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

Hello, and welcome to the NWF Group Results for The Half Year Ended 30th of November 2024. I'm Chris Belsham, Chief Executive, and I'm joined today by Katie Shortland, our Chief Financial Officer. As usual, we'll take you through the presentation, then we'll be happy to take questions at the end. As a reminder, NWF Group is a specialist distributor operating across the U.K. Our purpose is to act as a vital link in the supply chain, connecting essential suppliers with their customers, i.e., we're allowing suppliers and customers to trade with each other when they would otherwise not be able to do so. As a group, we create growth and therefore, shareholder value through strategic M&A in our existing and adjacent markets. Organic growth in our customer base backed by investing in capital investment when necessary to support that additional demand, optimizing our commercial or sales approach and improving our operational efficiency. And these three growth drivers lead to our investment case, which is sustainable in increasing profitability, a good return on capital, consistent strong cash conversion, allowing us to invest in further growth and pay an increasing dividend and a continued strong balance sheet to underpin our value. We currently operate in 3 market segments, and each of those benefit from scale and capability barriers to entry. In fuels, we're the third largest bulk liquid fuel distributor in the U.K., serving over 100,000 SME commercial and domestic customers powering their businesses and heating their homes. In Food, we're the leading ambient grocery consolidator, one of the few real specialists in providing that service, and we have about 5% to 10% market share. We enable our 125 customers to supply U.K. retailers effectively and efficiently. It represents both the most cost-effective and lowest emission way for our customers to get their products into the retailers and ultimately on to the end consumer. And in feeds, we're the second largest ruminant feed distributor in the U.K. with over 4,000 farming customers whom we help to feed their livestock to optimize their yield and therefore, their income. So if I now look at the results for the half year period and remember, this is the seasonally quieter half of our year. Overall, we've had a strong first half performance in line with Board expectations. Revenue is not a good measure for us as both our Fuels and Feed businesses have a significant element of pass-through costs relating to commodities and in the case of fuels, also duty. As you'll see in a moment, our activity levels have actually increased in the period, but because of the lower oil price, our revenue has reduced. More importantly, headline EBITDA, headline operating profit and headline profit before tax were all higher than the prior year as expected, and that reflected the stronger performance in both our Fuels and Feeds markets, which offset the lower performance in Food, which was impacted by the start-up costs of our Lymedale warehouse. Our cash position remains very strong with GBP 11.4 million of cash at the period end in spite of the investments in Lymedale in the last 12 months. Therefore, we have maintained our interim dividend of 1p per share. As a reminder, we've increased our full year dividend by 4% to 5% for the last 13 years, which reflects the Board's confidence in the prospects of the group. I'll now move on to each of our business in turn to give a bit more detail of what's happened in the period, and we'll start with Fuels. So if you remember here, what we're trying to do is to make the best absolute profit that we can do for providing the service of buying and delivering the fuel to the customer. Therefore, to some extent, we're a little bit indifferent to the actual price of the oil. What we're looking to do is make the best margin. And our margins are at their highest when customers are concerned about supply or there's volatility in the oil price. So we and the market as a whole benefited from much stronger margins through COVID and in the first year of the war in Ukraine. Now as you'll recall, the market normalized last year with very stable supply and a stable oil price. And we've continued to see that stable supply and lack of volatility in the oil price this year. Now clearly, we're yet to see what the impact of the new U.S. President and