Welcome, everybody, to the Genus FY 2026 results. It's bright and early. Thank you very much for joining us in person and also to those of you that are connecting via the conference call. It's a pleasure to see you this morning. My name is Jorgen Kokke, and I am the Genus CEO. This has been an excellent first half for the group, and I wanna start by thanking all of my colleagues for their hard work and dedication in making this possible. We've delivered strong profits alongside substantial strategic progress. We're executing well against our priorities in both PIC and in ABS, while taking important steps to strengthen our long-term growth platform.
I now wanna point you to the customary disclaimer before I'll start summarizing the key highlights from H1 and before our Chief Financial Officer, Andy Russell, takes you through the numbers in more detail. Starting with the highlights, the first half was strong across the group. We delivered record first half profit, driven by PIC growth and further benefits from the Value Acceleration Program, or VAP, in ABS. Making sure we turn our profits into cash is, of course, critical, and I'm delighted that free cash flow generation remained very solid compared to last year's record inflow. We achieved further regulatory progress on PRP, the PRRS-resistant pig, including a major step towards North American commercialization with the Canadian approval in January. Last but not least, we formed the porcine joint venture in China, positioning the business for long-time growth in the largest porcine market in the world.
We'll of course, touch on all these points in more detail as we go through the presentation. Before we dive further into the detail, this slide is a brief reminder of what Genus does. Our vision is pioneering animal genetic improvement to sustainably nourish the world. We have performed well against our three strategic priorities. The first is growing porcine, including accelerating PIC's growth in China. The second is successfully commercializing PRP and generating attractive returns from our R&D activities. The third priority is driving greater value from bovine. Progress against each of these priorities contributed meaningfully to our financial and strategic progress in H1. We'll discuss the impacts in more detail. Before I hand over to Andy, I did want to pause and reflect on the significant transaction that we completed in January.
As many of you will know, the formation of our porcine joint venture is a significant strategic step. It creates the right platform to capture the substantial growth opportunity in the largest porcine market in the world. I'd like to remind you that half of the world's pigs are in China. Our partner, Beijing Capital Agribusiness, or BCA, is partially owned by a very large state-owned agribusiness with commercial interest across the wider food and beverage sectors. We've worked very well with BCA for over five years now, and we believe the partnership of the two companies will create significant value for our shareholders. We're very excited to partner with BCA as we execute against the tremendous opportunity in China for the PIC business. Let me now turn the presentation over to Andy, who will take you through the financials.
Yeah. Thanks, Jorgen, and good morning, everyone. My name is Andy Russell, and I'm Genus's CFO. Before we dive into the numbers, I wanted to flag that we've slightly changed the presentation to reduce complexity and really hone in on the key drivers of performance. Rest assured that the key data that was previously reported can be found in the appendix and in the interim announcement. Having completed almost seven months with the company now, I'd like to share a few observations. When I stood up here in September, I said I was excited by Genus's strong IP and significant growth opportunities. As I've seen more of the company, my conviction in these initial observations has only grown. I continue to be impressed by my colleagues' passion for the business and dedication to our customers.
We have a tremendous platform for growth, and I'm extremely excited to help drive the execution of these opportunities. Let me now take you through our strong financial performance in the first half. On this slide, we're showing our headline group financials. We've delivered strong first half profit on unchanged revenue, with PBT up 57% to GBP 55.7 million and EPS up 53% to 60.8 pence per share. I should flag that these figures include the benefit of a GBP 5.6 million milestone receipt from our Chinese partner, BCA. Excluding this milestone, we still would have delivered record profits, with PBT up 42% and EPS up 37%. Moving to our balance sheet and returns metrics, leverage reduced to 1.4 times from 1.5 times at the end of June 2025.
We have a strong balance sheet already. In fiscal Q4, we also expect to receive approximately GBP 100 million of joint venture formation proceeds from BCA. Our 12-month rolling return on capital improved significantly from 14.7% at the end of June 2025 to 15.8%. This is a key focus area for us. Lastly, on free cash flow generation, we generated a GBP 8.2 million inflow in the first half, which is a strong performance compared to last year's record level. Conversion of 60% looks a bit lower than you might expect. This was predominantly driven by the timing of the receipt of the BCA milestone and dividends from Agroceres, our JV partner in Brazil.
The cash for both has now been received. I'm confident we will beat our 70% conversion target at the full year. Our first half performance was underpinned by strong operational delivery across both PIC and ABS. In PIC, royalty revenue growth is a good indicator of performance. We delivered 6% actual currency growth to GBP 93 million in the first half, comprising very strong performance in Asia, driven by over 50% royalty revenue growth in China. Notably, every region grew royalty revenue in constant currency. On the back of the solid royalty growth and including the BCA milestone payment of GBP 5.6 million, PIC adjusted operating profit increased 30% to GBP 72 million at a margin of 34.5%. Excluding the milestone payment, operating profit grew 19% with a margin of 33%.
