Nufarm’s agchem sales up 4% in FY2015

Nufarm's crop protection business grew sales by 4% to $2.58 billion and underlying EBIT by 24% to $250.9 million. Crop protection sales accounted for just over 94% of group revenues and generated an average gross margin of 28%, which is a significant improvement on the previous year.

The seed technologies segment generated revenues of $159.6 million, an increase of 10% on the previous year ($144.4 million) but encountered more challenging market conditions and posted a 14% decline in underlying EBIT of $31.8 million. With market conditions driving a lower value product mix, the segment generated an average gross margin of 44%, which was well down on the 51% achieved in 2014 and below margin expectations for future periods.

Group revenues increased by 4% to $2.74 billion (2014: $2.62 billion), while underlying earnings before interest and tax (EBIT) increased by 18% to $236.9 million (2014: $200.6 million).

Major product segments



Crop Protection

Nufarm's crop protection business generated $2.58 billion in revenues, representing a 4% increase on the prior year. These sales generated an average gross margin of 28%, significantly stronger than the 26% average gross margin recorded in financial year 2014.

Herbicide sales were $1.75 billion, an increase of almost 5% on the previous year. These sales generated an improved average gross margin. Phenoxy herbicide revenues and margins were up, driven by stronger sales in North America and a more profitable product mix in Australia and Europe. Careful management of inventories and a focus on higher margin formulations resulted in a significant improvement in margin generated from glyphosate sales. Dicamba and flumioxazin sales were also up on the prior year.

Group insecticide sales were slightly down on the prior year ($282 million versus $290 million), while margins were steady. Lower insect pressure and high channel inventories in South America resulted in reduced demand for these products, while North American sales increased, in particular in the turf and specialty segment.

Fungicide sales were up by 11% to $274 million and margins improved on the prior year. All regions other than Australia/New Zealand generated higher fungicide revenues. Increased disease pressure together with the approval and launch of new products drove a significant increase in azoxystrobin sales, while a number of other products also contributed to the stronger performance in this segment.

Sales of plant growth regulators (PGRs) and biorational products were also up, reflecting a consistent pattern of relatively high margin growth in recent years.  New product introductions and distribution arrangements with Valent BioSciences, a subsidiary of Sumitomo Chemical Company, helped drive growth across these portfolios.

The company continued to strengthen its strategic relationship with Sumitomo Chemical Company and this was reflected in significantly higher sales of Sumitomo products across Nufarm's distribution platforms, particularly in the US, Canada and Brazil, as well as the execution of a new distribution agreement in the UK.

Seed Technologies

Revenues reported in the seed technologies segment grew by 10% to $159.6 million, but underlying EBIT fell by 14% to $31.8 million.

Lower canola seed sales in Australia was the major contributor to the fall in earnings, with the area planted to canola estimated to be down by some 20% on the previous year, and an increase in the use of farmer retained seed.

Nuseed continued to expand its market presence in Europe with increased sunflower sales, but this was not sufficient to completely offset the impact of the deterioration in the confectionary sunflower segment in China.

While sorghum sales were relatively strong, a lower commodity price impacted margins.

Seed treatment growth was impacted by both adverse seasonal conditions and lower crop prices.  A number of important new seed treatment registrations were approved during the latter part of the year, however, and these new products will generate strong future growth in this high value segment. This included the registration in France of a new imidacloprid formulation on winter cereals (Nuprid 600 FS). 

The company's omega-3 canola program continued to advance through field trials and is now in the pre-registration phase of development. Several significant patents relating to this program were published and/or granted during the year, contributing to a very strong intellectual property position.

Regional sales

Australia / New Zealand

The Australian and New Zealand businesses generated sales of $582.4 million, down 4% on the previous year ($605.8 million). Underlying EBIT, however, was up by 56% to $52.7 million.

Australia experienced another relatively dry summer and autumn, which negatively impacted on demand. While Australian sales were slightly down on the prior year, a focus on higher margin products; more disciplined selling policies; and a lower cost base resulted in an improved operating profit.

The previously announced closure of three manufacturing facilities in Australia and New Zealand is continuing on schedule, with capacity now being relocated into other facilities. The full benefit of these changes will be realised in the 2017 financial year, with lower fixed costs; better plant utilisation; and improved efficiencies.

New Zealand sales were also down on the prior year, due to adverse seasonal conditions and a depressed dairy sector. However, some successful new product launches and strong sales into the horticultural segment helped the business generate a higher profit contribution.

Asia

Asian crop protection sales increased by 10% to $155.2 million. Underlying EBIT was $18.1 million, down on the $19.8 million generated in the prior year.

In local currency, sales were up slightly in the company's major regional markets of Indonesia and

Malaysia. Additional field staff and increased product development helped support a continued diversification of both the product portfolio and the crop segments into which products are sold.

