Good morning, everybody. It is wonderful to see you. Welcome to the Peel Hunt Auditorium for the Genus FY 2024 preliminary results review. My name is Jorgen Kokke, and Alison Henriksen, our CFO, is sitting next to me. We hope you had a chance to see our presentation this morning. It was released at 7:00 A.M. Not a lot of time, but we hope you had a chance to see it, and also received our preliminary results paper. We are now delighted to take your questions. Charles?
Thanks. Charles Hall from Peel Hunt. Jorgen, can we just start with ABS, given that that's where a lot of the issues have been over the last year? What do you see as an acceptable margin in that business, say, in the medium term? And have you already taken enough action to get to what you would regard as an acceptable margin, or is there more to be done?
Yeah. Now, first of all, I would say that I believe that ABS is well-positioned to return to profit growth next year, based on the actions that we have taken. I also believe that ABS is well positioned strategically. It is one of only two companies that has its own successful sexing technology. It has great genetics, great people, and great customers. But, you know, as it relate to your questions regarding margins, the current margins in FY 2024 were kind of mid-single digits, kind of 4% or 5% over the last two years, really. We're taking action to improve those action. It is a comprehensive transformation. We've completed phase one. We're now in the midst of phase 2 .
We'll evaluate whether there will be a phase 3, but obviously there's more work to be done. But in terms of margins, clearly, our ambition is to get to the mid... to the teens, for ABS, and we believe that is possible.
There's been a lot of corporate activity in the space over the last year with URUS and ST and Select.
Yeah.
How do you see ABS in a changing environment?
Yeah. You know, I think there's probably two kind of factors in the external landscape. Growth in the industry hasn't been as high as, you know, I think anybody expected. And we've seen, you know, M&A merger activity in the bovine genetics space. We obviously take note of that. At Genus, you know, we always are open to explore M&A opportunities if they can make the business stronger, if an M&A would allow us to compete better, and if it meets our strategic and financial hurdles, so that it creates value for shareholders. But you know, at this point, I can't really comment on what others are doing. We are very focused on executing our own against our own plans. We have our value acceleration program.
You know, we exited FY 2024 with a EUR 10 million run rate benefit. We're committed to deliver another EUR 10 million in terms of benefit in FY 2025. And we control, we want to control what we can control.
Last question from me. China obviously is significant step down in profits in both ABS and PIC last year. Is that mostly market related? Is there any structural issues to be aware of? How's your competitive position in both markets?
Yeah, I think the China market has been incredibly difficult due to the economic situation. That is impacting, I believe, many, many companies that are active in China. We also deal with certain sector-specific issues both in bovine and in porcine, which have to do with supply/demand. You know, the dairy sector has been hit particularly hard. Consumers of dairy in China tend to be younger people in urban areas, and there's been high unemployment among those groups. So that has having an impact on on consumption. At the same time, there has been overexpansion in prior years, and so that led to culling of the herd, so that hit us hard. But you know, we remain cautious and we remain...
We think in bovine, we're not expecting a quick kind of turnaround there, so still maybe a little bit more kind of pain to be had there. On porcine, I would say that we have seen an improvement in the market conditions over the last period, and in aggregate, porcine producers in China are now in the black numbers, in the black figures, and you know, making profits. You know, we're pleased about that. I would also highlight that we have changed our commercial strategy in China, in porcine, and we're now singularly focused on driving our royalty model, and we've enjoyed success with that.
It will take a while until that comes through in the P&L, but I'm increasingly confident that our porcine business in China can be a successful and growing business, and you know, I don't need to remind you that half the world's pigs live in China, so it is of strategic importance that we do that.
That's great. Thanks very much.
Seb? Yeah.
Jorgen, if you don't mind, if I could just interrupt just once. Just for people who are on the webinar, if you would like to ask a question, please, raise your hand on the webinar. You'll then be asked to put on your video and unmute yourself. So we'll go back to the room for questions, but we'll come to webinar questions. If anyone would like to ask a question, please raise your hand. Thank you.
