Genus PLC
LSE:GNS
Earnings Call Analysis
Q4-2023 Analysis
Genus PLC
Under the leadership of the new CEO, the company has implemented ambitious sustainability plans, making great strides in reducing carbon emissions by 36% since 2019, even as the business has grown. Strategic alliances, such as working with Innovate UK and the Gates Foundation on cattle genetics, are in motion to further these efforts. Financially, the company celebrated a solid year with adjusted operating profit reaching £85.8 million, a 10% increase in actual currency terms. PIC, one of its subsidiaries, recorded a notable operating profit of £145 million, setting a new record, while ABS closed the year with an adjusted operating profit of £43.6 million, emphasizing the strength across various regions, notably with a 32% growth in Asia's results.
The company has been vigorous in its R&D investments, with gene editing costs rising by 66% as it approaches regulatory approval for PRRS. This investment slightly pressured the operating profit margin, bringing it down to 12.4%, yet comparable to the previous year when excluding gene editing costs. Altogether, R&D expenses increased to £86.3 million, with notable investments in porcine and bovine product improvements intended to enhance the company's offerings.
Various challenges marked the year, including higher finance costs due to rising interest rates, resulting in adjusted profit before tax remaining flat at £71.5 million. Exchange rates provided a £5.4 million benefit, yet future currency headwinds between £5 million and £6 million are expected. For FY 2024, the business anticipates R&D costs to remain broadly stable, aiming to manage statutory profit impacts from non-cash items. Statutory profit before tax dropped to £39.4 million, but the adjusted tax rate decreased to 22.2%, with guidance indicating a range of 24% to 27% for the upcoming fiscal year.
The company achieved a significant improvement in free cash flow, posting £18.2 million compared to a prior year outflow. Adjusted EBITDA grew to a record £110.6 million, reflecting strong operational performance. CapEx for FY 2024 is projected to be around £30 million, focusing on IntelliGen capacity expansion and other technological and infrastructural investments. Net debt saw a reduction, leaving the business at a leverage of 1.6 times EBITDA and maintaining a healthy credit facility headroom. However, finance costs are anticipated to rise by about £2 million in the next fiscal year due to increased interest rates.
Despite the anticipated persistent volatility in the China porcine market, the company is committed to reinforcing its royalty-based business model in the region. While facing headwinds from currency fluctuations and interest rates, the company expects to attain its medium-term profit growth targets in constant currency. However, this does imply that profit before tax (PBT) growth in actual currency terms is expected to be modest for FY 2024.
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Good morning everyone. I'd like to welcome you to this Webcast, which will provide an overview of Genus Plc's Financial Performance and Strategic Progress in the year to 30th June 2023.
My name is Iain Ferguson, and it's my privilege to be the company Chairman. In a moment, I'll hand over to Jorgen Kokke, who will begin today's presentation. Before doing so, I'd like to say a few words about our CEO transition.
As I'm sure you all know, Stephen will be retiring from the company at the end of this month. He stepped down as Chief Executive on the 30th June, handing the reins over to Jorgen, who joined us as CEO Designate in May.
Stephen has played an important role for Genus over the last decade, initially as Group Finance Director, and for the last four years as our Chief Executive. He has remained with us since July as an Executive Director to help us close out the financial year and he will be leading our report on the year today.
I'd like to formally thank Stephen for everything he has contributed during his time with Genus. I'm sure you will join me in wishing him a fulfilling and a very well-deserved retirement.
Stephen gave us plenty of notice of his plans to retire, which enabled us to conduct a thorough and a global search for his replacement. Following this exercise, we were delighted to appoint Jorgen to the role. Jorgen has spent his entire 30-year career in the food and agricultural sectors. He joined us from Ingredion Incorporated where he spent 14 years in increasingly senior leadership roles, across Europe, the Middle East, Africa, Asia-Pacific, and the Americas.
Before that, he was Vice President of Food & Nutrition at Corbion, and spent a decade in leadership roles at Loders Croklaan, then part of Unilever, now part of Bunge. We are very pleased that he is going to be leading Genus through the next stage of its development.
So that concludes my role in introducing today's webcast. Thank you for joining us.
I will now hand over to Jorgen, who I know is keen to meet you all in the weeks and months which lie ahead. Thank you.
Thank you, Iain for your kind words. Good morning. Let me start by saying that I am delighted to be a Genus and look forward to meeting you during our Investor Roadshow.
I joined the business on May 2nd, as Iain mentioned, and took over as Chief Executive from Stephen on July 1st. I'm very pleased to say that we had a very productive transition period.
As for my background, I have worked in the food and agricultural industries for about 30 years. Having started my career with Unilever in The Netherlands after graduating with an Economics Degree from the University of Amsterdam.
During my career, I've worked with companies that are active in converting agricultural raw materials into high added value ingredients for food, including meat and dairy, beverages, pharma, and industrial applications.
These businesses operated in business-to-business markets and typically, their value propositions were underpinned by research and development and application know-how, but also supported by good risk management, just like Genus.
I joined Genus from Ingredion, a New York Stock Exchange listed ingredient solutions provider via health executive leadership roles for more than 14 years. Most recently running the $6 billion Americas business, successfully growing top and bottom-line by leveraging innovation, executing strategic M&A transactions, and driving commercial and operational excellence.
You may wonder why I joined Genus. Well, firstly, Genus' vision of pioneering animal genetic improvement to nourish the world really resonates with me. There are two aspects in the Genus vision that I'd like to highlight in this context. Pioneering reflects the strong commitment to innovation and R&D as a means to create competitive advantage. Second, nourishing the world speaks to genetics helping to make the food system more sustainable and more affordable.
Secondly, Genus has a track record of growth, is gaining market share, and as a result of investments in innovation, the PRRSv resistant pig is a case in point; and in supply chain, Genus is well-positioned for more growth going forward.
In my first couple of months, I've been on the road meeting many of our customers around the world. It is clear to me that our customers very much value our product and our service offering.
I have also learned that Genus is a very special company with passionate and professional team members, caring deeply about animals, progressing science, and creating value for customers.
