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

Good morning, and welcome to the NWF Group plc Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. And I'd now like to hand you over to Chris Belsham, CEO. Good morning, sir.

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'm joined by Katie Shortland, the CFO. As a management team, this has been our first full financial year in charge of the group. It's been a very busy year and a very productive year, and we're really pleased with the progress that we've made. I'll start with the highlights of the year. So 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 Pinnock, which is in line with our strategy to consolidate the U.K. fuel distribution sector and the development of a regional operating model in our Fuels business to improve both commercial effectiveness and operational efficiency. We tested that model successfully in our Northwest region in FY '25, and we're now rolling that out nationally. From a trading perspective, we managed mixed market conditions for our fuels business whilst controlling the cost base. In our Food business, we had a slower ramp-up of our new warehouse than anticipated, leading to lower performance. But decisive action was taken with management change and a restructuring of the cost base. These actions support both an improvement in immediate performance and help build the foundations for future growth. And in our Feeds business, we managed positive market conditions and benefited from a step-change reduction in production costs to deliver a strong result. So for shareholders, that means 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. Moving on to our financial highlights. So our revenue was lower in the year, but remember, a lot of our revenue is passed through. So this was purely as a result of the lower oil price in the year. Our activity levels were actually 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 positive cash balance of GBP 6.3 million. And as mentioned, that solid financial performance supports the continued increase in dividend. If we now look at the individual businesses. In Fuels, we saw a strong domestic heating oil market, and that was driven by the low oil price. So if you live in a home that's heated by oil, it was cheaper to heat your home this winter than it was the prior year. That contrasted with our commercial market, which was weaker with the difficult economic environment for some of our SME customers because of their end-use sector. For example, 15% to 20% of our volume goes to construction-related businesses. You may recall, we've reduced our cost base in June 2024 to create savings to invest in a new tanker fleet. Now that new fleet was slightly delayed, which didn't benefit us at the headline operating profit level, but did give the group a slightly lower lease interest cost overall, but that's just a short-term timing benefit. We made lots of strategic progress in our Fuels business, and I'll come on to talk about that shortly. In our Food business, we've completed the new Lymedale warehouse on time and to budget, and that increased our capacity by 39%. But the ramp-up of new business was a bit 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 additional expertise and experience and we restructured the cost base across both our warehouse network and central costs. Now there are 2 benefits to these actions. Firstly, it rightsizes our 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. And then in our Feeds business, we saw a good milk price across the year, so dairy farmers wanted to maximize their yield, and that means they feed more to their herd. We managed those conditions well, which resulted 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 successfully invested in product extension. And again, I'll come on to talk about that a little bit later. But before we get into the detail, it's probably helpful to give an overview of the group's business model and strategy. NWF Group exists to add value to supply chains by using our expertise to connect customers and suppliers who otherwise would struggle to connect with each other, mainly due to a difference in scale. We currently operate across 3 markets where we apply our expertise in the following areas: the sourcing and procurement of commodities that could be oil or wheat or rape, storage and warehousing, manufacturing and processing in our Feeds business, consolidation and bulk distribution across all 3 of our businesses. And again, across all 3 of our businesses, we've got a real focus on customer service. In our Fuels business, if you look at the red boxes on the slide, we connect domestic oil-heated homes and SME fuel users, both of whom need to buy fuel in bulk with the major U.K. oil suppliers who can't deal directly with those end-use customers. In Food, if you look at the blue boxes on the slide, we connect smaller grocery brand owners, manufacturers and importers with 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, again, the green boxes on the slide, we connect dairy, beef and sheep farmers with global agricultural commodity traders by formulating yield optimizing diets, procuring the commodities to manufacture those diets and distributing those effectively to farm. And as you can see from the numbers on this slide, 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 specialists. Most of our competitor generalists have struggled to maintain our level of service. And in Feeds, we're #2 in the ruminant market, that's cows and sheep, with just over 10% market share. All of our businesses have scale and capability barriers to entry. They need infrastructure, vehicles and the deep expertise in their specialist market to operate successfully. I'll now hand over to Katie to talk through our financial details in a bit more.

