Nufarm crop protection sales up 3% in FY 2016

Nufarm's crop protection business generated $2.65 billion in revenues, which was 3% higher than the previous year sales of $2.58 billion. These sales generated an average underlying gross profit margin of 28.8%, significantly stronger than the 26.9% average gross margin recorded in financial year 2015.



Herbicide sales at $1.76 billion were in line with the prior year. Glyphosate sales were down on the prior year, mainly due to the lower average technical price across the year (down around 20%), but margins were stronger. Glyphosate volumes were ahead of last year, with growth achieved in North America and Latin America. Phenoxy herbicide revenues and margins were up, driven by stronger sales in North America. Dicamba sales were down on last year due to an over-supply in the USA market while Flumioxazin sales were up on the prior year driven by new product launches in the USA.

Group insecticide sales were $279 million, and in line with the prior year. Gross margins were slightly ahead. 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 12% to $307 million, with margins slightly ahead of 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 successful focus on products in crop segments that can deliver higher margin earnings. Europe has benefitted from a focus on cereals with PGRs, and the North American business with biorationals into the trees, nuts, vegetables and vines (TNVV) segment.

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 platforms. Sales between the two parties grew 20% to $171 million in the year. There was very good sales growth in the US, Canada and Brazil, as well as the execution of a new distribution agreement in the UK. Portfolio collaboration opportunities continue to be explored and developed.

Seed Technologies

The company's seed technologies segment includes sales of seeds, managed under our Nuseed business, and seed treatment chemistry. Revenues in this segment were $143.6 million, 10% below the prior period sales of $159.6 million. The segment generated an underlying EBIT of $28.7 million, compared to $31.8 million in the prior period.

Segment sales were down primarily due to lower soft commodity pricing, continued dry conditions in Australia prior to seed planting, and over-supply in the US sorghum market. European sunflower sales were up on the prior year. Seed treatment sales were up in Europe, with strong demand for the company's 'Nuprid 600' product in France.

Nuseed has undertaken significant 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 continues on track, now well into field trials and 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. Nuseed is now engaging with several industry players to validate both performance and acceptance in end-use markets. Commercialisation of the technology is planned for 2018/19, subject to regulatory approvals.

Regional sales



Australia / New Zealand

The Australian and New Zealand businesses generated sales of $554.0 million, down 5% on the previous year ($582.4 million). Underlying EBIT was $47.0 million compared to $52.7 million in the prior period.

Climatic conditions in Australia were mixed. Western Australia had a very good season, but eastern Australia was again dry during summer and autumn, limiting pre-plant opportunities. Good rainfall in many areas from May onwards will boost yields for farmers, and provides a positive outlook for the summer cropping season.

A gross margin improvement in the Australian business reflected a focus on increased sales of higher margin products and more disciplined selling practices. However, this came at the expense of lower sales of larger volume commodity products, with a resulting negative impact on plant recoveries.

The previously announced closure of three manufacturing facilities in Australia and New Zealand is now complete. Two sites – Welshpool and Lytton – have been sold, with proceeds received post year end, and the Otahuhu site is expected to be sold during the second half of 2016. The full benefit of these changes should be realised in the 2017 financial year, as Nufarm achieves improved plant recoveries with a better balance between higher margin product sales and volume-based commodity product sales.

Asia

Asian sales were $148.6 million compared to $155.2 million in the prior year. Underlying EBIT was $22.8 million, well up on the $18.1 million generated in the prior year.

Although Indonesian sales were lower due to the prolonged dry season, this was more than offset by stronger sales into Japan, China, and Korea. Sales to Japan were up 36% on last year. 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 11% to $653.9 million. Underlying EBIT was up strongly to $59.3 million compared to $38.8 million in the prior year.

A mild winter and early warm spring in the USA provided good opportunities in the 'burn down' segment where Nufarm has a strong position. Despite soft commodity pricing that encouraged farmers to reduce their spend on crop protection, Nufarm was able to improve margins through marketing programs that closely aligned with the needs of distribution partners, and newer products that address the increasing challenges associated with resistant weeds. The turf and ornamental business also performed strongly during the year.

The previously announced closure of the Calgary plant was completed in June, with production successfully transferred to the company's Chicago based manufacturing facilities. The Canadian business grew sales and earnings, with new product launches and differentiated offerings continuing to strengthen Nufarm's position in that market.

Latin America

Latin American crop protection sales grew by 5% to $740.7 million. Underlying EBIT was up strongly to $100.4 million compared to $76.7 million in the prior year.

The business took a conservative approach to sales growth, particularly given the volatile market conditions. Nufarm was able to maintain market share in Brazil.

Eight new products were launched by Nufarm in Brazil in the first half of 2016, and further launches are planned in the new financial year. Channel inventory of Nufarm products remains well below the industry average, with good 'product-on-ground' usage during the year.

Higher US dollar priced raw material costs resulted in margins coming under pressure, but the business was able to increase local currency selling prices which offset much of that cost increase. Substantial procurement savings also contributed to the stronger EBIT result.

Risk management remains a key priority. The Brazil business incurred significant foreign 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 for Nufarm with potential for further substantial growth. Measures in place to mitigate the risks associated with the business are regularly reviewed.

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 was offset by margin increases on the inventory holdings at the time of the devaluation.

Europe

Europe crop protection sales grew by 1% to $550.4 million. Underlying EBIT was up to $73.0 million compared to $64.5 million in the prior year. Seasonal conditions were very mixed, with a wet and cold spring reducing herbicide and fungicide applications in cereals. Yields were below average in Western Europe, but record yields were achieved in Eastern Europe.

Nufarm's branded sales were slightly ahead of 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 nearing completion 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

The combination of additional cost savings benefits; margin expansion and revenue growth in a number of the company’s businesses is expected to result in earnings growth in 2017. This is despite an expectation that soft commodity prices will remain low and general market conditions will continue to be subdued.

The company's performance in Australia is expected to strengthen, with restructuring initiatives resulting in a lower and more flexible cost base, and a better balance between sales of high margin and commodity products that should see sales and production volumes improve. The outlook for the Australian summer cropping season is positive, with good winter and spring rains across the country.

The company is well positioned to generate growth in the US, where our business will benefit from new product introductions and stronger support from local distribution. The business will also benefit from the manufacturing efficiencies associated with the closure of the Calgary plant.

In Brazil, 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 new product introductions should result in Nufarm's business being well placed to achieve growth in the 2017 financial year.

New product introductions and increased investment in marketing and sales staff in our key European markets should underpin what is expected to be another solid performance in this region.

The combination of important new seed treatment product launches and continued expansion of the European sunflower business should support earnings growth in seed technologies over the next 12 months, along with the possibility of an improved outlook for Australian canola sales.

Net interest expense is expected to be moderately lower in 2017. Net foreign exchange impacts will continue to include anticipated hedging costs of $1 million to $1.5 million per month for Latin America.

Management will stay focused on strengthening the balance sheet, with continued attention given to working capital management and the sale of non-core assets. The working capital objective will be to retain the efficiencies achieved in recent years, and upon the completion of the supply chain investment, drive the next step change reduction in average net working capital. The benefits from this project will start to flow in the 2018 financial year. In 2017, the focus will be on improving cash flow and reducing the average leverage ratio.

Growth prospects over the medium to long term remain strong as the company continues to secure further benefits from the performance improvement program and expands its offerings in core crops and markets.