In ABS, VAP initiatives were the key drivers of profit growth. Sex volumes grew 1% in the period, with conventional volumes declining 2%. VAP initiatives drove a profit increase of 27% and a 180 basis point improvement in margin to 7.1%. Moving to group operating profit, you can see that we generated excellent first half profits with strong growth in the core and PIC China. On the right-hand side, you can see the building blocks of the year-on-year increase, with significant contributions across the board. It's a record first half performance, even excluding the milestone payment from BCA. Group operating profit margin also increased to 19.2% or 17.5%, excluding the milestone. Diving into PIC, this slide shows a more detailed breakdown of performance.
As mentioned, every PIC trading region achieved royalty revenue growth in the half. Within the regions, Brazil and China were the biggest contributors to a GBP 10 million increase in profits. The BCA milestone receipt was, of course, a big year-on-year driver as well. As a reminder, we recognized this milestone upon regulatory approval for the formation of our joint venture. This is the final milestone payment that we expect to receive from BCA. As planned, PRP costs continue to increase as we ramp up our market acceptance activity. For the full year, we expect an increase in underlying PRP-related expenditure of about GBP 3 million. Excluding the BCA milestone, PIC margins expanded to 33%. Moving to ABS, VAP benefits were again the primary driver of profit growth.
We realized GBP 4.7 million of benefits in the first half, comprising GBP 2 million of annualized Phase II benefits and GBP 2.7 million of in-year Phase III benefit. Regional trading remained solid, including an unexpected decrease in Asia profitability following China's decision to close its borders to U.S. bovine genetics. As expected, ABS's first half result was impacted by an increase in bovine product development costs of GBP 2.1 million. This increase in product development costs is due to higher depreciation on prior period investments and the impact of acquiring the minority interest in De Novo. For the full year, we expect bovine product development costs to increase by approximately GBP 4 million. As we think about other factors for the full year, we now expect an in-year benefit from VAP Phase III initiatives of approximately GBP 7 million, as we've been able to progress slightly faster.
We still expect the annualized benefit to be approximately GBP 9 million. ABS's margin increased 180 basis points to 7.1%. We continue to target a double-digit margin in the medium term. R&D is core to our business. Excluding the BCA milestone, we spent almost GBP 35 million in the first half. Approximately 80% was spent on product development and 20% on research projects. Our spend was marginally lower as a percentage of revenue in the first half. We expect a slightly higher level of spend in the second half. We'll continue to invest in product development to drive genetic progress and research that can drive game-changing innovation. Moving to our statutory income statement. As a reminder, we consistently measure and report adjusted results as we think these give a better view of the group's underlying performance.
Our statutory results are affected by non-cash items, in particular IAS 41, which can give a misleading picture of the group's underlying performance. Picking out the key line items, the movement in the IAS 41 valuation for the half was a GBP 6.4 million decrease compared with the prior year valuation, primarily driven by porcine. Exceptional expenses were slightly higher year-on-year at GBP 6.7 million and comprised two main elements: GBP 4.6 million in relation to VAP and GBP 1.9 million in relation to the PIC China JV formation. Based on what we can see today, we expect lower exceptional costs in the second half. In summary, statutory operating profit and PBT were significantly ahead of the prior year. Moving to free cash flow.
We generated GBP 8.2 million in the first half, which compared to a very strong GBP 10.3 million last year. The milestone of GBP 5.6 million had a distorting impact because it was recognized in first half EBITDA, but we received the cash post-period end. We had by higher bonus payment outflows in the first half compared to a low level last year. These bonus payments are driven by prior full year outcomes. FY 2025 was, of course, a lot stronger than FY 2024. The significant working capital negative movement on the chart is worth reflecting on. I'd remind you that this is the year-on-year change. Last year, we had a significant working capital improvement due to a decrease in bovine inventories and receivables. We're pleased to have held onto those gains, but the year-on-year impact is, of course, a negative.
There's also a positive impact of lower cash exceptionals in the half. Overall, we're pleased with the first half cash generation. I'd remind you that second-half cash generation is typically seasonally stronger. With what we can see today, we're expecting a step-up in H2 free cash generation, such that we expect FY 2026 free cash flow to be above FY 2025's record level. Following on from free cash flow, our balance sheet continues to strengthen, with leverage reducing from 1.5 times to 1.4 times. Gross debt increased marginally to GBP 233 million at 31 December 2025, with higher EBITDA driving the leverage reduction. Following formation of our porcine JV in China, we expect to receive approximately GBP 100 million in fiscal Q4 of FY 2026.
