Edited Transcript of FFARM.AS earnings conference call or presentation 13-Aug-20 8:00am GMT

When I zoom in on certain countries, in the Netherlands, I think it is worth noting that EUR 5 billion has been allocated by the government to, over the next 10 years for nature recovery and reduction of nitrogen emissions. This will have an impact, especially on our ruminant business. At this point in time, that impact is not entirely known. We are in intensive discussions. But again, it probably will take at least another 6 months to get a full clarity of the situation.

What is further important is that after the initial what I call, encouragement for stopping in the pig sector, which had an impact the end of last year, there is now a warm restructuring in the pig sector for which farmers had to register, and that is likely to have an impact on the sector of about 10% in the Netherlands, starting probably from quarter 4 this year into the quarter 1 of next year. 10% of the animals will be reduced as a result of that.

Maybe a bit on the positive side. Belgium, it has not had any African swine fever cases for quite a while and the expectation now if that situation continues that certainly, Q4, a full lifting of the ban not to sell pig outside the EU is likely to occur. The area that actually has been most affected is Poland. Poland has been suffering from 2 angles. Probably you recall that bird flu occurred in the beginning of the year. And Poland has developed over recent years as the key poultry country, which supports the rest of the EU. But on top of that, with COVID and the closure of food service, especially poultry, is a specie that is mostly consumed in the food service. So those 2 elements, bird flu and the reduction of demand due to COVID is having quite a significant impact on Poland.

Poultry is also the specie where farmers can quite quickly decide to not immediately fill those tables. The cycle in poultry is much shorter than in other species. So when the demand was reduced as a result of falling price in poultry, quite a few farmers took the decision to wait until there was a price recovery before refilling their barns.

That actually correlates well to general price developments. Again, why do we show this? Well, we recognize, although this is probably an indication of our customers’ profitability, it does provide, we believe, valuable impact to what volumes might do over time. As clearly, when customers are very profitable, they are much more inclined to look at increasing their — the number of animals and subsequently, the need for feed.

First of all, if you look at milk price as well following COVID, there was a reduction in the milk price. So it is now certainly below last year, with our — from our point of view, not at a catastrophic level. So in certain countries, it’s lower. But in general, it is at a somewhat reasonable, be it low level, at this point in time.

In pigs, there was a significant reduction coming from almost record highs following the African swine fever in Asia, where a major shortage has occurred in terms of pig meat. Europe has been at the forefront at taking advantage of that shortage. So there’s been a lot of exports, mainly to China but also to other Asian countries.

And then when COVID occurs, and recently, some of the slaughterhouses were constrained from being able to export to Asia as they had a number of infections in terms of people, this has put a significant reduction into the pig price again compared to very high levels. So even the level today is certainly not what you would say, a very depressed level, but the speed of that reduction is obviously concerning. We hope that over the next few weeks as the corona situation at the slaughterhouses becomes more controlled, that might be lifted, but that is still uncertain at this point in time.

Then moving to broilers. Again, broiler is the specie where farmers can react the quickest. And broilers took a real nosedive following COVID and the pricing of broilers in the markets became, in many instances, substantially — became substantially lower than the cost of production. So this was the reason why, especially in Poland, again, farmers took the decision to wait with refilling our barns. In fact — especially when food service reopens, we saw a quick improvement, but in recent weeks, with the increase in the number of corona incidents, again we have seen a gradual reduction again. So we expect over the next few months, that will continue to be quite volatile.

With all of that as a very challenging market conditions, we are actually happy to what we believe is report a solid recovery into our financial measurements. Strongly supported by the efficiency measures we announced about 1.5 years ago that are starting to have a quite significant impact on our results. But clearly, volume has been impacted by the factors that I mentioned. We achieved about a 5% reduction in terms of our volumes, a little bit more, in Total Feed, a little bit less in compounds. But given that we were experiencing a negative purchase situation last year and thanks to our improved mix with quite a bit more specialties, we did manage to have a 2.5% increase in our gross profit despite this drop in volume.

As a result of that, and again, thanks to the efficiency measures, we achieved 35% increase in underlying EBITDA and slightly above 80% in underlying profits.

Also, our net cash flow basically tripled, as well as our working capital compared to the same period last year improved. If you compare that to the beginning of this year, that was a worsening of the situation, but that is typical for this time of year, and we had a few elements like solving some of the outstanding earn-outs that played a role here. So we expect that actually underlying this has been decent progress.

And last but not least, over the last few years, we’ve clearly made this an effort, to get to world-class levels in terms of lost time incidents. Every incident is one too many, by the way. But it’s good to see that after the progress over the last few years, we, again, continue to sustain that with a further 21% reduction versus last year.

