Nufarm sales up 8% in H1 FY 2019

Nufarm Group revenues increased by 8% to $1.58 billion (2018: $1.46 billion) in the first half year of FY 2019 ended 31 January 2019, driven by strong sales growth in the key markets of North America and Latin America. European and Asian sales were also higher, along with stronger revenues generated by the company’s seed technologies segment. The Australian business was negatively impacted by continuing dry conditions.
Australia / New Zealand

Australian/New Zealand sales declined 26% on the first half of the prior year to $222 million. Underlying EBITDA was $4.0 million compared to $13.5 million in the prior period. Persistent dry conditions in key Australian cropping regions reduced demand for product, contributing to high channel inventories and aggressive pricing competition.

Production levels at the company’s manufacturing facilities were also greatly reduced, resulting in lower overhead recoveries.

The year started poorly with a dry spring depressing demand for fungicides in the winter broadacre and horticultural markets. The total area planted to summer crops is estimated to have decreased by 23% to 1 million hectares. The dry conditions continued into February and March, with the Bureau of Meteorology now forecasting below average rainfall for the autumn period for the key cropping areas on the East coast. Given this uncertain outlook, the business is now expected to deliver a second half EBITDA below that generated in the second half of the prior year. The company is taking a conservative approach to the winter season inventory build, which will result in forecast production levels being down to at least 50% of the prior year.

A performance improvement program is underway in Australia to deliver greater efficiencies; reduce earnings volatility and improve the company’s competitive position. The program is expected to deliver a sustained improvement in EBITDA performance over the next two years, with the target of a $10 million to $15 million EBITDA improvement. The program commenced in March and will be implemented over the next two years. The program is estimated to cost approximately $10 million.

Asia

Asian crop protection sales were $100.7 million compared to $95.3 million in the first half of the prior year. Underlying EBITDA was $14.5 million, down from $16.4 million in the prior year.

Indonesia sales were down 3% on last year, with an extended dry season impacting demand. The regional revenue growth was contributed by higher sales into China and Sri Lanka, but these are typically lower margin sales, and were not sufficient to offset the reduced margins in Indonesia.

North America

North American crop protection sales grew by 19% to $442.5 million with a very successful early-order program in the turf and ornamentals (T&O) segment offsetting lower fall burndown sales due to the wetter conditions in the US market. The shorter fall season contributed to a build in channel inventories, but a solid spring season is seeing inventories move quickly as moisture levels are excellent across all key cropping regions.

Underlying EBITDA increased 27% to $40.7 million with the higher margin T&O segment the major contributor.

The investment in the new Greenville production facility is on track to support further sales growth into the south east region and deliver further cost efficiencies. In February, the portfolio was further strengthened with the acquisition of the nematicide Trunemco from BASF. Trunemco is a proprietary product that improves the root systems, vigor and canopy closure for crops, and is expected to be launched in the US later this year, following EPA regulatory approval.

Latin America

Latin American crop protection sales increased 18% to $534.2 million and underlying EBITDA grew 5% to $58.6 million.

The first half period encompasses the key selling season in Latin America. The largest market, Brazil, experienced better climatic conditions this year and increased soy plantings, although the season did finish dry, which will reduce crop yields. The increased soybean plantings combined with market share gains drove revenue growth in Brazil of 18% on the prior year. A return to normal climatic conditions in Argentina also generated sales growth of 18%.

The Latin American business delivered EBITDA growth despite continued competitive pricing pressure in the glyphosate segment, and challenges in passing on increased costs for actives sourced from China.

The Latin American business managed its currency exposure well in the first half, aided by a stable Brazilian Real, and the move to US dollar functional currency in Argentina. Strong collections have improved the quality of the receivables book.

Europe

European sales were up 15% to $199.6 million, which included the contribution of the newly acquired European portfolios. Branded sales in the base business were negatively impacted by a slow start to the season, with dry weather in central and northern Europe persisting throughout summer and autumn. This caused higher channel inventories which delayed purchases.

