Genus Regulatory News (GNS)

Genus plc

Interim Results for the six months ended 31 December 2013

Continued Strategic Progress

Genus plc (the "Company" or the "Group"), a leading animal genetics company, announces its results for the six months ended 31 December 2013.

* Adjusted operating profit, adjusted profit before tax and adjusted basic earnings per share are before net IAS 41 valuation movement on biological assets, amortisation of acquired intangible assets, share-based payment expense and exceptional items. These are the measures used by the Board to monitor underlying performance.

+ Constant currency percentage movements are calculated by restating 2013 results at the average exchange rates applied in 2012.

** 2012 results have been restated for the amendments to IAS 19 see note 2. 

BUSINESS HIGHLIGHTS

· Revenue of £181.7m (2012: £167.2m), an increase of 9% in actual currency (10% in constant currency) driven by growth in Genus PIC, an initial contribution from the acquisition of Génétiporc and a much improved performance in Genus ABS:

o Porcine volumes up 7%, led by strong growth in the Americas (including Génétiporc) and Asia

o Bovine sales volumes 4% higher, with strong increases in Latin America following the difficult weather conditions in the prior year

· Adjusted operating profit including joint ventures little changed at £23.4m (up 2% in constant currency), with growth in Genus PIC and ABS offset by lower results in China as expected as the investment cycle there progresses:

o Genus PIC profits up 6% (6% in constant currency) with a strong contribution from Latin America

o Genus ABS profits up 13% (15% in constant currency) with all regions growing, particularly Latin America

o Genus Asia 45% lower (41% in constant currency), principally due to the expected investment costs associated with capacity expansion in the China porcine market

o Research and development costs down 1% (up 1% in constant currency)

· Adjusted earnings per share ahead at 24.6 pence (2012: 23.6 pence), up 4% in actual currency (6% in constant currency)

· Cash inflow from operating activities of £11.2m, substantially ahead of the prior year (2012: £1.5m), and net debt of £79.9m after the acquisition of Génétiporc and completion of the investment in the Besun joint venture

· Interim dividend increased to 5.5 pence per share payable on 28 March 2014

· Continuing good progress in implementation of strategy:

o Génétiporc porcine acquisition completed in October and Génétiporc do Brasil acquired by our 49% joint venture, Agroceres PIC, in February 2014, further strengthening our position in the Americas and adding valuable complementary genetics

o Bovine production joint venture announced in India with B G Chitale, the largest dairy processor in Maharashtra, to increase our capacity in this large market

o Memorandum of Understanding signed with large pig producer in China for new porcine joint venture

o Continued focus and investment in research & development led by Dr Jonathan Lightner, the new Chief Scientific Officer

Karim Bitar, Chief Executive, commented:

"As expected, our results in the first half reflected a good performance in PIC and ABS. While results in Asia and specifically China were impacted by the planned investments in expanding our porcine capacity compared with the strong prior year, the significant expansion of our capacity in China positions us to take advantage of the considerable growth opportunities in the region.

"We are also pleased to have successfully completed the acquisition of Génétiporc and are making rapid progress with its integration into PIC, which is on track. We continue active discussions with a number of companies in China to create further porcine joint ventures to expand our capacity in the market and signed an MOU with a large pig producer during the first half.

"While we face near term headwinds from the strengthening of sterling and from a virus that is new in the North American porcine industry, our confidence in the strategy for the business and in the future prospects for the Company is reflected in the ten percent increase in our interim dividend."

An analyst meeting will be held at 9.00am today at Buchanan's offices (107 Cheapside, London EC2V 6DN). A live audio feed will be available to those unable to attend this meeting in person. To connect to the web cast facility, please go to the following link: http://mediaserve.buchanan.uk.com/2014/genus250214/registration.asp approximately 10 minutes (8.50am) before the start of the meeting.

For further information please contact:

This announcement is available on the Genus website www.genusplc.com

About Genus

Genus creates advances to animal breeding and genetic improvement by applying biotechnology and sells added value products for livestock farming and food producers. Its technology is applicable across all livestock species and is currently commercialised by Genus in the dairy, beef and pork food production sectors.

Genus's worldwide sales are made in seventy countries under the trademarks "ABS" (dairy and beef cattle) and "PIC" (pigs) and comprise semen and breeding animals with superior genetics to those animals currently in production. Genus's customers' animals produce offspring with greater production efficiency, and quality, and use these to supply the global dairy and meat supply chain.

The Group's competitive edge has been created from the ownership and control of proprietary lines of breeding animals, the biotechnology used to improve them and its global supply chain, technical service and sales and distribution network.