With that, I would like to hand over to our CFO, Roeland, who will take us more through the details of some of the results.

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Roeland Tjebbes, ForFarmers N.V. – CFO & Member of Executive Board [4]

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Thank you, Yoram. Also, good morning from my side. I will guide you through the financial slides, and I will, of course, focus on the highlights. I will be talking about the underlying results and the underlying EBITDA, so without the exceptionals. And as you will see further down this presentation that there were hardly any material incidentals in the results.

And given that the impact of foreign exchange and M&A on these results are quite small, I will refrain from those effects. So we will look at the autonomous effects in the results.

Yes. And looking at this slide, what you see is what Yoram already highlighted, the Total Feed volume and the compound feed volume are both trending down. There are 4 major effects for that. And I think Yoram already alluded on that. The first one, of course, the COVID effects, and we see that throughout the whole operation, but especially in Poland and the U.K., and I will discuss it a little bit more when I get to the clusters.

In Holland, of course, we have the impact of the so-called stoppers arrangement for the swine industry. Like Yoram said, we had bird flu in Poland. And also, we — because of our more strict margin policy, we are focusing on more profitable contracts and clients instead of the less profitable profits and clients. This all ended in a gross profit, which is 2.5% up compared to last year, almost EUR 220 million. The main driver for that — one of the main drivers is, of course, that we don’t have this unfavorable position on purchases, which we had last year. And we, of course, have a lower gross profit because of the volume, but we were also able to improve our margins because of the better product mix, which was already highlighted, and as you will see that the gross profit per ton was above — increased with more than 7%.

If you then look at our operational expenditures, you will see that those are 2.9% lower. It is, of course, because of the lower volume, but also because of our cost-saving program and the efficiency programs, which we started last year.

And if you then look at the total EBITDA, which is EUR 48.2 million for the first half, which is 30 — almost 35% better than last year.

If you look at the profit development, further down our profit and loss account, you will see that HeBeMa, which is in the lion’s share of profit of equity accounted investments, is up with EUR 1 million, 2.7%, predominantly because of the transhipment activities and — which was quite profitable in the first half.

And if —

(technical difficulty)

Assets when it comes to debtors, but you will also see that our equity came down with about EUR 40 million. And the EUR 40 million is basically because of 4 elements. The first one being the share buyback program that was finalized last week. And we had a press release about that on the 4th of August, and it amounted to EUR 30 million in the first half of 2020.

We also paid out the dividend, which was approved during the shareholders’ meeting. And we also had a remeasurement of pensions, and that’s because of adjustment in our actuarial assumptions mainly on inflation and the discount rate, and that had an impact of EUR 10 million on our equity.

The last effect on our equity is the translation differences because of the weakening of the British pound and the Polish zloty. But besides these effects, we still see a strong and healthy solvency ratio of 48.5%, which you can also see on this slide.

If we go further down the slide, you will see our ratio for overdue receivables, which is trending down since — already last year and also this year. It’s on 40.4%. And given the profitability and liquidity of our clients, this is a nice percentage when taking that into account.

Our net debt is up to EUR 51 million, and that’s basically because of the — of mainly because of the share buyback and the dividend that was paid out. And that’s what you normally see in the first half, we pay out the dividend that has, of course, an impact on the net debt and giving other circumstances being stable, then in the second half, the net debt should come down. Again — and if we then look at the cash flow development, it was, like Yoram said, our operating activities almost tripled, our cash flow from operating activities. Of course, we have a better result. So that’s helping and we invested a little bit in working capital. So that’s bringing the cash flow a bit down. But it’s a seasonal effect is what we also saw last year. We sell the herbal products during spring, and that increases the total debt position. But like I said, the overdue debt is still very low.

Then if you look at the net cash flow from financing activities, of course, the share buyback and the dividend distribution are impacting deadline, and that’s why we had to take out a specific part of our loans.

All in all, I would say that the operational cash flow is on a very strong level in this first half, especially compared to last year.

If we go to the next slide, you will see our alternative performance measurements at the incidental items, which we take out when we are talking about the underlying profits and underlying results. We have 4 buckets for that. As always, the first one being the impairments; the second one, business combinations and divestment; restructuring; and other, you can see it for yourself. And then maybe good to highlight that in total, and you see that on the right-hand side, it’s minus EUR 2.3 million for profit to shareholders, and that is basically comprising of 2 elements: one, being the put option accrual we had to take like last year, and we had about EUR 600,000 of restructuring costs because of our efficiency programs.

