NWF Group plc (NWF) Earnings Call Transcript & Summary

Hello, and welcome to the NWF Group results presentation for the year ended 31st of May 2025. I'm Chris Belsham, the CEO, and I'll be joined by Katie Shortland, CFO. As a management team, this has been our first full financial year in charge of the group. It's been a very busy and very productive year, and we're very pleased with the progress we've made. And that's reflected in the new look and format to this presentation. If we start with the highlights of the year, we've made significant strategic progress whilst delivering a solid performance in an uncertain economic environment. That strategic progress has included the acquisitions of Northern Energy and Pinnocks, in line with our strategy to consolidate the U.K. fuel distribution sector and the development of a regional operating model in Fuels to improve both commercial effectiveness and operational efficiency. That model was successfully piloted in FY '25, and we're now rolling that out nationally. From a trading perspective, we've managed mixed market conditions for Fuels well whilst controlling the cost base. In our Food business, we had slower ramp-up of the new warehouse than anticipated, leading to lower performance, but decisive action was taken with management change and restructuring of the cost base. These actions support both improvement in immediate performance and the building of foundations for future growth. And in our Feeds business, we managed positive market conditions as well and benefited from a step change reduction in production costs to deliver a strong result. For shareholders, this means that our long track record of dividend growth continues with a further 3.7% increase, and we continue to have a robust financial position as we pursue our strategy. If we move on to the financial highlights now. Revenue was lower in the year, but that's purely as a result of a lower oil price. Our activity levels were higher, and this is reflected in our profit metrics, which are all slightly ahead of initial market expectations. Headline EBITDA was up 14.4% to GBP 22.2 million. Headline operating profit was up 14.8% to GBP 16.3 million and headline profit before tax was up 5.6% to GBP 13.2 million. Despite our strategic investments in the year, we ended with a positive cash balance of GBP 6.3 million. And as mentioned, that solid financial performance supports the continued increase in dividend. If we now quickly look at the individual business highlights. In Fuels, we saw a strong domestic heating oil market driven by the low oil price, which meant it was cheaper to heat your home this year than it was in the prior year. That contrasted with a commercial market, which was weaker due to difficult economic environment for some of our SME customers in the sectors in which they operate. For example, 15% to 20% of our volume goes to construction-related businesses. We had reduced our cost base in June 2024 to create savings to invest in new tanker fleet. That new fleet was slightly delayed, which didn't benefit us at the headline operating profit level, but did give a rise to short-term lease interest benefits at the group level overall. There was lots of strategic progress in Fuels, but I'll come on to talk about that shortly. In Food, we completed our new Lymedale warehouse on time and to budget, which increased capacity by 39%. However, the ramp-up of new business was slower than anticipated, and that combined with a lower throughput across our network. As a Board, we responded quickly. We changed the senior management team to bring in expertise and experience. We restructured our cost base across our warehouse network and central costs, and there were 2 benefits to these actions. Firstly, it rightsized the cost base to support immediate improvement in performance. And secondly, it builds the right foundations for future growth with a simplified and more scalable operation. In Feeds, we had a good milk price across the year. So dairy farmers wanted to maximize yield. We managed those conditions well, resulting in strong volumes at sensible margins. We also benefited from a step change reduction in our electricity costs as we participated in the government scheme to support energy-intensive industries. That benefit will continue as long as the scheme exists. We also successfully invested in product extension, which again, I'll come on to talk about a little bit later. Before we delve into more detail, I thought it would be helpful to give an overview of the group's business model. NWF Group exists to add value to supply chains by using our expertise to connect customers and suppliers who otherwise would struggle to connect mainly due to a difference in scale. We currently operate across 3 markets where we apply our expertise in the following areas: sourcing and procurement of commodities, that could be oil or wheat or rape; storage and warehousing; manufacturing and processing in Feeds only; consolidation and bulk distribution; and across all of our business, a focus on customer service. So in Fuels, if you look at the red on the slide, we connect domestic oil-heated homes and SME commercial fuel users, both of whom need to buy fuel in bulk, with the major U.K. oil suppliers who can't deal directly with them. In Food, if you look at the blue arrows, we connect smaller grocery brand owners, manufacturers and importers into the U.K. grocery supply chain in the most cost-effective and environmentally friendly way by providing a consolidated storage and logistics solution. And in Feeds, we connect dairy, beef and sheep farmers with global agricultural commodity traders by formulating yield, optimizing diets, procuring commodities, manufacturing the diets, then distributing it effectively to farm, and that's shown by the green boxes. And as you can see from our numbers, all of our businesses have significant scale in their specialist markets, which are robust and resilient. In Fuels, we're #3 in the market with less than 5% market share as it's a heavily fragmented market. In Food, we're the leading ambient grocery consolidation specialist. Most of our competitors are generalists who struggle to maintain our level of service. In Feeds, we are #2 in the ruminant market, that's cows and sheep, with just over 10% market share. All our businesses have scale and capability barriers to entry. They need infrastructure, vehicles and deep expertise in their specialist markets to operate successfully. I'll now hand over to Katie to talk through our financial results in more detail.

