, but if we actually strip out the timing difference from the working capital from last year-end, the underlying conversion rate would be closer to 100% in the year. Finally, moving on to net debt. Our cash outflow was GBP 6.3 million in the period, reflecting that investment in the business through the acquisition and the fit-out of the Lymedale warehouse. Cash flow before development expenditure was GBP 6 million in the period. Our facilities of GBP 61 million remain in place with an additional accordion of GBP 20 million, should we need it. The Board remains comfortable to support a 2x net debt-to-EBITDA position, which continues to give plenty of headroom for development and acquisition, and sits comfortably within our covenants. In summary, the group reported profit in line with expectations as prices normalized, following a period of volatility and cash remains strong to support the future ambitions of the group. With that, I'll hand back to Chris to talk more about our strategy.

Thanks, Katie. In reviewing our strategy as a new group leadership team, we've also considered our purpose, why does the group exist. Our vision, what do we want the group to be. And our values, how will we go about achieving that vision. So our purpose, I've already mentioned, which is to act as a vital link in the supply chain, connecting essential suppliers with their customers where those 2 parties don't have the capability to trade directly with each other. To give some examples of that, in fields, we're allowing a homeowner who needs oil to heat their homes to get fuel from an oil major. In feeds, we're helping a global commodity trader to actually get products through to an individual dairy farmer. And in food, we're helping a new food brand to actually make its way into the major U.K. retailers. So absolutely essential link in all of those supply chains. We then move on to our vision, we want to be innovators in specialist distribution, delivering value sustainably. So what does that mean? Well, it means we want to be the best of what we do in each of our chosen markets. And in order to do that, we'll need to innovate and improve to ensure we maintain a market-leading service in each of those market segments. And lastly, our values will achieve our vision through our values, foresees. Now I won't run through those in great detail, but overall, the aim is to develop, challenge and keep our colleagues safe whilst collaborating across the group to make use of the scale and expertise that we have. So those 3 things together are going to help drive our strategy. In addition, we also continue to use our ESG framework to deliver our strategy. And that, as you'll recall, is based on 4 pillars: safety, people, partnerships with customers and suppliers and respect for the environment. So key developments in this year, we have the B Corp accreditation achieved in food, which I've already mentioned. We've done an awful lot of work around voice of customer in fuels and feeds, and that's starting to drive our approach to those customer groups. And we've also seen further development of our TCFD assessment and disclosure. So we now move on to the strategy itself. So each of our 3 businesses has its own plan for growth. But in addition, as a group, we're looking to deploy the group's capital to inorganic opportunities, which offer an attractive level of return. As a group, we're also ensuring that we're deploying our strategic enablers as effectively as possible to help the businesses achieve their plan and also deliver those inorganic projects. So for example, that could be using some central expertise that we have in a specific area. So our M&A capability sits at group level at the moment, but we're deploying that into fuels or it could actually be about collaboration across the group. So both our feeds and fuels businesses are developing telesales capability. If I then look at the individual businesses, so in fuels, our inorganic strategy is based around M&A, and I'll talk about that in more detail shortly. Organically, we've been doing a lot of work on our sales model. So I mentioned at the half year results that we were undertaking a pilot around our proposition to domestic customers based on the voice of customer work that we've done. I'm pleased to say that pilot was very successful, and we're now rolling that out across our entire domestic depot network. On the commercial side, we've tended to focus on SME commercial customers, and that's not taking advantage of the depot network that we have in order to service customers who require a multi-site offering. So we're starting to target those type of customers and see that as an opportunity for growth. And we're also heavily focused on fleet efficiencies as tankers are becoming increasingly more expensive. And therefore, we have to be very disciplined about how we route and use those vehicles to ensure we're doing the minimum number of kilometers for each delivery. So that's what's driving the fuel strategy at the moment. In food, the priority here is always to continue to grow and develop the customer pipeline because that enables us to have the right portfolio of customers and also the additional new customers coming through, which support further expansion. And that expansion can be through further warehouse expansion as we've seen with Lymedale or it could be through targeted M&A. Now the targeted M&A is at an early stage, but the advantage that would give us is it would enable us to get another base elsewhere in the country, and that would lead to transport efficiencies. And then in terms of feed strategy, we're looking, as I've said, to grow our market share through our academy, utilizing our national operations platform, and we're also starting to develop additional products to sell-through to our existing customer base. We then move on to fuels M&A and look at that in a bit more detail. So in this market, we're #3, but we have less than 5% market share. #1 in the market is Certas, which is part of DCC, and that's got about 20% market share. Then there's #2 in the market, Watson's, which is owned by U.S. Corporate World Connect, that's probably less than 10%. And then there's probably 10 to 15 large regional players who sit below ourselves. And following that, there's a long tail of small businesses. So our approach to M&A is a dual one. Firstly, we'd love to do one of the larger transactions. So I'd be very keen to buy any of the top 15 businesses with possible exception of Certas, which is probably a little bit too big. They all know we're interested but we need one of them to sell. Whilst we're waiting for that to happen, therefore, we keep focusing on those smaller bolt-on transactions. So we've done 7 of those over the last few years. And as I referenced earlier, we're starting to see a more active pipeline now. Our M&A model is well established. So we have a very established deal process and functional integration model. We then look to drive value from a variety of sources. So firstly, if the business we buy is close to our existing geography, there's the opportunity for cost synergies coming out of the transaction. We're also keen to build depot density because the more depot density we have, the less distance our tankers have to travel in order to do their deliveries, so we can deliver fleet efficiency through that. The third area of opportunities around margin enhancement. So we can see from our business that where we have market share of north of 10% that we have significantly higher margins. And that reflects the fact that we've become a market leader on price model market followers. So we're looking to build up market share in all of our geographies. And lastly, by building more of a depot network, we're able to support those multi-site commercial customers that I talked about earlier. We also have opportunities in fuels around energy transition. So that splits into 2. On the domestic side, I spoke at the half year results about government consultation that was going to take place, which was hopefully going to lead to HVO blended kerosene being used for home heating. Unfortunately, along with many other things, that government consultation got delayed by the election, but it did have cross-party support. And as an industry, and we're an active participant in this, we are working with the new crop of MPs who've come into the House of Parliament to try and get that consultation going again. So an opportunity there for our domestic customer base. On the commercial side, HVO is available as a diesel drop in replacement. Unfortunately, there's a bit of a chicken and egg here around supply and demand. So because the level of demand is relatively low, there isn't a high level of supply, and therefore, there's a significant price differential between HVO and diesel. I would hope at some point, there'll be some government action around that. And then for we will be ready at that point to supply HVO to our commercial customers when that pricing differential narrows. I'll now hand back to Katie to talk about warehouse expansion.