his Drill, baby, drill mantra may be. But I suspect actually the bigger impact on the oil price will be lower global demand, particularly from China. And who knows the events of this week with the trade wars kicking off all over the place will have an impact on that. Now as we discussed last summer, we took action at the start of this financial year to manage the cost base by optimizing our sales team and tanker fleet to reflect the normalized volume and margin that we were now seeing. And we benefited from this action in the first half, which saw stable volumes that had stronger margins and a lower cost base. Our volume mix also benefited from elevated demand from domestic heating oil in the early autumn, which probably dragged some of our volume forward a little bit as people took advantage of the lower oil price as the weather started to turn. We also highlighted in the summer that we were starting initiatives to enhance our sales capability and also to improve our vehicle efficiency. And I'm pleased to say we've made good progress with those initiatives. These have been focused on our Northwest region where we have the greatest depot density. And therefore, the most opportunity to create value from concentrating our sales teams and utilizing our fleet more effectively. We also have a long-standing strategy of trying to consolidate this market through M&A and the pipeline is considerably stronger than it was at this time last year. And I'm pleased to say a number of those discussions are well advanced. So we continue to push forward with that. Moving on to our food business. The business model here is to act as the outsourced storage and distribution solution for our customers, creating efficiency for them by allowing them to share and consolidate with other customers. We make money from storing, handling and distributing their stock to their end-use customer. And therefore, the headline KPIs are the volume of products stored and the throughput of stock through the business. Now last year, we increased our capacity by 39% in the second half with the opening and fit-out of the Lymedale warehouse. That fit-out concluded in June 2024, and we've been building up customer stocks in the first half through a combination of moving stock that we were storing with third-party providers as well as bringing in new business. Therefore, this first half includes start-up costs, which we did not have in the prior year. Now some of those costs have been a bit higher than anticipated as we've moved stock around within our own warehouses to make sure customers are stored in the optimal location for effective consolidation with other customers. In addition, the inflow of new stock has been a bit slower as customers have taken longer to exit from their existing providers. We also saw slower throughput on a couple of specific customers for different reasons. In one case, the business went into administration in the period. Now we didn't suffer any financial loss from that administration. And indeed, we continue to service the new owners. But in the months leading up to that, they just weren't shifting very much stock because they weren't selling particularly well. The strategic focus of this business continues remaining to grow our customer base, which we can then service through expanding our capacity. So we currently have somewhere between 5% to 10% of the market, depending on how you define it. And there are not really many other true specialists offering our level of service and consolidation efficiency. So there's a great opportunity to grow our market share. We then move on to our Feed business. So here, we had a very strong first half performance with volume growth of 9.3% in excess of growth in the overall market of 4.2%. Market conditions encouraged feeding with an increasing milk price, encouraging farmers to maximize yield, and that combined with a wet summer and autumn, which meant grass quality and quantity was pretty poor. We've also been able to maintain a consistent margin and management of our cost base, whilst commodity prices have remained stable as they were in the comparative period. During the period, we also invested in extending our product range with the development of a facility to produce moist feed. I'll talk through that in a bit more detail later on. I'll now hand over to Katie to talk through the financial results in more detail.

