Full Year 2022 Origin Enterprises PLC Earnings Call Sep 27, 2022 (Thomson StreetEvents) -- Edited Transcript of Origin Enterprises PLC earnings conference call or presentation Tuesday, September 27, 2022 at 7:30:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Sean Gerard Coyle Origin Enterprises plc - Group CEO & Executive Director * T. J. Kelly Origin Enterprises plc - Group CFO & Executive Director ================================================================================ Conference Call Participants ================================================================================ * Anne Margaret Crow Edison Investment Research Limited - Director * Daan Arends Kepler Cheuvreux, Research Division - Equity Research Analyst * Jason Molins Goodbody Stockbrokers UC, Research Division - Food and Beverages Analyst * Kevin Christopher Fogarty Numis Securities Limited, Research Division - Analyst * Roland French Davy, Research Division - Food Analyst * William Larwood Liberum Capital Limited, Research Division - Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning, ladies and gentlemen, and welcome to the Origin Enterprises plc Preliminary Results Call 2022. Just a reminder that this call is being webcast live on the Internet, and the presentation is available to you on the Origin website. I will now pass it over to Sean Coyle, CEO of Origin Enterprises plc. Please go ahead, sir. -------------------------------------------------------------------------------- Sean Gerard Coyle, Origin Enterprises plc - Group CEO & Executive Director [2] -------------------------------------------------------------------------------- Thank you, and good morning, everyone. Welcome to the full year results for 2022 for Origin Enterprises. As you would have read in this morning's announcement, the numbers are a very strong set of numbers, and I'd just like to thank all of the team across the group, good delivery across all segments. And in particular, I'd like to thank our Ukrainian team who continue to operate in a hugely challenging environment for them. After 2 very difficult years from a weather and pandemic perspective, it's great to be announcing strong growth across all of our individual segments. And we saw improved financial returns with a very significant lift in operating profit across the group. We just start with the normal safe harbor disclosures. And as is normal for this time of the year, we're not issuing guidance for the year as a whole. And as many of you will know who follow Origin, the weather challenges that we variously encounter from year-to-year can typically dictate a large amount of our profitability. I'm not giving any guidance at this part of the year. So the business delivered very strong operating profit results with an increase in operating profit of 96% to just under EUR 120 million, a strong increase in operating margin as a result of that and growth in EPS to just above the range of analyst expectations, which we had guided and which are lifted a little further by the share buyback, which was executed during the year. The business finished with a net cash position, albeit somewhat bolstered by delayed payments to suppliers who are falling within the remitted sanctioned payments. And we're announcing an increased dividend of EUR 0.16 this morning, up from EUR 0.11 last year and a further buyback of up to EUR 20 million, which will be executed in the coming months on top of the buyback, which was completed for EUR 40 million over the course of last year. The business delivered strong operating performances as well in terms of I suppose the price volatility in which the business experienced through the year. So a number of changes to characteristics with gas prices moving frequently up and down throughout the year, availability of raw materials and fertilizer being challenged by both those gas prices and also supply chain challenges because of COVID in certain manufacturing jurisdictions for some of our principal suppliers. So access to product supply and considerable work done by the team has gone into delivering a very strong operating performance with, as I mentioned earlier, very strong growth across all 3 segments of the group. And we continue to see the business evolve from a strategic perspective with significant investment going into changing our own product set. We are (technical difficulty) a new coated urea plant, which is opened in Romania. We've developed a new biological lab facility in our Latin American business in Fortgreen called First Agbiotech. And we're also seeing significant growth in the internal portfolio within the group within our BAM portfolio, biological products, adjuvants and micronutrients. The business is also focused on embedding sustainability right across the group with the creation of new KPIs to focus on the area of soil health and nitrogen use efficiency as well as biodiversity within the group. And our Capital Markets Day focused strongly on that area and is still available to view on the Origin website. And in addition to that, then we have a very strong M&A pipeline with a focus on the specific areas of amenity, the environment and ecology sector where we see ourselves acquiring businesses and also in the product-based area where we're also looking at other opportunities. To