Thanks, Chris. I will now talk through the financials for the year, starting with the key highlights. Revenue is 5% lower year-on-year, driven by lower commodity prices in Fuels & Feeds that have been offset slightly by higher volumes in the Food business. Headline operating profit of GBP 16.3 million is GBP 2.1 million higher than the prior year of GBP 14.2 million and is slightly ahead of analyst expectations. The result reflects year-on-year growth in our activity across all 3 businesses, combined with business improvement initiatives as well as lower production costs in Feeds. Headline PBT finished the year at GBP 13.2 million, which is 5.6% higher than the prior year. This figure includes the year-on-year increase in lease interest costs that have previously been communicated, though in the year, there has been a timing improvement as a result of the delay in manufacture and subsequent delivery of the fleet renewals in Fuels. This is expected to catch up in FY '26. Our net cash balance in the year is GBP 6.3 million, a strong performance when factoring in the 2 acquisitions made in the year, along with the product investment in Feeds. Working capital has been managed well in the year and has benefited from some timing differences at the year-end. And this flows through to a strong operational cash conversion of 119%, reflecting the cash available to support future investment activity. Our headline EPS is 18.5p in the year. As a post-tax figure, this includes an aggregated tax reconciliation of prior periods, which has resulted in a one-off P&L adjustment, but cash remains unaffected. Our EPS prior to this adjustment would be 19.5p. As Chris has already mentioned, our Board is pleased to propose a full year dividend of 8.4p, consisting of the 1p paid at the half year and a further 7.4p at the full year. Return on capital employed has increased in the year from 16.3% to 17.5%. This reflects the strong returns of the businesses with an improved position on both Foods and Feeds. Fuels returns will be impacted in the year by the addition of the asset base of 2 acquisitions late in the financial year. Moving on to the summary income statement. Our operating profit in the year is GBP 12.6 million versus GBP 14.3 million in the prior year. This compares to a headline operating profit of GBP 16.3 million, which adjusts for exceptional costs and amortization of acquired intangibles. Amortization of intangibles increased year-on-year by GBP 0.1 million as a result of the recent Fuels acquisition. And exceptional costs finished the year at GBP 2.9 million. These costs include acquisition costs in Fuels as well as the completion of the restructuring program and restructure costs in Food as part of the rightsizing of the cost base as well as the completion of the internal investigation into the conflict of interest. In FY '26, we have received an exceptional credit of GBP 1.2 million relating to an insurance claim associated with the conflict of interest. This will be reported as part of our half year results. Finance costs increased in the year by GBP 1.2 million, largely as a result of the full year of our Lymedale warehouse as well as the fleet renewal program in Fuels. However, the full year number was lower than anticipated due to the fleet renewal delays previously mentioned. Bank interest showed a marginal increase year-on-year from GBP 0.4 million to GBP 0.5 million as a result of the investment activity that's taken place in the year. Headline PBT in the year was GBP 13.2 million compared to a prior year of GBP 12.5 million and a reported PBT of GBP 9.3 million. Our pension scheme interest has reduced marginally to GBP 0.2 million in the year, driven by the value of the pension liability. Our tax rate is 7% higher, largely due to the one-off noncash tax impact I just referred to. Disallowable costs associated with the acquisitions also had a small impact. The effective tax rate for the year is 33%. But going forward, we still assume our effective tax rate to be in line with the standard rate of 25%. I'll now spend some time talking through the in-year performance by segment. In our Fuels business, revenue was just over GBP 612 million in the year, with a reduction from last year driven by commodity prices. Headline operating profit increased in the year from GBP 7.9 million to GBP 8.4 million, with volumes staying broadly flat year-on-year. The main driver for the improvement is in the PPL earned, which increased from 1.2 to 1.27 PPL in the year. This was driven predominantly by product mix, and we expect the future PPL to be somewhere in the mid-120s. Food revenue increased by 10.9% to GBP 86.2 million, reflecting the increased activity and storage levels with average pallets stored increasing from 137,000 to 156,000 as the Lymedale warehouse came online. Headline operating profit in the period was below expectation at GBP 4.3 million, but did demonstrate a small increase year-on-year in absolute and operating profit percentage terms. We anticipate operating profit margin to be around 6% in the current financial year. The Feeds business had an increase in revenue of just under 5%, which is impacted by commodity price changes year-on-year, but also reflects the higher activity level in the year. Tonnes increased from 499,000 to 546,000 tonnes, reflecting good market conditions as well as a small uplift due to the moist feed product line. Overall, operating profit was almost 39% ahead of the prior year as a result of the increased volumes and the lower production baseline. As a result, operating