GROUP PERFORMANCE

Genus's results for the six months to 31 December 2013 showed growth in constant currency across all measures. In actual currency, adjusted profit before tax was unchanged from the prior year but adjusted earnings per share were up 4% at 24.6 pence per share (2012: 23.6 pence). In addition, Genus has made good progress in implementing its growth strategy.

RESULTS

Revenue of £181.7m for the six months to 31 December 2013 grew by 9% (2012: £167.2m). This reflects underlying constant currency growth of 10% offset by the impact of sterling appreciation. Porcine volumes were up 7%, driven by strong growth in Asia and the Americas including the initial contribution from Génétiporc, whilst bovine volumes were up 4% on strong volume growth in Latin America following the adverse weather conditions of the previous year. 

Adjusted operating profit including joint ventures was little changed at £23.4m (up 2% in constant currency). Genus PIC and Genus ABS performed strongly with profit increases of 6% and 13% respectively. Against a strong comparative which had benefited from initial stocking profits at the new Besun joint venture, as expected, Genus Asia's profits were held back by the planned start-up costs at Besun and the Chun Hua genetic nucleus farm. In addition, performance in bovine in Asia was down on lower semen volumes in China and mixed results in other Asian markets. Operating profits in Asia were 45% lower overall.

Finance costs were £2.8m (2012: £2.9m), as reduced interest rates offset higher net borrowings. These costs have been restated for the adoption of IAS 19 (revised). Adjusted profit before tax was £20.6m, unchanged from last year in actual currency but up 2% in constant currency. With the benefit of a lower tax rate of 27.7% from more efficient tax management compared with 31.1% last year, adjusted earnings per share rose 4% (6% in constant currency) to 24.6 pence (2012: 23.6 pence).

The Group monitors performance principally through these adjusted profit measures which exclude certain non-cash items including the fair value movement on biological assets. The statutory results, including these items, show a 1% reduction in profit before tax to £22.0m (2012: £22.3m) and an 11% increase in earnings per share to 28.4 pence (2012: 25.6 pence). This increase in statutory earnings per share results from lower UK statutory tax rates applied to the deferred tax liabilities on biological assets and intangible assets. 

Cash Flow and Net Debt

The Group had a cash inflow from operating activities of £11.2m in the period (2012: £1.5m) due to improved working capital management and the payment, as expected, of accounts receivable from Besun. Investments totalled £36.3m (2012: £3.7m), including the acquisition of Génétiporc for £22.4m, a capital increase in Agroceres PIC of £2.4m to fund the purchase of Génétiporc do Brasil, and an investment of £8.8m in the Besun joint venture during the period. Net debt at 31 December 2013 was £79.9m (31 December 2012: £63.9m) after these investments, and the balance sheet remains strong with net debt to EBITDA of 1.5 times (31 December 2012: 1.2 times).

Dividend

Based on its confidence in the Company's strategy and growth prospects, the Board has approved an interim dividend of 5.5 pence per share, an increase of 10% on last year's interim dividend of 5.0 pence. The interim dividend is payable on 28 March 2014 to those shareholders on the register at 7 March 2014.

Progress on Strategy

Genus completed the acquisition of Génétiporc, a leading porcine genetics business in North and Latin America, in October 2013 for £22.2m. In addition, Agroceres PIC, Genus's 49% joint venture in Brazil, acquired Génétiporc do Brasil in February 2014 for £4.9m. Génétiporc's complementary product portfolio expands PIC's genetic diversity and supports future global product development. The combination of the business with PIC brings significant opportunities to offer an enhanced service to an enlarged customer base and the broadened supply chain supports PIC's future growth. We are on track to realise annualised synergies of $11m (£6.7m) over the first two years.

There has been further progress on the Company's strategy to expand capacity in the important Chinese porcine market. During the first half, we commenced sales of the first animals from the Besun joint venture and will start sales from the 100% owned Chun Hua nucleus farm in the second half of the fiscal year. Shennong, our second porcine joint venture partner in China announced last year, has identified suitable land for the construction of the joint venture farm. We continue positive discussions with a number of other significant companies in China for further joint ventures and signed a memorandum of understanding with a large pig producer during the first half of the year.

Genus ABS has continued to build its presence in the large Indian dairy market in the first half. During the period we made the first sales of high quality genomic semen from the bulls which originated from North American embryos imported into India. In addition, we formed a production joint venture with B G Chitale, the largest dairy processor in Maharashtra, which will significantly increase our capacity to produce high quality semen in India.