Before I hand over to Stephen to cover the business and strategic update, I'd like to highlight my immediate priorities for the business. The successful commercialization of the PRRSv resistant pig and strengthening our business in China; continued growth in porcine and drive more value from bovine; and leveraging our R&D platform for value creation. I am very much looking forward to an exciting future at Genus.
Over to you, Stephen.
Good morning, and thank you, Iain, for your kind words and Jorgen, I've really enjoyed working with you over the last few months to ensure a smooth transition. I have a lot of confidence in how Jorgen will lead the company in its next chapter.
For me, it's been a great honor to have had the opportunity of leading Genus over the last four years and serving as CFO prior to that. What makes Genus so special is the tremendous people we have in the company who really live out our pioneering vision with customers and with our animals day-to-day.
So, as I take you through some of the strategic and business highlights for fiscal 2023, I want to recognize and thank the 3,500 Genus employees who made it all happen through their dedication, ability, and teamwork.
After that, Alison's going to conclude this prerecorded webcast with an overview of our financial performance and outlook, and there's going to be a live Q&A held later today. Details of that are all in our results release.
Before we get to that, let me just say a brief word about this picture. I am really honored to have had one of the very best young bulls in the world with polled genetics named after me, as a kind of going away present by the ABS team.
If you look closely, you'll notice that the ear tag of this very cute young bull has my name on it along with the letters PP that means it's homozygous polled, none of his offspring will grow horns and this is an area where ABS has clear industry leadership on a global basis.
Well, on then to the headlines for the year. We had solid results and good strategic progress in what were quite challenging markets. In actual currency, revenue grew 16%, adjusted operating profit grew 10%, and adjusted profit before tax was stable at £71.5 million. Our dividend remains unchanged, also at £0.32 for the full year.
While we did get some help from currency, this was significantly outweighed by both the impact of rising global interest rates and our increased investment in gene editing as we made very good progress with our PRRSv resistant pig, completing our submissions to the FDA ahead of schedule.
Alison will share more on our results at the operating profit level excluding our gene editing investment. We achieved 9% profit growth on 10% revenue growth in constant currency. I think that's a good performance. We've achieved this through market share growth in both businesses as a result of our leading genetics, supply chain, and teams.
The investments we've made position us well for growth. In addition, we were able to report good progress on our sustainability metrics. I'll give more detail on all of these themes in the course of the presentation.
First though, let's set the scene by looking at the market backdrop for our customers. This is always quite a dynamic picture. So, in porcine, we're seeing an industry downturn right now in North America with low producer profitability.
While in Latin America conditions for producers were actually quite positive, in Europe, we've had a really long deep contraction and that's now led to tight pork supplies much higher prices for farmers and perhaps heralds a possibility of stabilization.
In the second half of FY 2023, the China porcine market was once again very weak due to both soft demand and ample supply. I think after the experience of the last two years, it would be a brave person to predict the China market. However, there are a number of commentators that expect somewhat better conditions at least through the rest of this calendar year.
Turning to bovine, in our dairy markets, we've seen declining milk prices in North America, EMEA, and China and that decline has been outpacing the fall in input costs. Beef prices have been variable. They've been strong in North America, but continue to be weak in Brazil.
So, in summary, there are challenges for our customers in many markets. Our global diversification helps us, but more fundamentally our job is to keep providing value to our customers so that our business can grow and be resilient throughout market cycles as we've demonstrated we've been able to do in the past.
In PIC, we have an exceptionally strong growth platform. Our genetics are market leading and we continue to drive improvement at an accelerated pace, giving very tangible benefits to our customers. That has helped us drive increasing volumes through long-term royalty contracts.
Notice here 7% compound annual growth rate over past several years. Because we're confident in the ability of PIC to continue to grow, we've made a significant investment in expanding our global supply over the last few years.
While these investments carry a cost in the short-term, they position us well for growth for the next decade and more. We continue to lead the industry in the deployments of technology and I'm going to talk more about the PRRSv program in a couple of slides.
What underpins it all is the very best team in the industry. I want to pay tribute to doctor Bill Christianson, who retired this year as the Chief Operating Officer of PIC for the tremendous part he played in building the business over a 30-year period, including hiring many of the team.
And we were very pleased to promote Dr. Matt Culbertson, who's pictured here on this chart to succeed Bill. Matt is someone who's globally recognized in the in the pig industry as a highly talented leader and we're delighted to have him leading the business.
Well, it doesn't matter which region you look at. In PIC, we've grown volumes over the last few years and that's in an industry which on a global basis has basically flat volumes. So, we're clearly consistently gaining market share. PIC has a strategy which is very much customer-by-customer focused, grow our existing accounts, win new customers.
Brenneman Pork is a really good example of growth in an existing account, where the strength of our genetics and technical support have enabled us to make significant gains in FY 2023.
On the other hand, Cranswick, which I'm sure is well known to many of you here in the UK, is a new customer. As they sought to grow their pig production, they asked PIC to come in and create a new maternal genetic program.
As a result, we've stocked a GGP nucleus farm for them and this will start to generate GPs and [Indiscernible] that will populate their production systems over time, again, growing our royalty base.
So, having the best genetics is fundamental to this success and that means making them better every year and driving that pace of improvement. We measure the improvement in an economic index that shows incremental value being created for our customers every year. This added value cumulates over time. So, you can see that just over the last three years, that's around $11 of benefit.
But genetic improvement also drives a sustainability benefit. Our genetic improvement over the last three years translates into six and a half kilograms less carbon per slaughter pig. Multiplied by our volumes, that's about 1.2 million tonnes less carbon per annum.
We've also been ensuring that we put specific focus on creating the best peak in China for China. Our genetics all were already performed very well there as you can see from the data we've collected from our customers compared with industry averages.
To further build on this, we've created a specific index for China waiting the traits that are most valuable for customers there and driving selection of our local genetics against that index. In addition we're working with a major processor there to benchmark and validate the PIC carcass value against other genetics in the market. Early results look very promising.
Well, let's talk a bit more about China. As I said earlier, the market was tough in the second half of our fiscal year. And we also experienced disease in two of our farms, leading to a disappointing financial result in the second half.
The market's likely to continue to be volatile. To build a business that is resilient and grows predictably despite this volatility, It's essential we grow our royalty base in China. You can see that over the last four years, we've had compound growth of 50% in royalty and grown our presence with the top 50 producers. And in fact, we're doing some business in parts of four of the top five.