12-month rolling ROIC improved materially to 15.8% in the first half, albeit this includes the BCA milestone. As a result of our strong financial progress, the board is proposing an interim dividend of 11.2 pence per share, compared to last year's 10.3 pence per share. Back in September, I outlined our high-level capital allocation framework. We believe we're moving into a new cash flow paradigm. FY 2025 was a record year for free cash flow, and we believe FY 2026 will be even stronger. We're also, of course, expecting receipt of over GBP 100 million in fiscal Q4. I therefore wanted to provide some additional granularity on how we assess and prioritize capital deployment. Before we deploy any capital, we must secure our balance sheet. A strong balance sheet de-risks the group and gives us strategic optionality.
I know Genus has previously targeted a range, a leverage range of one to two times net debt to EBITDA, and I think this remains the right through the cycle range for us to operate within. That being said, I want to be clear that we won't be rigidly bound by this range. In the short term, on receipt of the BCA proceeds, we will de-lever our balance sheet below the bottom end of the range as we appraise opportunities. After maintaining the strength of our balance sheet, our first capital allocation priority is investing in organic growth. To give you a near-term example, PRP is a transformative opportunity that we will absolutely continue to ramp up our investment in. After funding the best organic growth opportunities, we clearly want to continue rewarding our shareholders through our progressive dividend policy.
We've also simplified the mechanics of our dividend policy to make it easier to model. Going forward, we intend to pay a full year dividend of between 30%-40% of our adjusted earnings per share. We will continue to split the full-year dividend into an interim and final, and the interim of 11.2 pence per share is 35% of the previous full-year dividend, in line with our updated policy. Continuing down the capital allocation waterfall, we get to inorganic growth opportunities. You can expect us to continue applying strict financial and strategic criteria to any potential M&A transactions. We'll be very focused on returns, earnings accretion, cash flow generation, and strategic fit. Genus has a good track record of value-enhancing bolt-on deals, and we are amenable to doing more.
Moving to the bottom of the slide, we will assess surplus capital returns to shareholders. We've given this significant thought and recognize it's an important element to shareholder value creation. We've established a defined process for evaluating surplus capital return options, and we will be judicious in deploying capital in line with this approach. I hope that gives you some additional color on how we think about capital deployment, and I expect we will return to this topic in the future. Before I turn the presentation back over to Jorgen, I wanted to share analysis we've put together to help you with your modeling. Going forward, PIC China will be deconsolidated from our group accounts. While PIC China continues to grow, this is a significant change to our reporting. We've also received one-off milestones from our Chinese partner, BCA, which also makes comparison a little difficult.
On this slide, we've shown you a pro forma P&L for FY 2025 H1 and FY 2026 H1. We've also included the same pro forma analysis for the whole of FY 2025 in the appendix. We think looking at the group this way probably gives the best like-for-like comparator for our future performance. The box on the right also flags a couple of the key elements that aren't in this analysis that are likely to impact the second half. Within PIC, we're expecting higher PRP market acceptance and product development costs. PIC China also had a particularly strong first half. We just want to be cautious about this level of growth continuing in the second half. Turning to ABS, we're expecting further VAP 3 benefits to be partially offset by an increase in costs half over half.
Lastly, at the group level, we expect lower net finance costs due to lower average net debt over the period. I'd finally also remind you that in our appendix, we have a technical guidance slide which outlines expected impacts in our FY 2026 accounts for various line items that, again, should help you with your modeling. With that, let me now turn the presentation back over to Jorgen to take you through our strategic progress and outlook for the rest of the year.
Thank you, Andy. Let me now take you through the excellent strategic progress we've made in H1. As a reminder, our three strategic priorities remain clear and unchanged. Let's discuss first PIC's royalty revenue. PIC royalty revenue is a critical driver of our financial performance. The royalty revenues are very high margin, recurring in nature, and extremely sticky. The royalty model aligns our success with our customers' success, decouples our earnings from the underlying pork price volatility, and supports the fostering of long-term genetic partnerships. You can see on the left-hand side of the page that PIC continued to grow royalty revenue in every region of the world in H1. As Andy mentioned, total PIC royalty revenue grew by 6%. Our four-year compound annual growth rate was also very healthy.
Looking at the four regions, Asia is, of course, the standout at 34% over the four-year period. Our commercial pivot two years ago to sell predominantly under the royalty model in China is a major driver of our growth. We generated around GBP 93 million of royalty revenue in H1. Continuing to drive royalty growth is a significant area of focus for us as we move forward. Moving to PIC China, which of course is part of PIC Asia, we achieved a very strong improvement in operating profit in H1. The chart on the left demonstrates that this was predominantly driven by a more than 50% increase in royalty revenue in China. This is in line with the change we made in China to our commercial approach, which is now focused on selling under the royalty model.
