Nufarm’s agchem sales up 16% in FY2014

Nufarm's crop protection business accounted for 94% of group revenues and grew sales by 15.5% to $2.48 billion. These sales generated an average gross margin of 26%. Underlying earnings before interest and tax (EBIT) was $200.6 million, up by 7.4% on the $186.8 million generated in the 2013 financial year. Underlying net profit after tax was $86.4 million, up 3.8% on the previous year. This included foreign exchange losses of $12.6 million reported as part of net financing expenses. 

Herbicide sales were $1.67 billion, an increase of 13% on the previous year, and represented 67% of total crop protection revenues (2013: 69%). Increased sales in both South America and Europe more than offset weather-related demand weakness in Australia and North America. Glyphosate margins were slightly up compared to the 2013 year, mainly driven by a strong performance from Nufarm’s ‘Crucial’ glyphosate formulation in Brazil.

Nufarm’s insecticide portfolio generated strong sales growth ($290.5 million, up 37% on FY13). Strong pest infestations in Brazil’s major crops generated very high demand for insecticide applications. Nufarm’s chlorpyrifos and imidacloprid based products were well positioned to take advantage of these conditions.

While total fungicide sales were up year on year ($247 million versus $219 million), both Australia and Brazil experienced low fungal disease pressure and increased competition for sales. The European business had a strong year in the fungicides segment, with increased sales of azoxystrobin based products.

Sales of plant growth regulators (PGRs) were up by 11% on the prior period and generated stronger margins. Record sales of PGRs into both cereal crops and the trees, nuts, vegetables and vines (TNVV) segment in Europe drove the strong performance in this product group.
The business also benefitted from a stronger portfolio of biorational products.

Regional sales

Australian sales were down year on year, reflecting lower demand due to a continuation of dry conditions throughout much of the country. Summer cropping conditions featured unusually low insect and weed pressure, and fungal disease for a second consecutive year, and fallow herbicide applications were well below normal. The challenging conditions led to pressure on both pricing and margins.

With good rainfalls in many cropping regions, market conditions improved considerably in the final quarter of the reporting period, providing an opportunity for channel stocks to normalise, lifting sentiment, and giving the Australian business a much more positive platform to start the new financial year.

Domestic sales in New Zealand were in line with the previous year but generated a slight improvement in margin contribution.

Asia
Asian crop protection sales were $140.9 million, an increase of approximately 13% on the previous year ( $125.2 million). Underlying EBIT was largely unchanged at $19.5 million (2013: $19.6 million), with additional investments being made in new product development and an expansion into new markets segments, as well as regional markets such as Vietnam and Korea. The Indonesian business recorded just over 25% sales growth in local currency, driven by new product launches and increased sales in the important rice and vegetable segments.

North America
North American crop protection sales were down on the previous year at $513.6 million (2013: $516.3 million). In local currency, Nufarm’s US sales were down by 10%. Segment EBIT fell sharply to $20.6 million, compared to $42.2 million in the prior period.

An unusually cold and long winter in the US negatively impacted both the cropping and non-crop markets, with fewer applications and higher inventories generating strong price competition. Sales into the burn-down (pre-plant) segment were well below average due to the shorter planting window for growers.

Lower volume demand and more efficient inventory management resulted in reduced production and lower overhead recoveries at Nufarm’s major herbicide manufacturing facility in Chicago. Seasonal conditions prevented Nufarm from capitalising on a stronger and broader product position in the turf and specialty segment, having completed a distribution arrangement for Valent’s portfolio of products in January of this year.

Nufarm performed strongly in the US industrial and vegetative management (IVM) segment, with both sales and EBIT contribution ahead of the previous year.

Seasonal conditions in Canada were generally average. Nufarm made good progress in implementing its differentiated strategy and launched a number of new products that received strong support from the market. Both sales and margin were up on the prior period.

South America
The South American business performed strongly, with regional sales up by 54% to $662.5 million (2013: $431.4 million) and underlying EBIT up by 76% to $71.6 million (2013: $40.6 million).

In general, weather and cropping conditions in the region were average. Some parts of central Brazil experienced drier than normal weather which limited fungicide applications, but favoured the use of insecticides. Extremely cold conditions in Chile negatively impacted the important local fruit and vegetable segments.

Nufarm’s sales in Brazil were up on the previous year by more than 60% in local currency and helped the business gain market share. Sales growth was driven by Nufarm’s differentiated ‘Crucial’ glyphosate formulation as well as the successful introduction of a number of new products. A different product mix, that included significantly higher sales of older insecticide products, resulted in a slight fall in the average Brazilian gross margin. However, good cost control and the benefits of scale resulted in EBITDA margin expansion.

In Argentina, the business performed strongly with growth in the quickly developing herbicide segment for control of glyphosate resistant weeds. Local currency sales grew by more than 70%.

Further investments were made in strengthening the regional organisation, with an additional 15 sales representatives added in Brazil and a number of senior commercial appointments in Argentina. A new commercial manager was also appointed to support Nufarm’s expansion into Peru and a new distribution arrangement was finalised for the Uruguay market.
 
Europe
European sales were up by 19% to $555.5 million (2013: $468.3 million). Underlying EBIT was in line with the previous year ($56.4 million v $57.2 million). In local currency, Nufarm’s branded sales were ahead of the prior year, while revenues generated from operations (third party and industrial sales) were down. Total gross margin was up on the previous year when measured in Euros, reflecting a higher proportion of branded sales.

Most western European markets experienced favourable weather conditions which helped drive an increase in cereal plantings and positive demand for crop protection inputs. Eastern Europe was affected by colder weather patterns and dry conditions.

Nufarm experienced solid growth in markets such as Spain, Germany and Romania, with new product introductions contributing to a slight improvement in average margins across the region.

A focus on working capital efficiencies resulted in changes at the European manufacturing units, with better forecasting and supply chain management allowing lower levels of safety stock and a resulting reduction in volume through-put. Consequently, overhead recoveries in these facilities were well down on the previous year. The contribution from the European manufacturing sites was approximately €2 million lower this year compared to the prior year.

Outlook

With a return to more normal seasonal conditions in Australia and the USA, the company is strongly positioned to generate growth at an underlying EBIT level in 2015.

Spring and summer rains in Northern NSW and Queensland are needed to generate demand for crop protection products in Australia and to establish an important first half platform for the business. The restructuring program will be further progressed in 2015, with associated cost savings helping to drive earnings recovery.

Given the USA experiences more normal weather patterns – particularly in the spring period from March to May – Nufarm’s business will be able to capitalize on a stronger product portfolio and generate a significant recovery in earnings.

The branded business in Europe is expected to generate further growth, however lower overhead recoveries will result in a reduced contribution from manufacturing operations and an overall flat earnings outcome for the European segment.

The South American business will benefit from new product introductions and – given normal seasonal conditions and no significant further deterioration in crop prices – should post high single digit growth in 2015.

Earnings growth is also anticipated in the seed technologies segment, with a number of new varieties to be launched across our core crops. Some $7 million is forecast to be spent on progressing the Omega-3 canola project and this will be capitalised.

The balance sheet will remain a key focus for management, with net working capital to sales expected to decline over the year.

Longer term growth will be driven by a strong pipeline of new product launches; a transition to higher margin products; and additional operational efficiencies.