The case studies illustrate how we grow with existing customers and when with new customers. However, we need to go even faster in driving the growth of our royalty business.
So, China looks more like our PIC business in other global markets. To do that, we're introducing a number of changes to our royalty pricing models in China this autumn. And we're also increasing the global support we give to our team there now that we're once again able to travel to China.
Finally, on PIC, I want to update you on the PRRSv program. I'm very pleased to be able to confirm that we've now completed our submissions to the US FDA ahead of schedule.
I want to pay tribute to the R&D and PIC teams who've worked together in in in making this really huge accomplishment. These submissions have all been pre-reviewed by the FDA giving us confidence, we will achieve approval in the first half of calendar year 2024.
In parallel, we've advanced the regulatory process in several other markets. Approval packages have been submitted in Brazil and Colombia, and we expect to file regulatory submissions in Japan and Canada this year.
The regulatory environment in China is also developing positively. The Ministry of Agriculture has published regulations on gene editing in animals, opening up the regulatory path.
In addition, we've been granted consent to import gene edited animals for testing in China, the first such approval ever given. So, we're encouraged by the progress we see.
All this brings into focus the next step bringing the PRRSv resistant pigs successfully to market. You should already be aware that we'll hold a Capital Markets Day in November, specifically devoted to this topic.
However, to whet your appetite, let me share a few thoughts now. First, we're actively engaging across a broad range of industry and value chain participants to demonstrate the benefits of the PRRSv resistant pig. We're also conducting independent life cycle assessments of their sustainability benefits.
Secondly, we're planning the optimal way to disseminate the genetics. Now, this inevitably will take quite a few generations of pigs in our customer systems. And to go as fast as possible, we'll be using boar semen as the primary transmission mechanism.
To go through this process, customers will need to make a long-term commitment. Our pricing strategy is going to be geared to maximize rapid widespread adoption. And we anticipate that we will be charging an incremental trade fee above our existing royalties.
However, recognizing the time it takes to disseminate genetics, there'll be a mechanism to progressively work up to the full trade fee as dissemination progresses within the context of a committed multi-year contract with our customers. So, watch this space for a fuller discussion and more information on this topic before the end of the year.
I've covered a lot of ground on PIC. It's time to turn to ABS. The platform for growth that you see here in ABS follows some similar themes to the chart I showed on PIC. Strong genetics, here I'm focusing on our NuEra of beef genetics, great team, our customers, our supply chain, and technology.
We've made major investments in the last few years in our supply chain to replace a number of very old facilities with world-class new facilities. That investment is now behind us and it puts us in a great position for many years to come.
Our sexed semen technology continues to grow rapidly winning new customers and delivering great performance in the field. ABS has also been moving towards long-term contracts with customers similar to PIC. And while there's still a good way to go, we're making some encouraging progress.
The global bovine genetics market contracted in FY 2023 due largely to the industry challenges in Brazil. However, in this tough environment, we grew volumes globally and gained market share in key markets such as the US, Mexico, Brazil, months, China, to name a few.
Our business is increasingly shifting to sexed and beef, including beef on dairy, and we strongly encourage our customers to pursue this strategy in contrast to many of our competitors who lack sexed technology and proprietary beef genetics.
Winning new customers continues to demand that we demonstrate the value our products and services in the customer's operation. There are two great examples here, both show the power of our products and services in action.
I had the pleasure actually of visiting this Italian dairy in February of this year. It's the most technologically-advanced dairy I've ever visited anywhere in the world. They made a huge investment in sustainability and automation, but all the technology in the world won't compensate for polled genetics and service and that's where the customer was really delighted with the major contribution we were making to improving their performance.
Our genetics continue to be very competitive in dairy, and we have a unique program in beef. And once again, the economic indices of genetic progress are closely correlated with improvements in sustainability.
While the measures are somewhat different between dairy and beef animals due to the lactation of the of the dairy animals, the message is really the same; genetic progress provides a valuable contribution to making the production of animal protein more sustainable and the gains accumulate over time.
As we review the progress we've been making at Genus, I'm particularly pleased with the strength, depth, and talent of the R&D team we've built over the past four years.
We've been talking already about the work we do in genomic selection to breed better animals. In Biosystems Engineering, we're also making very good progress in developing further improvements to our sexing technology, which I feel bodes very well for the future.
In Gene Editing, you've heard about PRRSv, and we continue with discovery efforts on a number of other porcine diseases. We're also making very good progress in our Reproductive Biology effort, which we launched just a couple of years ago. That holds the promise of being able to shorten generation interval and change the way genetics are disseminated.
Finally, underpinning all of these efforts is a strong capability in genome science, data analytics, and scientific computing. Ultimately, it all needs to deliver better products for our customers.
I'm really excited by the potential I see and we'll be watching with interest over the years ahead to see how the projects underway today are commercialized in the future.
Finally, when I became CEO, we mapped out an ambitious plan to improve our carbon footprint and become a leader in sustainability. I'm pleased to say that we've made great progress ahead of the plan we set out.
We've made some remarkable strides in reducing our Scope 1 and 2 carbon emissions at the same time as growing our business, resulting in a 36% reduction in our primary intensity ratio since 2019. And we have many plans in place which are going to drive and deliver further improvements in the coming years.
In addition, as we seek to reduce the impact of animal protein production globally, it's encouraging to have started work on selecting cattle with lower methane with the support of Innovate UK. And in addition, we're working with the Gates Foundation and other partners to improve dairy genetics in East Africa.
While, I've covered a lot, I think you can see there's been great strategic progress. Now, it's time for me to hand over to Alison to take you through the numbers.
Before I say anything else, I wanted to thank Stephen for his guidance and leadership during our partnership and wish him a very happy retirement.
On this cover page, I'm sharing with you a picture of the Nelore breed, originally brought from India to Brazil. They're favored for their resistance to the heat and diseases in a tropical environment and they represent approximately 70% of ABS Brazil's beef sales.
This year, our Board visited Brazil, where we saw these interesting animals firsthand. It's been tough down there right now, but we came away feeling very positive about the strength of our business and the passion of our team.