I'm also really pleased that the strong financial performance was achieved despite a weak market backdrop, as pork prices in China have been low. This highlights the value our genetics can bring to our customers in China, just as they do elsewhere in the world. The right-hand side of the chart is a reminder that post-period end, we formed our strategic porcine JV in China with BCA. We are very excited by the platform this create, as we seek to execute against the tremendous opportunity for growth in China. Moving to our second priority, we continue to make steady progress on PRP regulatory approvals globally. January marked another major milestone towards North American commercialization, with Canada approving the use of the PRP gene edit. As a reminder, to commercialize in North America, we still believe we also need the Mexican and Japanese approvals.
We're encouraged about the engagement with both of the regulatory bodies in those countries. Before turning to our outlook, let me touch on the Value Acceleration Program, or VAP, in ABS. As a reminder, we initiated VAP in FY 2024 to accelerate ABS's growth and structurally improve margins, return on invested capital, and cash generation. In FY 2026, we're executing phase three initiatives, which have been focused on reshaping our go-to-market strategy and embedding commercial excellence across our global teams. We've also launched a broad operational excellence initiative, led by our new head of supply chain for ABS. Achievement in the first half was good, with GBP 2.7 million of annualized operating profit benefit delivered from phase three. We now expect to achieve an in-year benefit of approximately GBP 7 million, which is ahead of our previous expectations of about GBP 6 million.
We still expect the total annualized benefit from phase three to be approximately GBP 9 million as we continue our journey towards achieving a double-digit margin in the medium term. Let me now turn to our outlook for the second half of the year. As we discussed earlier, our royalty model significantly insulates our financial performance from underlying market conditions, specifically in PIC, of course. As such, our momentum from H1 continues into H2, despite challenges in some of the markets. Looking at the market environment for our customers, we'd probably characterize the first half as being mixed, with the Americas stronger than the rest of the world. As we look to the second half of the year, the global porcine outlook appears relatively stable, albeit there are continuing disease challenges in some regions, such as the outbreak of ASF in Spain.
Pork prices in China also remain relatively weak. In bovine, we're seeing global milk prices weaken, and the China border is still closed to U.S. bovine genetics. Therefore, we see a generally stable market environment in the second half of the year. This comes with the usual caveats that these markets are dynamic and the situation could change quickly. Turning to our outlook for the second half of the year, I'd start by saying that we're delighted with our first half performance, record profits, solid free cash flow generation, and significant strategic progress. We're very pleased to have formed our porcine JV in China. As mentioned, we expect to receive the proceeds of approximately GBP 100 million in fiscal Q4, and we have outlined our capital allocation framework for assessing capital deployment.
As we look to the second half, we continue to see good momentum across the business. As such, we're confident that we can deliver significant growth in FY 26 adjusted PBT, in line with market expectations that were raised in January. With that, let me thank you for your attention, and we're now happy to take your questions. Charles, please, huh?
Thanks. Just a couple of questions. Can we just start on PIC in China and in Brazil? Obviously, very strong performances from both of them. It doesn't feel as though the market's helping you in China. Can you just run through how sustainable the performance is there and what your opportunity is with customers? Have you won any new customers in the period, or is it just penetration of existing customers? Can you just talk through the Brazilian market and what's happening there?
Yeah. Well, thanks, Charles. We have put significant effort on China over the last two years, supported our team. We've built a formidable organization there, which is supported by our global team. We, as I mentioned, we changed our approach in China two years ago by focusing on the royalty model, which previously we did not.... The reason for the change is that the market in China has changed profoundly post ASF, which, as you know, the outbreak that happened in 2020. Post that ASF outbreak, we've seen a professionalization of the industry in China. We've seen concentration happen, with the big players becoming bigger. That has led to an increased level of sophistication among our customers.
It is just a requirement for pork producers to have a high level of sophistication, a high level of, you know, ability to interpret data, to take advantage of elite genetics. We've seen the Chinese market become much more conducive to using advanced genetics, and we've taken advantage of that. Specifically to your question, we have won, you know, a very significant number of customers over the last two years, about 25 new customers, and we want additional new customers in FY 2025. As to your question of what was driving it's both. It's the customers that we won in the last two years, as well as also some that we won just more recently.
We're pleased, and we believe that we're in the very early innings of the growth in China. As you know, our market share in China is very low. We are already probably the largest player in China, with a market share of below 5, probably in the 4-ish range. We see tremendous opportunity to continue to drive growth over the next years. As for Brazil, do you wanna comment a bit on Brazil, Andy?