profit per tonne increased from GBP 5.21 to GBP 6.59 in the year. We expect this profit per tonne remaining in the GBP 6 to GBP 6.50 range. Moving on to cash for the year. Overall, our net cash at the year-end was GBP 6.3 million. This was driven by strong operational performance, resulting in a cash flow in the year of just under GBP 20 million. The main driver to this inflow is the business operating performance. Working capital movements through the year were small in total and was bolstered by some timing differences at the year-end. Our operating capital expenditure was GBP 1.8 million in the year, a reduction from the prior year, driven by the cyclical nature of some of our BAU CapEx requirements. Our strong operating cash has enabled the business to invest both organically and inorganically through the Fuels acquisitions and the moist feed product range in Feeds, whilst also supporting current pension obligations and a return to shareholders through an increased dividend in the year. The business continues to have good cash generation and access to facilities to support continued growth. With regard to the balance sheet position for the group, the key headlines to note are the strong cash position we've already talked about and the continued strength we see in the operational cash generation of all 3 businesses. In addition, we have a strong asset underpin with net assets of GBP 260 million, a slight increase on the prior year, providing support and stability for growth. And finally, we have a strong return on capital employed position across the group, which has increased year-on-year, demonstrating continued value in the investments made by the group. Our cash generation and solid balance sheet support our overall investment case and are reflected in our capital allocation policy, which we're presenting for the first time. We will continue to invest in CapEx across the group to support the ongoing business requirements whilst also looking to invest in growth where possible. This strategy is reflected in our Lymedale investment, which required a CapEx outlay upfront, along with our moist feed product line in feeds. The group continues to deliver shareholder value through its dividend payment, which as already mentioned, we will increase again this year. We will continue to utilize our cash facilities to support inorganic growth in the group as demonstrated with 2 acquisitions completed in Fuels in the year. And finally, where appropriate and where allocations elsewhere have been fully optimized, we will review the option to complete a share buyback. I will now hand over to Chris to talk about NWF's strategic progress in the period and the investment case.

Thanks, Katie. Our strategy is based on building from the strong foundation provided by our business model. We are doing this by focusing on 4 key areas. In the orange on the top right-hand side, commercial effectiveness. This is about understanding our customers' needs, about ensuring our services meet those needs and developing our routes to market and our sales processes and managing those tightly to ensure we maximize the commercial return from the services we provide. And when I'm talking about this internally, I summarize it as selling well. Then if we move over to the left-hand side of the slide in red, operational efficiency. We have lots of infrastructure and vehicles which are required to provide a good service to our customers. That means we need to have a continuous focus on using those assets as efficiently as possible, whilst maintaining or improving service to deliver increasing operating margins. And again, when I talk about that internally, I call it working our assets harder. Then we have growth investments in the bottom left-hand corner in the blue. We have a strong financial position, so we can look for opportunities to invest in growth through new services, new products, new geographies or improvements in commercial effectiveness and operational efficiency. Examples of this could be a new warehouse, manufacturing a new feed product or putting fuel tankers into a new geography or piloting business improvement initiatives. And then last but not least, in the green on the right-hand side, targeted acquisitions. This is about growing through step change and bolt-on acquisitions in existing and adjacent markets. Our most recent focus has been on consolidating the fragmented U.K. fuel distribution market, but we can also see that acquisitions may have a role to play in expanding our network in Food. On the next few slides, I'll walk through examples of the strategic progress we've made in the year in each of these areas, starting with commercial effectiveness. Our Fuels business previously operated a depot model. From a sales perspective, this meant we combined the domestic customer services role with the commercial sales role, and that was located in each of our individual 30 depots. That led to small teams, a lack of specialism, no critical mass, and it made it difficult to manage the sales process and KPIs. It's also meant an inconsistent experience for customers. So we decided to test a regional operating model with the North-West pilot, which commenced in November 2024. As part of this, we separated the roles into specialist teams. So we had one domestic customer services team and a commercial sales team because those are different skills. Our 9 depots were consolidated into 1 regional hub in Crewe, and we put in place a suite of sales and service KPIs. We also started regional control over fuel procurement and the