Anpario : 2023 Reports

Anpario plc Interim Report 2023

Anpario plc

("Anpario", the "Group"

or the "Company")

Interim results

Anpario plc (AIM:ANP), the independent manufacturer of natural sustainable animal feed additives for animal health, nutrition and biosecurity is pleased to announce its unaudited interim results for the six months to 30 June 2023 ("H1 2023").

Highlights

Financial highlights

• 7% decrease in sales to £15.3m (H1 2022: £16.5m) as sales growth in the United States and Australasia was offset by declines across Asia Pacific, Europe and Latin America.
• Gross profits fell by a lower amount of 3% due to an increase in gross margins to 43.9% (H1 2022: 41.9%)
• 37% decrease in adjusted EBITDA1 to £1.9m (H1 2022: £3.0m)
• 42% decrease in profit before tax to £1.4m (H1 2022: £2.4m)
• Diluted adjusted earnings per share down 42% to 5.66p (H1 2022: 9.81p)
• 2% increase in interim dividend to 3.20p (H1 2022: 3.15p) per share
• Cash balances, including short-term investments, of £7.3m at 30 Jun 2023 (31 Dec 2022: £13.6m), after £9.1m transferred to an escrow account ahead of the completion of the tender offer in July.

Operational highlights

• Sales price increases helped soften the reduction in volumes and recovered gross margins previously impacted by raw material price inflation.
• Sales growth of Orego-Stim® and pHorce® benefiting from the trend to reduce antibiotic use and demand for anti-viral feed mitigants.
• Strong growth of sustainably sourced omega 3 supplement brand Optomega® Algae.
• Received first ever King's Award for Enterprise for Sustainable Development.

Outlook

• Further improvement of gross margin expected in H2 2023 through an anticipated further reduction in the cost of raw materials and recovery in sales volumes.
• Benefits of mitigating cost reductions and efficiency improvements implemented in H1 2023 expected to feed into the latter part of H2 2023 and more fully realised in 2024.
• Some signs of the recent challenges faced across the global agriculture industry are beginning to alleviate.
• Regulatory environment continues to move towards natural and sustainable feed additive solutions giving the Board confidence in the long-term profitable development of the company.

Matthew Robinson, Chairman, commented:

"In my first statement as Chairman, I would like to thank my predecessor, Kate Allum, for her two years of service to Anpario and the significant contribution she made in her leadership and guidance of the Board.

The Board reports the Group's performance during what has been a difficult and challenging first half of the year for the global agricultural industry. Group sales declined by 7% to £15.3m compared to the prior year period of £16.5m, as meat protein producers came under significant margin pressure due to high feed and overhead costs, weak consumption as consumers reacted to the effects of increased cost of living and in some regions an oversupply of poultry, pork and shrimp. These difficulties inevitably led to a reduction in the use of speciality feed additives as producers scaled back production and looked to reduce input costs. Our biggest region, Asia, suffered the most, further affected by disease outbreaks of avian influenza and African swine fever (ASF).

The actions taken to recover raw material price inflation helped to increase gross margins by 2.0% to 43.9% compared to the same period last year, which would have been higher but for an under recovery of production overhead costs due to lower volumes. Our weighted average selling price increased by 25% driven by necessary price increases and a higher value-add product mix.

Adjusted EBITDA1 declined by 37% to £1.9m compared to the same period last year of £3.0m. Action has already been taken to reduce overhead costs and the automation investment in the production facility has improved efficiency at lower volume levels. The benefit of these actions will be partially felt in the final quarter and more fully in 2024. The difficult decisions taken would not have been possible without the efforts and support of our staff across the globe who have remained resolute throughout difficult trading conditions and remain focused on implementing our strategy.

The geographic and product diversity of the Group continues to serve us well but the synchronised challenges currently impacting global agriculture and most species are highly unusual. Our strategy to offer sustainable and environmentally friendly products which help customers transition away from using antibiotics and some of the harsher chemical treatments positions Anpario to take advantage of current and future trends.