Yeah, sure. Brazil, we clearly have our joint venture partner, Agroceres, there. They cover Brazil and Argentina. Royalty revenue contract penetration is slightly lower than North America. We saw good growth across the board, both upfront breeding stock sales and within royalty revenues. A lot of that is driven by the underlying market. There's a strong market there with strong pricing. We see that continuing, albeit that penetration of royalty revenue is just slightly lower than North America. There is a bit more of those of upfront breeding stock sales, but it's largely driven by a strong underlying market.
If I could just follow up on ABS, the beef market's obviously been very challenging over the last couple of years. Beef prices now very high around the world. Are your customers starting to feel more optimistic that they can expand production and invest in genetics?
Well, I would say that beef prices has been very, very high. As you know, the beef herd in the U.S. is down very significantly, driven by weather events, right? A couple of years, the drought in the western parts of the United States, that has pushed up prices. That's a good thing for dairy farmers, right? If you think about beef on dairy, it's quite attractive. Beef is selling their calves into the beef industry is a major sort of value creation opportunity for the dairy farmers. That bodes well for us with our beef on dairy products for in ABS. Yeah. Seb, you wanna go next? Yeah.
Morning. Thanks for taking my question, Seb Jeantet for Panmure Liberum. Two questions, if I can. First of all, just on staying on ABS for a little bit, obviously, we've had some really good kind of margin growth from the VAP program over the last few years, but it feels like we're kind of coming towards the end of that program, and we're now into perhaps more of a phase of continuous development. I'm kind of wondering, what are the levers you've got left to pull to get that business towards the double-digit margin? You know, when we say double digit, do we mean low double digit? Can it get to teens? I'm just trying to get a sense of where that might go. The second question is actually just around the PRP investment.
I was wondering if you could just give us a little bit more detail on the investment you're making in PRP around market acceptance, how you're gearing up for the launches in Colombia and the Dominican Republic?
Yeah. Okay, let me start with ABS. Yes, the VAP has been a major driver and has resulted in improved margins in ABS. It also positions the business for growth, because you have to be lean and fit to grow. We're making this into, you know, a much better business. We've made a lot of changes in terms of people, in terms of organizational structure, in terms of culture, in terms of incentive schemes, and so forth. You're right, a major transformation program, you know, will have a beginning and an end, probably, right? We're certainly looking beyond VAP, and there's two major initiatives and value drivers that we're embedding in ABS as we speak.
One is around commercial excellence, which is a broad sort of theme, around strengthening our go-to-market activities, and I'll give you a few examples of what we are doing. We are standing up inside sales desks, for example, that have a lower cost to serve for, let's say, smaller and more transactional customers, so that the field sales force can focus more on the largest and most attractive opportunities. We have expanded our sales agents and authorized representatives network, and in some cases, we have reduced our own field sales force because we felt that was a more appropriate and more efficient way to go to market in certain geographies. We are also investing in certain capabilities. For example, we are hiring hunters that are incentivized to hunt in certain sales territories, so very much more rewarded on the basis of growth.
We have invested in a pricing manager, with very clear pricing, methodology, and pricing guardrails. We have been doing a lot of work on pricing over the last really 2 and a half years, but we're embedding and institutionalizing that in our business, and you need to anchor that with processes and also with people and capabilities. We have brought in a sales compensation manager, for example, an expert in that regard. How do we incentivize our people, you know, for driving results that align with our objectives? Those are just a few examples, but there is many, many more. We're really standing up that capability. That's on the commercial excellence.
The other lever that we're pulling, Sepp, is around operational excellence, which is a broad theme that's used across manufacturing businesses widely. We have hired a new supply chain leader for ABS. He's been with us now for about a year. He's a world-class expert in Lean and Six Sigma, which is about eliminating waste from the business and driving efficiencies. We're taking all of our people in operations through the Toyota training philosophy, and we're setting the appropriate targets for the people in the business, continuous improvement targets, to actually deliver savings. To give you a few examples, what we're working on, we're moving the ABS intelligent labs to 24/7. They operate five days a week, so that drives more throughput through your labs, so thereby you lower the cost. We're implementing further automation. We...
There's lots of opportunities that we're pursuing in that area. Clearly, we haven't made the decision on VAP and the future. We're very focused on delivering the result in H2, but we're not sitting still, and we're clearly thinking beyond VAP.
Do you want me to take PIC?
Yeah, yeah. Maybe on PIC. Maybe on the target, Sepp, you know, we think that double-digit operating profit margin is an appropriate target. Let's get there first. Once we hit that target, we'll, you know, we will always be ambitious, and we'll also set more targets, but let's get to the double digits first. Yeah, you wanna talk about PRP?
PRP investment?
Yeah.