Thanks. Hi, it's Seb Jantet with Panmure Liberum. First question, just going back to China. Obviously, you've had some really good success adding royalty customers there. I think you've previously talked about having market share in the 3%-5%. Presumably, that's increased, although we obviously won't be seeing it in the numbers because the market is still kind of different, still kind of a slow. So where do you think your market share now is in China?
... You know, I would say that, you know, our market share in China, you're, you're right, it's probably kind of in the mid-single digits, thereabouts. Our ambition clearly is to drive growth in China. We have made investments in our organization, especially in the supply chain, even also over the last year. So, we believe we can accommodate more growth in China without adding further investments. We're very pleased with the fact that we have doubled our royalty customer count. Now, again, it will take a couple of years until that comes through in the P&L in terms of its full potential. But our ambition in China would be absolutely to drive market shares into the double digits.
Presumably, though, adding the royalty customers must have increased your market share, so-
Yeah
... any sense of how much that's actually increased it by?
Yeah, I think it's difficult to say exactly because it will also take some time until, you know, those revenues and those volumes come through.
I think the thing to add, too, would be that it's fantastic we're winning these new customers, but we don't typically win all their business when we win them as a royalty customer. We'll win a portion, and then it's the typical PIC model over time to gain more addressable share with that customer.
Okay, thanks. Moving on to PRP. So just two questions on PRP. One is, I seem to recall in the CMD that you called out Japan as being a determination, and that looks like it's now moved to an approval. Has there been a change there, or was that just me not remembering it correctly? And then the last bit is on Mexico as well. So Mexico, that looks like it's taking a while to kind of make progress there, and I'm wondering how crucial Mexico is to commercialization plans. Is it one of those markets that makes it very difficult to commercialize PRP if you haven't got it, or is it one that you can kind of get away without having?
Yeah, I mean, maybe take, maybe I'll take Mexico first. You know, Mexico is a critical market for PRP. We've, we've always said that, in order to commercialize in the United States, we do need approval slash determination in Mexico, Japan, and Canada, because they are key export markets. And in fact, Mexico is the number one export markets, number one export market for U.S. pork. Yeah, we're making really good progress in the U.S., but also in Canada and Japan. Mexico is a bit complex in that it doesn't have an established regulatory framework. Now, we are certainly very focused on Mexico. I've been involved personally in a number of discussions in Mexico.
We're seeing very strong receptivity and interest from the local pork producers, and we are engaging with those local pork producers and soliciting their support and input as part of the process. We have also had discussions with the new government already. As you will know, there has been elections in Canada, or sorry, in Mexico, and the new Minister of Agriculture will be installed in October. There's already been contact, and we have good advisors, and we believe that the new government is receptive and open to biotechnology, and so we're looking forward to a constructive dialogue with them, but it's a little bit more difficult to be very specific and clear, again, because the pathway isn't defined yet. But, you know, to your other question around whether Japan was a determination or a, or an approval, I don't know, Alison, if you remember-
I'm not aware of-
Yeah
... yeah, fundamental change there.
No.
Yeah.
No. No.
Yeah.
I do think Japan is actually an approval, as far as I recall . It's quite a comprehensive review, and so we have. You know, but we've made our submission in Japan, and we've, they've acknowledged our application, and we've been in a dialogue with them. We've had questions from them, and so that's ongoing.
Okay, then last question is just on working capital. So revenue was flat year on year, yet you consumed another chunk of working capital. What were the dynamics that kind of caused that consumption at the end of the year?
Yeah. Well, inventory in ABS because you know our sales volume was lower than what we anticipated it would be. So that would be the main driver.
And just as a follow-on on that, I noted that you had made a provision against some inventory. I'm guessing that must have been some of that in ABS.
That's right, yes.