Initiatives to improve product differentiation have included completing the implementation of our single-step genomic evaluation across the porcine development programme for all traits under selection during the first quarter. We believe we are leading the industry in developing these techniques, which are now also being applied through our common scientific computing infrastructure in bovine product development, enabling the introduction of our proprietary tailored customer indices (Real World Data™). There are now over 2,500 ABS bulls evaluated for the monthly Real World Data bull fertility evaluations based on data from more than 15 million cows and over 1,000 herds. New indices of economically important traits will be launched in the second half of the fiscal year.

People

Saskia Korink, who joined the Group in January 2013 as Chief Marketing Officer, has been appointed Chief Operating Officer of Genus ABS after a short period acting in that role. During the half year, Dr. Denny Funk retired as Chief R&D and Scientific Officer, after a successful career with Genus spanning 18 years. He has been succeeded in that role by Dr. Jonathan Lightner who was previously Vice President of Agricultural Biotechnology at DuPont Pioneer.

Outlook

Market conditions for Genus's customers have improved in terms of input costs and output prices and progress has been made towards our strategic goals including the acquisition of Génétiporc. Although trading was in line with our expectations for the first half of the year, Genus faces short-term headwinds from the currency appreciation of sterling and a virus[1] in the North American porcine industry which will negatively affect porcine revenues in the near term. These factors introduce more uncertainty to our second half outlook. However, as a sign of the Board's confidence in the Group's future prospects, and the success of our strategy in driving underlying trading, the interim dividend has been raised by 10%.

[1] Porcine epidemic diarrhoea virus (PEDv) is a virus that has been prevalent in Asia for some time that has now reached the North American porcine industry for the first time. Affected herds experience a loss of 5-6 weeks of pig production as piglets die. Older animals including sows acquire immunity, though longer-term impacts on herd productivity are still somewhat uncertain. PEDv has been spreading rapidly and has been reported in large numbers of sites. It is estimated that over 30% of the US sow herd has been affected, reducing farmers' pig production (on which Genus receives royalties) and disrupting expansion plans.

REVIEW OF OPERATIONS

Genus PIC

Genus PIC comprises the Group's porcine business in North America, Latin America and Europe. It also includes the technical services and supply chain functions supporting the porcine business globally.

Market

Market conditions across the businesses improved through the six months with declining feed costs following good harvests. In the important North American markets, producer margins have been positive. Lean hog prices were higher than the previous year, although they did decline from the summer highs, and slaughter weights were on average 5lbs higher than a year ago. Since the summer, there has been a rapid spread of porcine epidemic diarrhoea virus (PEDv) throughout the North American industry. It is estimated that over 30% of the US sow herd has now been infected and the pace of outbreaks is continuing to accelerate. Infected herds typically lose 5-6 weeks of pig production before herds acquire immunity. In Latin America, feed prices have reduced in all territories and hog prices increased particularly in Brazil. In Europe, pig prices fell off towards the end of the year, however margins for producers were still positive.

Performance

During the period, Genus PIC performed strongly with operating profits including joint ventures up 6% to £26.1m on revenue growth of 13% to £72.9m. Volumes grew by 3%, with strong growth in North and Latin America, but volumes declined in Europe as we continued to exit the parent gilt business and move to a royalty-based model. Overall, operating margins declined to 34% (2012: 37%) due to the initially dilutive effect of the Génétiporc acquisition prior to the execution of cost synergies. The initial integration of Génétiporc has progressed rapidly and we are pleased with customer reactions. Delivery of the expected $11m (£6.7m) per annum of synergies over the first two years is on track.

In North America, profits were up 2% in constant currency on volume growth of 7% driven by strong royalty income from improved performances across our customer base, enhanced by additional CBV Max royalties, and the initial two months of sales from Génétiporc. However, looking forward there is increased risk to near term results from the impact of PEDv on producers.

Latin American margins improved through the first half as the region further benefited from the transition to royalty contracts, and profits increased by 25% in constant currency on the same period last year, driven in particular by Mexico which benefited from its focus on growing key accounts. In Brazil, profits rose by 19% in constant currency, as we executed the PIC global strategy there, including successfully launching CBV Max, supported by additional high index AI boar availability from Agroceres PIC's investment in a new boar stud.

The European region is re-focusing its product offering, supported by the Genus PIC global business unit and locally appointed technical services directors. We are actively marketing these new products to key integrated pork producers and engaging in product validation trials. A premium boar line (CBV) was successfully launched in Germany. During this half year, profits were down 11% in constant currency and volumes were down 13%.

