Hello, and welcome to the Genus interim results Q&A webinar. We're joined today by Stephen Wilson, CEO, and Alison Henriksen, CFO. If you would like to ask a question to Stephen and Alison, please use the Raise Hand function at the bottom of the screen. You will enter a back staging area before being promoted to a panelist to ask your question. I'll now hand over to Stephen to begin.
Thanks very much, and welcome everyone to the question- and- answer session. I hope you had a chance to look at the video that Alison and I recorded yesterday, outlining the results that we achieved in the first half, and we're looking forward to your questions. Let's see if we have a first question.
Thank you. As a reminder, if you'd like to ask a question, please use the Raise Hand function at the bottom of your screen. We'll take our first question from Charles Hall. Charles, please go ahead.
Morning, Stephen. Morning, Alison. Well done on the results.
Thank you.
Thank you.
I don't think I can hear you now. Perfect. Could we start on China and just give us a bit more insight into what you've been seeing over the last few weeks, obviously with the pricing being low? How much experience have you, has your team seen of COVID in real life, and what's that done to orders? I think you said, Alison, that there was a healthy pipeline of new business opportunities. What's the timing on those and the appetite for expansion? If we could just start on those, that'd be great.
Yeah. I think what I would say is that it's been really quite a volatile period of time. You know, we had this severe COVID clampdowns all the way through until mid-December, and then suddenly those were released, and then, you know, basically everyone caught COVID. We had 1 point just around about the new year when 90% of our team in China had COVID. It swept through. It does appear actually that it's, you know, been so comprehensive that there's no second wave appearing at this moment, which was one question that people had after the Chinese New Year, would that happen. I think life is beginning to normalize.
People are coming out of hiding and starting to go to restaurants again, and, you know, I think that's gonna be positive for demand. And, I think the signal the Chinese government is giving in the economy is let's get back to growth. I think that's helpful. Now, what has happened to the Chinese pig price in, you know, we saw these elevated prices in the autumn. I think that encouraged some people to say, "We're gonna go back to the boom. Let's hold our pigs, get them, grow them out and get them even heavier, and we can make even more money in the future.
Mm.
The price starts to come down, and guess what? There's a lot of pork coming in just at the moment when demand was really depressed because everyone was stuck at home feeling ill. It's just been incredibly volatile. Where are we now? I think producers are sort of in a process of a little bit of wait and see, of just are we gonna start to see price recover? How quickly is that going to happen? The last couple of weeks we've seen the price just start to move upwards. I think once we start to see price reestablishing an upward trajectory, you know, I think there is some latent demand there in the system to restart. There's also been a lot of ASF.
It's been a very heavy winter for ASF. Very cold in north and eastern China, and that has helped the disease to spread and that, of course, has also led to quite a lot of pigs going to market and will reduce then future supply of pigs to market. We've experienced that ourselves as we announced in the results. One of the joint venture farms that we had has experienced an ASF break, we've been part of that. We've sent some of those pigs to market. I, you know, I think the timing of this is always something that is difficult to predict. I think you've always got to retain a, you know, certain view that maybe you're gonna see some surprising things in the China pig market.
All of the evidence we would see at the moment suggests we're in a period where we're gonna see a recovery, a stabilization, and that should, you know, lead to more demand for breeding stock. The real question is just, you know, exactly, you know, which months do that, does that start to kick in.
Can you just remind us on the expansion of the supply chain in China?
Yeah
... put a lot of effort into.
Yeah
... through this down cycle. Just specifically on that farm with ASF, how much capacity does that take out? And obviously there's cost to cleaning it out-
Yeah
Does it have any impact on your ability to supply?
Yeah, no, we think we can source supply from other farms. We, you know, we're building a supply chain there with the expectation that there are always going to be disease breaks somewhere in that system. And as I think we've explained to you and to investors over time, we want to try and establish a supply chain where we have layers of different supplies. We have a couple of owned farms where we keep really elite animals. We're just in the process of stocking a new state-of-the-art farm called Heigang, which is replacing a legacy farm we've exited. And then we've got this layer where we've got joint venture farms, so we're sharing some of the risk with a major producer.
