Nufarm crop protection sales up 6% in FY 2018
Sep. 28, 2018
Herbicide sales were up 8% to $2.12 billion. Glyphosate sales were well up on last year, due to a higher average technical price, and stronger volumes in North America and Latin America, however, margins were slightly down due to competitive market conditions in Australia and Latin America. Phenoxy herbicide revenues were 4% up on the prior year, but with margins largely in line with the previous year. Other herbicide revenues were ahead of last year by 6%, with picloram and fluroxypyr - two important mixture products for the pasture and glyphosate resistance segments - being the main drivers.
On August 10, a California jury found Monsanto liable in a lawsuit in which a man alleged the company’s glyphosate-based products had caused his non-Hodgkins lymphoma. This verdict is being contested, with Bayer-Monsanto claiming the jury’s decision is wholly at odds with over 40 years of real-world use, an extensive body of scientific data and analysis which support the conclusion that glyphosate-based herbicides are safe for use and do not cause cancer in humans. Glyphosate is an important product for Nufarm, contributing 12% of the group gross profit. The company’s position on glyphosate is supported by the more than 800 scientific studies and reviews that have concluded that glyphosate is safe to use and is unlikely to cause cancer. The company supports the rigorous scientific process employed by regulatory authorities around the world, which undertake years of analysis and review before products like glyphosate are approved for use.
Insecticide sales were up 14% to $382 million, with margin percentage in line with the prior year. The increased sales were driven mainly by Brazil, with growth from new products and extensions into new crops.
Fungicide sales were down 6% to $316 million, with margins holding on the prior year. The fungicide portfolio was down due to the dry conditions in Australia and lower mancozeb sales in Brazil.
The company continued to strengthen its strategic relationship with Sumitomo Chemical Company and this was reflected in higher sales of Sumitomo products across Nufarm’s distribution platform. Nufarm sales of Sumitomo products have grown at a compound annual growth rate of 37% to $245 million over the last five years. The higher sales were mainly in the US, Canada and Brazil. Portfolio collaboration opportunities continue to be explored and developed.
The company’s seed technologies segment includes sales of seeds, managed under the Nuseed business, and seed treatment chemistry. Revenues in this segment were $185.5 million, which represented a 10% increase on prior year sales of $168.6 million. The segment generated underlying EBITDA of $43.6 million, down 4% on the $45.3 million recorded in the prior year.
Despite challenging seasonal conditions in the Australian canola segment, stronger sales of sunflower and sorghum and an expanded offering of seed treatment products helped drive higher revenues for the period. As disclosed in the July trading update, profitability was impacted by a European regulatory directive that restricted use of neonicotinoid-based seed treatment applications in France. A derogation application to allow temporary use of these products in France was not successful and this resulted in an estimated $11 million negative impact at the underlying EBITDA level. The seed technologies segment overall experienced an excellent growth year, gaining approximately $9M in underlying EBITDA contribution in other areas to offset the downside in France.
While the canola season was challenging for total canola seed volumes in Australia, Nuseed retained share in the largest segments, achieved growth in new hybrid categories, and increased end-point royalty collections, resulting in solid FY18 earnings in the region. Successful new product launches broadened Nuseed’s offerings in the European, Latin American and US sunflower segments, and strengthened the company’s position in the Latin American and US sorghum markets.
An expanded distribution base in the US helped drive higher sales of seed treatment products, along with the successful launch in Brazil of an insecticide treatment based on Sumitomo chemistry, and early sales of a combination product in Europe, acquired as part of the European portfolio transaction.
The reporting period saw significant progress relating to Nuseed’s proprietary omega-3 canola. In February of this year, Australian regulators approved omega-3 canola for production and use in feed and human consumption. Subsequent to year-end, the United States Department of Agriculture (USDA) approved omega-3 canola for cultivation in the US. Regulatory submissions relating to food and feed approval in the US and cultivation, food and feed in Canada continued to progress through the review process on schedule, and those approvals are anticipated prior to the 2019 North American cropping season.
Nuseed successfully contracted, planted and harvested 15,000 acres of omega-3 canola in Montana under the USDA notification process. This activity has helped validate the company’s closed loop business model and stewardship protocols. Multiple pre-commercial feeding trials, utilising Nuseed’s omega-3 canola oil, were commenced with downstream aquaculture companies, with initial data expected at the end of the calendar year.