Underlying EBITDA declined by 34% to $15.1 million in the first half and was impacted by the slow start to the season, supply challenges and cost of goods increases on the acquired portfolios and scheduled maintenance shutdowns at the Wyke and Linz plants.

The supply issues are mainly in the acquired portfolios, where the portfolio vendors are supplying Nufarm product at cost under the transitional supply agreements. There have been supply disruptions triggered by the enforcement of improved Chinese environmental standards. There has been limited visibility around forecast deliveries, and the business is experiencing some cost increases. This has resulted in lost sales opportunities and the financial impact may worsen as the main summer selling season develops. In response to the product availability issues, the company has expedited the transfer of product registrations, which allows the business to exit the transitional supply agreements and bring the product sourcing under Nufarm control prior to the autumn selling season, which will re-position the company to meet full demand over the 2020 financial year.

The European back-office harmonisation project is on track, with all countries scheduled to be live on the new Oracle ERP system by May 2019. The shared service centre has been established in Krakow, Poland. Along with the Oracle ERP system, a new demand planning system is also being implemented. These projects will contribute to more efficient planning and operations in Europe, with benefits to be delivered when they are fully implemented.


Crop Protection

Nufarm's crop protection business generated $1.50 billion in revenues, which was up 8% on the previous first half period.

Herbicide sales were up 2% to $995 million. Glyphosate sales were down on last year by 9%, due to the extremely dry conditions in Australia and high channel inventories. Nufarm’s Australian glyphosate sales volumes were down approximately 50% on the prior half year. The glyphosate margin percentage is down on the prior period, with margin pressure in Australia and Brazil the key drivers. Phenoxy herbicide revenues are up on last year, with growth in North America and Latin America offsetting reduced sales in Australia. Phenoxy margins are in line with the prior period. Other herbicides are well ahead of last year, with flumioxazin, dicamba and fluroxypyr being the main drivers.

During the first half, both Health Canada and the Brazilian regulatory authority, ANVISA, confirmed regulatory approval of glyphosate following their re-evaluation of the product. Both authorities reaffirmed that glyphosate is safe to use and presents no risk to users when used in accordance with the label instructions.

Group insecticide sales were up 13% to $224 million, with margin percentage only slightly below the prior period. The sales growth was across most regions, with Latin America accounting for nearly 70% of the sales at the half. The acquired portfolios in Europe accounted for one-third of the sales growth. Sales of chlorpyrifos (Brazil) and acetamiprid (Spain and Italy) are performing well.

Fungicide sales were up 37% to $156 million, with margins down on the prior year. Fungicides sales grew in all regions, with Europe, North America and Latin America accounting for most of the growth. The acquired portfolios in Europe accounted for one-third of the sales growth.

Seed Technologies

The seed technologies segment includes sales of seeds, managed under our Nuseed business, and seed treatment chemistry. Revenues in this segment were up 12% to $76.8 million and underlying EBITDA increased 47% to $15 million.

A combination of higher seed treatment sales and strong first half seed sales in Latin America have delivered good sales growth in the seed technologies segment. The seed treatment sales growth was mostly in Brazil and Europe, with the highlight being the launch of Fipronil in Brazil. For seeds, the strongest contributions came from the European sunflower business and sorghum globally. Nuseed continues to grow ahead of the market, driven by a strong pipeline of new products and the focused execution of its ‘Beyond Yield’ strategy.

Nuseed’s proprietary omega-3 canola continued to progress towards commercialisation, with acres contracted for the first commercial planting to take place in the US this coming season. This follows the United States Department of Agriculture’s (USDA) approval for cultivation last August. Regulatory submissions to FDA relating to food and feed approval in the US were also progressed, with approvals anticipated well before the upcoming crop’s harvest. Regulatory approvals for cultivation, food and feed in Canada are continuing through the review process, as are applications already filed in China and Japan, with expectations to file imminently in Europe, Mexico and Korea.