We've got, you know, that layer. The majority of the supply chain is actually in third-party multiplication with our customers, just as the situation we have in the United States.
One last question on China. The royalty share of volumes was much higher in.
Mm.
The first half. Is that because royalty contracts are now rolling through, or was direct sales depressed because of the market?
It's basically both factors working at the same time. You wanna comment further on that?
Well, the royalty share actually in the first half versus the previous half is quite similar. It's not too different.
Mm.
It is around half.
Mm.
Actually, yeah. If you compare it to the first half of the prior year, it's significantly higher.
Yeah.
That is, you know, a combination of things. It's PIC very deliberately striving to grow the proportion of business that's under royalty contracts, and they've proven they're doing that. I think that's proven also through the downturn, you know, the strength of having those royalty contracts. But also, it reflects the market as well. You know, it is a very gradual recovery and we haven't seen a big change in upfront breeding stock sales as yet.
Got it. Thanks very much.
Thank you, Charles. We will now take our next question from Damian McPhillips. Damian, please go ahead.
Okay. Thank you, everybody, for taking the questions. I'm sorry I don't have my tie on. Congratulate Charles on a new tie. I've got a few questions. Just firstly continuing the China theme, are you able to sort of give any indication of what the sort of pipeline for the second half and maybe the first half of next year looks like? Have you got any visibility on the sort of what the state of business could look like? I know it's volatile, and it's hugely dependent on where the pork price goes, but just if you could give us any sense of that sort of pipeline, how it looks, and perhaps how it changed over each month. The second question is on ABS margin.
Just wondering whether you could give us a sense of what degree of recovery we could expect in the second half. I know there's some one-off in the first half, but I just wanted to try and balance that with the ongoing difficulties, in LatAm. Then the last one from me for now will be on cash conversion. Can I just check that you said you expect to be at 9% cash conversion for the full year this year? That's right. Can you just provide us some bit more color on why you're confident on being able to achieve that, please?
Okay.
Well, why don't I take the first of those on China and then ask Alison to respond to the ABS margin and cash?
Mm-hmm. Yeah.
On China, I'd say that, I'd regard our pipeline of new prospects as healthy, and that's both from existing customers wanting to expand their business with us and new customers. You know, I feel that we're making good progress in that respect. Now the question I think is always then, well, you know, as with any sales process, you know, you have a list of prospects. You then work that into a list of proposals. Then you get, you know, to the point of sort of verbal acceptance, and then you get to the point of, well, when am I actually gonna take it, and do I put money down to go ahead? As always, there's a variety of factors that influence that timing decision at the end.
Sometimes it's dependent on new farms being commissioned and, you know, the timing of construction projects and commissioning. Sometimes it's more of a market-based decision as to when's the right time to do things. We see those debates, you know, going on. We have, you know, we obviously have a clear list of the, of the pipeline and, what we're working through there. We don't wanna get into specifics, but I'd just describe it as a healthy pipeline. The key consideration is just really one around timing.
ABS, we're expecting ABS to have a better second half than first half. As you would have heard me say in the presentation, the business was hit with extra production costs in the first half of GBP 1.2 million, which will not recur in the second half. Latin America's having a tough time, and we think they will continue to have a pretty tough time this half. Elsewhere, the regions are doing really well, and North America particularly, and we expect to see that continue in the second half. In terms of margin, what I would expect is better margin in the second half.
I don't know exactly where they'll land, but I would hope that their margin is similar to prior year when we get to the end of the full year. In terms of cash flow, I have confidence that our cash flow will be strong in the second half. We do have seasonality in our cash flow, first half versus second half. Second half is always stronger because we have certain payables that flow into the first half. For example, performance-related remuneration. But really what we'll see is, you know, further growth in EBITDA, and we will have further CapEx, which will be higher than the first half but, you know, down on prior year. We should have a very healthy cash inflow for the second half.
Just a quick follow-up. On working capital, I think it's GBP 22 million outflow. Could we be anticipating an inflow? I know you sort of mentioned some of the improving payables and sort of the intelligent systems.
Yeah.
Would it be reasonable to expect an outflow for the full year though still?
Yes, there will still be an outflow, yes.
Yeah, not as large as the one in the front half.