Thank you, Chris. So I'll now talk through the financials for the year, and we'll start with our key highlights. Our revenue is 5% lower year-on-year, and that's driven by lower commodity prices in Fuels and 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 activity across all 3 businesses, combined with the 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 Chris has already talked about, and we've previously communicated those. And as Chris has mentioned, there has been a timing improvement on those as a result of the delay in manufacture and subsequent delivery of the fleet renewals in Fuels. We do expect that 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 also been managed well in the year and has benefited from some timing differences at the year-end. 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 is unaffected. EPS prior to this adjustment would have been 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. Our 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 Food and Feeds. Fuels returns will be impacted in the year by the addition of the asset base of the 2 acquisitions later on 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. So the amortization of intangibles did increase slightly year-on-year by GBP 0.1 million as a result of those recent Fuels acquisitions, and our exceptional costs finished the year at GBP 2.9 million. These costs included acquisition costs in Fuels as well as completion of their restructuring program, a restructure of cost in the Food business as part of their rightsizing as well as completion of the internal investigation into the conflict of interest that we talked about at the half year. In FY '26, we've received an exceptional credit of GBP 1.2 million relating to an insurance claim associated with the conflict of interest, and this will be reported as part of our half year results. Finance costs in the year increased by GBP 1.2 million, largely as a result of the full year of the Lymedale warehouse and the fleet renewal program in Fuels. 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 in the year. Our 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. 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 cash tax impact I've just referred to and some disallowable costs associated with the acquisition have also had a small impact. That takes our effective tax rate for the year to 33%. But going forward, we still assume our effective tax rate will be broadly 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, and this was driven predominantly by product mix. We expect our future PPL to be somewhere in the mid-1.20s. 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 expectations of GBP 4.3 million, but did demonstrate a small increase year-on-year in absolute and operating profit percentage terms. It is anticipated that operating profit margin will increase to around 6% this year. The Feeds business had an increase in revenue of just under 5%, which was 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, reflecting good market conditions as well as a small uplift due to the moist feed production line. Overall operating profit was almost 39% ahead of the prior year as a result of the increased volumes and the lower production baseline. And as a result, our operating profit per tonne increased from GBP 5.21 to GBP 6.59 in the year. We expect this profit per tonne to remain 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. Our working capital movement through the year was small in total and was bolstered by some timing differences at the year-end, and 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. That strong operating cash has enabled the business to invest both organically and inorganically through the Fuels acquisitions and the moist feed product range of Feeds, whilst also supporting current pension obligations and a return to shareholders through an increased dividend in-year. The business continues to have good cash generation and access to facilities to support continued growth. And as a result, we expect net cash in the current year to remain at similar levels prior to any further M&A investment. With regards to the balance sheet position for the group, the key headlines to note are the strong cash position I've already talked about and the continued strength we see in the operational cash generation of all 3 businesses; continued strong asset underpin with net assets of GBP 260 million, a slight increase on the prior year, providing support and stability for growth; and 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 here for the first time. So we'll 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 the 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. In summary, another strong set of results underpinned by good cash generation and a strong balance sheet. I'll now hand over to Chris to talk about NWF's strategic progress in the period and investment case.

