Nufarm sales up 14% in FY 2019

Nufarm Group revenues increased by 13.6% to $3,758 million with growth in all regions except Australia/New Zealand for the 2019 financial year ended 31 July, 2019. A full year contribution from the acquired European portfolios and strong performances in North America, Seed Technologies and Asia business segments were the key drivers of earnings growth. External headwinds constrained performance with the continuation of drought conditions in large parts of eastern Australia, extreme flooding in major cropping regions in the United States and supply disruptions in Europe.

Nufarm Managing Director and CEO, Greg Hunt, said it had been a difficult year for the global agricultural industry but Nufarm had delivered a steady performance and was well placed to deliver further earnings growth and cash generation as conditions improved.

“A full year contribution from the acquired European portfolios and strong performances in North America, Seed Technologies and Asia have driven earnings growth for 2019.

“While earnings are up, external headwinds constrained performance. The work we have done in 2019 sets a strong base to continue to improve earnings and cash generation in 2020.

“We’ve largely addressed the significant inventory overhang from drought conditions in Australia and made good progress in re-setting the cost base to make this a more resilient business while maintaining upside exposure to improved weather conditions. “We have completed the integration of the portfolios we acquired in Europe last year and further strengthened our management and commercial teams. There is strong customer demand for the new product portfolio and the actions we have taken to increase control of the supply chain will address product availability issues we experienced in 2019 and contribute to earnings growth in 2020.

“Our North American, Asian and Seed Technologies businesses have delivered a strong performance given the external conditions and each provides further upside to improved weather conditions.

“We strengthened our financial position with the equity raising in the first half of 2019 reducing debt and supporting the business during a difficult period of external headwinds. “Maintaining a strong balance sheet and generating long term cash returns are important goals for the business. Improving margins and working capital efficiency will be key priorities for the coming year”.


Crop Protection

Crop protection sales and earnings increased in all regions except Australia/New Zealand which was impacted by continued drought conditions in large parts of the east coast of Australia, and earnings were flat in Latin America.Further detail on the drivers of performance in each region is provided below.

Herbicide sales increased eight per cent to $2.29 billion with growth in phenoxy herbicides offsetting a three per cent decline in glyphosate sales due to unfavourable weather conditions in Australia. Glyphosate sales represented approximately ten per cent of total company gross margin in 2019. Other herbicide revenues were up 21 per cent on the prior year with Dicamba, Flumioxazin, Bromoxynil and Fluazifop the major contributors.

Insecticide sales were up 21 per cent to $462 million with growth driven primarily by a full year contribution from the acquired European portfolios and continued growth in Brazil.

Fungicide sales grew by 30 per cent to $410 million. Growth was driven primarily by a full year contribution from the acquired European portfolios with tebuconazole and prochloraz mixtures delivering strong growth despite constrained supply limiting sales.

Europe

Sales and earnings grew in flat market conditions with a full year contribution of $75 million from the product portfolios acquired in 2018 the main driver of growth. This contribution was below the forecast contribution as a result of supply issues increasing costs and impacting ability to meet customer demand. The acceleration of product registration transfers for the acquired product portfolios is expected to improve product availability in 2020. Dry winter conditions in the central and northern Europe impacted earnings in the first half of the year, and biennual planned maintenance shutdowns also impacted earnings by $5 million.


North America

Extreme wet conditions in the US south and Midwest delayed the season, reduced area planted and impacted crop protection and turf applications with dry conditions in Canada also impacting sales. High channel inventories in the US and Canada from impending tariffs and the reduction in seasonal applications resulted in aggressive industry pricing.

A strong contribution from the turf and ornamental segment in the first half and market share gains in crop protection products from existing and new customers in the second half offset the impact of external headwinds.

Working capital levels were elevated as a result of lower and later than expected sales following the extreme weather conditions.

Australia/New Zealand

Continued dry conditions for large parts of the east coast of Australia following extreme drought last year and a late season for the west coast impacted demand and sales of crop protection products. Elevated levels of inventories in Australian sales channels due to a second year of drought conditions resulted in aggressive industry pricing that kept margins at reduced levels for a second year.

In response to the low levels of demand and high inventory levels, manufacturing lines in Australia were temporarily closed to enable an orderly reduction in excess inventory. This action resulted in the company incurring overhead costs of $21 million that could not be allocated to manufacturing production and these were recorded as a material item in the financial accounts. Inventory levels have been reduced by approximately $100 million and manufacturing has recommenced in the 2020 financial year.

The next phase of the performance improvement program was launched during the year 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 with an improvement of $10 million to $15 million dollars forecast in 2020. Costs of $10 million to implement the program have been incurred to date and included as a material item in the 2019 results.

Asia

Drought conditions, low pest outbreaks and low commodity prices led to a decline in the overall market in Indonesia. Nufarm gained market share with the support of new product launches and increased sales of differentiated products to achieve a small increase in sales and earnings.

Sales and earnings momentum continued in China with a full year contribution from the new joint venture. Sales and earnings also increased with strong customer support in Japan, Malaysia and Sri Lanka and a new product launch in Vietnam.

Latin America

Increased soy plantings in Brazil and a return to more normal climatic conditions in Argentina drove volume and revenue growth across all key product groups.

Strong early demand for the summer season drove sales late into the second half of 2019, which also resulted in an increase in working capital balances. Strong competition on foundational products reduced margins. This was offset by increased sales volumes and an improved product mix to deliver a steady EBITDA outcome for the period.

Seed Technologies

Seed Technologies combines the seed treatment portfolio and the Nuseed business.