Yeah. That's right. Yeah.
Okay. Thank you very much for now.
Thanks, Damian.
Hi.
Hi, Matt.
Stephen and Alison.
Hi, Matt.
Hopefully you can hear me.
Yes.
Yep. I haven't seen you. It's great.
Couple of questions. Congratulations on the first half. In terms of an update on PRRSv first, just wanted to try and understand a little bit more about your interactions with the FDA.
Mm-hmm.
I know you're looking to file before the end of 2023, and approval now sometime in 2024. Interested to understand the interactions and the sort of risk assessment of a clean, quick review with the FDA. Also just in terms of how do you roll out, you know, a launch of a genetically modified pig, 'cause that's not something I'm experienced with. That's the first question. You know, multiple parts obviously. The second one is just to try and understand what you're seeing in terms of obviously good prospects in China.
Do you think that when the China market picks up that your market share recovery that you'd had, you know, you'd gained market share quite quickly ahead of the sort of COVID coming in, and it's been fairly flattish since. Do you think that's likely to start to pick up again? I just get an understanding for where you see that potential share going to as well.
Okay. Why don't I take the PRRS one, and then Alison, I'll ask you to take the follow-up question on-
Sure.
on China.
Yeah.
Look, we have a very constructive relationship and dialogue with the FDA. You can see from the presentation on page 11 that we've been submitting the different phases of information that we need to send to the FDA, and that the first three of those have been accepted. This is. Think of this as being a continuous assessment rather than just one final exam at the end. You can see that items four and seven, the phenotypic characterization and the food safety and food and environmental safety, you can see there that the process we're in is we submit drafts to the FDA.
They give us back comments before we make our final submission, which then provides the basis for them to formally accept. You can see this is a very collaborative process, where they're helping to guide and steer us as we go through. We would expect items four and seven on page 11, you know, within the next few weeks that we'll be formally submitting and expecting, you know, in the springtime to have those accepted. Then the last two items, phenotypic and genotypic durability, these are ones where we need more generations of animals, so we're on the E2 generation. We're giving birth to E3. We'll be characterizing the E3s and testing the E3s. There are quite a lot of details around exactly, you know, how you do some of the final tests.
We're in the process of discussing with the FDA all of those details. You know, it's a scientific experiment, lots of design details you need to get correct for the final regulatory submissions. You know, we're in a dialogue with them on that. In terms of other markets, we highlighted that we're making some, you know, nice progress actually in dialoguing with regulatory agencies in quite a few other jurisdictions. That's important because if you think of pork, it's a globally traded commodity, if we're introducing a gene-edited pork in the US, for example, we need that to be accepted by export destinations for US pork. We're working in parallel in international markets.
To the question of then how do we do market introduction, you mentioned the word genetically modified, so I'm just gonna say, no, we're not, we're not introducing a genetically modified pig. These are gene-edited animals.
De-deletion.
Yes. This is gene-editing, something different. We're just taking a little snip out of the DNA. We've introduced no foreign DNA into the organism. That's something that we're quite active also, working with the industry. We have a whole set of work streams going. We dialogue with industry associations, with producers, with packers, with retailers. We're doing several studies around, life cycle assessment of what is the impact of PRRS, both from an economic perspective in the industry, but also, what is the carbon cost of PRRS? We're trying to get a third-party validation around, you know, the real environmental benefits of being able to have PRRS-resistant pigs. This is all part of then framing, what is the proposition we're bringing to the industry.
From a technical perspective, we also have to then think about how do you distribute this gene through the population? We need to move from having, you know, hundreds, you know, perhaps a few thousand animals in a nucleus that have this gene in a homozygous state to then how are you gonna impact, for example, in the US, 55 million pigs per annum being slaughtered. There's a big biological and logistical process involved here. You know, as we get closer to the point of finalizing our FDA submissions, you know, it'll probably be appropriate for us to spend some more time with investors and analysts and, you know, we may at the appropriate time hold dedicated capital markets day on the, on some of the rollout, thinking and plans.
You know, we think at the moment, the right frame is to just stay focused on, let's make sure we get to the regulatory hurdle first.