Then going to the different clusters, which we have, starting with the Netherlands and Belgium, but maybe first to highlight that all our clusters have a better EBITDA, so a positive EBITDA development compared to last year, compared to the first half 2019.

Looking at Holland and Belgium, you see that the cluster is trending down on volume of 2.7%. Yes, it’s mainly the impact of the so-called stoppers arrangement in the swine industry, like I said, and COVID effects on the B sector and the cattle where we were suffering from less sales because of the clients were not able to sell to the out-of-home segment. A positive effect is that there was more volume to poultry farmers and the sales of our coproducts.

If we then look at the gross profit, you will see that it’s much better than the last year. Of course, the unfavorable purchase position is impacting that, but also a better product mix when it comes to the specialties and especially then the concentrates.

The underlying OpEx, as you will see, is more or less on the same level, but because of our tax regime reallocating overheads, so this is a wash between corporate expenses and the cluster, Netherlands, Belgium, we had to allocate higher overheads to the cluster (inaudible) . If you take that out the total OpEx is lower than the year before.

And then look at the — in the total, you will see that the EBITDA is almost EUR 35 million. And we have very strong ROACE for this cluster.

Then going to the cluster, Germany and Poland, where we see volumes a bit down. And that’s because of — it’s a mixed deck of positive effects and negative effects. Starting, of course, with the positives, there’s more sales in the dairy sector in both countries, so we were able to sell more in that sector. And the negative effects are predominantly on COVID in Poland, where there were less broad replacements and the Asian flu impacting the volumes for Poland. And yes, that’s why the total volume for this cluster is down.

In Germany, we had the impact of lower volumes on swine, basically because of environmental measures that were taken over there.

If you look at the gross profit, you will see that it’s much better also here because of the better product mix and the focus which we have on the specialties. And in total, the EBITDA is again higher, up to almost EUR 7 million for this cluster.

The last cluster is the United Kingdom, where also here, COVID had an impact on the volume. And especially in the ruminant sector, where we see that a lot of the products of the ruminant sector is sold into the out-of-home segment. And of course, because of the COVID and the closure of restaurants and pubs in the U.K., it was not possible to sell a lot, and that’s why we see a decline in that volume.

Another effect was the mild spring we had in the U.K., being that leading to that sheep and other ruminants were standing outside a bit more than we would expect, and that’s why we sold a little bit less compound feed for that sector.

Yes, like we say in the — in our comments, like you can read it over there. One of our bigger clients had fewer pigs, and that’s also leading to lower sales.

If you then look at the underlying operating expenses, that’s quite a positive trend. It’s EUR 4 million better than last year. That’s because of the efficiency program that we run. So we closed 2 plants last year, and that is tipping in and lowering the operating expenses.

And if we put it all together, you see that the underlying EBITDA is also for this cluster, up to last year and is almost at EUR 10 million. And that’s — are the highlights for our financial results. And with that, I would like to give it back to Yoram.

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Yoram Knoop, ForFarmers N.V. – Chairman of Executive Board, CEO & GM [5]

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Thank you, Roeland. What I’ll do is give you an update in terms of our strategic progress in terms of Horizon 2020. First of all, when it is relating to the focusing on attractive segments, a few things I’d like to point out. Again, in line with recent years, despite the volume being lower, but our specialty sales grew, our market share in terms of specialties, in general, is still below that of compound feed. And also with our strategic partnership with Nutreco, our ambition is to continue to increase the market share of specialties over time.

We’ve seen in the last 6 months, again, the increased interest for data-driven solutions. Also this environmental pressure and the ability to be able to respond with data and continuously look for further optimization on a farm by farm basis, but — is supported by data is really assisting us with our Total Feed solutions. So we believe that, that will be an asset as things will become more challenging over time.

And last but not least, we can say that the overall ruminant business is pretty flat. But within ruminants, year-on-year, there is growth for robot milking. You see for a number of reasons, but probably most importantly, convenience, farmers are switching more to robots. And in this segment, we are clearly the market leader and are able to offer, again, with data-driven solutions and a lot of expertise. So our share is increasing in that segment.

When it’s about delivering the Total Feed portfolio and solutions to our customers, one element that I’d like to point out, and that is the rollout of our e-business module. We started with that a few months ago in the poultry segment in the Netherlands. And the objective was very clear. This was not aimed at cost efficiency, no, this was aimed at enhancing the customer experience. So we’ve done, obviously, research to ensure that, that objective is met. And only when that will be met, we will be rolling out — that module out to other species as well. And considering the — again, the results of that survey and the adoption rates that we were experiencing in poultry, this has now been recently been rolled out in the Netherlands to swine. Ruminant is planned for later this year, and then subsequently, we will be rolling this out to other countries as well. But we really strive at a click of a button on the mobile phone to make it very easy for farmers to order but also get support and advice from — for farmers.