Revenues increased 19 per cent to $221 million, with seed treatment revenues increasing 17 per cent to $98 million and Nuseed revenues increasing 20 per cent to $123 million. Growth in seed treatment revenues and earnings was driven by higher sales of Sumitomo products into Latin America and European sales grew with a full year contribution of seed treatment products acquired in the prior year. This more than offset a decline in Australian sales and sales into North America remained stable on the prior year.

Nuseed secured market share gains across its three focus crops of sunflower, sorghum and canola. This was despite challenging seasonal conditions in Australia which negatively impacted canola plantings and in the United States, which resulted in lower plantings of sunflower and sorghum.

New varieties were successfully launched in all regions, helping to drive both increased sales and stronger margins. Europe was a stand-out performer, with new sunflower hybrids contributing to a significant increase in sales over the prior year. Substantial progress was achieved in relation to Nuseed’s proprietary omega-3 canola, which is being commercialised initially as a feed input for the aquaculture industry branded under the name ‘Aquaterra’.

During the period, a regulatory approval for cultivation was secured from the United States Department of Agriculture and regulatory filings were submitted in several other markets including Europe. The regulatory submissions relating to consumption (food and feed) approval in both the USA and in Canada are also progressing.

The first commercial crop of 35,000 acres was planted in Montana and North Dakota in the US and is currently being harvested. This crop will be stored on-farm prior to delivery to mill for crush and oil production in the first quarter of next calendar year.

Next generation varieties of omega-3 canola with improved agronomic performance, including higher yields, are currently in seed production and will be available for commercial planting in the US next year. The introduction of these new varieties will continue to improve oil production per planted acre, reduce grain transport costs and progressively lower the cost of goods.

Extensive fish feeding trials, involving more than one million fish, were undertaken with several aquaculture firms during the period. Initial data confirms earlier independent findings by NOFIMA that production metrics such as growth, feed conversion, and mortality are competitive with fish oil. The data also suggests enhanced fillet colour for fish that were fed Aquaterra diets with increasing inclusion rates, which is an important feature for the final market. The trial results validate the performance and fit of Aquaterra in potential customers’ existing feed manufacturing and fish farm systems on a large scale.

Positive initial commercial discussions have been undertaken with the key aquafeed and farm companies in Norway and Chile. Nuseed is targeting to have first commercial supply agreements in place before the end of the calendar year.

The intellectual property estate which protects the proprietary omega-3 technology platform continued to strengthen, with new patents secured during the period.

Proceedings were instigated in the Eastern District of Virginia asserting infringement of valid patents held by Nuseed and its collaborative partners, CSIRO and GRDC. The result of this court action does not impact Nuseed’s freedom to operate. The court action is scheduled to be heard in October 2019, with a decision anticipated before the end of the year.


2020 outlook

eptember 2019 the company announced its intention to divest the crop protection and seed treatment assets in South America (including in Brazil, Argentina, Chile and Colombia) for cash proceeds of $1,188 million and customary net working capital adjustments on completion. The proposal is subject to review by an independent expert, shareholder and competition approvals by relevant South American regulatory bodies. Completion of the transaction is targeted during the first half of the 2020 calendar year. Nufarm will continue to operate these businesses until completion of the transaction.

Nufarm expects continued growth in sales, cost saving benefits and improvements in supply chain efficiencies to drive earnings growth in the remaining businesses in 2020.

The performance improvement program in Australia is forecast to deliver increased earnings before interest, tax, depreciation and amortisation of between $10 million to $15 million in 2020. The business is well positioned to benefit further from improved weather conditions if they occur.

Resolution of the supply issues that impacted product availability in Europe in 2019 is expected to contribute positively to earnings for 2020. The tight supply conditions for some technical ingredients sourced from China experienced in 2019 are expected to continue to impact negatively on the cost of goods in this region during 2020. The net impact of these factors is expected to benefit earnings before interest and tax by approximately $15 million. There is nomajor planned plant maintenance shut down scheduled for the region in the 2020 financial year.

Competitive market conditions are expected in North America due to the current high levels of inventory in sales channels and lower farm incomes. Continued support from existing customers is forecast to deliver sales growth and commissioning of the Greenville formulation facility in the first half of 2020 will support future growth into south-eastern states of the United States. The full earnings benefit of the Greenville facility is expected to be realised when manufacturing throughput reaches planned capacity in 2021.

Earnings from Seed Technologies will be reduced by the impact of the divestment of the South American seed treatment assets to Sumitomo if this transaction proceeds. Earnings from the remaining assets are expected to grow with continued momentum from product launches supplemented by increased canola sales if weather conditions in Australia improve. First commercial sales of omega-3 canola are expected in 2020 with a positive earnings contribution forecast for 2021.

Forecast net interest expense of $105 million to $110 million in 2020 includes an estimated $30 million of interest costs relating to the South American businesses that are proposed to be divested.

Forecast hedging and net foreign exchange costs of $20 million includes an estimated full year hedging cost of approximately $12 million relating to the South American businesses that are proposed to be divested.

The company’s effective tax rate is expected to be approximately 33 per cent in 2020. Capital expenditure is forecast to be approximately $150 million.

Forecast depreciation and amortisation of $190 million includes a full year forecast of $8 million relating to the South American businesses.

Earnings before interest, tax, depreciation and amortisation for the first half of the 2020 financial year are expected to be in line with the prior year. This assumes a full half contribution from the South American businesses and average seasonal conditions for the major selling periods in our key markets, with the exception of Australia where continued drought conditions are expected to impact the east coast for the summer cropping season. No material impacts from government policy changes or additional third party supply interruptions are assumed in this forecast. ROTAC Joint Venture, Treatme