Nuseed and its partners, CSIRO and GRDC, continue to strengthen the intellectual property (IP) relating to the technology, with more than 20 additional patents granted over the past 12 months. Earlier this month, Nuseed – together with partners CSIRO and GRDC - filed US federal court proceedings against BASF and Cargill claiming infringement of 16 of our patents for their activities in the USA. The company believes it has clear freedom to operate, and a clear path to commercialization of its proprietary omega-3 canola technology.
The company remains confident it will be first to market with a land-based, sustainable, long-chain omega-3 solution.
During the year, Nufarm signed and announced agreements to acquire crop protection product portfolios, from FMC Corporation for US$85 million, and from Adama and Syngenta for US$490 million. The acquisitions were subject to regulatory approval, and both acquisitions were subsequently completed in the first quarter of 2018. The FMC acquisition was completed on 1 February 2018, and the Adama/Syngenta portfolio acquisition completed on 16 March 2018.
The acquired portfolios consist of established brands, formulations and registrations for the European market. These product portfolios strengthen the company’s position in our core crops and key markets in Europe and provide additional scale that will make Nufarm more relevant to both key distribution customers and end-users.
For the 2018 financial year, the acquisitions delivered sales of $69 million. Integration plans are well progressed and the business has seen strong engagement with customers on the new portfolios. To support the new products in the portfolio, an extra 41 people have been added to the business in the areas of sales, marketing, regulatory and field development. The acquired European portfolios are expected to deliver the financial targets given at the time of the acquisitions.
Australia / New Zealand
Australia/New Zealand sales were down 10% on the prior year, as the Australian business was impacted by a severe drought through the autumn and winter cropping periods.
The segment generated sales of $590.1 million, down on the previous year’s $654.2 million. Underlying EBITDA was $23.7 million compared to $64.9 million in the prior year.
Climatic conditions in Australia were poor during the winter cropping period. The autumn period was one of the driest on record across Australia, limiting pre-plant herbicide opportunities. Winter also proved to be very dry in the eastern and southern states. Much of New South Wales and Queensland have been declared drought affected and production is expected to be down 30% to 40% on the prior year. Western Australia received good winter rains and will deliver close to a record harvest. The drier winter conditions in the Eastern states have extended into spring, which severely limited the post-emergent market opportunities and reduced demand for this higher-value component of Nufarm’s portfolio.
The earnings result was impacted by a scheduled plant upgrade at the Laverton manufacturing site in the first half. The 2,4-D plant was off-line for a total of nearly eight weeks, and works included the replacement of two reactors involved in the synthesis process. This has improved long term efficiency and productivity of the plant. Lost recoveries from the scheduled shutdowns impacted the Australian result by $8 million at the underlying EBIT level.
The consolidation of the company’s Nufarm and Crop Care marketing arms and brands in Australia, occurred on August 1, 2017. This has resulted in a single, focused sales organisation that is delivering business efficiencies and an improved service to Australian customers, who have welcomed the change.
Both the New Zealand and Croplands equipment businesses performed well, improving earnings on the prior year. The New Zealand business capitalised on a strong agriculture sector, with growth in the pasture and horticulture markets. The Croplands business increased sales of its WeedIT smart technology applications and improved manufacturing efficiencies during the period.
Asian crop protection sales were $170.7 million compared to $165.6 million in the prior year, an increase of 3%. Underlying EBITDA was $25.2 million, 11% down on the $28.3 million generated in the prior year.
Indonesian sales were up 8.6% in local currency, driven by good weather, new product introductions and higher glyphosate pricing. Sales growth was also achieved in China, Malaysia and Sri Lanka. Sales into Japan were down 18%, due to increased generic competition in the non-crop segment. Sales in Japan are typically higher margin so the lost sales had a significant impact on earnings.
During the period, Nufarm established a sales and marketing joint venture in China with locally-based Fuhua Group. The joint venture strengthens Nufarm’s relationship with a highly strategic supply partner, with a portfolio and go-to-market approach that is complementary to Nufarm.
North American sales grew by 10% to $833.7 million. Underlying EBITDA was up strongly to $99.5 million, compared to $89.3 million in the prior year.
The North American business increased market share in all three of its key segments, being US row crops, the Canada market and the turf and ornamental business. The revenue growth reflects a focused product portfolio and increased support from the customer base. Glyphosate volumes grew 12% on last year reflecting strong customer support for our foundational products. The business also successfully launched several new products, including formulations that combine Sumitomo and Nufarm chemistry to address an increasing incidence of glyphosate resistance.