Relating to acquisitions, we were able to close out on a few outstanding agreements that we had with previous acquisitions. And related to One ForFarmers and the actual results, we’ve spoken about that. But I would say one thing worth mentioning is the fact that we achieved the EUR 10 million of efficiency benefits that we were supposed to have achieved by the end of this year. We are there now. But we are planning to come up with a new set of measures that we’ll be announcing later this year for the future because we still feel there will be in challenging markets. We don’t think that, that will automatically change. And we see there is a further opportunity to optimize and drive that efficiency going forward.

And last but not least, in the past, in terms of our transport, we were pretty much doing that captively. So our own trucks, our own drivers. And the approach now is to have much more of a mix where we work with a limited number of strategic suppliers by which we look for further optimization and especially of reducing the empty mileage back. And by doing so, achieving obviously cost benefits as well.

When it comes to our employees, I can say I am incredibly proud how we were able to get through these past 6 months. Clearly, very challenging for our people. We had a, I would say, a significant responsibility on us to ensure that our farmers would get all of their feed supplies on time. And I think we did remarkably well there.

Obviously, as probably quite a few of you when you are used to working in office and you certainly cannot, that can have quite an impact on morale, we are testing that on a regular basis, but I tend to say, I’m pretty convinced that morale has been very strong. Commitment of the staff has been great through this transition.

We’ve also accelerated our e-learning tools. So many of the courses that previously were face-to-face are now happening and happening in a digital way.

In terms of nutritional solutions, the first point worth mentioning is there’s clearly a big discussion happening in the Netherlands with the ministry to look at the nitrogen debate and it’s good to see that we are able to contribute to that dialogue and hopefully help the Ministry to get to the right solution over time, which is still a challenge. But clearly, the data-driven approach and our expertise is providing real support to be able to do that. And Apollo, the program that we launched last year in terms of poultry continues to perform very well and it really raises the bar for quite a few of our competitors to lift performance again.

Then moving to outlook and summary. Again ruminants, long-term outlook remains relatively positive with — in Europe, dairy and meat consumption stabilizing with global growth. But clearly, production in the Netherlands, we believe, will be impacted. And as such, we’ll see an impact, and we’ll plan to be able to share more details in our upcoming strategy on September 15.

Relating to swine, we are continuing to benefit from the shortage of swine as a result of swine fever in Asia. European consumption seems to be slowly but steadily declining in line of the expectations we shared a few years back. We expect that the sector, especially in the Netherlands, will be impacted because of this warm restructuring. Again, quarter 4 of 2020 and probably quarter 1 of ’21, which we believe a predicted reduction in terms of the herd of around 10%.

And relating to poultry. This is still — this specie — the global specie that has the strongest prospects and actually credibility in terms of delivering growth. However, it’s also the specie that has been hardest hit by COVID, and especially Poland, again, is — has been suffering from that. But the long-term expectations remain positive. Also environmentally speaking, it’s the specie that has the best CO2 footprint.

When it comes to the outlook of the markets, that is COVID, overall volatility in terms of raw materials and currency, trade agreements, Brexit, the nitrogen debate, these are all uncertainties that are impacting our business, which are very hard to predict. But again, uncertainties seem to have more — grown even stronger than before.

Overall, where does that bring us ForFarmers? We do believe, just as there was already in the first half of this year in the second quarter, we also believe there will be an H2 impact in terms of — especially in terms of volumes due to COVID. Obviously, we can’t predict exactly the size, but there will be one.

As mentioned, the EUR 10 million savings program has been achieved. And we will — we are planning later on this year to come up with new plans that will provide for more opportunities going forward to make our organization yet leaner and more agile.

And compared to, obviously, weak 2019, we now forecast that our underlying EBITDA and net profit will be comfortably higher than again previous year. Already mentioned, but again, I want to repeat that we are planning to announce our new strategy following our Horizon 2020 on September 15.

And with that, I would like to open it up to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question is coming from (inaudible) from (inaudible)

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Unidentified Analyst, [2]

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Congratulations on a good set of results in really challenging circumstances. I’ve got 2 questions. The first one related to the U.K. cluster. And one of your competitors recently reported quite significant market share gains, together with a margin reduction. And I was wondering if you could comment on the competitive environment in the U.K.? And then the second question, you were referred to selling more specialties. And I hoped you could provide a little bit more information as to what you classified as a specialty product, noting a reference to Nutreco?