sales price rather than allowing that to happen at depot level. The pilot was successful with greater visibility of the sales function and performance. So we started to roll this out nationally from July 2025. We continue to test that this model is meeting customer needs through a focus on service metrics and regular voice of customer surveys. The outcome will be that our 30 depots nationally will be consolidated into 4 domestic and 5 commercial hubs. We then move on to operational efficiency. As part of the Fuels regional operating model, we also needed to change our operations to support the new sales model. Previously, fuel tankers were allocated to individual depot locations. The capacity was managed and vehicles were routed by the depot manager. And this led to a disparity in vehicle utilization and geographical crossover in routing, i.e., our depots were delivering in each other's territories. So as part of the North-West pilot, we relocated tankers to be close to the majority of their deliveries. Our vehicle management and routing was consolidated into Crewe under the management of transport managers. And again, we put in place a suite of KPIs. This was successful, and we saw in the pilot that our miles per drop reduced from 14.5 miles to 13 miles. Now that might not sound very much, but the average cost of moving a tanker a mile is over GBP 5. And across the country, we do 275,000 drops per annum. Along with the sales model, we're now rolling this out nationally. The control that this change has given means that the next stage is to seek opportunities to extend vehicle utilization. As a result of this change, all of our depots are now consolidated into one national hub for tanker management. Moving on to growth investment, and I talked about our investments in product extension in Feeds at the half year. But as a reminder and an update, we identified that NWF feed customers were buying moist feeds from other suppliers. Moist feed is a byproduct from the brewing industry, providing excellent nutrition for cows. But as a byproduct, supply and product quality can be variable. The opportunity was identified to use existing facilities, combined with some further equipment to manufacture our own product, providing year-round supply and consistent quality to our customers. A GBP 750,000 investment was made in our site in Cumbria, and that was completed on time and to budget. We commenced sales in January, and I'm pleased to say our volume is way ahead of plan, and that the project has an anticipated IRR well in excess of 20%. And then lastly, targeted acquisitions. We have a stated strategy to consolidate the U.K. fuel distribution market through large and bolt-on acquisitions. In the year, we did 2 bolt-on acquisitions. Firstly, Northern Energy Oils, which was acquired in March. This services a predominantly domestic customer base in Yorkshire, Lincolnshire and the North-East, delivering 42 million liters from 5 depots. It already operates a regional hub model, so slots really neatly into our new business model as a new region, with the opportunity to add additional commercial volume. The integration of that is now complete. Then in April, we acquired Pinnock Brothers. This similarly services a predominantly domestic customer base, but this time in Berkshire from its depot near Newbury, and it delivers about 13 million liters per year. Integration is underway, and again, that will slot into our new model. So overall, we've added 55 million liters of volume, an 8% increase, as well as increasing our geographic coverage. And we continue to work on a further pipeline of acquisition opportunities. So moving on to our investment case. Why should people invest in NWF Group and why now? Well, firstly, we're a leading player in each specialist market in which we operate, with scale and capability barriers to entry. In these uncertain economic and geopolitical times, our markets are large, robust and resilient with continued demand, which gives confidence in our ongoing performance. Secondly, as a group, we are focused on continuously improving our financial performance through strategic focus on commercial effectiveness and operational efficiency. And we'll start to see the benefits from that. So we expect to see the benefits from the development we have made to the Fuels operating model. We also believe that the actions we've taken in Food will improve our performance and build the foundations for further efficiency improvement and growth. Thirdly, we're constantly looking for opportunities to invest in growth. We are actively consolidating the U.K. fuel distribution sector, and we're seeking to continue to grow our food business through new warehouse development and targeted acquisition. And lastly, we deliver consistent, attractive financial returns. All our businesses are profitable. We generate cash. Our asset base gives us a strong balance sheet. We deliver a strong return on capital employed on that balance sheet, and we have an excellent track record of growing our dividend. So in summary, a solid financial performance, slightly ahead of initial market expectations, significant strategic progress made in the year, a robust financial position to support ongoing strategic activity and continued dividend growth. Now in terms of outlook, it's early in our financial year, but so far, we are trading in line with Board expectations. And the Board is confident in the future prospects and strategy of the group. I'd like to thank you for watching, and we look forward to updating you at our half year results.