Thanks, Chris. I'll now present the financials for the first half year, starting as always with the income statement. Overall, revenue in the period was GBP 454 million, which is a decrease of 3.9%, compared to the prior year. The variance is driven by lower commodity prices and product mix within the fuels business, offset partially by higher volumes. Our headline operating profit was GBP 5 million in the period, compared to GBP 4 million for the equivalent period last year. If I look at each business in turn, Fuels reported an operating profit of GBP 1.7 million, compared to GBP 0.7 million in the prior period. This reflects slightly higher volumes in the period and a favorable mix towards heating oil and gas oil products. The overall PPL for the period was 0.5, reflecting that mix improvement, and the full year projection remains around the 1.1 to 1.2 PPL mark. The Food business has reported an operating profit of GBP 2.5 million in the period versus GBP 2.9 million in the prior period. This reflects start-up costs in the current half year related to Lymedale as the warehouse finished its final kit out and ramped up its volumes. The customer pipeline growth in the period has also been slower than expected with some specific customer challenges. Finally, Feeds reflects a strong first half performance of GBP 0.8 million, compared to GBP 0.4 million in the prior half year. Volumes in the period are ahead of last year with a profit per tonne of GBP 3.25, reflecting relatively stable commodity prices and a strong milk price bolstering demand. Our exceptional items in the period are a cost of GBP 1.1 million. Within these costs, we have GBP 0.1 million of our ongoing ERP project, GBP 0.4 million relating to restructure costs within our fuels business as we look to optimize the commercial and operational model within that business and GBP 0.6 million relating to an investigation into a conflict of interest in supplier commercial arrangement in our food business. The investigation is ongoing, and we expect to provide a further update as part of our full year results. At this point, it is not expected that this will have a material impact on our headline results for the year. As a reminder, our positive exceptionals last year included a legacy legal claim, which was settled in the period. Total operating profit in the period was GBP 3.6 million versus GBP 4.6 million in the prior period. Continuing at the bottom half of the income statement, our finance costs have increased from GBP 0.8 million to GBP 1.5 million from the prior period. IFRS 16 interest increased by GBP 0.8 million in the period, which predominantly relates to the Lymedale warehouse lease, which was not in the prior year numbers as well as a small amount relating to fleet renewals in our Fuels business. Bank interest and pension interest costs have remained broadly the same year-on-year. Our effective tax rate in the period is 25% and is what we expect our tax rate to be for the full year. This tax rate will continue to include an element of deferred tax associated with fully expensed CapEx items. As Chris has mentioned, our interim dividend is maintained at 1p with strong coverage. Moving on to the balance sheet. Our fixed assets have increased in the period, largely due to the Lymedale fit-out. Right-of-use assets and liabilities have similarly increased due to Lymedale and the fleet renewals in our fuels business. Net working capital reflects a small change in the period, which is due to customer mix and timing of large supplier payments, particularly in our fuels business. I'll touch on pension and cash in our later slides. And as mentioned on the previous slide, our tax position reflects the deferred tax associated with fully expensed CapEx as well as a reduction in our deferred tax assets associated with our pension deficit. Overall, we continue to have a strong asset base of just over GBP 251 million to support future investment with a group return on capital of 17.8%. At the end of the period, our accounting deficit reduced by GBP 5.1 million from the prior period to GBP 3.7 million and has reduced slightly from the year-end position. This continues to be driven by the company contribution along with a small increase in our net assets. Given the current cash position, this is not seen as a constraint to group development. Any change in pension strategy will be reviewed as part of the next triennial valuation, which will commence at the end of the calendar year. Moving on to cash flow. Headline EBITDA in the period was GBP 7.9 million. As a reminder, this is stated before exceptionals and IFRS 16 depreciation. Depreciation in the period reflects the investment in Lymedale, noting that the cash impact of Lymedale will be less in the first 18 months due to the rent-free period on the lease. Working capital movements improved in the period, reflecting customer mix and timing on the supplier payments I referenced earlier. Interest increased marginally in the period due to fleet and equipment leases. And our development spend reflects the remaining CapEx spend on the Lymedale kicked out in the first half of the year. Cash conversion in the period was just over 70% versus 55% in the prior period. Finally, moving on to net cash and just looking to the right of the slide. We closed the period with a strong net cash position of GBP 11.4 million, which Chris has referenced already. Cash generated in the period before development and capital expenditure was GBP 4.4 million and lease repayments were GBP 5.2 million in the period. We have now exercised our option to extend our facilities for a further 2 years, which takes these out to May 2028. As a reminder, these are primarily invoice discounting facilities with an additional accordion of GBP 20 million. The extension was made at the current base plus 125 basis points. The Board continues to be comfortable to support a 2x net debt-to-EBITDA position, which continues to give plenty of headroom for further development and acquisitions and sits comfortably within our covenants. In summary, profit in the period reflects a strong first half performance for the group with good cash generation as we enter the busiest second half period. Full year guidance overall remains unchanged. With that, I will hand back to Chris to talk more about our strategy.