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Yoram Knoop, ForFarmers N.V. – Chairman of Executive Board, CEO & GM [3]

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Okay. Yes, happy to take those questions. The first one, yes, I’ve also seen the release in the U.K. of a competitor that indeed reported a market share gain, but actually significantly lower profits. And we decided and we shared with you last year that we feel that optimizing our profitability and picking and choosing where we want to play is a pivotable part of the approach. So yes, we are consciously let some volume go. And we’ve seen a very strong margin improvement. We’ve also seen volume losses. A certain part, a small part is related to that element, a much more significant part has been the overall market environment. But the — consequently, we’ve been able to take a lot of cost out. So I believe we have now a much healthier balance with profitable volume. And now we can continue to optimize the balance between volume and profits. So I believe we are now in a much healthy situation to build from.

Relating to your second question, in what do we refer to as specialties? Well, most of our products are compound feed, which is, call it, the standard traditional product. When you go to concentrates, so a lower inclusion products, where the amount of vitamins, minerals, starts playing a bigger role and the customization of the product starts playing a bigger role, we classify that as specialty. We also classify as specialty, for example, the products we do with Nutreco, like piglets prestarters. There are calf milk replacers for ruminants that are classified as a specialty, maybe you recall, we also provide a silage additive, which is a specialty. We have buffer product in ruminant, which is the first facility. So we have actually acquired a lot and together, there’s probably 20 or 30 different products. Together, they make up for the specialty range. And we see ongoing opportunities to expand that range and again, add more value also to our customers with this rent.

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Operator [4]

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And the next question is coming from Christophe Beghin from Kempen.

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Christophe Beghin, Kempen & Co. N.V., Research Division – Research Analyst [5]

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(technical difficulty) information or not?

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Yoram Knoop, ForFarmers N.V. – Chairman of Executive Board, CEO & GM [6]

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I can only say that there was a regular process as it happens with many private equity companies. So they normally invite quite some people. We don’t know actually who was all involved. But as far as I’m concerned, it was a regular process, yes.

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Christophe Beghin, Kempen & Co. N.V., Research Division – Research Analyst [7]

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Okay. And second question is on actually the summer weather conditions. So we see a bit similar situation like in 2018, but not as — not that strict as it was. But you see very warm weather conditioning potentially hitting harvest of grain, I don’t know, the yields. Water levels are still okay, but yes, they are lowering. How do you anticipate on these elements together as a company because it will also maybe impact the volume demand because ruminants are growing less outside. Do farmers have to buy in more for going into the winter? Can you elaborate all these (inaudible) together please?

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Yoram Knoop, ForFarmers N.V. – Chairman of Executive Board, CEO & GM [8]

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Yes. I can give you a bit of background on those 3 points. And starting with the warm conditions. I think it feels probably that it’s very warm, and it is because we all experience that every night. But for the growing seasons, in the major, let’s say, production areas, so far, the conditions have been pretty ideal. If you look around the globe, you talk about the U.S., you talk about South America, you also can talk about Europe. Even Australia in the critical stages of planting, pollination, et cetera, for wheat, barley and of course, corn still has to come in Europe. I think so far, we have not seen any major impact of, let’s say, the climate or weather factors. And the crops look to be pretty good as far as quality and volume at the moment. So for that concern, we don’t see any major concern.

Water levels, okay? We monitor it very critical, and we have plans to switch, if we have to. So far, not dramatic and also something that we monitor on a continuous basis. And probably that point also, yes, still in the safe haven. Last, volume demand for, let’s say, ruminants, reflective on that. Silage so far has come in at good quality and also, I think they are at the right moments of rain. We see across Europe that farmers have their claims filled with proper volume and quality of silage. What is still outstanding, and also there, we feel that, that is the last cut of my silage to come, that’s in October, September. Also there, if you look in the fields in Germany, Poland, also in the Netherlands and Belgium, also the other fields look pretty good. Although if you look in East Germany, for example, now, there are certain areas where you have very sandy soils. We have some, let’s say, early drying of the, let’s say, the crops is happening. But not to a major extent. And also there, we don’t expect major, let’s say, increase of feeding on the back of, let’s say, deteriorating crops to answer your questions.

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Christophe Beghin, Kempen & Co. N.V., Research Division – Research Analyst [9]

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Okay. Clear. And maybe the last question, if I may. Can you share with us the volume development of Poland, specifically, please?