During the year, the US business extended the distribution relationship with Sumitomo in the turf and ornamental business for a further five years. Nufarm plans to extend its manufacturing capacity in the USA, with a new formulation facility to be based in Greenville, Mississippi. The facility will help facilitate sales growth into the south-eastern region of the USA and will provide freight savings to the business. It is expected to commence operations in the middle of 2019.
Latin American crop protection sales were up 8% on the previous year ($885.2 million v $821.8 million). Underlying EBITDA at $97.4 million was up 2% on the prior year’s $95.6 million.
The Brazilian business grew sales by 11%, which was mostly volume-driven, and reflected increased demand in the soybean and pasture segments, and for solutions to a growing glyphosate-resistance issue. Nufarm continued to increase market share, with the total crop protection market in Brazil down 7% (in US dollars) in calendar year 2017. The reduced market size was caused by competitor channel stock adjustments. It is now considered that industry channel inventories are back to normal levels. Pricing was very competitive, with margins impacted by the higher cost of active ingredients out of China and currency volatility.
Argentina experienced a severe drought from November through April, which reduced soybean production by approximately 30%. Rains finally arrived in April/May, which provided a better outlook for the winter wheat season. Sales were down 16%, but earnings improved due to a focus on higher margin product sales and the benefit of price increases as the currency weakened.
In contrast to last year, the average Brazilian Real exchange rate for the period was 6% weaker against the Australian dollar and the Argentina Peso 31% weaker. On a constant currency basis, Latin America sales would have increased 17% and underlying EBITDA 12%.
Credit conditions in Brazil eased during the year, off the back of improved farmer profitability. The business managed net working capital well, and combined with a reduction in bank base interest rates, this led to lower funding costs in the business. The currency exposures were managed well, given the increased volatility in Latin American currencies in FY18, with exchange losses across the crop and seeds businesses totalling $19.5 million. This is largely in line with the guidance given for the year. The company will continue to closely manage credit and currency exposures.
European sales increased on the prior period by 19% (2018: $642.6 million v 2017: $539.8 million). Underlying EBITDA improved to $149.9 million, up 24% on the $121.4 million posted in the 2017 year.
The sales growth was driven by a $69 million contribution from the European portfolio acquisitions, and translation gains from a stronger Euro. Climatic conditions were adverse in the year, particularly in central and northern Europe. The season started late, with winter extending into late March/early April. This was followed by a very short spring season and a hot, dry summer. Severe drought and heat waves in large parts of France, Germany and the Nordic region severely impacted the business.
The business continues to focus on high value and differentiated products, together with new product launches and pricing discipline and this has contributed to the improved profitability of the business.
The new European ERP system and implementation of a shared services model will further strengthen the European business over coming periods. The first wave of countries went live on the new system in November 2017, with the remaining countries going live in two phases in August and December this year.
The newly acquired product portfolios performed strongly in FY18, reflecting well executed integration plans and a positive response from the customer base. Management has well-developed business plans to deliver the acquisition financial targets in FY19.
The combination of revenue growth, partial recovery in the Australian business and the full year impact of the European acquisitions is expected to result in earnings growth in 2019. This is despite an expectation that soft commodity prices will remain low and market conditions will remain competitive. Underlying EBITDA is expected to be in the $500 million to $530 million range for the 2019 financial year.
This outlook also assumes average seasonal conditions for the major selling periods in our key markets and no material impact from government policy changes or third party supply interruptions outside of our control. It should also be noted that heightened volatility currently exists in relation to various potential industry-wide impacts, including currency movements.
An improvement in net working capital is anticipated, with the net working capital to sales ratio expected to return to a level below 40%. The completion of the supply chain investment and a commitment to the company’s Integrated Business Planning (IBP) process should help drive the average net working capital to sales down to the 35% to 37% range over the medium term. An increased underlying EBITDA and lower net working capital position at July 2019 will strengthen cash flow and result in lower group net debt levels and reduced leverage.
Net interest expense is expected to increase in the 2019 financial year, given the full year funding of the acquisitions. Net foreign exchange impacts will continue to include anticipated hedging costs of approximately $20 million for Brazil and Argentina.
Given the ongoing drought-related impacts in Australia and some planned maintenance related plant shutdowns in Europe, first half underlying EBITDA is expected to be similar to that generated in the first half of FY18. At an underlying EBIT level, earnings are likely to be below the FY18 first half, as the increased amortization associated with the European acquisitions will more than offset the first half earnings contribution from those portfolios, which are weighted to the second half of the year.
The company continues to remain alert to potential acquisitions that might result from industry consolidation, but will be disciplined in terms of ensuring any such opportunities represent compelling value and are strategically sound.
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