Thanks, Katie. In simple terms as a group, we're trying to do 3 things to grow. Firstly, we're looking to consistently improve our current operations to maximize our sales approach and increase operational efficiency. Secondly, we're looking to organically increase our customer base and market share and invest in our facilities to support that growth. And thirdly, we're looking to undertake strategic M&A where it makes sense in existing our adjacent markets. And we look to do that across our current businesses and ultimately deploy capital and group time and resources where we can get the best returns in order to achieve growth to deliver our target outcomes of sustainable and increasing profitability, strong return on capital employed, consistent good cash conversion and maintenance of a robust balance sheet, which underpins our value and an increasing dividend. So that group strategy is being deployed into our current markets in the following ways. In Fuels, we're looking to grow inorganically through M&A, and I'll provide a bit more detail on that in a moment. But organically, we have a number of initiatives that are well progressed to improve the effectiveness of our sales model in both our domestic and commercial markets. We also have initiatives to deliver greater fleet efficiency in the Northwest, where we have the greatest depot density. Here, we've reduced the number of our tankers. We've introduced much stricter delivery locations. We've relocated tankers so they're closer to their delivery areas, and we've routed vehicles on a regional rather than a depot basis. And what we're starting to see is that means we're delivering the same volume of fuel by driving a shorter distance. So ultimately, that means we have more capacity to sell more fuel or we can operate with fewer vehicles. And we're hoping to see the financial benefits of that in the next financial year. In the meantime, we continue to monitor opportunities for fuels in energy transition, albeit that is dependent on government action and progress by government with the election has been pretty limited over the last 12 months. In Food, we continue to focus on proactively increasing our customer base and pipeline to build demand, which we'll then look to service through further warehouse expansion. We've demonstrated this strategy with Lymedale and in the past with our crew warehouse. What we'd be looking to do probably with the next warehouse is to expand to another part of the U.K. because that would give us the opportunity to benefit from transport benefits through greater fleet utilization. We've also started to look at strategic M&A in this sector, but we are being quite specific in terms of our criteria. Some might say slightly picky. But I think that's important because we are a true specialist in what we do, and we wouldn't want to dilute that by acquiring something that was more generalist in nature. And in Feeds, we're looking -- our strategy is to increase our market share to make the most of our operational platform. And we're doing that through training new salespeople in our academy to take advantage of the fact that there's an aging sales demographic across the industry. We're increasing our product range offering to existing and to new customers. And we're also looking to improve our sales model, so it's tailored more to the varying demands of the different customer segments in that market. So we then look at a few of those in a bit more detail. First starting with Fuels M&A. So here, we're #3 in the market with less than 5% market share. #1 in the market is Certas, which is part of DCC, FTSE 100 company. #2 is a business called Watson's, which is owned by U.S. corporate, and that has less than 10% market share. And then there are 10 to 15 large regional players, each of which have about 1% to 2% market share. And then beyond that, there's a long tail of smaller mom-and-pop type businesses. So therefore, we have a dual approach to M&A. We are trying to buy the -- one of the top 15. They all know we're interested. They all know we're capable of doing that transaction, but we need one of them to want to sell. In the meantime, we're pursuing those smaller bolt-on transactions where we can take advantage of owners who are looking for the opportunity to retire and make a capital gain. Now once we are into a deal process, then we've got a very well-established deal process and functional integration model. And we've recently invested in in-house M&A resource to try and increase the pace on those transactions. And once we bought the business, we're looking to drive value from cost synergies where the business we bought can be combined with our existing operations from having greater depot density. So as we found in the Northwest, that enables us to reduce our delivery zone and use our fleet more efficiently. We're looking to enhance margins. So as we increase our market share in a region, we tend to find our margin increases. And we're also, through having a greater depot network, have more scope to increase our sales to commercial customers across the U.K. Now I flagged in the summer that our pipeline has strengthened, and that's continued to be the case. So there are always difficulties with buying family businesses, but our current pipeline is well progressed, and we're confident that we'll close out some deals in the future. I mentioned not much has happened on energy transition. The one thing I would just flag is that the new government has brought in a safe aviation -- a sustainable aviation fuel mandate. Obviously, we hope it would be safe. And that fuel is similar to HVO for home heating, so it should increase supply of that fuel in the U.K. However, that may all be allocated to aviation emissions. So it's unclear what impact that will have on home heating uses. Katie, would you like to talk about warehouse expansion?