Great. Maybe just before, Alison, you join in the other question. It was just maybe a little bit about, have you got multiple other genetic traits, you know, classical genetic traits in these herds? You talk about homologous PRRSv herd. Do you have different genetic traits, classical genetic traits within that herd as well?
Well, look, what we've tried to do is to take the most elite animals we had and use those as the starting population for the PRRS edit. We're, you know, seeking to obviously move the PRRS-edited pigs up the normal genetic progression curve in the same way we would do with a non-edited pig. The, you know, there's a little bit of a challenge in terms of population size. You know, you have to. Over time, we'll have to sort of work on that. We wanna select the gene-edited pigs for all the same traits that we do with the non-gene-edited pigs: litter size, feed efficiency, piglet survival, carcass traits. All of these, all of these traits, we wanna manage in just the same way.
You know, what I can tell you is that, you know, we're seeing just sort of similar performance from a gene-edited pig as we're seeing from a non-gene-edited pig, which is part of what item 4, phenotypic characterization, is actually about in terms of our submission to the FDA.
Okay. Thank you.
Moving on to China. What I would say is, if I compare where the team are at now with a year ago, it is different in terms of their visibility of where the opportunities might be. They do have a very, a defined pipeline, you know, by customer and opportunity. I think if we hadn't seen, you know, the recent decline in the pig price, we would be saying something quite different today about how that's progressing. At the moment, what we're seeing is a bit of a pause really from our customers. I guess what they're doing is watching to see what happens to the price.
We're a little, I guess cautious about what will happen over the next few months, and it is going to really depend on what happens in the market at large. What I can say is that, as Stephen said earlier, the supply chain is very robust. We will be able to meet the demand, certainly that we can see in our pipeline and more than that. There isn't a constraint on our supply. It's very difficult to call, you know, the phasing, and the speed of the growth that we'll see there.
Is your market share still about, 6%? I think you were talking about a herd size.
It's certainly.
About-
It's low single digits, yes. Yeah.
Right.
We've held all our customers. We, you know, we've held all our customers through the last, you know, two years. In the pipeline, we've, you know, we can see opportunities with new customers as well.
Right. The breeding herd was about GBP 35 million or something like that. Is that still kind of right?
Yeah. We've stopped putting it in the presentation because-
Yeah
It's just so hard, to get, you know, clear data.
What number would you like to believe?
Yeah.
Okay. Thank you very much.
Yeah.
Thank you, Matt. I can see that Charles Hall has a follow-up question. Charles, whenever you're ready, please go ahead.
Thanks very much. Yeah, Nate would be very upset if I don't ask a question about ABS this time. The question on ABS is, the bit that really struck me from the first half was the significant increase in price and mix, and that hasn't really been a feature of ABS previously, except when you're increasing sales of Sexcel. Can you just talk a little bit about what's been happening on pricing and how you see that dynamic moving forward?
Yes. That's been very deliberate on the part of ABS, and they've done a great job, actually. I mean, price increase has always been a feature in, you know, high inflation countries in Latin America. In Europe and North America, the industry at large, you know, had not sought price increases. We've benefited from better prices with the switch to Sexcel. You know, with like all businesses, we've had some inflation we've had to manage, and ABS, more so than PIC. Yeah, they have sought price increases, particularly in Europe, as well as North America. The customers have accepted that, and you can see that in the revenue line.
Mm-hmm. And is that probably a different theme going forward? Because as you say, it hasn't been previously done in those markets.
Yeah, yeah.
Does that now give greater confidence that you can be a bit more on the front foot on pricing?
Yeah. I think so, yes.
Yeah.
You know, inflation hasn't stopped.
No. Yeah.
It might have stopped at the peak. It might have peaked, but it's still there.
Yeah.
you know, we're going to have to continue to manage that.
On the genetic side, now you've obviously got a strong pipeline of bulls coming through. Just give an update on where you sit in the rankings and how broad spread your bull rankings are?
Do you want me to take that?
Yeah, sure.
Yeah. Look, I think we've got a, you know, really good genetic lineup. We put a chart in here in terms of the bulls that are currently being marketed, the average of our bulls is very, very competitive. You know, the pipeline fluctuates from week to week. Every Tuesday, you get a new list, you know, some weeks you're feeling really good, and some weeks you're feeling less good. That's, you know, it changes week to week. I think we feel very good about the strength of the program. One of the things that I think differentiates us is that we've got a very, very broad range of sire stack and cow families within it.
