Genus plc (LON:GNS) has announced its interim results for the six months ended 31 December 2023.
| Adjusted results1 | Statutory results | ||||||||
| Actual currency | Constant currency change2 | Actual currency | |||||||
| Six months ended 31 December | 2023 | 2022 | Change | 2023 | 2022 | Change | |||
| £m | £m | % | % | £m | £m | % | |||
| Revenue | 333.6 | 350.2 | (5) | 1 | 333.6 | 350.2 | (5) | ||
| Operating profit | 33.0 | 41.2 | (20) | (14) | 21.3 | 14.7 | 45 | ||
| Operating profit inc JVs | 38.1 | 48.3 | (21) | (17) | n/a | n/a | n/a | ||
| Profit before tax | 29.2 | 42.2 | (31) | (26) | 14.3 | 15.0 | (5) | ||
| Free cash flow | (3.3) | (3.3) | – | n/m3 | |||||
| Basic earnings per share (pence) | 33.3 | 48.8 | (32) | (27) | 20.6 | 20.4 | 1 | ||
| Dividend per share (pence) | 10.3 | 10.3 | – | ||||||
Resilient revenue delivery amidst challenging markets
· Low growth and prices in protein production across several markets, China the most impactful
· Decisive management actions taken:
o Value Acceleration Programme underway in ABS to improve profitability and returns from investments
o R&D strategic review completed to sharpen alignment to strategic and commercial goals
· Commercialisation of the PRP (PRRS Resistant Pig) remains on track; US FDA regulatory progress, genotypic and phenotypic durability submissions accepted. Engagement has shifted to the post-product approval compliance procedures with PRP approval now expected in fiscal year 2025
As expected, first half adjusted profit performance lower year on year
· Group revenue increased by +1%2 in constant currency (5% decrease in actual currency)
· Adjusted operating profit including joint ventures decreased 17%2 in constant currency (21% decrease in actual currency)
· Adjusted profit before tax (PBT) decreased 26%2 (31% decrease in actual currency) as lower profit performances in China of PIC and ABS, and higher net finance costs were partially offset by profit growth in the rest of the Group
· Statutory PBT 5% lower at £14.3m, with a £2.6m increase in the non-cash fair value IAS41 valuation of biological assets of the Group, offset by exceptional expenses of £7.5m
· Stable free cash outflow1 of £3.3m (2022: £3.3m outflow) as lower adjusted profit performance, higher exceptional expenses and interest costs were offset by positive working capital management
· Cash conversion increased to 69%1 (2022: 62%), in line with expectations
· Net debt1 increased to £250.1m, as expected, with a net debt to EBITDA ratio of 2.1x1
· Adjusted earnings per share 32% lower and interim dividend of 10.3p per share unchanged, with 2.2x1 adjusted earnings cover
Reporting format change
Product Development costs now being allocated to PIC and ABS, having previously been reported within the R&D division; management has determined that this better aligns the costs as well as the opportunities of this activity with the businesses; no change to group adjusted operating profit.
Divisional headlines
· PIC – Resilient trading ex-China continuing to gain market share, ongoing challenging environment in China
o Strategically important royalty revenue growth of 2%2 with volumes also growing 2% demonstrating the strength of the royalty model
o Adjusted operating profit including joint ventures decreased by 10%2; PIC trading regions ex-China grew adjusted operating profit by 5%, but was impacted primarily by China’s decrease in adjusted operating profit, PRP commercialisation costs and higher product development costs due to expansion into PIC’s Atlas farm
o Enhanced commercial focus in China gaining traction; new royalty customers won in the period demonstrating the attractiveness of PIC’s royalty model and genetics
· ABS – Challenging trading across all regions; significant action taken to improve performance
o Volumes decreased 6% (ABS ex-China down 2%) with sexed volumes up 2% and beef volumes down 5%
o Revenue increased 3% in constant currency supported by robust price increases and product mix
o Adjusted operating profit decreased 15%, due to lower trading volumes in all regions except Europe partially offset by growth in IntelliGen third party contracts and management’s mitigating price and cost actions
o Comprehensive Value Acceleration Programme; leadership change and targeted restructuring. Focused price action, production rationalisation and other cost efficiencies delivered £1.3m in FY24 H1 with a further £5m of savings expected in FY24 H2, resulting in £10m annualised savings expected for FY25. Exceptional restructuring costs of £2.9m recognised through the FY24 H1 condensed income statement. Further ABS restructuring to continue in the second half and additional exceptional restructuring costs are anticipated in FY24 H2
o In January 2024, US and NZ litigations with ST were settled outside the courts, details in the condensed financial statements.