The recovery in our markets is taking longer than we anticipated at the beginning of the year and is also exacerbated by high inventory levels throughout the industry. However, our sales teams are focused on offering high value differentiated solutions which deliver significant benefits to the producer across the four main species groups of poultry, swine, ruminant and aquaculture. There are signs that some of these challenges are alleviating for our customers, not least, the expectation of further falls in animal feed prices in the second half of this year. The second half has started at a similar level as the first, but we anticipate that as conditions in the industry improve and our business development initiatives prove successful, sales growth will return as the year progresses and into 2024.

We were pleased to return £9m in cash to shareholders by way of the tender offer. After this corporate action the Group retains a strong balance sheet and healthy cash balance with which to deliver on its growth objectives."

Matthew Robinson, Chairman

1 Adjusted EBITDA represents operating profit for the period of £1.195m (H1 2022: £2.313m) adjusted for: share based payments and associated costs £0.120m (H1 2022: £0.091m); and depreciation and amortisation charges of £0.590m (H1 2022: £0.604m)

Chief Executive Officer's statement

Overview

Group sales for the six months to 30 June 2023 declined by 7% to £15.3m (H1 2022: £16.5m), impacted by the numerous challenges affecting the global agricultural industry. Brazil and the United States (US) delivered strong sales growth of 18% and 27% respectively, reflecting the strength of their home agricultural and energy markets which enable them to be competitive exporters of meat protein to the other regions of the world. However, Asia, our biggest region, accounting for more than a third of Group sales during the period, experienced sales and volume declines of 18% and 29% respectively.

Our higher value differentiated product brands Orego-Stim®, pHorce® and Optomega® Algae delivered sales growth of 4%, 42% and 117% respectively, but these performances were offset by declines of more competitive product areas in organic acids, mycotoxin binders and antioxidants. Group product volumes declined by 26% with the biggest impact being in these lower value-added price sensitive products. Volume declines, however, were tempered by an increase in weighted average selling price of 25% compared to the same period last year, which illustrates the extent to which raw material price inflation has been passed on in selling prices and the strength of our leading product brands.

Gross profit decreased by 3% to £6.7m (H1 2022: £6.9m) for the six months to 30 June 2023, reflecting lower volumes sold. Encouragingly, gross margins increased from 41.9% to 43.9%, primarily due to passing on raw material price inflation in prices, combined with declining raw material and logistics costs during the period. Historically high inventory levels, which we are now reducing, means that some of the cost reductions will continue to work their way through to benefit cost of goods sold, which is also dependent on production volumes through the factory reflecting the Company's high operational gearing.

pHorce® continues to perform well in the North American swine market not only as an anti-viral feed mitigant but also improving the performance and productivity of the animal. In addition, pHorce® is undergoing trials with a significant poultry integrator where it has already proven to be effective at controlling salmonella in antibiotic free formulations. Our new Orego-Stim Forte® product for aquaculture, which contains several natural phytogenic compounds, has proved to be highly effective at preventing and controlling necrotic enteritis when administered through the drinking lines for poultry in an easy-to-usewater-soluble form. We have developed a number of product extensions for Orego-Stim® to customise the product for specific applications tailored to market requirements.

The first half of the year has undoubtedly been the toughest to navigate where industry specific and geopolitical challenges have coalesced to make the trading environment very difficult. The 37% decline in EBITDA1 to £1.9m compared to the same period last year (H1 2022: £3.0m) is disappointing and reflects market challenging conditions. However, the team's priorities remain on profitable sales growth but equally it has been necessary to reduce our overheads to match current trading levels. There are some positive signs in our markets and with our customers but these are volatile times and so we remain cautious but optimistic that our markets are beginning to improve from what was a very testing first half.

Operational review

Americas

Overall, the segment grew sales by 7% due to increased sales in Brazil and the United States delivering growth of 18% and 27% respectively compared to the same period last year. Brazil's poultry industry was a big beneficiary of export trade, with a 17% increase in the first quarter of 2023. Whether this level of export activity continues will depend on how successful the industry is at limiting the impact of high pathogenicity avian influenza (HPAI) which has now reached some poultry producing southern states although it appears to be limited to wild birds and smaller farms.