Now, let's get into the numbers. So, overall, we delivered solid results for the year. In actual currency, adjusted operating profit of £85.8 million, was up 10% and as shown on the graph to the right, we weren't far off the peak results we had in FY 2021.. PIC delivered a record performance and ABS had a better second half. Together, they achieved healthy 17% growth in operating profit.
This funded significant planned growth in R&D, part of which was a 66% increase in gene editing costs as we head towards PRRS' regulatory approval and prepare for commercialization.
This also weighed on the operating profit margin as shown in the graph, down on prior year at 12.4%, whilst comparable to prior year at 14.5% when excluding the growth in the gene editing costs.
Central costs were 1% up on prior year, reflecting prudent cost management and our finance costs were £14.3 million, more than double in the prior year and that's predominantly due to rising interest rates. So, consequently, adjusted profit before tax was flat to prior year at £71.5 million in actual currency.
This year, there was a £5.4 million exchange rate benefit on the translation of overseas profits, most of which occurred from sterling weakening against Latin American currencies in the first half of the year.
In recent months, we have seen considerable strengthening of the pound against certain currencies and at today's spot rates, we estimate we will experience a currency headwind of between £5 million and £6 million in FY 2024. Further information about this is in the appendix of this presentation.
Looking at performance in constant currency, adjusted operating profit excluding gene editing costs was up 9% and we achieved our target of 10% CAGR growth over a five-year period. Looking forwards, we remain committed to achieving this medium term target.
Now, before I talk about the performances about operations, I wanted to go under the covers a little and share insights into the key drivers of our profit performance. The graph on the left shows how consistent the growth of the company's operations has been with adjusted operating profit excluding gene editing and PIC China growing 13% in the past year.
The margin of 13.8% was down on prior year due to the increased investments in other areas of R&D, and a lower margin in our ABS business in the first half of the year, which I'll talk more about later.
You can also see PIC China's profit for the year was £9.4 million, up against the prior year of £5.6 million, which if you recall did include a one-time customer credit of £4 million. Good growth and royalty revenue of 26% was achieved in the year, which as Stephen said, is the way we are building a more predictable business in China.
On the right hand side of this slide, you can see a bridge of what's happened to our adjusted profit before tax. Our cash profits were strong, with growth in adjusted EBITDA excluding gene editing costs, being £17.1 million.
Gene editing costs themselves increased £6.4 million as planned. And our depreciation and amortization costs increased £4.9 million, reflecting the high investment program we've had.
And as I mentioned previously, we bore higher finance costs, up £8.1 million. As we look forwards, we are past the peak of our investment program and therefore, depreciation and amortization growth will be lower.
Gene editing costs and finance costs will continue to be significant in FY 2024. However, we see this as a near-term situation which should reduce as we move into commercialization of PRRS' peak and borrowings reduce in subsequent years.
As Stephen said, we're taking market share and that's illustrated by the growth you can see in the volumes on this chart. Porcine volumes grew 5% with North America key driver at 9% growth, part of which was growth in sales to Olymel.
Europe also contributed strong growth of 8%. In bovine, we achieved 3% volume growth. This was due to continued growth in sexed genetics. And from a regional perspective, North America led the way with 25% growth in sexed volumes.
Beef volumes were flat with Latin America key driver of growth in prior years. Latin America finished the year with flat volumes and gained market share in Brazil, even though economic conditions continued to impact consumer spend.
Now, onto PIC. PIC delivered a strong performance hitting a new record for operating profit of £145 million for the year. Royalty revenue was up 10% and grew in all regions.
Adjusted operating profit margin improved to 38.6%, nearly back to the level in FY 2021. The changes in operating profit shown here are in constant currency as I think they give a better indicator of underlying performance across the regions. And as you can see, there was good growth in all regions.
North America continue to deliver strong growth with operating profit up 9% on prior year as they continue to take market share and benefit from sales to Olymel. Royalty revenue growth was also strong at 8%.
Latin America's profit was up 12%, with growth achieved by all countries in the region and our joint venture with Agroceres in Brazil saw profit up 14% on prior year.
Europe's profit was 6% up, achieving a stronger performance in the second half and saw some improvement in Germany and the UK. We've continued to achieve growth in Spain, up 10% on a strong prior year comparison.
And lastly, high growth in Asia's results, up 32%. In addition to China, Philippines is making a steady recovery from ASF with growth of 12%.
ABS delivered a stronger second half to end the year with adjusted operating profit growing to £43.6 million. Margin was down at 13.7%, which reflects the impact of no growth in LatAm and one-time production variance related to the first half of the year of almost a £1 million. Further details of ABS' profit statement are provided in the appendix.
Moving now to the regional performances, which are shown in constant currency. North America continued to achieve profit growth of 17%. Sexed volumes grew very strongly at 25%, while beef volumes were down 4%, but that was against a very high prior year compare. This, together with robust price increases and growth in IntelliGen third-party business meant revenue was up 15%.
EMEA's revenue was up 8% and profit was up 7%, whilst volumes were up 1%, and that's due to robust price increases to offset inflation.
Sexcel continued to grow at 15% and beef volumes were up 5%, particularly across France, Northern Ireland, and Italy. IntelliGen third-party business also grew in the region.
Asia achieved solid growth in operating profit, up 4%. India and Australia experienced double-digit growth in volumes and profits, but we saw a slowdown in the China milk market in the second half, which gave rise to lower volume demand. However, the business grew Sexcel volumes by 24% in the year.
Overall, R&D increased in actual currency, £19 million to £86.3 million and it's important to note £6.5 million of this growth reflects the impact of FX translation. The growth in spend was as planned, with the largest drivers being expansion of PIC supply chain and the post-program as we progress the regulatory submissions.
Porcine product development was up 24% in constant currency, reflecting investment in customer-centric support programs, genomic testing, and the increase of costs associated with Atlas Farm since becoming operational.
As you heard from Stephen, we have expanded our activities in relation to obtaining regulatory approval for the PRRS pig, including increasing our population of gene edited pigs. As mentioned previously, our gene editing spend was up 66%, which is what we expected.
Bovine product development spend was stable, reflecting continued investment in IntelliGen production enhancements and our dairy and beef development programs. Another research increased 13% supporting the R&D pipeline, particularly in the field of reproductive biology.