Thank you, Chris. If I just recap on some of the key points around our Lymedale warehouse expansion. So this is a second investment in warehouse growth beyond our word head office site, with the first investment in our crew facility in 2020, which gave an additional 35,000 pallet space. Lymedale adds an additional 52,000 increasing capacity by 39% to 187,000 pallets. As Chris has mentioned earlier, fit-out is tracked in line with plan, and was broadly complete by the end of June 2024. And the warehouse is currently 70% full and is expected to be at operational capacity by early autumn, all in line with business case. Our customer pipeline remains active with our aim to continue to grow this to enable future expansion. And as Chris has already mentioned, in addition to this, we will look for targeted M&A opportunities to enable expansion beyond the NatWest. And with regards to the numbers associated with Lymedale, so the Lymedale warehouse is a 15-year lease with the 2-year break clause. The facility is now broadly complete, as we've mentioned, with costs estimated to be just under the budget of GBP 8.5 million. The IFRS 16 impact of the facility is reflected in a write-in use asset of GBP 27.2 million and a liability of GBP 25.4 million. The asset is about GBP 1 million higher than previously guided, purely for accounting reasons. Actual lease costs remain unchanged. In addition to this, the impact of IFRS 16 interest will see higher interest costs in the early years, which will unwind through the life of the lease. As a result, PBT will grow from GBP 1.2 million in full year '26 to GBP 2.5 million by the end of the term. Full year '24 saw start-up costs of GBP 1.2 million at operating profit level and GBP 1.7 million at PBT. Full year '25 is still forecast to deliver GBP 1.5 million of operating profit and PBT neutral in year. The investment is still expected to deliver an IRR of 20% as previously communicated.

Thanks, Katie. Therefore, our strategy features both organic and inorganic growth opportunities, and those give rise to our investment case. So NWF Group is focused on delivering a strong return on capital employed, as we've seen with our recent Lymedale investment and our fuel acquisitions over the last few years. Our strong balance sheet reflects the scale and capability of our asset base, which gives the Board the confidence to invest in development, and the cash-generative nature of our businesses means we get a return from that investment pretty quickly. So the return from the developments has allowed us to increase our dividend to shareholders for the last 13 years, therefore, given a good overall return. So in summary, solid financial performance in 2024. Fuels responding to a normalizing market. Food, strong performance, which support the Lymedale investment and the successful fit-out of that new warehouse. And feeds managing gross margin and cost base to give a resilient performance. We're cash positive. We've got long-term funding in place for development. As you will have seen from the recent announcements that our Board succession planning has now completed with our recent nonexecutive director appointments. And from a current outlook perspective, it's very early in our financial year, and it's the quiet period of the year. So we don't read too much into some performance. But at this stage, our trading is consistent with Board expectations. And the Board has confidence in the future development opportunities and outlook for the group. So that concludes the presentation. Thank you for joining us, and we look forward to updating you on our half year results in January.