These investments are forecast to drive local earnings growth over coming years.

North America

North American crop protection sales grew by 15% in Australian dollars ($588.7 million) and underlying EBIT recovered strongly, up by 89% to $38.9 million.

US sales were up by 5% in local currency with improved marketing and a re-phasing of sales campaigns generating increased demand in both the crop segment and the turf and specialty segment. Despite softer commodity prices impacting all broad-acre crop segments, Nufarm saw strong growth in newer products that address the increasing challenges associated with resistant weeds.

More favourable spring conditions, and a successful early order program, also allowed the company to leverage its broader portfolio in turf, nursery and greenhouse markets, with the business benefitting from a number of new product launches.

Local currency sales in Canada were down 11% on the prior year, with very dry conditions impacting cropping activity in the Western provinces. The company launched new products in a number of segments and continues to strengthen its position with differentiated offerings.

South America

While local market conditions were more challenging in South America and the value of the total crop protection market contracted (measured in US dollars), the company posted another strong year with 7% revenue growth ($706.5 million) and a similar increase in underlying EBIT ($76.7 million).

Lower crop prices impacted overall demand for inputs in Brazil. Despite this, the company's sales were up by 8% in local currency and generated a higher average margin than in the prior year.  The excellent result was driven by a focus on newer and higher margin products, along with expanded reach into a number of market segments. Higher beef prices supported additional crop protection investment in the pasture market – where Nufarm has a strong position – and the business capitalised on stronger demand for fungicides in some regions. The insecticide segment was well down on the previous year.

Revenue growth was also achieved in Argentina, Chile and Colombia, and the company secured a number of new product registrations in Uruguay.

Europe

European sales were slightly down in Australian dollars (2015: $544.8 million v 2014: $555.5 million) but underlying EBIT grew by 17% to $64.4 million. Seasonal conditions were mixed, with unusually hot and dry weather in Central and Southern Europe impacting demand for some products in the last quarter.

Nufarm's branded sales grew when measured in Euros, with France, Spain, Portugal, Romania and

Hungary performing strongly. The company also generated strong growth in its expansion markets in the Middle East and Africa.

New product introductions in the cereal herbicides and cereal fungicides segments helped drive margin expansion.

The restructuring of the European manufacturing base is proceeding on schedule. The Botlek manufacturing facility in The Netherlands is being closed, with capacity relocated to the Wyke facility in Northern England. Production capacity is also being increased in the Gaillon facility (France). These changes will permanently reduce the company's fixed cost base; improve working capital management; and support the continued growth of the European business.

Outlook

The combination of cost savings benefits; margin expansion and revenue growth in a number of the company's businesses is expected to result in another solid profit performance in 2016. This is despite an expectation that general market conditions will continue to be subdued.

Initiatives associated with the cost savings and performance improvement program are forecast to contribute an additional underlying EBIT benefit of at least $20 million in 2016. These will include savings relating to the rationalisation of the manufacturing footprint in both Australia and Europe and benefits resulting from other manufacturing efficiencies; improved procurement practices; and expense reductions in head office.

The company's performance in Australia is expected to continue to improve, with restructuring initiatives resulting in a lower and more flexible cost base and a continued focus on margin expansion.

The likely impacts of an El Niño weather pattern have been factored into the company's forecasts for 2016. This weather pattern typically results in drier than normal spring conditions in Eastern

Australia; more reliable rainfall patterns in Western Australia; and higher rainfall in South America.

Given Australia is cycling several years of relatively dry spring conditions, the additional impact on the Australian business is expected to be marginal. The impact in Brazil is likely to result in stronger demand for both insecticide and fungicide products.

Despite low soft commodity prices and tighter farm economics in the Americas, the company expects to generate growth in the US, where our business will benefit from new product introductions and stronger support from local distribution.

While the US dollar value of the Brazilian market may see further declines over the next year, the area planted to crops and the volume of crop protection inputs are expected to rise.  Careful management of inventories; positive exposure to stronger market segments; and a strengthening product portfolio result in Nufarm's Brazilian business being well placed to achieve further market share gains in the 2016 financial year.

Solid growth is forecast in Europe, with the company well placed to expand its position across a number of European country markets.

The combination of important new seed treatment product launches; continued expansion of the

European sunflower business and more favourable market conditions in the Australian canola segment should drive earnings growth in seed technologies over the next 12 months.

A strong focus will be maintained on balance sheet objectives, in particular working capital efficiencies, with the aim of reducing average net working capital to sales below 40% by July 2016.

Beyond the current 2016 financial year, additional benefits resulting from the ongoing performance improvement program, along with profitable growth opportunities across products, crop segments and geographies, place the company in a strong position to deliver sustainable earnings growth and improved shareholder returns over the medium to long term.