Yes. You'll have seen on page 14, in the first half of this year, we spent almost GBP 5 million. A GBP 1 million increase on the same period last year. In the second half, that growth will expand, and that we'll spend an extra GBP 2 million compared to second half last year. Full year, about GBP 3 million up, which is about GBP 13 million in the year of spend on PRP. There's quite a diverse range of spend within that bucket. Clearly, we have a lot of animals and that we continue to maintain, so there's costs of running the farms. There's also the other costs around marketing, focus groups, and a lot of work we're doing around the broader market acceptance piece.
There's a broad range of spend, which we continue to invest and increase that investment as we go through, and we expect a further increase in the spend next year into FY 2027.
Sorry, just on the, what are you doing in Colombia and the Dominican Republic, and when do you think you might be launching in those markets?
Yeah, you know, I think we're carefully considering the launch, you know, in those products, sorry, in those, in those countries, but we haven't done that as yet. We'll definitely keep the market apprised as we move closer to commercialization in those geographies. Clearly, we see them as opportunities to experiment, gain valuable experience with the introduction of the technology. Rest assured that there is a strong desire and appetite to utilize the technology in those countries.
Thanks.
Hi, thanks. Sean Conroy from Shore Capital. I'll just sort of follow on from Sepp's question really around that investment into the PRP program. I mean, is that going to be more a consumer level, or is that more a producer level that you're trying to drive that acceptance ahead of the launch? Has your confidence changed in any way in terms of the level of adoption you think that you can get to with PRP versus the numbers that you stood as to at the capital markets day? Just on ABS as a follow-up question, do you see any risk that, you know, the margin improvement story at ABS is going to become a distraction from the growth opportunity that you have in Porcine?
Okay. Sean, thank you. You know, in terms of our investment in PRP, of course, is a transformative new technology. You know, CRISPR-Cas9 gene editing was awarded the Nobel Prize for Chemistry. The technology is used in pharmaceuticals. For example, there's a successful drug that is used for treating sickle cell anemia. There is also a lot of work on crops. I think about 500 different crops where the technology would be used. As a reminder, GE is different from GMO. I mean, we do not use any foreign DNA. It's essentially disabling the receptor for the disease. It's been very rigorously reviewed by regulator, most recently in Canada, and prior to that, in the USA, where we've submitted all of the safety and.
You know, efficacy data, really reviewed over multiple years. If you think about a new technology like this, right? There's first the scientific and technical risk that hurdle that you need to overcome. You get the regulatory risk. We're making good progress. You have the market acceptance. We obviously have invested in all three. There's sort of a sequence, right? In the beginning, you do a lot of studies on the animals. There's of course, the regulatory work, where we had to hire people, work with consultants, pull dossiers together. The market acceptance work has been going on for a long time. We have hired public relations experts, people that speak at conferences. We speak at conferences, I would say, you know, probably multiple times a month.
We have a website that is the prrsresistantpig.com, which in essence is consumer-facing. I would highly recommend everybody to go to that website. It's very informative. You can read studies, consumer studies. You can read about what experts, you know, in this field say about the technology. Yeah, I mean, the market acceptance is an area where we're very engaged at this point. We welcome a debate with all of the stakeholders. To your question, the ultimate decision makers will be, you know, will be our customers' customers. I think it will be the brand owners and the retailers will have a key influence on that. You know, as to your question on ABS, is it a distraction?
I would say no. ABS and PIC are run as different businesses, and the ABS people are not involved with PIC and vice versa. They have very, very clear agendas on how they can create value and what their focal areas are, so we're not worried about that. Perfect. Thanks. Damian? We go to Jens after. Yeah.
Thank you. Damian McNeela from Deutsche Numis. First question is on the third pillar of your capital allocation policy, inorganic opportunities. Can you give us a sense of what the current pipeline looks like, what the sort of priorities may be in that area, and any guidance around returns metrics that you're looking at there?
Yeah.
Yes-
Maybe I'll talk a bit, a little bit about M&A and then hand it over to Andy. Look, I think what is so great about Genus is that we have fantastic organic growth opportunities to create shareholder value. As such, M&A is not a must-do for us. The priority is really to deliver against the PRRS-resistant pig, to improve the economics of ABS, to take advantage of the opportunity that we have in China, and to continue to grow our business. That is reflected in my strategic priorities that I defined for the business when I joined two and a half years ago. Of course, we do wanna be opportunistic when attractive opportunities present themselves, right? We know the industry, and the industry knows us.
You know, that's where we think, how we think about it. It's not a must-do. The pipeline is probably, I would say, not very robust at this point. As you may know, there isn't, you know, a huge number of potential targets, and we're comfortable with that. However, things can always shift, and then we have very clear criteria. To give you some examples, we'd love to, of course, do bolt-on in PIC, where we have a great track record, you know, with. And it probably would be smaller businesses that would help us grow. Again, I mean, I don't have any visibility to any of that happening in the near term. In bovine, the bar would be higher, and I would like to see clear synergies.