touch on some of the individual business segments very briefly, and I'll just pick out some highlights here because TJ will cover the financials in depth later on. All of the individual businesses within the Ireland and U.K. portfolio saw very strong growth, particularly strong within our U.K. fertilizer business, but also strong growth within our Feed Ingredients business, which bounced back from a very challenging year last year, which had a fire and also a challenging delivery schedule with some vessels coming from South America. Our Amenity business continue to grow and grow strongly post COVID. And our traditional agri businesses, our B2C businesses in the U.K. market also saw very strong growth. So very pleased with the delivery from our Ireland, U.K. businesses. And you can see that all of the metrics from operating profit to margin right across the group improved considerably. Our Continental European businesses saw very strong growth across our Polish and Romanian businesses, in particular. And that's offset then by the loss of our Pillaert business, which we sold in the previous year, which is coming out of the comparable numbers and also a decline into loss-making figures for our Ukrainian business. So considerable work has gone into improving margins across our Polish and Romanian business with a focus on specialty revenue and strategic products, and they've continued to deliver for us. So we're very happy with the performance of those 2 businesses. And obviously, Ukraine has been extremely challenged, both from a volume perspective and also the price environment and availability of products has been a challenge for that business over the last year. And we continue to focus on reducing working capital and optimizing margin across our CE geographies in particular. And finally, then in Latin America, again, strong growth in the business, which has been evident, I suppose, since the completion of construction of our controlled release fertilizer facility in the second half of FY '21, but continued growth in our traditional core product set within that business as well. So the Brazilian business growing strongly supported by the currency translation as the Brazilian real strengthened again during the year and also the general geopolitical tensions and global grain and oilseed markets have supported Brazil as a production economy, and we see increased soy production area in that geography over the coming 12 months. I'll hand over to TJ perhaps who will run through the financials. -------------------------------------------------------------------------------- T. J. Kelly, Origin Enterprises plc - Group CFO & Executive Director [3] -------------------------------------------------------------------------------- Thank you, Sean. Just to focus on some of the highlights from the financial metrics piece. Revenue growth overall at just over 41% in a reported currency basis, driven primarily by fertilizer pricing and with strong growth in volumes delivered in our CP and CE businesses, offset overall by what were pricing-led declines in fertilizer volumes. I'll come back on the build of revenue a little bit later. From an operating profit perspective, then as Sean said, very strong growth to just under EUR 120 million from EUR 61 million in FY 2021. And that really reflected good growth, particularly across the U.K. and Ireland segment, as we've just seen good management of the pricing volatility in the fertilizer book, underlying good performance in the Amenity business and what were also strong underlying volumes in our core crop protection and seed businesses across the U.K. and Ireland segment. LATAM equally, as Sean just highlighted, delivered strong growth, volume growth evenly split across the core BAM portfolio and CRF portfolio. So pleased with progress in the LATAM business and our CE business, despite the challenges of the Ukraine performance, underlying solid performance across both the Romanian and Polish businesses. From a dividend perspective, then you're pleased today to be announcing a final dividend of EUR 0.1285, which brings the total dividend to EUR 0.16, which in conjunction with the share buyback already completed of EUR 40 million in FY '22 and a buyback being proposed today of EUR 20 million, we believe delivered very solid and attractive returns to the shareholders. And to put that in context, we are distributing 50% of the FY '22 profit after tax number with today's announcement. From a return on capital employed perspective, then clearly very pleased with the progress there, up to just over 18% from 9.3% last year. And that compares to our targeted return on capital range of 12% to 15%, and really in FY '22, a function of strong profit delivery across the portfolio. Looking then at revenue in a little bit more detail from a headline perspective. Revenues, excluding crop marketing is up just under 43% with underlying revenues up just under 40%. Of that, then, as you can see, pricing is a significant driver. And of that 5% pricing growth, approximately 80% of that is fertilizer pricing led within the revenue declines then 5.4%. When you back out the impact of Ukraine, that decline is about 2.7%. And when you strip out the volume decline to fertilizer, then overall, the portfolio is showing about