· R&D – Investment decreased by 8%2 as planned
o Sharpened focus on key priorities that aligns to our strategy, has a compelling commercial opportunity, is deliverable, and leads to a portfolio that is balanced overall
o Strategic review completed and expected to give rise to annual cost savings of £5m in FY25. We expect to recognise c£1m of associated exceptional cost in FY24 H2.
Commenting on the performance and outlook, Jorgen Kokke, Chief Executive, said:
“Genus faced challenging markets which impacted performance in the first half of the year. We have taken rapid action including initiating a comprehensive programme to accelerate the value delivery from our bovine operations. We have also completed a strategic review of R&D activities. The Company is benefitting from savings achieved in the first half and will benefit further in the second half of the year and into FY25, as we optimise resource allocation to best deliver our growth objectives.
In North America, Europe and Latin America PIC continued to achieve growth in royalty revenues and operating profit, illustrating the strength of PIC’s business model. China continues to be a challenging porcine market, however enhanced commercial focus is delivering results. New royalty customers were signed in the first half which gives us more confidence that our sales approach is effective. The opportunity in China remains significant and given the success of the relationship with our local partner, BCA, we are jointly exploring ways to accelerate our collaboration going forward.
ABS saw weakness across most markets. China dairy was particularly challenging; not only did conventional volumes suffer from a double-digit decline in the dairy herd, but mix was also impacted as demand for sexed genetics reduced.
As described in our recent trading update, taking into account management actions taken, and assuming that present market conditions persist for the balance of the fiscal year, management expects fiscal year 2024 adjusted profit before tax to be not less than £58m in actual currency. We are seeing the positive impact of our actions to accelerate value delivery which will deliver further benefit in the second half and in subsequent years.”
Results presentation today
A pre-recorded analysts and bankers briefing to discuss the interim results for the six months ended 31 December 2023 will be held via a video webcast facility and will be accessible via the following link from 7:01am today:
https://stream.buchanan.uk.com/broadcast/65a7b66cc5ec665c02ecf7b9
This will be followed by a live face to face Q&A session to be held at Buchanan at 10:30am. A Zoom alternative will also be available. Please contact Verity Parker at Buchanan for details: [email protected]
1 Adjusted results are the Alternative Performance Measures (‘APMs’) used by the Board to monitor underlying performance at a Group and operating segment level, which are applied consistently throughout. These APMs should be considered in addition to, and not as a substitute for or as superior to statutory measures. For more information on APMs, see APM Glossary.
2 Constant currency percentage movements are calculated by restating the results for the six months ended 31 December 2023 at the average exchange rates applied to adjusted operating profit for the year ended 30 June 2023. Percentages are calculated on prior period restated figures. Please see Note 1 on the notes to the condensed set of Financial Statements changes of reportable segments
3 n/m = not meaningful
Group Performance
Genus had a challenging first half of the year with a number of markets, most notably China, proving to be difficult. PIC ex-China performed resiliently, with North America, Latin America and Europe achieving adjusted operating profit growth in constant currency. PIC adjusted operating profit from Asia, however, halved due to weak trading in China as well as higher supply chain costs and lower by-product revenue. ABS, faced into a number of difficult markets, which led to volumes decreasing 6% in the period.