Is that now everything that needs to come out of that, or is there a risk that if things slow down further, we'll have some more kind of provisions to make there?
Yeah. Certainly, the provision reflects where we were at the end of June. We are not expecting volume to decline like it has in FY 2024, but if it did, clearly that would have an impact on our inventory, and we may have to take more provision. But there's some good work going on in terms of our production planning to reduce the actual holding we have of inventory. So over time, what I would like to see is that we've got more flexibility in our inventory system, and we don't have to take, you know, provision in a circumstance like we've had.
Okay, thanks.
Thanks.
Yeah, thank you. Jens Lindqvist at Investec. Just a brief one on the VAP phase 2. You were talking on the webcast about centralization of key functions, and also about further supply chain initiatives. Just a little bit curious as to what, you know, if you can share any more detail on that? And also the timeline for the realization of the GBP 10 million saving, please. Thank you.
Yeah. So, you'll be aware that we made a change, you know, in last year, bringing in a new leader for ABS and consolidating the beef, dairy, and IntelliGen businesses all up to that new leader, Jim Lowe. Previously, those three kind of business units reported all up directly to me. You know, Jim has made a very good start, I would say, and he's well-received within the business. He's now owning VAP and driving VAP, and as part of that, we're looking at, you know, organizing ourselves in a more efficient and more effective way, and part of that is centralizing certain functions, such as, for example, S&OP, sales and operations planning, which is it's absolutely critical in terms of managing your working capital, your inventories.
But also in terms of how you're gonna be allocating scarce, elite genetics, and ensuring that you allocate those to customers and to countries where you get, you know, the appropriate financial returns, but also where you have the right strategic relations. And so you need to have a central oversight to be able to do that. Also, you don't wanna reinvent the wheel in every single country, and so you wanna leverage your resources across the organization. So, you know, there's been kind of globalization of roles in marketing, in product management, in S&OP, as I mentioned, in strategic key accounts, and in a couple of other areas. So that is underway, and those are the changes that Jim is making. So yeah, sorry, the second question was?
It's just on the numbers.
Yeah.
So, yeah, phase 1 impact in FY 2024 was GBP 7.3 million. And so there's a year-on-year upside of GBP million 2.7, because it's 10 million annualized impact from that. And then phase 2 actions that Jorgen's just mentioned, we expect around GBP 5 million of benefit in FY 2025, with a GBP 10 million run rate at the end of FY 2025.
Thank you.
Hi, Joe Serena from HSBC. Getting back to you, PRP, is the work there in terms of the commercialization timeline, is that still very much focused on the regulatory piece, or have you moved on to things like the consumer acceptance, working with retailers in kind of more, with more focus now that time is kind of moving on? And then I'll come back to a second one after that, if I can.
Yeah, maybe let me take it, and maybe, Alison, you wanna add to it. Yeah, Joe, certainly, we are working in parallel on both the regulatory approval as well as the market acceptance. In terms of market acceptance, there is, you know, a lot of work going on in terms of consumer studies. Also, in terms of doing LCAs, life cycle assessments, to prove the environmental benefit of the PRRS-resistant pig. There is work going on in terms of engaging with stakeholders in the value chain, be it retailers or other companies. There's work going on in terms of engaging with potential customers. There's work going on in terms of creating marketing materials and educational materials. So there's a lot of work going on on pre-commercialization, so to speak.
But obviously, the main focus is on getting the regulatory approval, and that. And there's also, of course, if you think about the cost side of things, there's also the supply chain. So we have, you know, two farms where we have PRRS-resistant animals, and yeah. So, so we're growing the population and preparing for the commercialization. Alison?
Yeah, but I mean that cost, you know, over GBP 12 million, which PIC is carrying and reflects all the activities that Jorgen just mentioned.
Thank you. And then just turning to exceptionals, I think, within the numbers in the results, there was an amount for some abandoned transactions. Can you just give a little sense of what they are? And I guess, was the potential opportunity with BCA, was that part of that figure?