mid-single-digit volume growth across the core product offering. So I would say underlying -- pleased with the performance on an underlying basis across the core crop protection and seed areas. Moving now to the financial highlights pages. We covered some of these earlier. Just draw your attention to a couple of points here. Finance costs or interest costs, as you will note, have increased from EUR 8.6 million to EUR 11.1 million in the current year. And while we had a very strong cash performance in the year and are actively managing our working capital position, we -- and we have various interest rate hedging programs in place. We are exposed on the left to interest rate volatility in certain markets where it's not possible to have synthetic hedges in place. And obviously, with the recent rate voice that we've seen, we continue to have some exposures. We're not hedged and where we're in markets, we don't have hedging programs, such as Brazil, Romania and Poland. So really the key driver of that interest rate rise in the year was just the exposure to those variable rates. From a JV and associate perspective then, strong improvement in the year, benefiting from, again, very strong trading conditions overall. But bear in mind that that performance is set against the challenging prior year where we suffered the impact of the fire in our animal feed facility, and we also had some supply chain challenges late H1, early H2 of FY '21. Looking at the operating profit bridge, underlying profit up (technical difficulty) of Green-tech, which is the acquisition column; and Pillaert disposal largely offsetting, and we see some currency tailwinds come through primarily as a result of a strengthening sterling against the euro in FY '22 over FY '21. Clearly that's a dynamic that has been changing in the last couple of days, as you will know. From a balance sheet perspective, then overall shareholder bonds improved by about EUR 40 million and that approximately equates to the improvement in our net debt position at the end of the year. And again, for those of who know us will be aware that the year-end July does reflect and represent a seasonal low point in terms of our working capital cycle. From a free cash flow perspective, then, again, obviously, very pleased with the conversion of profitability to cash. I mean, the key driver ultimately of that free cash flow of EUR 108 million is the increase in EBITDA performance from EUR 69 million to EUR 130 million, and you'll also note there that we did have a working capital inflow. There are a few components to that working capital inflow, one of which, as Sean mentioned, is the impact of sanctions payments, whereby our net working capital has benefited from the fact that there are certain trade payables that have been suspended in accordance with the international sanctions imposed on the Russian authorities who are benefiting in that EUR 60 million to the tune of EUR 40 million, EUR 45 million. We've also had a strong cash mix in our sales in FY '22. So we continue to improve the mix of cash over credit sales in the year. That's also contributing to that working capital inflow. And similarly, we have been actively reducing the working capital levels in Ukraine, post the start of the conflict. And that, again, has driven a working capital inflow from a working capital perspective. So we have seen underlying headwinds from a pricing perspective, as you might expect. But just to give you some sense of some of the tailwinds that have been offset or have helped to offset those headwinds in FY '22. Our taxes paid number also you see is up year-over-year. That's partly a function of increased profitability, frankly, and it's also a function of the timing of certain of our prelim tax payments in FY '22 over FY '21. From a credit metric perspective, then, again, as you anticipate our net debt to EBITDA, given that we're in a cash positive position at the end of the fiscal year is 0. And EBITDA to net interest gained very strong metrics through to the end of the fiscal year FY '22. So with that, I hand it back to Sean. -------------------------------------------------------------------------------- Sean Gerard Coyle, Origin Enterprises plc - Group CEO & Executive Director [4] -------------------------------------------------------------------------------- Thanks, TJ. So from a strategic perspective, one of the things that we've been very focused on and if you have watched our Capital Markets Day videos, you'll get a good flavor for us is changing our product sales and changing the profile of the business to, I suppose, live with the new reality of increased regulation around fertilizer, increased regulation around pesticide usage and the changing regulatory environment from an EU Farm to Fork perspective and a U.K. agricultural build perspective. So the business has been focused for a number of years now on developing manifestos, which will provide advice for the farmer, centering on these principles. And Green Horizons and fertile future manifesto were published over the course of the last couple of years. We've been very focused on productization within our portfolios. And those of you who got an opportunity to look at the Capital Markets Day videos, would have seen Peter Scott and Clare Bend talk about the