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Yoram Knoop, ForFarmers N.V. – Chairman of Executive Board, CEO & GM [10]

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No. We combine that in the cluster, and we normally stick to that. Yes. Yes, I can tell you, though, that in Poland, we have been growing. We saw the overall cluster, we saw as a marginal drop, but that’s mainly caused by Germany. Poland has been growing not as fast as we wanted, of course, because it was affected by avian flu early in the year and also later on with COVID in Q2. So we were expecting a speedier ramp-up of Pionki, particularly where we have the space. That has still been growth, but not as aggressive as we wanted. In Germany, of course, yes, for measures of environmental reasons, also our policy in terms of pricing, we dropped in — particularly in the swine sector, but overall margin and composition in terms of product mix has been far better in Germany with better results.

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Operator [11]

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The next question is coming from Paul Hofman, The Idea.

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Paul Hofman, The Idea-Driven Equities Analyses Company – Research Analyst [12]

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I ask a couple of questions. The first 1 in Poland, well, actually, you more or less addressed it already, just in a previous question, but still I try another one. So if the close was down in the half year and you say that Germany was down, then yes, I guess, that Poland was up. But can you also conclude that Poland was down in the second quarter? And can you also share the utilization rate, that was something that you provided in the past, it was 40% at the end of 2019. I understand all the volatility for the short-term and a short life cycle, but yes, if you can provide any details there, much appreciated.

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Yoram Knoop, ForFarmers N.V. – Chairman of Executive Board, CEO & GM [13]

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Now, like I said before, Poland has been growing. We have been affected in Q2, of course, by the COVID, like anybody else in Poland. You see there that the out of market — or let’s say, the out of home markets, are particular served for exports by the Polish industry. So in Q2, that has been the case. We have still been growing, though, in Pionki and also overall business, but have been affected. So in that sense, that’s what I can say.

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Paul Hofman, The Idea-Driven Equities Analyses Company – Research Analyst [14]

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Okay. Perhaps a second question specifically about the Netherlands, specifically about Reudink organic feed. It has been a continued success story in the past, but there was some competitive pressure this half year, I understand. Are there some structural changes? Is there a new entry? Is there — is it a matter of price competition? And if it’s structural, what are you planning to do to change that?

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Yoram Knoop, ForFarmers N.V. – Chairman of Executive Board, CEO & GM [15]

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Okay. There’s a couple of points. The market has become more competitive because there have been 2 new entrants in that business that happens 1 — 2 years ago, 1 year ago. But you may also recall that when we acquired Van Gorp, there was also a — we also produced for a third-party that we mentioned, probably going forward, we would not produce for. So that is a significant part of the volume reduction that you are seeing.

The expectation going forward for organic feed is still growth. I must say, over the last 6 months, it’s not a straight line. So the last 6 months wasn’t all that great in terms of wells. But that goes with — in periods, and we expect that, again, over time, we will see some growth coming from that business, and we are organizing ourselves to take advantage of that.

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Paul Hofman, The Idea-Driven Equities Analyses Company – Research Analyst [16]

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Perhaps then a final one about the U.K. There was also already a question about that one. The 12% decline in volume is, yes, is quite something, of course, but the reasons are known. If I look at the comparison, 2 years ago, that’s minus 16% in volume, but the profits per ton are actually up. So that’s a major recovery. I guess that was due to the savings, but also to shedding low-margin activities or operations? Yes, savings are more or less done, I understand. What about the upside still left from, let’s say, shedding low margin products? Is there still something to be done? Or should it all come from really a volume growth recovery?

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Yoram Knoop, ForFarmers N.V. – Chairman of Executive Board, CEO & GM [17]

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Yes. I believe in terms of sharing the lower-margin business, this is pretty much done. So it is now building the volume again. But I would say we also feel there’s ongoing opportunity from a cost point of view.

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Operator [18]

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And the next question is coming from Patrick Roquas from Kepler Cheuvreux.

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Patrick Roquas, Kepler Cheuvreux, Research Division – Equity Research Analyst [19]

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To start with the outlook based on, let’s say, the indications provided for the full year and market uncertainty. Is it fair to assume that EBITDA will be down or flat in the second half of this year? That’s the first question.

Second, relates to cost savings, you are hinting towards some more cost savings being achieved. So what kind of measures would this entail? And would this be a kind of comparable program as the one you kind of have just closed ahead of expectations in terms of timing?

Then the third question is on Poland. Clearly, you have bird flu, COVID-19, all externalities. But how far is the Polish business off from your initial expectations when you acquired Tasomix? And is this also impacting, let’s say, the remaining earn-out, if I’m right, that you have to — or will be paying in ’21?