PIC has achieved progress against its strategic objectives for the year. Genetic control and product differentiation is accelerating through the successful full implementation of a single-step genomic evaluation for all populations and traits - a first in the porcine industry. Two new terminal sire products focused on global markets requiring high robustness have entered commercial test. We are targeting key markets through bespoke account plans for our top 80 customers globally and continuing to pursue implementation of best practice in all countries. Core competencies have been strengthened during the period by more than doubling the product validation trials underway with customers.

Genus ABS

Genus ABS comprises the Group's dairy and beef businesses in North America, Latin America and Europe. It also includes the technical services, marketing, production and supply chain functions supporting the dairy and beef businesses globally.

Market

The last six months have seen the stabilisation and subsequent steady decline of customer input costs and recovering milk prices, giving rise to improved customer profitability and restored confidence. There has been no repeat of the severe weather conditions experienced last year. The current outlook for the remainder of FY14 looks favourable, with projected milk to feed ratios set to remain strong.

Performance

Genus ABS revenues were up 11% for the half year at £77.9m (up 13% in constant currency) and profits increased by 13% to £12.4m (an increase of 15% in constant currency). Volumes were up 6% on last year and operating profit margin was maintained at 16%, as customer confidence continues to improve, a trend first being seen during the fourth quarter of FY13. 

North America profits increased 4% in constant currency on volumes that declined 3% on last year, leveraging growth of the InFocus (beef on dairy) initiatives as well as ancillary products such as udder care. There has been continued focus on expense efficiencies and on increasing non-semen revenues. 

In Latin America, profits increased 19% in constant currency and volumes by 18%, driven by very strong performances in Brazil and Mexico. Brazil achieved record beef sales, with profits 30% up in constant currency on last year, with the country returning to a normal beef season after last year's severe weather conditions. Mexico continued a steady growth trend first seen during the third quarter of last year, with profits up 25% in constant currency on last year driven by conventional dairy volume growth.

Europe's volumes were 1% ahead of last year, but profits grew by 6% in constant currency, mainly through trading in the UK, which benefited from solid conventional dairy and sorted sales as well as strong service and product offerings. Solid trading was also evident in Italy and France, offsetting some challenges in the European distributor network.

Genus ABS strengthened its genetic line up in proven bulls, genomic bulls and its recently initiated elite female programme. In parallel, it has continued to develop its Real World Data™ (RWD) platform and will introduce new indices in the second half. It is using these indices to pioneer new selling approaches in key geographies based on recently completed customer segmentation. Work has continued to ensure best practice is shared across the global dairy and beef businesses, with the approach to technical services being standardised across the Group. Additionally, Genus ABS has invested in its marketing and supply chain functions in the period to ensure full optimisation of product across the globe.

Genus Asia

Genus Asia includes the porcine, dairy and beef businesses across the region. In addition to the businesses in China, the Philippines and India, the region also includes the Group's operations in Russia and Australia.

Market

Market conditions across the region have been generally favourable for producers. Higher pork prices in Russia saw producer profitability and confidence return to the sector. In China, demand for high quality genetics is increasing as the market consolidates and slaughter prices increased through the period. Elsewhere across the region, pig prices continued to be favourable compared with last year. In bovine, milk prices in China continued an upward trend as further consolidation in the dairy processing market, and reduction in backyard milk production, continued through the period. However, semen prices in China were under competitive pressure in the period. In Russia, the number of dairy cows fell year on year, pushing milk prices up and returning profitability to the sector. Climatic conditions improved on last year in Australia, but buying behaviour in the bovine industry there continued to be overshadowed by prior year losses.

Performance

Genus Asia's profits decreased in the period by 45% to £3.9m (41% in constant currency) on a revenue decline of 14%, with results in China causing both the revenue and profit decline. In China, porcine grandparent gilt sales in the period increased 37% on last year and a strong order book has been established for the second half. However, this was more than offset by the expected start-up costs on the Besun joint venture farm and the Chun Hua genetic nucleus farm ahead of them reaching full capacity. In addition, the prior year had benefited from revenues and profits associated with the initial stocking of the Besun farm.

Overall, volume growth in Asia porcine was 26% up on last year. In Russia, volumes grew by 49% on last year generating a profit improvement of 30% in constant currency, mainly through higher direct sales to key accounts and from a greater contribution of royalty income which rose to 37% of the total gross margin (2012: 27%). In the Philippines, year on year profit growth was 65% in constant currency, as further successful transition to the royalty model continued through the period. Despite the positive performance in Russia and the Philippines, Asia's porcine profits were down 31% in constant currency due to the planned costs associated with strengthening the China supply chain for future growth.