Yeah, yeah. Maybe starting on BCA, right? So BCA did approach us, and they were interested in pulling the transaction forward. As you know, we have an existing relationship with them that, you know, would transact once we gain the PRP approval in China. So they requested, you know, discussions to pull that forward, but those discussions have not resulted in a transaction. And you need to see that in the context of the Chinese environment, which has been very, very challenging, and so that has made that difficult. Obviously, we didn't wanna compromise any of our valuation expectations. We really look at it, you know, through the lens of the long-term potential in China, and didn't wanna compromise there. Yeah, I think, you know...
So clearly, that was one of them. You know, we have explored other potential transactions. You know, I can't really go into any detail other than to say that we are very disciplined, and we look at transactions through the lens of: Will they create value for shareholders? Will they make Genus a stronger and more competitive company in the long run? And if those you know objectives cannot be met, we will not do a transaction. Alison, do you wanna add?
Yes, that's exactly right, and yes, part of that cost is in relation to progress we thought we were making with BCA on a deal which didn't happen.
And just to finish off on that, I mean, as you stand here today, as you kind of look forward, are there any kind of expectations of further exceptions to come, or i s that kind of largely behind us?
Yes, yes. I have to differentiate between the P&L and cash flows, so looking into FY 2025 from a P&L perspective, I expect our exceptional cost to be in the range of GBP 6 million-GBP 8 million. Really, that will reflect, in the main, restructuring costs for VAP phase 2, as we make further changes there. From a cash perspective, we will still have some significant cash outflows in FY 2025, and we do actually set those out in a new slide at the back to give you help with that. Essentially, we will have payments which are part of the settlement agreement with ST.
And this is the settlement we talked about back in February, which was finalized in January, but the cash flows were spread over a few years. And we'll also have the cash flows associated with the restructuring costs I just mentioned. So yeah, so there are a few more to flow through. But once we get past FY 2025, there's one payment left in relation to the ST settlement, which equates to about GBP 4 million, and I'm not aware of any others after that.
Hi, Christian Glennie with Stifel. A couple of things on just your expectations around for this year, particularly as it relates to volume growth in or recovery in both ABS and PIC, please. And then your assumptions as you guide the market on your PIC China profitability. I think it was three point eight in last year and your assumptions for this year.
Yes. I think in terms of PIC, I mean, you should expect solid growth. I'm not going to give you more guidance than that, but they have a good track record, as you know. In terms of ABS, we're not assuming volume growth. The profit growth will be self-help, you know, through the actions we've been talking about with VAP. China, in terms of PIC, we're being very cautious. The profit, as you know, is relatively small now in China. We'll be cycling some increases in costs we had in FY 2024, because we expanded the supply chain with two farms. So, you know, growth in profit really will come from growth of the business.
But that's going to take time because of the strategy that we have with growing royalty customers. So they, those wins we've had will have a very minimal effect in FY 2025. It will be in subsequent years that you will see that come through. And as Jorgen said, for ABS, we expect it'll be a tough year in FY 2025. We're not expecting any growth at all.
Sorry, just to clarify on ABS, overall, no volume growth as in flat.
That's it.
Yeah. Yeah, exactly.
Yeah.
Not, not declining.
Obviously, there's mix effect in there. I mean, you saw that even in a really tough year, we grew sexed. So there will be mix effect within that overall assumption, and we expect sexed to grow.
Thanks. And then maybe on follow-up on PRP. Kind of six months on from when you know you had to go back. You know, there was further follow-ups with the FDA required. You didn't get the approval as you expected. Just some further you know six months on you know your level of confidence in you know what the. You've got full clarity on exactly what the FDA is asking you for, you've got the answers, and your confidence on meeting those requirements.
