Daniel Jacquemond, Deputy Managing Director Vilmorin & Cie: "We would be able to carry out a structuring operation without massive increase of our capital"

In an interview with La Lettre de la Bourse, Daniel Jacquemond reviews the 2018/2019 results published by the world's fourth largest seed company and explains why he remains optimistic about medium- and long-term market developments. He also mentions Vilmorin & Cie's financial flexibility to participate in the consolidation of its market.

La Lettre de la Bourse: what is your view on the results of the 2018/2019 financial year?

Daniel Jacquemond: I think these are good quality results beyond their reading made a little difficult by some exceptional elements, sometimes positive or negative. In vegetable seeds, Vilmorin & Cie is above the global market trends, while in field seeds, we have accompanied the good evolution of the market, especially at European level.

In detail, the current operating margin of the vegetable seed segment was still eroded by 2.2 points to 14.9% of sales? How do you explain it?

This can be explained by two elements. First, unfavorable monetary impacts on the Brazilian real, the Argentine peso, or the Turkish lira. Then, the mix produces vegetable activities has evolved in a direction that is less favorable to us because of the redemption, three years ago of an American company, Genica, a large part of the activity is carried out by delegation of products to distributors or competing companies, so with lower margins. We have finally developed species with less profitability, especially on pulses such as beans or peas. We want to continue to develop these activities because they offer interesting growth potential.

On the other hand, the field crop segment improved its current operating profitability by 4.7 points and benefited from positive exceptional items. Which ?

Our sales grew on all species and our sales margin improved by more than one point in Europe thanks to excellent growth in rapeseed activity, as well as in South America on maize. In addition, there are non-recurring products such as a capital gain on the reorganization of the research company Biogemmae, or a profit on the sale of the industrial tool dedicated to the production of maize seeds in Hungary.

Are not you a little disappointed by the contribution of companies accounted for by the equivalents, whose result of 19.326 million comes largely from a profit of revaluation?

There are three large companies accounted for by the equity method. We have approximately a 33% stake in Australia's AGT, the country's leading producer of wheat seeds, at around 40%. It is profitable and offers the advantage of connecting, in terms of research programs, with the rest of our device in wheat. With regard to the main equity-accounted company, AgReliant, equally owned by KWS and developing corn and soybean seeds in the United States, its contribution is indeed disappointing because we decided to recast our distribution to regional distributors . Previously, we operated under six different brands and decided to merge the different branded teams under a single LG Seeds brand, which temporarily resulted in a loss of revenue. In addition, the late spring weather conditions were very difficult in the Corn Belt region and caused a certain wait-and-see attitude among US farmers. Finally the third largest equity-accounted company, Seeds Cco, is impacted on the Zimbabwe market because of the difficulties of the local economy, but its international performance, in countries such as Zambia, Tanzania or Africa South, are very satisfactory and the activity remains very profitable.

What are the prospects for the seed market in the medium and long term?

By 2050, it will be necessary to increase the production of agricultural products by about 6070% to meet demand. There is a need to increase yields and this can not be done through the increase in agricultural areas which tend to decrease in the world because of urbanization. Productivity is linked to the improvement of the technical performances of the products and therefore of the seeds. The seed market is growing at a linear rate of around 2% per year and this growth is taking place both in terms of volume and value.

The sector still seems to be under intense competitive pressure ...

That is true. This phenomenon is linked to the market for agricultural production and the price of commodities such as maize or soybeans, which are themselves highly dependent on climate change. In Europe, yields were very poor this year for wheat and barley, but Russia and Ukraine posted record yields. So there was no price spike and farmers with few products in Europe suffered. They are therefore forced to make trade-offs in their inputs and seeds are part of it.

The balance sheet at 30 June reflects an increase of 146 million euros in net debt. How do you explain it and how much room for maneuver Vilmorin & Cie currently has at the financial level?

Debt has actually increased due to longer settlement periods for certain customers, particularly in Eastern Europe, and especially capital-intensive transactions in recent months such as the acquisition of Sursem and Geneze in South America or AdvanSeed in the US. Denmark. At the end of the year, net debt represented 2.8 times our gross operating surplus compared to a ratio of 2.62.5 a year earlier. We must remain vigilant about our debt leverage on gross operating surplus which must remain below 3, but this ratio may occasionally be exceeded. I would like to point out that the gross operating surplus does not include the share of companies accounted for using the equity method, ie around ten million euros. Regarding our room for maneuver, we have already had the opportunity to appeal to the market in the past, but also to issue debt. We would be able to achieve a structuring operation without increasing our capital massively. Two years ago, for example, we investigated a multi-million-euro deal related to the combination of Dow Chemical and DuPont. This asset was finally taken over by a Chinese actor but our financial partners were ready to follow us.

Vilmorin & Cie will increase its distribution rate from 38% to 41.9% this year. What is your shareholder policy?

Our dividend policy is not intended to be modified and is based on a dividend distribution rate of between 30% and 40%. This year we reach 41.9% because we are aware that the market evolution of Vilmorin & Cie is disappointing and we thought it important to make a gesture towards our shareholders by maintaining the dividend at 1.35 euro per share despite the award of a free action for ten in January, which amounts to an increase of 9%.

How do you explain this disappointing stock market?

The enterprise value of Vilmorin & Cie represents only about 5 times our gross operating surplus against a historical average ratio between 7 and 8 times. This can be explained by the fact that our capital is locked in light of the approximately 70% stake held by Limagrain. The title is also illiquid because of the previous phenomenon and the fact that our other shareholders are generally in a long-term approach. Finally, the markets were perhaps too optimistic a few years ago concerning the price of agricultural commodities. The improvement in productivity did not cause the rise in expected prices. Finally, we must recognize that our very profitable vegetable seeds division has seen its growth slightly slow down in recent years and this may raise questions among investors.

Can we imagine a reduction of the weight of Limagrain in the round of Vilmorin & Cie?

Limagrain does not intend to lose control of the company. It is a patient shareholder and very long term that does not make decisions based on the stock price. This being the case, between 70% and 50% of detention, there is a margin of maneuver that can be used depending on the projects that we could propose. One may wonder if Bayer has an interest in maintaining its vegetable seed division, which is very marginal at the group level, and so is Syngenta, but things can very well be maintained.

What are your forecasts for the 2019/2020 financial year?

On a like-for-like basis, we expect growth of 3% in our vegetable business and 2% in our field crops business, representing an overall increase of our turnover of between 2% and 3%, with an operating margin rate at least 8%, compared to 8.4% last year, which included positive elements of an exceptional nature. These forecasts may seem cautious, but we are optimistic to hold them.

Editor's note: This article was originally published in French. This English summary has been prepared with Google Translate and edited for clarity.