Nufarm’s agchem sales flat in H1 FY 2016

Nufarm Group's revenues increased by 0.3% to $1.19 billion, while underlying earnings before interest and tax (EBIT) increased by 12.3% to $71.2 million. Nufarm's crop protection business grew by 0.4% to $1.15 billion. The seed technologies segment generated revenues of $41.7 million, a decrease of 2.8% on the previous year.

Nufarm’s results for the first six months are typically dominated by contributions from Australia and Brazil. Nufarm posted a 30% increase in EBIT contribution from its Australia/New Zealand segment, and grew Brazil sales 22% in local currency, despite the tougher economic conditions.  With the weakening Brazilian Real (27% weaker against the Australian Dollar compared to the same period last year), Australian dollar earnings for the LATAM region were 11% down on the prior period.

Major product segments

Crop Protection

Nufarm's crop protection business generated $1.15 billion in revenues, which was very close to the previous year sales of $1.14 billion. These sales generated an average underlying gross profit margin of 28.1%, significantly stronger than the 26.6% average gross margin recorded in financial year 2015.

Herbicide sales were down 0.8% to $755 million.  Glyphosate sales and margin dollars are slightly down on last year, mainly due to the lower average technical price in the first half. Glyphosate volume is in line with last year, and the gross margin percentage has improved. Phenoxy herbicide revenues and margins were up, driven by stronger sales in North and South America, and growth in higher value Asian markets.  Dicamba sales are down on last year due to an over-supply in the USA market. Flumioxazin sales are up on the prior year due to new product launches in the USA.

Group insecticide sales were down 6.7% to $152 million, and margins were slightly down.  Lower insect pressure and higher rainfall in southern Brazil 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 13.2% to $120 million, with margins in line with the prior year. The fungicide portfolio performed strongly in the period, with relatively low disease pressure in Brazil offset by a positive autumn season in Europe, and the continued roll-out of new mixture products.

Sales of plant growth regulators (PGRs) and biorational products were also up, with a focus on products in crop segments that can deliver higher margin earnings beginning to pay dividends.

Europe has been benefitted from a focus on cereals with PGRs, and the North American business with biorationals into the trees, nuts, vegetables and vines (TNVV) segment and cotton harvest PGRs.

Seed Technologies

The company’s seed technologies segment includes sales of seeds, managed under Nuseed business, and seed treatment chemistry.  Revenues in this segment in this segment were $41.7 million, in line with the prior period sales of $42.9 million. The segment generated a loss of $4.4 million at the underlying EBIT level, compared to a $5.2 million loss in the prior first half.  

Sales volumes were down slightly while overall margin was up approximately 2%, largely due to the product mix. The Australian business saw reduced sales in sunflowers and sorghum caused by the dry conditions leading into December, but this was offset by higher seed treatment and sorghum sales in the USA.

Nuseed has completed significant strategy and organisational changes to improve efficiency in the areas of research and development, supply chain and customer focus. This included the implementation of a centre of excellence model for R&D, the closure of two seed processing facilities and the centralisation of the global portfolio and commercial functions. As a result, headcount was reduced and expense savings were delivered in the period.  The changes enable Nuseed to concentrate resources in the high-growth, high-value segments and build a stronger trait and hybrid pipeline.

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

While Australian sales were slightly down on the prior year, a focus on higher quality sales, with improved selling discipline and a lower cost base, resulted in an improved EBIT result.

The Australian and New Zealand businesses generated sales of $231.6 million, down 3% on the previous year ($238.3 million).  This represented 20% of total crop protection sales in the first half period.  Underlying EBIT was $14.6 million compared to $11.2 million in the prior period.

Climatic conditions in Australia were again challenging for most of the period, with another dry late winter and spring for most of the large cropping areas. In late December and January, there were good summer rains, which generated strong demand in January and some positive momentum heading into the second half.

The previously announced closure of three manufacturing facilities in Australia and New Zealand is now complete. The sites are currently being remediated in preparation for sale.  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 experienced below average rainfall over spring, which affected plantings, and in addition, declining milk prices resulted in reduced demand from dairy farmers. However, good summer rainfall helped growers prepare for their autumn plant, and the horticultural segment saw increased sales demand.

Asia

Asian crop protection sales were $71.6 million compared to $83.0 million in the first half of the prior year.  Underlying EBIT was $9.4 million, up on the $8.6 million generated in the prior year.

Although Indonesia sales were down due to the prolonged dry season, this was somewhat offset by stronger sales into Japan, China and Sri Lanka. A combination of increased focus on higher margin products and prudent cost control, led to an improved EBIT result on the prior year.

North America

North American crop protection sales grew by 10% to $251.0 million (22% of total crop protection sales). Underlying EBIT was $7.4 million compared to $0.5 million in the prior year.

Sales in North America were down 4% on a constant currency basis.  Despite soft commodity pricing that saw increased price pressure on key products, Nufarm was able to improve margins through better marketing programs and newer products that address the increasing challenges associated with resistant weeds.