For example, cost synergies that would help us to get our, to our objective. If you think about other species, it would have to be a foundational asset with really good leading position and a really good growth trajectory.
Yeah, I guess just to add to that, we've had a pretty good track record of doing M&A in the past, albeit some of them have been opportunistic. I think we'd continue to apply some of the criteria that we've always looked at. You know, clearly, we look at return on invested capital. I talked about ROIC being a key metric for me. We'll look at ROIC compared to our WACC in the medium term, post-acquisition, as you'd expect. We'd look at IRR and, you know, net present value, that sort of thing. In terms of, you know, a bit like what Jorgen said, it has to be accretive to growth, has to be accretive at operating profit margin levels. And then, of course, that translates to EPS growth, right?
I think we've got some clear financial criteria combined with strategic fit, which we'll continue to apply. Like Jorgen said, in terms of pipeline and strategic priorities, it's not quite up there.
Okay, thanks.
No problem.
If I may, just one on China JV. Obviously, you've become the minority partner, but can you give us a sense of what changes, what doesn't change, what confidence you've got that the strategy is gonna be maintained, that you've set in train, that sort of thing, please?
Yeah. Yeah. Well, clearly, our PIC business in China is a successful business as it is. We look forward to execute against that roadmap. There is not a huge amount of changes that need to happen in the near term. Clearly, we feel that the partner is extremely helpful and probably will be instrumental in unlocking the PRP opportunity in China. That is a significant consideration in doing this deal. As we look at the governance of the PIC China, so PIC China business, I do wanna say a few things about that. We will have two out of five board seats. We have the right to appoint the CEO, and the CEO is the current or the former PIC general manager for China.
The CEO will have broad management rights. We believe that the interests will be very much aligned with BCA. To remind you, BCA has multiple shareholders. 40% is held, in essence, by the Chinese government. 60% is held by private investors, institutional as well as private individuals. Our interests are aligned with those in terms of growing the business, generating cash, driving profitability.
Okay, just one quick follow-up on PRP in China approval process.
Yes. We have PRRS-resistant pigs in China, and they've been there now probably for about 18 months, and they're reproducing. China is the only country in the world where we need to replicate all of the testing that we have done in the U.S. for the rest of the world. We need to replicate that in China. They require us to expose the pigs to China-borne viruses. That process is underway. That's progressing well. The animals are in a biosecure facility on the top of a mountain. Nobody can go in or out of the facility, and actually, the workers live in the facility. They cannot go out. They can only go out, I think, every 2 months or so to go back to their family so as to avoid any contamination.
The data that we generate, all of the safety efficacy data, will be used to generate a dossier, just as we have generated for the U.S. and Canada, Brazil, Argentina, and so forth. The testing will be done by the end of this calendar year, and then we can proceed to the next stage, which is submission, yeah, of the dossier.
Yeah. Thank you.
Hi, Jens Lind with Investec. I saw the % of volume and the royalty dropped a bit in Asia in the first half, in spite of a very strong relative revenue growth in China. Just wondering if you could walk me through that dynamic, please. Secondly, your thinking on the preferred means of capital return, perhaps in the short term, in whether or not you will return part of the GBP 100 million from BCA, perhaps.
You wanna take both.
One final one, you mentioned very excitingly, game-changing innovation. Could you give me any more color on that, please, refer to anything in particular?
Yeah. Yeah, sure. The proportion of royalty revenue in Asia, I'll start with the royalty revenue. You're seeing royalty revenue in Asia is predominantly driven by China, and the royalty revenues in China did see a quite a significant step up from sort of GBP 6 million in the first half last year to GBP 9 million. We've got strong revenue, royalty revenue growth within China. The non-revenue growth is lower margin, but it did step up in terms of upfront breeding stock sales and some and a little bit of by-product. But in terms of impact on profit, that's been close to immaterial in that we still saw a profit growth highly correlated to the royalty revenue growth.
There's a bit of noise and lumpiness in that non-royalty revenues within Asia, which can fluctuate half to half. I'm not overly concerned with that. In terms of your second question around capital allocation and potential shareholder return, first of all, we haven't got the proceeds yet. Okay? We've still got a few months before we get those proceeds, and then clearly, we're assessing what else is on the landscape. I talked about priority number 1 being around organic growth opportunities, which we'll continue to look at, and of course, we got dividend return.
We talked about M&A, you get down to number four on the priority, on the framework, you know, that's something we'll assess at the right time, and we'll probably come back to it.