In bovine, the region's profits were down 38% in constant currency on volumes that were flat on last year. While results were mixed across other countries, profits and volumes in China were the most affected in the region during this period as competitive pressure in the market increased. In order to sell more effectively to the growing enterprise and large commercial segment in China, we have made a number of changes. We have moved to a non-exclusive bull supply and distribution agreement with SK-Xing, and as a result are starting to work directly with several 'tier one' customers and made the first direct sales during the second quarter. We continue to review our approach to penetrate further the China bovine market.

In Australia, the poor market conditions reported last year adversely impacted semen spend through the first half of this year. We restructured this business during the period to provide clearer focus and lower expenses in the future. India achieved 23% volume growth during the first half and price improvement of 22%, as it continues to establish product differentiation in this vast market with an increased genomic offering and best-in-class bulls. A production joint venture with B G Chitale, the largest dairy producer in Maharashtra, was signed in November to expand our capacity to serve the market with high quality genetics.

We have continued to strengthen both the bovine and porcine management teams in the Asia region, with an emphasis on key account management and technical service support. Genetic dissemination in the region has been accelerated and our new farms in China are operationally on track to reach full production capacity in mid-2014. We continue active joint venture discussions with a number of other companies in China and have signed a memorandum of understanding with a large pig producer.

Research and Product Development

Overall, investment in research and development for the half year decreased by 1% to £14.3m (up 1% in constant currency), with increased investment in core research (up 17%). Porcine product development costs reduced as feed costs fell and slaughter by-product prices increased. Bovine product development costs increased as we invested in Real World Data ™ (RWD) and bovine genomics.

Investment in research is centred around three core platforms aimed at accelerating our competitive lead: disease resilience, gender skewing and genomic selection. In disease resilience, we are working on projects to deliver animals that are more robust and less affected by diseases such as porcine reproductive and respiratory syndrome (PRRS). Genus has embarked on a multi-year collaborative research agreement with The Roslin Institute and the University of Edinburgh to support this approach.

In porcine product development, significant progress has been made in implementing single-step genomic evaluation, where we believe Genus is leading the industry in the application of these techniques. Implementation is significantly improving selection accuracy and as a result, the rate of genetic progress. 

In dairy product development, our successful launch of proprietary customer-tailored indices (RWD) for our enterprise and large commercial customers is accelerating. The elite female programme was initiated this year and is on track, producing more than 70 confirmed pregnancies and our first offspring have been born and are being genotyped. In beef product development, we are extending our genetic expertise to accelerating the genetic progress in beef cattle in order to address unique customer needs.

Genus Products

Genus manages its global operations through the three businesses, Genus PIC, Genus ABS and Genus Asia, but also monitors product performance globally, after allocating product development costs specific to each species.

Porcine revenue grew 9% overall on volume growth of 7% for the Group. The initial results from Génétiporc contributed to these increases but, as expected, were dilutive to margins ahead of the delivery of planned synergies. Margins were also affected by start-up losses in Besun and the Chun Hua nucleus farms, compared with Besun stocking profits in the prior period. Overall, profits rose by 4% (5% in constant currency) with solid growth in North and Latin America offsetting the investment costs in China.

In bovine, volumes rose 4% overall with particularly strong growth in Brazil, due to strong beef season demand, and in India, where currently selling prices are low. Revenue grew by 6% (up 8% in constant currency). Profits decreased by 8% at £8.4m (5% lower in constant currency), with the increases in North and Latin America and Europe offset by the tough trading conditions in Asia.

PRINCIPAL RISKS AND UNCERTAINTIES

Our approach to risk management is to identify, evaluate and prioritise risks and uncertainties and actively manage actions to mitigate them. The Genus plc Annual Report 2013 (a copy of which is available on the Genus plc website at www.genusplc.com) sets out a number of risks and uncertainties that might impact upon the performance of the Group. The principal risks and uncertainties are set out below. The risk that industry-wide disease in porcine will affect the performance of the Group in the second half of this financial year has increased due to the rapid and accelerating spread of porcine epidemic diarrhoea virus (PEDv) in North America. There has been no change to the principal risks that might affect the performance of the Group in the current financial year.

*restated see note 2

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the six months ended 31 December 2013

*restated see note 2

*restated see note 2

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (CONTINUED)

For the six months ended 31 December 2013

*restated see note 2

*restated see note 2