Yes, yes. Clearly, it's been a very novel process, right, for the FDA as well as for ourselves. I mean, this is the first mainstream gene-edited protein product that is seeking approval. So it is a really big deal for the FDA, as well as, of course, for ourselves. You know, they're applying kind of pharma standards to it. And so we're dealing with the people that are on the animal drug side. I think what is really important is that they have accepted our safety and efficacy data. So meaning that they consider the product safe for human consumption, meaning they agree that the gene edit prevents the pigs from getting the PRRS virus. I think that's a huge hurdle. The activities now are all focused on post-approval compliance, so it is more about how do you capture the data?
How do you take samples? How do you test those samples? What is the analytical methodology that you deploy? How do you store data? If a pig gets sick, whether it gets PRRS or it gets another disease, how is that information flowing back into the system? And then, how do you report that information to the FDA? And what is the system that you use, and what are the access rights, and who has the right to delete information or not delete information? On what server is it stored? So you get into a lot of practical details. So, you know, to a degree, there was some level of surprise in terms of, you know, the expectations that we had to meet.
But it is a top, top priority for our teams. And, you know, I would say that the dialogue with the FDA, and the review processes, and the exchange of drafts, is very constructive. I've recently participated in a meeting with the FDA, and I came away very positive in terms of the outcomes. And I came away with a sentiment that the FDA is clearly working towards the approval. So, yeah. It's been a huge amount of work, clearly, but we're making, you know, really, really good progress, and we're getting very close. But, you know, just on the timeline, right? I mean, and we highlighted that in the deck.
Once we, you know, complete all our submissions, then there is a step where the FDA inspectors will come to the two farms, as well as our testing lab, so they will visit three locations. So that is a little bit, you know, unpredictable, I would say, although, of course, we are preparing ourselves with consultants, and, you know, also by, you know, socializing, you know, just pig farming with the FDA. But the FDA is a large, large organization, right? And you don't know exactly which inspectors will come to your sites. And they will only schedule those inspections, those audits, once all of the documentation has been received and has been approved.
And so it is also somewhat unpredictable in terms of what are the findings going to be, and then how much time will it take to address those findings. Are those gonna be deal killers? No, I absolutely don't expect that. I think they're more practical kind of matters. But that's why we are, you know, somewhat cautious in terms of, you know, of timelines. And I think this is just, you know, I think just in general with regulatory approval processes, they are very difficult to predict because we don't control the process. Obviously, we control the input. We make a request, but then you deal with large government organizations, and at any point in time, they can, you know, raise questions or, you know, raise concerns. And that can lead to, you know, some delays.
Thank you. Thank you. That's very helpful. And then maybe just to... just as a follow-up on the potential, I know it may be hard to predict, but the potential timelines on Canada and Japan in terms of their reviews.
Yeah. Again, I would say that the submissions have been made. They have been received. We're working, you know, constructively with those regulators. I would say that probably we feel that Canada is going quite well, maybe a little bit, you know, better than we had expected. I think there's obviously exchange between Canada and the U.S., so maybe that's a factor. Japan is going well as well, but again, it's very difficult to be very clear on the timeline. Again, given that for also for those countries, this is the first gene-edited mainstream protein product that would flow into the mass food supply chain.
So those regulators obviously want to make sure that they, you know, are well covered and are rigorous and thorough. But we're prepared for that. We have all the data. We have experts in-house that are experienced, and we have also experts that are consultants, that are working with us. So we feel confident about our ability to navigate those situations.
Thank you. Matthew Abraham from Berenberg. Just a couple of questions to start on VAP, please. Just the first one, you referenced some of the changes that have been made to VAP recently. Is the path to that mid-teen margin target any different today, given those changes you've spoken to relative to what it was in the past?
Yeah.