During the period the Group initiated a comprehensive Value Acceleration Programme at ABS and completed a strategic review of R&D activities. These actions have delivered £1.3m of efficiencies in FY24 H1, a further £5m of benefit expected in FY24 H2, and full year combined benefits of £15m in FY25 across both programmes. Exceptional costs of £2.9m have been recognised through the FY24 H1 condensed income statement in respect of ABS restructuring.
Group revenue increased by 1% in constant currency (5% decrease in actual currency) to £333.6m (FY23 H1: £350.2m). PIC revenue decreased by 1%2 but strategically important royalty revenue increased 2%2 and volumes grew by 2%. ABS revenue increased by 3%2 despite volumes decreasing 6%. Sexed genetic volumes continued to grow, up 2%, albeit beef volumes fell 5%.
Adjusted operating profit, including joint ventures, was £38.1m (FY23 H1: £48.3m), down 17% in constant currency. Within this, Genus’s share of adjusted joint venture operating profits was £4.7m (FY23 H1: £6.9m) with profits from PIC Agroceres impacted by hyperinflation in Argentina. Net finance costs were higher at £8.9m (FY23 H1: £6.1m), due predominantly to higher interest rates year on year.
Statutory profit before tax was £14.3m (FY23 H1: £15.0m), and reflected a £2.6m non-cash increase (FY23 H1: £17.2m decrease) in the net IAS 41 biological assets fair value. Porcine biological assets increased by £30.6m principally due to the restocking of Aurora, our genetic nucleus farm in Canada, following an upgrade to the farm facilities and health status, along with stocking of the Ankang and LuoDian farms in China. Bovine biological assets reduced by £28.0m primarily reflecting lower forecast sales volumes and rationalisation of bulls. Exceptional items in the period were an expense of £7.5m which was primarily legal fees related to the litigation disputes with ST and ABS restructuring charges. In January 2024, US and NZ litigations with ST were settled outside the courts. Further details are provided in note 21 of the condensed financial statements.
The tax charge on adjusted profits for the period was £7.3m (2022: £10.2m), which represented a tax rate on adjusted profits of 25.0% (2022: 24.2%). The adjusted tax rate increased due to the full year impact of the UK tax rate increase to 25%, that took effect from April 2023, and a change in profit mix to higher tax rate jurisdictions. The statutory profit after tax was £10.3m (2022: £12.0m).
The effect of exchange rate movements on the translation of Genus’s overseas profits was a negative impact of £2.7m compared with the prior period, primarily from weaker Sterling against Latin American currencies.
Free cash outflow of £3.3m (2022: £3.3m outflow) reflected the lower profit performance in the period offset by improved working capital. Cash generated by operations of £22.8m (2022: £25.7m), which is seasonally weaker in H1, represented a 69% conversion (2022: 62%) of adjusted operating profit of £33.0m (2022: £41.2m) into cash. Our medium-term objective is to achieve an annual conversion of at least 90%, and we are on track to achieve it this fiscal year.
Net debt increased to £250.1m (June 2023: £195.8m), as expected, reflecting the payment of the final dividend, free cash outflow, new farm leases in China and foreign exchange movements. The net debt to EBITDA ratio increased to 2.1x (June 2023: 1.6x), reflecting the higher net debt, and we expect our leverage ratio to be similar at June 2024.
The Board has declared an unchanged interim dividend of 10.3 pence per share, which is payable on 28 March 2024 to shareholders on the register at 1 March 2024.
Strategic Priorities
Genus is a leading genetics player with a long track record of investing behind its businesses. Amongst others, these investments span Product Development, R&D, supply chain and talent. We are resolute in our commitment to deliver the resources our businesses need to prosper in the medium-term, in-line with our strategic and commercial goals.