So, in FY 2024, what I expect is that R&D will remain broadly stable in actual currency. We consistently measure and report adjusted results as we think these give a better view of the business' underlying performance.
Our statutory results are affected by a number of non-cash items and I will talk you through these. Statutory profit before tax decreased to £39.4 million and profit after tax on a statutory basis was £31.8 million.
The adjusted tax rate was 22.2%, down 210 basis points compared with the prior year. And that's due to the recognition of deferred tax assets for Brookwood [ph] losses offsetting a rate rise in the UK that took effect in April and increase in overseas taxes due to share of profits in higher tax jurisdictions.
Our guidance for FY 2024 is a range of 24% to 27%, reflecting the ongoing impact of these factors. Now, those of you that are familiar with our accounts will know that we are acquired in our statutory accounts to apply IAS 41 accounting for biological assets. The effect was a £16.9 million decrease, which principally reflects the timing of the depopulation of PIC's Elite Aurora Farm to complete a health upgrade, which will put both Atlas and Aurora Farms at industry leading health status.
As those of you who follow the company know these fair value calculations can fluctuate and are non-cash movements. Exceptional expenses of £3.5 million are principally in relation to the legal costs for the ongoing litigation with ST Genetics. But this number does include a credit of £1.7 million being the sale of our Canadian ABS facilities following the completion of our leads [ph] facilities in Wisconsin.
Now, before we take a look at the movements in our net debt position, I wanted to talk about free cash flow. You can see on the table on the left, our cash generated by operations was £78.7 million, which reflects cash conversion of 105%, exceeding our annual target of at least 90% as we anticipated.
Free cash flow of £18.2 million was a significant improvement on the prior year when it was an outflow of £13.5 million. The drivers of change in the cash flows are shown in the chart to the right.
As I mentioned previously, we had a strong adjusted EBITDA growth in the year, reaching a record high of £110.6 million. In addition, working capital outflows were lower by £10 million, reflecting focus on improvements in receivables and inventory management. And we had lower spend on biological assets after a peak year in FY 2022 when we're expanding our beef herd.
Spend on CapEx of £35.2 million was £18.1 million lower as planned. And if you recall, FY 2022 was a peak year of investments in our porcine and bovine facilities. I expect CapEx to be around £30 million in FY 2024, when the main investments will be in relation to IntelliGen capacity, the continuation of Genus 1 ERP rollout in LatAm and Asia, ABS' UK facilities upgrade, and sustainability initiatives.
If you recall, our cash flow is typically stronger in the second half of the year, primarily due to the phasing of certain expenses and payables. And I expect this pattern in FY 2024 and a higher proportion of gene editing costs in the first half, which will give rise to lower cash conversion in the first half of the year, improving in the second half to meet our annual target of at least 90%.
You can see on this chart, we ended the year with net debt of £195.8 million. Our leverage decreased to 1.6 times EBITDA as expected and remains within our targeted range of 1 to 2 times.
At the 30th June, the headroom on our credit facilities was £118.7 million and I expect finance costs will be up by around £2 million in FY 2024, reflecting higher interest rates. Our leverage should be around a similar level by the end of next fiscal year and well within our targeted range.
Given our solid financial position, we are pleased to propose our full year dividend is maintained in line with prior year. which is 2.7 times adjusted earnings cover, within our targeted range of 2.5 to 3 times.
Now, I want to remind you of Genus's four medium term financial objectives, which as you can see have all been met. When referring to our five-year profit CGAR performances, you can see we have consistently delivered against our target of 10% for operating profit, excluding gene editing costs in the past five years. And there are a few ups and downs in annual cash conversion, but our five-year average is comfortably over 100%, which compares with our target of 90%.
Our leverage target is 1 to 2 times EBITDA and our dividends cover is 2.5 to 3 times earnings. Again, we have consistently managed these targets. Despite the various macroeconomic and geopolitical challenges in the world, our stated financial objectives remain the same. We will continue to manage the company with our focus on the medium and long-term growth opportunities.
So, to conclude, a lot of good strategic progress has been made in the past four years that will set us up for the next period of growth and we fully intend to continue to meet our medium term targets.
The China porcine market is likely to continue to be volatile, but we're focused on building PIC China's royalty-based business and capturing market share just as PIC does elsewhere in the world.
In FY 2024, we expect to achieve our medium term profit growth target in constant currency, but we have currency and interest rate headwinds that mean PBT growth in actual currency will be modest.
Nevertheless, it's going to be an exciting year with FDA approval of our PRRSv resistant pig not far away. And we look forward to sharing our commercialization plans with you in November.
So, thank you for listening and we look forward to meeting you for our results Q&A session at 10:30 today.
Good morning everyone. Thank you for joining, our Q&A session this morning and for having spent time looking at our webcast and results. We've got a hybrid event today. So, it's a warm welcome to those of you in the room, particularly on a morning like this. And it's great actually to be having our first in-person Q&A session. We've also got some people joining us on the web. So, I'm going to have a few instructions in a moment as to how that's going to be handled.
But -- I'm Stephen Wilson, I'm the -- as you can see, the retiring Chief Executive, but I'd, warmly like to welcome, and introduce Jorgen, our new Chief Executive.
Thank you very much, Stephen.
And Alison, our CFO.
Hello, everyone.
And, Scott, do you want to just say a few words on procedures, and then we can get going?
Of course. Thank you for that, Stephen. Today, we'll be taking questions from the room and then from the webinar. [Operator Instructions]
But we will now take our first question from the room. [Operator Instructions] Thank you.
Charles Hall from Peel Hunt. Can we kick off by maybe talking about customer wins because, quite notable in the presentation was a number of customers where you're either totally new or you're gaining share. What's driving those customer wins and I know it's a whole load of different things? But is there a feeling that you're gathering momentum on customer wins and that's the rate of genetic progress that you've been achieving that's really delivering that?
Yes. Look, I think -- great question, happy to respond. I think we have seen some really good momentum and share gains across many of our markets in both businesses in porcine and ABS. And we highlighted in the presentation strong share gains in the ABS business, for example, in the US, in Brazil, despite it being a down market; in China, France. In the porcine business, I think wherever you look really in the world, we're seeing share gains and what drives it, I think it's really a combination of factors and we try to highlight that on our chart when we talk about the strategic platforms for growth is the combination of genetics, having really good genetics, the strong supply capability. So, the supply chain is really important.