Thanks, Katie. So 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. Starting with commercial effectiveness, so if you look on the right-hand side of the slide, it's the one in orange. Commercial effectiveness is really about understanding our customers' needs, ensuring our services meet those needs, developing our routes to market and our sales processes and managing those tightly so we can maximize the commercial return we make from providing our services. And when I'm talking about that internally, I really just summarize that as selling well. If we then move over on to the left-hand side of the slide in the red, operational efficiency. We have lots of infrastructure and vehicles, which are required to provide this good service that we do give our customers. But that means we need to have a continuous focus on using those assets as efficiently as possible whilst maintaining or improving our service. And if we do that, we'll deliver increasing operating margins. And again, when I'm talking about this internally, I'll summarize that as working our assets harder. If we then move down to the bottom left-hand corner in the blue, we have growth investments. We have a strong financial position. So we can look for opportunities to invest in growth, whether that's through new services, new products, new geographies or improvements in commercial effectiveness and operational efficiency. And so examples of that could be a new warehouse, manufacturing a new feed product, putting fuel tankers into a new geography or piloting business improvement initiatives. And last, but by no means least, in the green, we have 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. And over 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. So our Fuels business previously operated a depot model. And from a sales perspective, this meant we were effectively combining the domestic customer service role with commercial sales roles and locating that in each of our individual 30 depots. The result was we had small teams, a lack of specialism, had no critical mass, it was difficult to manage our sales processes and KPIs, but it also meant an inconsistent experience for customers. So we decided to test a regional operating model with a pilot in our Northwest region, which commenced in November 2024. And as part of this pilot, we effectively firstly separated our sales team into domestic customer service specialists and commercial sales specialists because those are 2 very different skills. With the former, it's all about giving the domestic customer a good experience. With the latter, it's about outbound telesales. We consolidated our 9 depot teams into 1 regional hub in Crewe, and we put in place a suite of sales and service KPIs. We also put in regional control over fuel procurement and our selling price, which have previously been done at the depot level. Now that pilot was successful. It gave us greater visibility over our sales function and performance. So we commenced a national rollout in July. And we continue to test that this model is meeting our customer needs through a focus on service metrics and regular voice of customer surveys. And the outcome of all of this will be effectively that our 30 depots will be consolidated into 4 domestic and 5 commercial hubs, albeit we'll retain 30 delivery locations. Now if you're doing that on the sales side, you have to match that on the operational side as well. So as part of the Fuels regional operating model, we also need to change our operations. So under the depot model, previously fuel tankers have been allocated to individual depots and the capacity of those vehicles was managed and the vehicles were routed by the individual depot manager. And that led to a disparity in vehicle utilization and geographical crossover in our routing. In other words, our depots were effectively delivering into each other's territories, leading to inefficiency. So as part of the Northwest pilot, we relocated our tankers firstly to where they were making the majority of their deliveries. And that's something we'll continue to do on an ongoing basis to make sure we're constantly optimizing where our fleet resides. We introduced vehicle management and routing consolidation into Crewe. So all of our vehicles were managed from Crewe for the Northwest region, and that was under the management of transport managers rather than depot managers. As with the sales, we introduced a suite of operational and service KPIs. And the result of all of that is that we reduced our miles per drop across the Northwest region from 14.5 to 13 miles. Now that might not sound very much, but it costs north of GBP 5 to move a fuel tanker 1 mile. So effectively, we've saved about GBP 7.50 per drop in the Northwest region. If you look across the country as a whole in the year, we'll do about 275,000 drops. So the saving opportunity is significant. It's not to say we'll be able to achieve all of that because in the Northwest, we have greater depot density, but it does show there was benefits in doing what we've done. So along with the sales model, we've rolled that out nationally now and the control that this change has given us means the next stage is to seek opportunities to extend vehicle utilization through the day and through the week. As a result, all our depots are now consolidated in one national hub for tanker management, and that hub sits in Crewe. If we then move on to growth investment. So I talked to you at the half year about our investments in product extension in Feeds. But as a reminder and as an update, so we'd identified that NWF feed customers were buying a product called moist feed from other suppliers. Moist feed is a byproduct from the brewing industry. It provides really excellent nutrition for cows. But as a byproduct, supply and product quality are variable. So we recognize the opportunity to use our existing facilities, combined with some further equipment, to manufacture our own product, providing a year-round supply and a consistent quality to our customers. So we made an investment of about GBP 750,000 in our site in Cumbria. That was completed on time and to budget, and we started selling in January. And I'm pleased to say our volume sold to date is way ahead of plan, and our anticipated IRR on that project is well in excess of 20%. And last, but not least, progress on targeted acquisitions in the year. So our stated strategy is to consolidate the U.K. fuel distribution market through large and bolt-on acquisitions, and we did 2 bolt-on acquisitions in the year. Firstly, Northern Energy Oils Limited, which we acquired in March. This services a predominantly domestic customer base in Yorkshire, Lincolnshire in the Northeast and delivers 42 million liters from 5 depots. The business was actually already operating in a regional hub model. So it slots really nicely into our new model as effectively as a new region, but gives us the opportunity to sell additional commercial volume into that region. That business is now fully integrated into our model. And then secondly, 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 13 million liters. And integration is underway, but again, it will slot into our model. So overall, in the year, we added 55 million liters, an 8% increase in volume and increased our geographic coverage. And we continue to have a strong pipeline of fuel acquisition opportunities in place. So why should people invest in NWF Group and why now? Well, firstly, we're a leading player in each of our specialist markets 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're focused on continuously improving our financial performance through strategic focus on commercial effectiveness and operational efficiency. We expect to see the benefits from the developments we've made to our Fuels operating model flowing through. And in our Food business, the actions we've taken this year will improve performance as well as building the foundations for further efficiency improvement and growth. Thirdly, we're constantly looking for opportunities to invest in growth. We're 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 really strong balance sheet, but we deliver an excellent return on capital employed on that balance sheet, and we have a really good track record of growing our dividend. So in summary, a solid financial performance in the year, slightly ahead of initial market expectations; significant strategic progress made; a robust financial position to support ongoing strategic activity; and continued dividend growth. In terms of outlook, it's really early in our financial year, but so far, trading has been in line with Board expectations and the Board is confident in the future prospects and strategy for the group.