Yeah, as for Jens, as for your question on innovation, I think you used the term exciting innovation. I like that. Yeah, you're right. I mean, we spent a significant amount of money on ensuring that our products are leading-edge. It's about 10% of revenue. 80% goes in product development, about 20% in more game-changing breakthrough R&D. You know, I think your question is more about the breakthrough R&D. The focus has been on disease-resistant animals, PRP is a case in point. That obviously is quite a long journey, we have previously talked about, you know, other potential diseases that we're interested in, we named ASF. We have to be very careful because there is, of course.
we're still in the discovery phase, so that means that we do not have a proof of concept. It also means that we don't have intellectual property, so it's too early to talk about a path towards commercialization. As you know, these things could take a while. In addition, an area of focus in R&D is sexing, as a broad topic, and our intelligent technology is a case in point there. Again, I can't really discuss anything further for commercial and confidentiality reasons. But rest assured that we back R&D bets where we have conviction, and that continues to be a very important lever for us as we move forward.
Thanks. Adam Tomlinson, from Berenberg. Just a follow-up on PRP in China. You've talked about the regulatory process there, but I'm just wondering if you have any kind of in terms of market acceptance, your activity that you've been undertaking over there, just any steer on that? I think a lot of the surveys you've done in terms of the consumer's view have been U.S.-focused. Just anything around any color you can give that on what's happening in China in that sense would be great. You've also talked. Sorry, just another one on regulatory approvals. Further progress in Mexico and Japan, I don't know whether you can give any other color around that. Then just a third one on a small one on costs.
In PIC, you talked about lower input costs of production in H1, just wondering if you could give a bit of detail on that and the outlook for H2 on that. Thank you.
I think there's three questions. You wanna take the last one, maybe?
Yeah.
Yeah. We go to the other two. Yeah.
Do you want me to... I'll do that first. Yeah, yeah. In PIC in the second half, there's actually quite a few moving parts which you need to think about if you're looking at H1 v H2, so at the half and half. Clearly, there's the China deconsolidation, which will reduce. We've talked about PRP costs stepping up, so again, that's a reducing factor. The third one is around product development costs. On product development, clearly, we have a lot of animals going through, and there's input costs, and there's outputs as the animals flow through. So far, we've benefited from lower input costs and then stronger pricing as we, as we exit.
We don't think that will continue over the long term. We're being cautious around what we expect in the second half. That translates to an increase in overall product development costs 'cause we have a lot of animals going through that part of the P&L. Does that help?
Yeah.
Yep.
Yeah, your first question was around PRP market acceptance, specifically in China, right? You know, I would say that the arguments for the use of PRP are similar to elsewhere in the world, right? Those arguments are, you know, it addresses the most devastating disease among pigs, and, you know, the benefits are, you know, much improved animal welfare, which I think is an important argument. Another argument is it lowers the use of antibiotics. Another argument is it lowers greenhouse gas emissions, and we've done the life cycle analysis that shows that it lowers GHGs by about 8%. Last but not least, it drives very significant economic benefits to our customers. Now, as for market acceptance in China, of course, in China, relationship and support from the government is absolutely critical.
It's probably important in every country, but I would say more so in China than in many other countries. Of course, that is one of the reasons why we have aligned ourselves with a state-backed entity, and so that's where the benefits will kick in. Our partner is leading the charge in that regard, and they are, for example, very active in hosting conferences and in engaging with government officials, where some of our research scientists make appearances and give talks. That work around regulatory, both regulatory as well as market acceptance, is very much underway in China. I think the other question that you had was in relation to Mexico and Japan. We are, as I mentioned, we're encouraged about the interaction with both regulators.
We've been, you know, in very, very active dialogue with both of them for years now, similar to the U.S. and Canada, right? The process has taken years, literally. You know, if you think about Mexico, we're dealing with an organization called SENASICA, which is the more or less the equivalent of the FDA. We're also dealing with SADER, which is the Ministry of Agriculture. We believe that they're very receptive, based on all the information that we have provided. What is somewhat different in Mexico is that there isn't a very clearly defined pathway towards getting a technology like this approved. What is very helpful, we believe, is that we get very strong support from Mexican pork producers. They're active in, you know, making their position known to the government.
Mexico definitely has a PRRS problem. There is, I would say, a strong desire to adopt the technology in Mexico. I would say Japan is maybe a process that is somewhat more similar to what we have seen in Canada and the U.S., but not, certainly not exactly the same. Certainly, it appears to be moving, you know, a little bit more deliberately, a little bit more slowly. Japan does have a record of supporting modern biotechnology. They have approved other gene-edited products. We remain optimistic about both countries, really.
Thank you.
I think we're getting to the end. Yeah?
Okay. We have no further questions on the webcast or the conference call at the moment, Jorgen, so maybe back to you for any closing remarks.
Well, I would like to thank everybody for your interest and for your questions. Once again, we're very pleased about the progress. My gratitude goes out to all of the Genus colleagues. Thank you for appearing here this morning. I wish you a very good day.