The technology that underpins it, that the way we approach the market and focus on, large -- customers who are progressive in their thinking and are willing to enter into long-term arrangements. And then really that the key ingredient then on top of all of that is great team. And this is a business where it's a classic B2B relationship, so it takes time.
We engage with customers over a long period of time and quality of the team you have is absolutely fundamental.
And what's really notable is that a number of end markets were particularly challenging over the course of the last year, whether it was European pork or Latin American beef, but actually the business performed pretty well during that. And you seem to have built a lot more resilience into the model. I guess China is obviously the one area where there's still a lot of volatility. Do you want to just comment on how you build resilience into that part of the business?
Yes. I think on China -- I think you're right, the business is always -- actually, if you look over time, the business has managed to grow through many ups and downs in the in the agricultural cycle. China has -- in porcine has been a challenging market. It was certainly challenging, particularly in the second half of last year.
But I think a fundamental drive that we must do is continue to really push on growing our royalty base in China. And we've done that pretty successfully over the last several years. We started from basically zero royalty in China back in about 2019 and we're now at about 60%, roughly 55% to 60% of our business in China on royalty. We've had compound growth of 50% in royalty over that time period, but we need to double down and just go even faster.
And then Jorgen you're new into the us, any observations, you'd make on what drives customer wins, you've been visiting a number of customers?
Yes, I mean, one of my observations would be that, Genus is very well-respected by its customers, very strong relations. The people at Genus are very much appreciated by customers, and customers also very much recognize that Genus has been making investments, investments in technology. It's clearly a leader. I think the PRRS resistant pig is a case in point, on the porcine side, but on the bovine side, it’s a sexing technology. And as a customer, you want to partner with vendors with suppliers that invest for the future and that bring new technology to the market so that you have early access to those technologies.
But it's not only about technology. It's also about the supply chain, which I would say is absolutely world-class. Both from the bovine side. I was blown away by just the facilities in Wisconsin, for example. Genus puts animal welfare very high on the priority list and is a leader in that regard. And customers see that and they appreciate that and they want to partner with a with a supplier like that.
And specifically on China, obviously, the pork price in China has picked up a little bit recently, but it's given the depth of the market over the last 18 months or so, I guess Chinese producers are going to be pretty wary about starting to order genetics in the short-term?
I think we should expect that the Chinese market is going to continue to have ups and downs and be volatile. There's a lot of capacity that has been put in place since ASF originally hit.
And producers I think will have to learn to operate in an environment where you have to be really, really efficient to make money. And that should be an environment that as producers get accustomed to that, they have to realize that you've got to optimize every part of your business, and that includes the genetics.
And we highlight in the presentation how our genetics are performing in China and it's really good and that is opening up new conversations for us. So, I think we're encouraged by the conversations we're having and the wins that we've had in China and -- but we need to do that on a royalty basis. And as you're well aware, those royalty revenues build over time.
And those customer opportunities are coming from players that have integrated supply chains rather than having to supplant a competitor?
I'm not quite sure I understand the question.
[Indiscernible] integrating operations?
Yes. They're from they're from producers. Some of those producers also have slaughtering capacity, so they're fully integrated, others don't.
It's Max Herrmann from Stifel. So, just first question again on China and in terms of the guidance that you're giving for FY 2024. I think previously you'd said you'd expected a recovery in China. Now, you're talking very much about volatile markets in China remaining.
I mean if they have been volatile over a long period of time now, I guess why the change now? Is it more of just a history that is now -- or do you feel that something has changed in the market since you last updated? So, that would be the first kind of question.
Ye. I think we recognize that the extreme movement in the market post-ASF was a one-time event. We're unlikely to see that degree of change in the market, either to the positive or the negative, depending on which part of the cycle you're talking about.
As Stephen said, there is still -- there is lots of capacity in the market and also the Chinese economy is not in great shape. So, consumer demand for pork is -- we believe is also being impacted, but we can't control those things.
What we can control and focus on is how well we serve our customers, and as Stephen said, that's about providing the best genetics and growing through the royalty model, which has proven to be superb model everywhere else in the world. There's no reason why that can't be the model for China. But it takes time to achieve that and so the growth that we're expecting in FY 2024, we're assuming it will be modest.
And then just on to the PRRSv opportunity, obviously, you've now filed with the FDA. I think you said previously about a six-month review period, which I guess brings us into the first half of next year. How do you see the rollout of the PRRSv pig in the US? And then what's the timing in China?
And how does that also just on PRRSv, I know we talked earlier about how that impacts, the investment in R&D because obviously, R&D is up hugely in FY 2023. How do you see that progressing as well as part of that coming to fruition?
Yes. Do you want to comment on PRRS and I'll comment on the cost?
Yes. So, firstly, I think we're really encouraged by the progress. I think it's a massive achievement on the part of our R&D and PIC teams to have completed all of the submissions to the FDA.
All of those have been pre-reviewed by the agency. So, we've had their initial comments. We've responded to those. There's now a six-month period for them to give us final determination on it. So, we're very confident in all of the data that we've submitted. So, I think we can look forward to the FDA approval with a good degree of confidence.
In terms of how we will move forward in the rollout of the product and commercializing it. Of course we also are working in on regulatory pathways in a number of other countries. Pork is a globally-traded commodity, so it's important that we deal with a number of other jurisdictions. We've given information on how we're doing that.
And then, I'd highlight that there's a Capital Markets Day event scheduled now for the 1st November, when there's going to be opportunity for a much more detailed discussion to take place around our commercialization plans.
Yes. In terms of R&D and gene editing as part of that spend, as you're seeing, we spent about £14 million on gene editing costs in FY 2023 and expect to spend a similar amount in FY 2024.
In terms of R&D as a total spend, we've, as you know, significantly increased our spend in the last few years, and going forward, I would expect that to stabilize, so the growth overall to be modest and slower than the growth in revenue.
Great. Thank you.