And then a very small question. For me, it’s not clear yet why you have been allocating, let’s say, around EUR 4 million, if I’m right, in central cost to the Netherlands? That’s it.

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Yoram Knoop, ForFarmers N.V. – Chairman of Executive Board, CEO & GM [20]

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So let’s start with the last one.

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Patrick Roquas, Kepler Cheuvreux, Research Division – Equity Research Analyst [21]

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That’s the easy one.

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Roeland Tjebbes, ForFarmers N.V. – CFO & Member of Executive Board [22]

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Yes, it’s easy one. Yes, I will take the easy questions today, Patrick. Now it’s a EUR 2.8 million swing between corporate cost and the cluster in the Netherlands. And it all has to do with the fiscal regime which we have, where we have a system where we allocate where the profit is. So that’s why you see this swing. It’s a wash between group and — let’s say, group overhead cost and the cluster. So that’s about it.

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Yoram Knoop, ForFarmers N.V. – Chairman of Executive Board, CEO & GM [23]

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Then in the question on Poland, are we off versus the original business case that we created? Yes, we did not take into account that anything like COVID would hit us. We are very optimistic about the long-term outlook for Poland. So that has not fundamentally changed. There is an earn-out for Pionki that has to be resolved at the end of this year, payments for first half of next year. And there, you could argue, we will benefit from that situation because we are going to — we’ll have to pay over the profits that has been achieved in ’19 and ’20.

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Patrick Roquas, Kepler Cheuvreux, Research Division – Equity Research Analyst [24]

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Yoram, I’ll just say, can I follow-up on that, because clearly, you’re off your initial targets. But the question was, how far — can you give an indication how far you are let’s say, behind schedule here. Is this 1 or 2 years? Is that not the right way to look at it? Or…

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Yoram Knoop, ForFarmers N.V. – Chairman of Executive Board, CEO & GM [25]

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No, I can’t comment on that. Again, I can say that the long-term outlook has not changed. And we’ll see how bird flu and COVID play out. It will probably take longer than expected to achieve that full potential, but we will leave it together.

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Roeland Tjebbes, ForFarmers N.V. – CFO & Member of Executive Board [26]

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Exactly. Yes. I think the end business case has not changed for us, but the perspective of Poland, the growth potential we see, the development of the market. Although COVID was unexpected for us —

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Yoram Knoop, ForFarmers N.V. – Chairman of Executive Board, CEO & GM [27]

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And bird flu.

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Roeland Tjebbes, ForFarmers N.V. – CFO & Member of Executive Board [28]

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And bird flu as well, it has not brought us off track as far as the long-term perspective of the market.

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Yoram Knoop, ForFarmers N.V. – Chairman of Executive Board, CEO & GM [29]

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Then your question, Patrick, relating to the cost program, I have to say we have to wait until we share with you what that will entail. There are some opportunities you could relate that are similar to our first program, but also new ones have been emerged. So will create a comprehensive set of programs, and we’ll share that with you as soon as we possibly can.

You want to talk about the outlook, Roeland?

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Roeland Tjebbes, ForFarmers N.V. – CFO & Member of Executive Board [30]

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Yes. So like we said in the outlook of our results, we think that we will be — coffers be higher than the year before. And given the — yes, all the circumstances which we are in, like the COVID, and will there be a second wave, we refrain from giving more guidance on that, that the second half will be better or worse than last year.

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Patrick Roquas, Kepler Cheuvreux, Research Division – Equity Research Analyst [31]

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All right. That’s clear. And then a final question, if I may. Given market uncertainty, have you seen, let’s say, an improving momentum in your M&A pipeline?

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Yoram Knoop, ForFarmers N.V. – Chairman of Executive Board, CEO & GM [32]

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We monitor the market as always. So we talk with a lot of players in the market who could be potential prospects. So that is what we do. So in that sense, I think, not so much has changed. So we’re talking with them, and that is the situation.

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Operator [33]

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The next question is coming from Guy Sips from KBC Securities.

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Guy Sips, KBC Securities NV, Research Division – Executive Director Research [34]

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Most of my questions are already answered, but I have just 1 remaining. You mentioned that the transport cost decreased in line with lower volumes, it seems quite logic. But then, this — you mentioned that despite an increase in third-party transport costs, how should I see that? And in what countries is that? I think that’s mostly Germany, but how is that evolving?

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Yoram Knoop, ForFarmers N.V. – Chairman of Executive Board, CEO & GM [35]

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Yes. If you look at the evolution of drivers in general over recent years, you’ll see in many industries that there has been quite an inflatory pressure on that, a shortage of drivers. And there’s been significant cost increases on that side. So you have that element that played a role. On the other hand, where you have seen that we’ve created these and these partnerships to really look at planning and optimization, and that has given us benefits to compensate for these cost increases.