Yeah, I think, you know, first of all, I would say that we're very committed to ensure that ABS is a value-creating business with, you know, with acceptable or attractive margins. I would say that all options are on the table. I think we're taking a very kind of thorough look at the business, and we have done that. You know, I think that organizational change, cultural change, improvement in commercial excellence and operational excellence, you know, accountability, holding our people accountable, incentive systems, all of those things are being reviewed, and all tools basically in the box are deployed to elevate the business to where it needs to be. So, yes, I think we're probably taking a more kind of thorough look at it than we had done before.
Yeah, I would add to that.
Uh, yeah.
I agree with that.
Yeah.
I would add that, in the past, it was probably more of a belief that the margin growth could be delivered through the volume growth and the shift in mix to Sexcel. I definitely, the shift to Sexcel is certainly going to continue to improve margin. But, yeah, we're more cautious on volume growth, and, you know, more of that margin improvement will come from the things that Jorgen has described.
... Okay, that's helpful. And maybe just as a follow-up to that, in moving to phase two, are there incremental difficulties in executing some of the efficiencies you're looking to? Or put another way, you know, has the lower-hanging fruit been taken out in phase one, and phase two is a different story?
Yeah, I mean, look, I think if you look at phase one, right, I mean, the overwhelming majority of that was cost-related. I think if you look at phase two, still the majority of that is cost-related, but there's increasingly, you know, also revenue benefits. Because I would say that perhaps, you know, the cost element is somewhat lower-hanging fruit, right? Because it's within your own control. But ultimately, VAP is not just a cost-cutting exercise. It's about ensuring that ABS is a growing and profitable business that is lean and that is, you know, very competitive and delivers, you know, attractive returns.
But, you know, if you do these, and this is a major transformation project, right? In a sense, probably, you know, we're talking about two years, but, you know, likely it's gonna be more than two years. So you also have to prioritize, right? Because an organization can only, you know, implement so much change at one go. So you have to kind of look at, hey, what's the benefit? How... What's the ease or difficulty of implementation? What are the resources that we need to execute, and then how do we prioritize that? You can't do it all at the same time.
I would add also that, I mean, the depth of analysis that's been done gives us confidence in terms of where the opportunities lie. Now, you have to execute to deliver that, but it's not a... This is not a guess. This is based on very data-driven analysis.
Yeah.
Yeah.
Okay, that's helpful. One more, if I may. Just in reference to your expectations for China, which, as you've said, are quite cautious. Is there a view as to when growth might return in that market, internally? Is it a multi-year view? How far out do you think that could be? And what are the key factors that you think could deliver that growth again in that market?
Yeah, I think. Look, I think this is just my view. I mean, if you look at, look at dairy, I mean, the Chinese economy needs to improve significantly for young people to start wanting to buy, you know, milk-based products, like they were before. The other side, obviously, is the supply side. That will correct over time because there has been a reduction in the dairy herd in China, but you know, demand from consumers has to come back, and I'm not gonna guess when that is, and then when we talk about porcine, you know, we've seen the pig price get to a reasonable level, and it is at the moment. It's just shy, I think, of 20 renminbi per kilo at the moment.
It's been, you know, nicely improving since about April, but that's after a very long time of losses for producers, so you know, I think our observation of our customers is that they continue to be cautious, and you know, I think the whole market wants to see the producers make a profit for a reasonable length of time before anybody gets really excited and wants to expand, so that's what we're hearing, and that's what we're seeing, but no one's gonna predict when that changes.
Okay, great. That's helpful. Thank you.
Okay. I don't think we have any further questions in the room just at the moment. So, if anyone would like to ask a question on the webinar, please raise your hand now. We'll just pause for a moment, just to see if anyone raises their hand. So, if you'd like to ask a question, please raise your hand. It's in the toolbar at the bottom of your panel. Okay, it looks as if nobody is raising their hand on the webinar at the moment. So, Jorgen, maybe I'll pass back to you for any closing remarks.
Yes. Well, thank you very much for your interest in Genus. We really appreciate you coming out here to the Peel Hunt Auditorium for the Q&A session. Thank you for your time, and wish you a very good rest of your day.