Yes, sure. Okay. Thank you. So just as a recap on our Lymedale investment. We signed a 15-year lease in January 2024 for a 332,000 square foot warehouse with capacity to store an additional 52,000 pallets. As of today, all major CapEx investment is now complete and has come in under the planned value of GBP 8.5 million. Storage commenced in March of last year with the first deliveries from the site in April. By September last year, stockholding was around 42,000 pallets and consisted of 13 customers. The site currently has around 45 outbound loads a day, depending on seasonality. Recruitment and retention of staff has been positive with the employment of around 90 warehouse staff, the majority of whom live locally to the site, boosting the local economy. As Chris has mentioned, start-up costs around stock moves and productivity have been slightly higher than forecast in the first half of the year, but expectations remain that the financial year '26 will be a full year of operational performance. The original business case estimated an IRR of 20%, which we continue to support. These returns provide us with the confidence to continue to increase our market share through new customer growth, underpinning further warehouse expansion.

Thanks, Katie. And the last one I'm going to talk about strategically is around product range extension. So this isn't a massive investment, but it's a good example of where we can make a tactical capital investment to increase our profitability. So this is in our Feeds business, where we recently invested in a moist feed production facility. Now moist feeds is typically produced as a byproduct of the brewing industry, and that creates a really good feedstuff for cattle, and it's something that is widely used by many of our customers. But because it's a byproduct from another industry, supply can be a bit patchy and product quality can vary. So by investing in our own production facilities in Cumbria, we're able to offer our customers a consistent year-round product of consistent quality. So that enables us to exist -- to service our existing customer base and get a greater share of their wallet but it also offers a really good way to target new customers because we're going in there with the products that they're not buying from their current feed supplier. So it gives us a point of differentiation. So very excited about that. I think we are -- we started selling it in January and initial interest in that has been very, very positive. And we'd expect a return on this well in excess of 20%. So not huge in itself, but it demonstrates the type of initiative that we are encouraging to find opportunities for growth across the group. So as you can see, we are pursuing multiple opportunities to grow the group and continue to be very active in looking for further opportunities. So just to summarize the first half, a very positive first half, and we continue to focus on growth. We saw a strong first half performance. We've had year-on-year growth in headline operating profit and headline profit before tax. We've had good performances in Fuels and Feeds, offsetting a slower first half performance in Food. We've had positive cash generation, and that's resulted in a robust cash position with GBP 11.4 million at the half year-end, which gives us funding for future development. Our new Board is in place and working well with increased ambition for future growth. And the Board's full year trading expectations remained unchanged ahead of our seasonally more significant second half. That gives us confidence in the future development opportunities and outlook for the group. We'll now be very pleased to take any questions that anybody may have.

[Operator Instructions] We will now take our first question from Charles Hall of Peel Hunt.

Chris, I first ask on the feeds business, so a very good increase in like-for-like sales there. And it looks like you've had quite a lot of activity in the period, but to be outperforming the market by that much was very notable. Is that winning new customers? Is it a greater share of wallet? Is it having more salespeople? And also how sustainable is it?

So a bit of both in terms of the source of that, Charles. So our existing customers are definitely feeding more and probably feeding more in excess of the overall market growth, but we have also won some new business as well in the period. And in terms of how sustainable that is, clearly, the market conditions are beneficial at the moment with that rising milk price. So if that was to fall, I think volumes would be under a bit more pressure. However, in terms of the new business we've won, we'd clearly hope that we can hang on to that.

And is that business being won from anyone in particular? Or is that just a range of customers coming on board?

It's a range across the board, really. I mean our business is very stable at the moment, and that's not necessarily the case for some of the competition. So that's always helpful when people have internal reorganizations going on, et cetera, none of that is happening in our business. So our sales team can be very focused on just getting out there and doing what they do best.

Got it. And then on the food side, you mentioned Lymedale taking a bit longer to fill up than originally expected. Is that purely a timing issue and you've got to where you want to be?

Yes. We expect to have that optimal capacity by the end of this financial year, which is a little bit slower than we anticipated. In hindsight, we were probably a bit optimistic of people moving just before Christmas. So the reality is if people haven't moved sort of really by the end of October, then they're not going to start looking at that until into the new year because they don't want to jeopardize their Christmas period. So we were probably a little bit optimistic in our plan around that.

Got it. But in terms of the full year '26 expectations, those haven't changed.

No, they haven't changed.