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Guy Sips, KBC Securities NV, Research Division – Executive Director Research [36]

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And how do you expect that to evolve going forward?

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Yoram Knoop, ForFarmers N.V. – Chairman of Executive Board, CEO & GM [37]

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Well, given COVID, I would say the, that the shortage of drivers probably will disappear for a while. So there’s probably much more supply. And we continue to look for opportunities to reduce empty kilometers and improved utilization of our fleet. And logistics is one of the key elements of achieving further efficiency gains over time. And we’ll be sharing more of that in the strategic updates in — during our Capital Markets Day.

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Operator [38]

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And the next question is coming from Eric Wilmer, ABN MRO.

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Eric Wilmer, ABN AMRO Bank N.V., Research Division – Analyst [39]

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A couple of questions from my side. Firstly, I also had a question on transportation costs, but then on the U.K. specifically. The press release states that transportation costs were down in the U.K. on the back of lower volumes. But I was wondering what the dynamics were specifically in this market, as you expect negative operational leverage to frustrate this dynamic? Secondly, could you perhaps shed some more light on the discussions you have with the Dutch government on the nitrogen discussion, perhaps in terms of frequency and the discussion strategy, et cetera? And finally, also in Poland, as far as you can disclose, I was wondering roughly how much of poultry — of sorry, Polish poultry volumes relate to exports?

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Roeland Tjebbes, ForFarmers N.V. – CFO & Member of Executive Board [40]

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Let’s start with the last one, because I think that gives the rest a bit of time look at the other ones. Now on Poland, roughly 50% of the Polish poultry is exported. And of that, also the majority is out-of-home.

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Yoram Knoop, ForFarmers N.V. – Chairman of Executive Board, CEO & GM [41]

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Your first question, in terms of transports, U.K. and lower volumes, obviously, we want to get to a situation where our transportation costs are fully flexible, so that the euros per ton transport cost is not impacted by whether we do more or less volume, so that flexing is very important. But in the past, everything we did and what we still do in the U.K., the 2, I would say, 95% is with our own people, with our own fleet. To be able to get normally then to a full flex cost is very challenging, if not impossible, because you can’t fully plan for that. So I’m very pleased to see that actually, despite the significant reduction in the U.K., we were able to achieve just that a full flexing of our transport cost. So less vehicles, less drivers. But on top of that, at a higher level of utilization through better planning as well. So I would say that is on the positive side.

Related to the nitrogen discussion, we have a number of experts who are assisting the ministry and as well as the branch organization (inaudible) to provide a lot of data and suggestions in terms of how to optimize nitrogen in particular. There is still, we believe, significant opportunity with the current knowhow that we have available to achieve a reduction. As such, we believe to enhance innovation is the way forwards. And that is the strategy that we are still on, and we are getting a lot of support from both farmers and other feed companies. Clearly, the government has an obligation to create room for — especially for building and construction, and has created this measure to achieve for a very short period of time, room to maneuver. We do not feel that, that is the appropriate measure as this will impact farmers’ returns. It’s not good for the health of animals. So as such, we really do believe that, that is putting the thing in the wrong direction. So we are continuing to explore better options. But clearly, we are one of the channels in the chain in doing that. But going forward, clearly, we believe that there is a significant opportunity to improve on nitrogen deposition, leveraging the loss of the industry and providing the right incentives.

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Eric Wilmer, ABN AMRO Bank N.V., Research Division – Analyst [42]

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Okay. That’s very helpful. So do I understand correctly that this EUR 5 billion nitrogen buyout package, which is basically partially includes — is scheduled to include buyouts, but also investments. So is it then more a discussion to skew or to basically move this discussion more towards the investment side of this, let’s say, the allocation of this budget versus obviously the buyouts? Is that is that…

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Yoram Knoop, ForFarmers N.V. – Chairman of Executive Board, CEO & GM [43]

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Yes. Well, we believe, given if we are allowed time, we believe that the industry is capable of achieving the stated requirements without cutting in the animal herd number. So by enhancing innovation, by doing many of the things that the industry has done very well over the last decade, but by moving on this element, through using a number of non-technologies already, but also undoubtedly creating some new technologies that will help in this aspect, we can make the step that is required. Clearly, there is a short-term issue now, where the ministry is looking at how to resolve that. And the measures that have been announced so far are, again, from a farmer’s point of view, very detrimental in terms of what they stand for as well as the future for the segment. So we will continue to look for ways of achieving the outcome through the —

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