You know, the process here is that bulls are also continually being re-ranked. As new data comes in about milking daughters, then that changes the genetic evaluations of genomic bulls. You know, you need that sort of breadth of portfolio to stabilize and ensure that, you know, you're always gonna be in a good position. I think that is one of the things that we've benefited from a lot in ABS, where you've seen us consistently being very good in terms of the genetic profile. Whereas with some of our other competitors, you know, one year you'll see one of them very strong. The next year, you see one of the others very strong.
It's that variability that we've managed to, I think, deal with very well by having that breadth. The other area that I'd say, I think we are in a really unique position at the moment in the industry is around polled genetics. As I mentioned, these are the, it's the gene that enables the cow not to grow horns. We have a, just an extraordinarily unique position here. We've been able, over the last, four or five years to fundamentally change the way polled genetics are regarded in the industry. Historically, if you wanted a polled bull, you were always gonna make a very significant sacrifice in terms of the Net Merit of the animal versus the best in the industry.
You know, something like two years worth of progress would be given up to accept a polled animal. We've eliminated that. In fact, some of the highest-ranking sires in our entire lineup are actually polled. If you look at the top polled genetics in the industry today, I think, you know, the stat I was seeing is 31 of the top 33 polled bulls in the industry sit at ABS.
Wow.
Pretty remarkable.
One of the things we were talking about up in Ruthin was that how you're working hard to retain the IP.
Mm-hmm.
That probably fits in well with what you've been doing in polled. Do you see this as a much longer-term competitive advantage because of where you sit now on that retention of IP than it would have been, say, five years ago?
Yeah. I think, retaining IP is something that, you know, we've always tried to take a leadership position in, and so we've introduced contracts to help us to do that. Certainly, you know, we're definitely thinking about the polled here as this is something where we seem to have got, you know, real step forward compared to the rest of the industry, and how do we maintain that going forward.
That's great. Thanks very much.
I like the tie.
Nate will too.
Yeah.
Thank you, Charles. We will take our next question from Sebastien Jantet. Seb, whenever you're ready, please go ahead.
Hi there. Can you hear me?
Can do, yes.
Yep, okay. Just turn my video on as well.
We can't see you.
There we are.
There we go.
Great.
I haven't got a tie on, I'm sorry. I have got a branded jersey. Actually most of my questions have been asked. I've only got one left, which is just on the cyberattack, obviously, that had an impact on the kind of cost in ABS and the margin in ABS. I was wondering if you could expand a little bit on the steps you've taken to kind of to stop that going forwards.
Yeah, sure. I mean, the first thing I would say is, I don't think it's unusual what happened to us. It's incredibly common, now. Our team recovered the situation very quickly at the time when it happened. But, you know, there were lessons learned. And, we've made some further investments both in the team itself, that manage our IT security and also, software, surveillance software particularly. So, you know, we're not resting on our laurels at all, but I think we feel that we're doing everything we should be doing, to protect against that happening again.
Brilliant. Thanks.
Thank you, Seb. We've also had a question come in from Alistair Smallwood: Please, could you give some color around the net debt position? Specifically, it'd be good to understand covenants and expectations for finance costs for the full year. Thank you.
Yeah. Sure. So, so our leverage at the moment is 1.8x , and I expect by the time we get to the end of the year, that will be lower, around 1.6x . That's well within our covenants. Our interest costs have gone up, and that's reflecting the market obviously. Part of our debt is hedged from an interest perspective, but we do have exposure. Essentially, our costs have gone up by about 200 basis points compared to a year ago. That will be the case for the full year as well.
Thank you. As a reminder, if you'd like to ask a question, please use the Raise Hand function at the bottom of your screen. We'll just take a brief pause to see if anyone raises their hand. It appears we have no more questions, so I'm now gonna pass back to Stephen for any additional closing remarks.
No, okay. Nothing further really to add, but just to thank you all for participating, for your questions, and we look forward to continuing the dialogue with you in the coming days. Thank you very much.