The US delivered strong sales and volume growth from both Orego-Stim® and pHorce®. Orego-Stim® had a successful launch to the young cattle market for inclusion in calf milk delivering healthier better performing calves, reduced medication costs and reducing antimicrobial resistance as proven by our research with the University of Reading and the granting of the UK patent for this specific claim. We have also combined Orego-Stim® and our mycotoxin binder product to produce a 2-in-1 solution for the US dairy market and are working with a distributor to the poultry industry on a water- soluble combination product for preventing and controlling necrotic enteritis as demonstrated in trial work undertaken in the US last year.

Historically Argentina has been a consistent market for Anpario but in recent times the economy has been under increasing strain with a weak currency, high inflation and central bank currency controls which have impacted our sales to the country with a decline of 22% compared to the same period last year.

Sales to the Latin America region declined by 9% and, although Colombia and Mexico delivered good sales growth with products including Optomega® Algae and pHorce®, the overall performance of the region was impacted by a drop in pellet binder sales to Ecuador.

Asia

The segment, which includes Australasia, China and South-East Asia accounts for just over one third of Group sales. Sales declined by 18% in this segment compared to the same period last year with volumes 29% lower of which two thirds can be attributed to the Philippines, which has been badly affected by African swine fever such that pork production is still 23% lower than in the first quarter of 2021. In addition, producer profit margins have been squeezed by high feed and overhead costs. The decline in volumes tended to come from more price sensitive and lower margin products such as antioxidants where the price of a key raw material ingredient increased exponentially across Europe due to supply constraints following Russia's invasion of Ukraine.

The other notable decline in sales performance was Malaysia, which suffered from high feed prices and a number of outbreaks of avian influenza. The expectation is that lower feed cost levels, albeit still historically high, in the second half will support producers in improving their margins.

Australasia and Indonesia delivered strong sales performances of 18% and 49% respectively compared to the same period last year. The tough markets in South-East Asia have also been exacerbated by high inventory levels throughout the supply chain following the rapid opening up of economies post pandemic; this placed increased pressure on global logistics prompting feed additive suppliers, distributors and feed mills to build up inventory only to be confronted shortly afterwards by a drop in meat protein production as consumption waned. The unwinding of this situation is taking longer than expected but is and will continue to improve with time.

China which accounts for just under 13% of Group sales declined by 9% due to the difficulties experienced in the swine market driven by weaker than expected pork consumption, while continuous herd liquidation added more supply resulting in lower pork prices. Furthermore, outbreaks of African swine fever in some provinces have seen short-term disruptions and this uncertainty and months of losses is forcing smaller producers to exit production. Pork prices have improved in recent weeks, but it remains to be seen whether this is sustainable given the weak economy. Our China business is redirecting its efforts towards the dairy and aquaculture sectors, with success, which we believe have better growth opportunities in the medium term and will reduce our dependency on the swine market.

The Middle East, Africa and India

Despite sales and volumes declining by 4% and 37% respectively compared to the same period last year, we are encouraged by the progress the sales team has made in selling our higher value add products such that the weighted average selling price improved by a hugely significant 52%. Most of the drop in volumes are attributed to lower margin mycotoxin and pellet binders, which are often subject to tender bidding processes leaving little opportunity to differentiate. In contrast, Optomega® Algae has been well received by customers looking to improve dairy cow fertility. There was also good growth in Turkey with Genex® Poultry which is an acid-based eubiotic and phytogenic combination.

Sales of Orego-Stim® to India increased by 28% as our long-term partner expanded the market opportunities for the product. We consider India to be a good opportunity for Anpario's product range and will be working more closely with our local partner in the future.

Europe

Overall sales and volumes declined by 8% and 20% respectively compared to the same period last year. However, the first quarter of last year had some residual sales from the UK feed hygiene customer lost due to significant cost inflation in organic acids; excluding this customer loss, the sales across the segment would have grown by 3% with volumes declining by a lessor 9%. The weighted average selling price across the segment increased by 15% reflecting actions taken to recover raw material cost inflation.

Pork production across Europe has been in decline over the past year with a year-on-year decline of 10% in the first four months of 2023 with the UK and Spain, the latter being Europe's largest pig meat producer, experiencing declines of 17% and 7% respectively. The contraction in supply has helped to increase pork prices and with feed prices dropping more efficient producers have returned to profitability. The improvement in market conditions for producers means they are more receptive to using speciality feed additives which is borne out by our improved performance in Spain, Poland and the Baltic States.