Management changes in the USA have resulted in a sales team that is more closely aligned with channel partners and better able to meet their needs.

Latin America

Despite the challenging conditions in Latin America the underlying business performed well.

When measured in constant currency (FY16 local currency results translated at FY15 exchange rates), sales were up 19% and underlying EBIT was up 8%.

The sharp devaluation of the local currency had a major impact on the Australian dollar results.

Latin American crop protection sales were down 2% on the first half of the previous year ($415 million v $422 million), and represented 36% of the total first half crop protection revenues.

Underlying EBIT at $57.7 million was down 11% on the prior period’s $65.0 million.

Local market conditions were challenging in South America and the value of the total crop protection market contracted (as measured in US dollars) by an estimated 20% in calendar year

2015.  The average Brazilian Real exchange rate for the first half period was nearly 27% weaker against the Australian dollar and over 50% weaker against the US dollar.   The weaker Real put pressure on margins as many raw material inputs are priced in US dollars. The business was able to increase Real selling prices and achieve significant procurement savings to recover much of cost increase.

Local currency sales in Brazil were up by 22%, driven by increased share in the soybean segment, where plantings were approximately 3% ahead of the previous year. The business continues to enhance the portfolio with eight new products launched in the first half.  Channel inventory for Nufarm products is well under control.

Risk management remains a key priority. The Brazil business incurred significant exchange losses, hedging costs and interest costs due to a structural change away from US dollar pegged invoicing.

While this increases the cost of doing business, Brazil remains a strategically important market and the company regularly reviews the measures it has in place to mitigate the risks associated with the business.

The Argentina business performed well, despite the political and economic instability. The new government devalued the Peso, reduced taxes on grain exports and relieved some of the foreign currency controls. The impact of the one-off devaluation was included in material items, and the exchange loss from the devaluation is expected to be offset by margin increases, as most product pricing is linked to the US dollar. 

Europe

European sales were ahead of the prior period (2016: $176.7 million v 2015: $169.4 million) but relatively steady on a constant currency basis. European sales accounted for 16% of the crop protection sales for the group. Underlying EBIT improved to $7.1 million, ahead of the $3.2 million posted in the first half of 2015.  Seasonal conditions were mixed, with a mild winter and good rainfall in northern Europe. But in the south of Europe, it was particularly dry.

Nufarm's branded sales were in line with the prior year, when measured in Euros.  Margin increases were achieved due to more disciplined selling policies, higher sales of differentiated formulations and the launch of several new products in the period.

The restructuring of the European manufacturing base is proceeding on schedule.  The Botlek manufacturing facility in The Netherlands closed, with capacity relocated to the Wyke facility in

Northern England.  Manufacturing efficiency programs are under way at the Linz (Austria) and Gaillon (France) production facilities.  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

Nufarm’s sales and earnings remain heavily weighted to the second six months of the financial year, with the major cropping seasons in Australia, North America and Europe occurring in that period.

The majority of sales relating to the seed technologies segment also take place in the second half.

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

Australian climatic conditions in the February-March period have been mixed, but the expectation is for above average rainfall in autumn. With some improvement in demand, the business is expected to generate a better second half result than in 2015.

Despite low soft commodity prices and tighter farm economics in North America, the company expects to generate growth in the US, with business benefiting from a more focused portfolio and new product introductions.  The company has restructured sales team to better align with customers and is working with the channel partners to make it easy to do business with Nufarm, resulting in good support from distribution.  The North American business is well positioned to capitalize on more positive seasonal conditions.

The second half represents the smaller season in Brazil. While the Brazilian market will continue to be tough, a larger safrinha (second season) crop is expected, in local currency, Nufarm would expect to outperform the second half of last year.  Much focus in the second half will be on risk management, with close attention paid to cash collections, foreign exchange risk and channel inventories. 

Given normal seasonal conditions, the European business is expected to have a better second half than last year. The growth will come from continued focus on higher margin products and the benefits of the manufacturing efficiency programs.

Seed technologies earnings growth in the second half will be challenging in a competitive market.

Whilst new seed treatment products and continued expansion of the European sunflower business will be positive, there are challenging market conditions in sorghum and global confection sunflower.  The company remains cautious on the Australian canola market growth at this early stage of the season. The second half is expected to see continued positive progress on the canola omega 3 program, with the objective of moving into a regulatory approval process by the calendar year end.

With the continued volatility of the LATAM currencies through February and even after the benefits of hedging, Nufarm has incurred a further $5 million in foreign exchange losses in the February month. Underlying net profit after tax will be impacted by higher net financing expenses in the second half.

The combination of cost savings benefits; margin expansion and revenue growth in a number of the company's businesses is expected to result in solid EBIT growth over the prior year. This assumes relatively normal seasonal conditions in key geographic markets.

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 to 40% by July 2016.