So that finishes the formal presentation. You can see we've got some questions that have come in. So we'll now answer those. Starting with what percentage of fuel sales are domestic heating oil? And are you comfortable about the future of that business given the heat pump drive? That's probably one for me. So about 25% of our volume goes to domestic customers. That is more profitable at gross profit levels. Probably about 40% of our gross margin is domestic customers. In terms of the outlook for that vis-a-vis heat pumps, the reality is heating oil is still the cheapest way to heat your home and heat pumps are difficult to put into the typical off-grid home. So a typical off-grid home is older, it's detached, and it was designed to be drafty because of the original heating sources used to heat the home. So putting a heat pump into your typical oil-heated rural home is a very expensive thing to do. And whilst the government has a subsidy scheme in place, that really doesn't cover most of the cost of actually doing that. So the government heat pump schemes actually was brought in under the previous administration. It's been in place for about 3 years. The take-up of that has been really low and most of the take-up has been by people who are moving from main gas-heated homes to heat pumps rather than oil to heat pumps. So for the foreseeable future, we don't see significant diminution in the market for domestic heating oil. Our next question is, do you see opportunities to cross-leverage customer relationships or infrastructure across the business units? Customer relationships, a little bit. We can do more in terms of particularly our farming customers from both our Feeds and Fuels businesses. I think the opportunity though more of working together as a group is around infrastructure and expertise, and it's expertise where I'm particularly focused. So many of the issues our businesses are dealing with are the same across all 3 businesses. It's how do you use fleet as efficiently as possible. Vehicles have become more expensive. So we've got to sweat those assets harder, and actually working out how we can do that at a group level means we can do that across all 3 of our businesses rather than trying to do it individually. In terms of infrastructure, one of the things we're looking to do in our Food business is actually try and build a national network. Well, could we use some of our fuel depots as trade parks to help start doing that, that's something we're looking at. And then probably a third area is the peaks and troughs of some of our businesses through the year. The seasonality is slightly different, so would there be scope to use some of our people from our Food business in our Feeds business when Food is a bit quieter and Feeds are busier. So these are all things we're looking at now under this leadership team and are looking to manage the group on a more holistic basis. Next question is fuel acquisitions have been a key part of the growth strategy, can you talk to your pipeline and what type of returns you are targeting on future deals? Yes, so our pipeline remains strong. Those of you who have been following us for a while will recall that the pipeline became quiet during the sort of COVID, Ukraine period. That's because oil distribution businesses were making super profit. That market normalized in 2024. Since then, we've seen our pipeline pick up. And one of the things we have invested in, in the year to make sure we can process that pipeline more effectively is an M&A specialist to come in and work on those transactions because it was something I was doing alongside the day job. We've now got a head of M&A who is making a real difference in just motoring through our pipeline. So we continue to have a strong pipeline in place. In terms of our returns, that hasn't changed. We're still looking to pay 6x the EBIT that we expect to make from the business. What has changed though is, with our new regional operating model, we would look to be able to drive more value out of the acquisitions that we make because we can slot them into our model and have a view on the additional sales and efficiency we can bring to what has been a mom-and-pop business. Next question is, do you think there is any chance to expand the farm feed to acquire other firms? It's not something we're actively looking at the moment. So the opportunity in the feed sector is to consolidate that sector to some extent to remove production capacity and create transport efficiencies. We are #2 in that market. It is something that was looked at a number of years ago. But in the moment, that market, no one is particularly looking to be a consolidator and neither is anyone particularly looking to be the consolidator. So it's not something we're actively pursuing. Next one, the website has many driver vacancies, is this because of the depot changes as mentioned or an example of the growth push? We're always looking to employ drivers. So it's a constant process of bringing in new drivers, some of whom work out, some of whom don't. We haven't got any shortages at the moment. I'm pleased to say we generally are seen as a good place to work as a driver. So no issues with the driver availability at the moment.

Those are all the questions that we have.

That is all the questions.

Chris and Katie, thank you for answering all those questions from investors. And of course, the company can review all questions submitted today, and we'll publish those responses on the Investor Meet Company platform. Just before redirecting investors to provide you with their feedback, which I know is particularly important to the company, Chris, could I please just ask you for a few closing comments?

Yes. Thank you very much. So firstly, thank you, everyone, for taking the time to watch, and we look forward to seeing you again at our half year results. Main takeaways from this meeting, hopefully, are really solid financial performance, significant strategic progress made in the year, but a lot more to come going forward. We look forward to updating you on that in 6 months' time.

Chris, Katie, thank you for updating investors today. Can I please ask investors not to close this session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This will only take a few moments to complete, and I'm sure it will be greatly valued by the company. On behalf of the management team of NWF Group plc, we'd like to thank you for attending today's presentation, and good morning to you all.