Hi there, Damian McNeela from Numis. I think I can't remember what chart number it is, but you showed sort of the improvement in -- the sort of your genetics in terms of the index, and it looks like the improvement has slowed in the last year. Sort of I'm not diminishing the efforts that you're putting into sort of -- that sort of genetic improvement, but can you sort of explain to us perhaps what's in that slowing rate of improvement, how we should interpret that graph is first question?
I think the way you should interpret it is that we had a record level of improvement that we were able to achieve in our nucleus will be delivered to producers over the next two or three years. So, our customers are going to see fantastic performance coming from PIC genetics.
Remember what you're looking at here is the dollar improvement in economics for a producer over the prior year. So, -- and if you think about what is the cost of a pig? What is the profit margin of a producer on average? These numbers are extraordinary. We're looking here at over a three-year period, a cumulative gain of about $11.
So, genetic improvement is delivering incredible value to our customers and it's going at a very rapid clip. So, I think you should feel very satisfied by that. Our customers are seeing the benefit of that. And I think it's what is helping us to win in the marketplace.
And don't forget the calculation is relating to the profitability that the customer is achieving, which is related to pig prices. So, that can move.
And then just on PRRS, I know that there's a Capital Markets Day in November, but just in terms of where you are -- I think you've previously commented about the fact that you're talking with the sort of the wider supply chain in terms of making sure people understand the benefits of your product, have you got any comments you can add at that stage and how those conversations are going?
There's a lot of interest. A lot of interest, yes.
Okay.
We'll say more on November 1st. Yes. Anything you want to add on that?
No, I think the philosophy that we have is the quadruple bottom-line. So, working with all of players throughout the whole chain. So, that is the producers, it's the packer, sort of branded manufacturers, it's the retailers, and it's the consumer and articulating what the benefits are to all of those players in the chain. Very thoughtful and comprehensive approach, which we can share more on November 1st.
I think there's a question on the webcast, I saw. Is that right?
Yes, we have got Seb Jantet from Liberum, who is going to be asking a question on the web today. Seb, Please go ahead.
Hi there. Thank you for taking my question. Just checking, you hear me all right?
We can hear and see you, Seb.
Excellent. Right. So, just two questions, if I may. One just on, China and the royalty, I think I picked up from the prerecorded session that you were looking to make some changes to your royalty model in China. And I was wondering if you could just kind of give us a little bit more detail on those changes?
Yes. So, -- yes, we've really been thinking about how we can adapt the royalty model that we've been pursuing in China to the growth of the industry there. There's -- I think there's always been a variety of ways in which we frame the royalty, do it on SAU [ph] usage, to do it on a wean pig, to do it on a slaughter pig. There's a whole variety of ways in which we've constructed those prices and then how do you frame those for different scales of operation.
So, we've taken a thorough look at that. Our intent is to really drive penetration of royalty in the marketplace. And so we're, we're launching over the autumn some refreshed approaches there, which we think will be very compelling and attractive for producers in China.
I guess you're not going to give us any detail then on what those might actually be.
I think it's a complex subject. So, you could spend a lot of time going into that. I think the key point is that our royalties in China are at levels which are comparable with the rest of the world and we intend to maintain and grow on that basis in China.
Second question then was just around ABS. So, obviously, one of the longer term investment stories that have been around the margin growth in the ABS business. And that that felt like it was probably a little bit slow this year. I was wondering if you could give me a sense of kind of some of the levers that you think you can pull in that business to move the margins forward?
Sure Seb. There were some factors which impacted ABS' margin in FY 2023. We did have a one-time impact of around a £1 million in the first half, which related to the cyber incident, we had a year ago, so that's not repeating. And LatAms didn't grow and that had an impact as well.
But going forward, we still believe that there's margin improvement that we can drive in the business. A lot of good work going on and looking at our go-to-market strategy, and segmenting our customers in far more detail than we've done before and really looking at how we approach them, underpinned by -- in the main long-term contracts. That's the direction that we're going and we do talk -- Stephen talks in the presentation about that. We believe that that's key.
And I think there are further efficiencies also that we should be able to drive in the business as well. So, we've talked in the past about, the aspirational goal of 20% margin and we still have that.
Jorgen, you -- do you want to comment -- and ABS?
Yes. I would say that, if I think about the priorities for the business, clearly, we spoke about the PRRS commercialization, which is very important. We already cover China, right, how do we build a predictable, profitable, growing franchise model in -- business model in China.
And then you go to ABS and you say, look, ABS, we need to drive more value from ABS. So, how do you do that? Clearly, we're reviewing our go-to-market approach and so kind of homing in on this theme of commercial excellence, right, which is around how do you segment your customers, which are the customers that we should give a lot of service. Maybe others don't appreciate that service as much, so it's a little bit more of a transactional sale.
How do you price, right? How do you keep -- set the right guardrails for your sales organizations? How do you think about that? And then there's the efficiencies also that Alison highlighted. So, for me, kind of, coming in clearly driving the margins in ABS and driving the profitability of ABS features among my, let's say top four, five priorities.
Great. Thank you, guys.
We go to questions in the room.
Danielle Russo from HSBC. Coming back to profitability, my questions on ABS has been already just answered. But on PIC, there was an improvement in profitability in the year by about 200 basis points, if I'm not wrong, reaching pretty much an overall high. So, what is the driver of that improvement? Is that royalty or is there anything else? And I mean, have we picked or do you think there's further scope for improvement moving forward?
It’s a great business to leverage. So, a comparatively fixed cost base and with the kind of growth that they're achieving, you will -- we will achieve margin expansion and I expect them to continue to do that.
It was it was only a positive leverage, or was it also driven by the increase in royalties?
It's positive leverage, leveraging higher volumes.
Okay. Could you talk a little bit about the maturity of your royalty contracts across the different businesses in PIC geographically? And if there's anything to say on ABS as well?
Yes, PIC is very progressed in having penetration of royalty contracts across the globe. We have in the appendix of the presentation the degree of that penetration. You can see each year, it's just getting higher. The US is at 97%, North America, I mean.
ABS is still quite a way to go in EMEA, quite high penetration, about 25%, 30%. Rest of the world, lower than that, so a long way to go compared to where we are with PIC.
I saw Max raising his hand here.