There has been strong interest in Nuseed’s omega-3 oil, branded as Aquaterra, from major feed and salmon farm producers. The aquaculture industry accounts for 65% of global omega-3 demand. Feeding trials were commenced at downstream aquaculture companies, with initial results validating the positive production and quality results generated in the independent NOFIMA trials reported last year. These results confirm that Aquaterra presents a ‘drop-in’ solution with positive feed conversion and fish growth rates, and ease of use for feed manufacturing. Additional data from the feeding trials will be available mid-year.

Nuseed’s strong existing intellectual property estate has continued to expand with new patent claims secured in FY 2018 being extended across multiple geographies. Nuseed and its partners are now asserting their patent estate against others for infringement in the USA. Court actions regarding the infringements and validity will be heard in the US Federal court in October 2019.

Important work has also been undertaken to validate stewardship of the crop and to refine the supply chain across crush, quality and logistics. Testing has also confirmed excellent oil stability. The global fish oil supply and demand balance continues to develop in line with previous expectations of an expanding deficit in availability. Each point of market share of the fish oil deficit in 2028 is expected to generate approximately $8.5 million of EBITDA.

The omega-3 canola opportunity is one of several ‘Beyond Yield’ innovations being developed within the Nuseed business. It will be an important source of profitable growth for the company.

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.

Nufarm’s North American business is experiencing strong growth momentum and excellent support from channel partners and is well positioned to grow profitability across the full year.  

The early start to the Brazil soybean season has expedited harvest in many regions and allowed early plantings of the second half Safrinha corn crop.  Second half Latin American earnings are expected to be broadly in line with the prior period.  

The Australian business is expected to face ongoing challenges in the second half due to very low sub-soil moisture levels in key cropping areas and expectations of a poorer than average season in Eastern states.  Given the weaker demand outlook and the need to control inventory levels, production activity will be scaled back to approximately 50% on the prior year, which will result in an under-recovery of fixed costs.  The projected EBITDA impact of lower sales and lower manufacturing production levels is expected to be approximately $30 million against our previous forecast.    

Europe has experienced a slow start to the season with dry weather continuing into the autumn period.  This has contributed to higher than normal channel inventories and delayed purchases.   Ongoing supply challenges associated with the newly acquired portfolios are expected to impact the scheduled delivery of products for the business to meet the forecast second half demand and will drive higher costs.  The EBITDA contribution from Europe is expected to be down approximately $30 million against previous guidance, mainly attributable to the supply challenges for the acquired portfolios.  The company remains confident in the strategic value and quality of the acquired portfolios, and the customer response has been strong.   

Assuming adequate planting conditions – particularly for the Australian canola crop - the seed technologies segment is expecting another solid year of sales and earnings growth.  The second half is expected to see continued positive progress on the omega-3 canola program, as we continue with field tests with potential customers, and scale up the pre-commercial activity ahead of an initial commercial crop in the US this year.   

Given the continued dry weather in Australia, the slow start to the season in Europe in the first half and the supply issues being experienced with the acquired portfolios, EBITDA for the 2019 financial year is expected to be in the range of $440 million to $470 million.  This also assumes timely seasonal second half breaks in North America and Europe as the peak selling season unfolds in both regions.  

Net interest expense is expected to be approximately $105 million, with the guidance for foreign exchange impact to be in the $15 to $20 million range, assuming $1 million to $1.5 million per month of hedging cost for Latin America in the second half.   
   
A strong focus will be maintained on the balance sheet, with the net working capital balance at 31 July 2019 forecast to be in a range of $1.3 billion to $1.4 billion, which compares to $1.325 billion at July 2018.  The working capital reduction will be achieved through collections in the second half and the sell-through of inventories in the upcoming major seasonal demand periods.  This forecast net working capital range will enable a deleveraging of the balance sheet at July year-end.