Our strategic priorities are to:
1) Continue growing in porcine, with more stable growth in China
2) Deliver successful commercialisation of PRP, the PRRS gene edited pig
3) Deliver greater value from bovine; and
4) Continue to generate returns from R&D investments
In porcine, North America, Latin America and Europe continue to grow. Asia trading, however, was weak, driven by the challenging Chinese porcine market. Here, we have enhanced our commercial focus which is already bearing fruit with new royalty customers signed in FY24 H1. Financial performance from royalty customers takes time to build but our experience shows that a greater mix of royalty business will deliver more stability over the longer-term. Our relationship with local Chinese partner, BCA, is close and collaborative. Given the success of the partnership to date, we are jointly exploring ways to accelerate our collaboration going forward.
With regards to our PRP gene edit, progress has been made with the US FDA’s acceptance of our animal characterisation submissions in respect to phenotypic and genotypic durability. Recent engagement with the FDA has shifted to the post-product approval compliance procedures. This has clarified the data submissions and monitoring that will be required on an ongoing basis post PRP approval. Validation of our procedures to comply with these monitoring requirements is expected to take several months. We therefore now expect FDA PRP approval in FY25. Our dialogue shifting to the post-product approval compliance procedures reinforces our view that product approval will be forthcoming. There are no changes to our commercialisation timeline or financial projections.
To drive greater value from bovine we initiated a comprehensive Value Acceleration programme. These actions have delivered commercial and efficiency benefits in the first half. We have taken targeted action to increase cost recovery on our value-added services through price increases. We have rationalised our production and integrated our beef, dairy and IntelliGen leadership to drive efficiencies in supply chain and resource allocation. We will go further in the second half with additional action being taken to improve structural profitability in the future.
During the period we completed a strategic review of our R&D activities and portfolio. The goal was to ensure that all early-stage projects align to our strategy, have a compelling commercial opportunity, are deliverable, and lead to a portfolio that is balanced overall. Through this review, we have sharpened our focus on key workstreams and improved our innovation processes and governance. There were some projects that did not meet our criteria, and we have stopped further work. We expect this to result in £5m of ongoing annualised savings from FY25.
Aqua
During the period, we exercised our option to take full ownership of Xelect, the leading global aquaculture genetic services company, following the purchase of a minority stake in 2021. Xelect’s small team of specialists are helping us explore opportunities for accelerating genetic improvement within aqua.
People
We foster an inclusive and ethical culture that challenges, inspires and supports our people to perform to their best and fulfil their potential. During the period, we began a project to explore key components of that culture and ensure they are embedded consistently across the company. This has included work to refresh our core values, which have been in place for more than 12 years, to better reflect the business we are now. This process has involved gaining input from colleagues across the company and the refreshed values will be introduced later this year.
We also ran our latest global employee engagement survey, which attracted a record number of responses. This gave us positive feedback on our culture and helped us identify areas for improvement, which leaders and managers are currently working on with their teams.
In February 2024, ABS Chief Operating Officer Dr Nate Zwald left the business. After a comprehensive search process, Jim Low has been appointed as the new Chief Operating Officer of ABS and will join the business on 15 April 2024. He has spent 25 years in the nutrition and food industries, most recently as Chief Commercial Officer for Glanbia’s $1 billion global, dairy based, nutritional solution business.
Outlook
Conditions remain challenging for our customers in several parts of the world and we have driven acceleration of our value delivery initiatives to improve performance in the first half, with further action being taken in the second half. Our focus is on driving commercial excellence and efficiency improvements at ABS as well as concentrating our R&D efforts on projects with the most attractive commercial outcomes.
With management actions taken, and assuming that present market conditions persist for the balance of the fiscal year, management expects fiscal year 2024 adjusted profit before tax to be not less than £58m in actual currency1. Management remains committed to strong profit growth in the medium-term.
1 This is a forward looking statement. Although Genus believes that the expectations reflected in this forward-looking statement are reasonable, it can give no assurance that these expectations will prove to be correct. Because these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements. Adjusted profit before tax is as defined in our Alternative Performance Measures glossary.