Yes. Max Herrmann again from Stifel. Just maybe a question for Jorgen, actually, on the NuEra opportunity here. I know you wanted to get some more pull. I know one of the issues when we had the visits to North Wales, one of the issues was trying to get people to distinguish between two black cows; one being NuEra and therefore, having better meat cuts compared with potentially another cow? And trying to get people like Sainsbury's taste the difference and other customers to appreciate the value that offers? I don't know whether from your background that there are any things that you can see that that can help Genus achieve that kind of objective.
Yes. Well, I think it's clearly a very important point within our ABS is to leverage the beef on dairy technology. And also our beef on beef genetics. We -- this pull-through was working with retailers or other partners further down the chain to create a pool for our genetics is going very well.
You highlighted Sainsbury's I mean, there is a test going on in the North of England, where I believe, our, NuEra based beef is in about 150 stores for a test. And I think a clear benefit that we can offer is in the area of sustainability. And so we're completing an LCA, Life Cycle Analysis to further quantify that and reduce the environmental footprint for our customers. And so that's another value proposition that we can bring to the chain. Maybe you want to add.
Yes. When you started your question on NuEra, I wondered if you were talking about the CEO of NuEra, its beef genetics. But we didn't actually highlight very much in the presentation this time around to put the theme on pull-through, but actually, the progress we're seeing is really encouraging.
And that's true whether you're looking in the UK market, the North American market. Actually have started some new dedicated supply chains and programs in Spain, in The Netherlands, and in some of the Scandinavian areas.
So, actually there's growing momentum. It takes time to build because you have to create those supply chains and of course beef animals, how long does it take to get a beef animal to market? You have to create the calf. That's here. Grow the -- so these things build over time, but I think we're encouraged by the momentum.
Thank you.
Yes, I think, Scott, you had--
We've got another question from the webinar, which is from Jens Lindqvist from Investec. Jens, if you could please just accept the invitation, then unmute yourself and then turn on your camera, that would be great. [Operator Instructions] So, Jens, if you just turn on your camera, that'd be great.
I am trying. Here we go.
And go ahead with your question.
Thank you. Yes, thank you for taking my question. Following on from Charles' question earlier, I think with regards to the share gains in PIC across all of the major geographies really. May I just ask who in general you are taking share from? I mean, is it the likes of top pigs in within the premium segment, or is it more from regional players?
And then secondly, I was wondering if you could share any detailed please of the -- for the plan changes on the of the PIC royalty model in China?
And then finally with regards to the gene edited pigs that will be imported into China, will they be housed in BCA's facilities or were it in yours? And is it still the case that the development will be exclusively funded by BCA as per the original agreement? Thank you.
Yes. Okay. So, quite a few questions. Let me take them in reverse order and see if we remember them. So, in terms of the PRRSv pigs in China, yes, those will be housed in BCA facilities, and yes, BCA is funding and progressing that work on gaining regulatory approval in China. And we're actively working very closely with them as you can imagine to support them in that process. So, that's -- that was a question around BCA.
In terms of the China royalty model, I don't -- we already had a question on that. I think, I don't have a lot further to add on that at this point. Just to reiterate that our royalty pricing in China, it is very much at similar levels to the rest of the world.
And then your third -- your first question, I guess, answering them in reverse order was around who are we gaining share from. I think it does vary around the world. And so you have -- I think you have a whole variety of things going on. Internal programs, right, would be one of the places that we're gaining against. So, think of what we did with Smithfield, with Olymel. So, that will be one theme.
The growth of the sirloin [ph] in North America, PIC 800, being super-competitive and growing our sirloin share, that will be very much actually against DNA, which previously was the distributor of DanBred Genetics in North America.
If you're looking in Europe, I think it would be broad based, there's quite a few cooperatives operating in Europe and smaller regional players and so those would typically be the people that we would be winning against that.
So, it's quite a broad based picture. I think we're happy to compete against anyone anywhere in the world.
We'll take next question from the room. Maybe Charles Hall from Peel Hunt.
Just going back to ABS, can you just talk a little bit more about the progress in Sexcel, how the market's operating? how the competitive environment for that product is maybe in terms of pricing and different regions and maybe specifically on India? And whether you're getting any more IntelliGen contracts?
Yes. Look we're achieving strong growth in Sexcel. You would have seen that 18% and even the markets which we would classifiers more mature are still achieving strong growth, North America, for example, 25%. And it's a very competitive environment, but ABS had real success in rising increasing prices actually across all product groups. So, yes, competitive environment, but I think ABS is competing well and gaining share.
And actually specifically on that pricing point, historically, ABS wasn't very good at getting pricing. And as a change of mood as over the last year or so. Is that now sort of part of the culture is to be going for price and effectively collecting on the genetic improvement that you're actually providing?
It's definitely changed. I think the confidence of the business to be able to push on price having had the success that they've had. And, yes, they're seeking to achieve value, definitely. So, we expect that they will achieve further price increases, but they've got to grow volume as well.
So, it's a fine balance between the two, and, yes, we'd like them to push on volume just as much as they're pushing on price.
You also raised India as a point there. I think we're encouraged by the progress in India. The government of India contract has that that we were successful in winning a good share of that business during course of the year.
I'd say like all of these things which government initiated, so little sticky to get the ball rolling. But I think we were pleased overall with the progress we made there. We think that there's plenty of growth opportunities still there in India. Anything you want to add on pricing in ABS?
Yes. I mean that is something that we're studying very carefully, where we're putting additional resources into that. And we're clearly looking, as I mentioned earlier, in terms of the surface levels and focused on making sure that we get compensated adequately for the very high added value services that we offer.
And I think there's just -- with many businesses, I think, around the world, in this inflationary environment, the need to do so, I think, has increased and as a result of that, I think we have learned at ABS and so that will continue to be a focal area going forward.
Thank you. We have no further questions from the webinar at the moment. So, if there's no further questions in the room, then we'll go back to Stephen for his closing remarks.
Let's just check to see there's -- no. Okay. Very good. Well, thank you all very much for coming. It's been great actually to have some face-to-face and also nice to see we're able to work with the remote webinar as well.
We're looking forward to visiting with investor and others over the coming days. Thank you for your support here and look forward to continuing the conversation. Thank you.