technical approach to product selection within the portfolios. Within our M&A focus, again, we are continuing to look at opportunities within environment and ecology as part of our approach to M&A. And in addition to that, then broadening our exposure to the landscaping and immunity sector that we're already in and focused on product-based solutions, improving the overall profitability within the group and the overall trajectory of growth within the group. We published our first sustainability report this time last year, and we will be publishing another one in tandem with our annual report again this year. And that sets out our commitment to the UN sustainable development goals. Our nurturing growth framework is within that sustainability report. And obviously, we're focused on setting real targets from a science-based perspective and the taxonomy of the overall business as well. So the business is hugely focused from top to bottom from a board perspective than to the individual businesses on where we can impact our own business and how we can change the focus of the business to cope with the reality of the new world from an environmental perspective, and we'll continue to focus on that space. And we set out our strategic growth drivers within that, then responding to what we see as the 3 key macro growth drivers that impact our business. So sustainable economy and the type of advice that we need to be given to farmers over the coming years is the first focus. The food supply chain and the responsiveness of the globe to food production challenges and the emerging major economy as being another key aspect of the business. So we've set out there our strategic priorities in relation to each of those 3 key macro drivers, continuing to focus our business, which it already has been in fairness, but continuing to focus the business on good technical advice and good technical solutions within our U.K., Irish and Continental European businesses, transitioning our product set away to biosolutions, where we can and specialty nutrition products focused on yield optimization and accelerating the group's investments in products and services that will enhance the environmental and ecological benefits in sustainable use of land. And we see our approach in terms of the sustainable use of land and sustainable agronomy both in the agricultural front, and then the immunity front been focused on balancing sustainability of food production and output, focusing very much on soil resilience and plant nutrition. And again, I advise you to take a look at those technical presentations from Clare and Peter within the Capital Markets Day in innovative and integrated plant nutrition. So combining traditional chemistry with new product sets around plant protection and enhancing biodiversity within our systems and protecting natural capital within our systems. And again, our focus as an organization will continue to be in that space. And across each of our 3 geographic segments, we see the aspect of transitioning our product portfolio and transitioning the services that we provide as being addressed in different ways. And obviously, we're a reasonably diverse group of businesses, but the focus is slightly different within each of the individual business units. So the transition of our product set, the transition of our advice portfolio from Ireland and U.K. where we intend to widen the BAM portfolio within the overall group, expanding our Polish business with a new product plant going into production and construction over the course of FY '23 and continued investment in controlled release fertilizer plant and biological businesses in Latin America has been key to transitioning the group to a new way of thinking from a product perspective. And within the nature economy and the environmental and ecological markets, which we have some exposure to via our Green-tech business and via our agricultural businesses now, which are falling under the environmental land management schemes as part of the U.K. agricultural policy and the various other regulatory changes that are taking place in the European context, we need to build out businesses and build out service offerings in these areas, which will continue to enhance the group's offering. So we continue to view this area as an opportunity for growth and where we will continue to focus some of our M&A activity over the coming years. So in terms of actions that management want to take over the next 12 to 18 months, we set out at our Capital Markets Day, some of the areas where management will continue to focus and working capital discipline is hugely important at the moment, particularly in a very inflationary price environment. So cost of fertilizer, cost of grains, cost of raw materials in general continues to tick upwards and is still at very elevated levels compared to 18, 24 months ago. So investment in working capital is a huge resource challenge for the business, and we continue to maintain very strong discipline in relation to cash versus credit sales, credit terms generally across the group and our overall approach to working capital. We've talked a good bit about our product innovation and transition in terms of mix of products and rolling out those specialty fertilizers and nutritional products as well as the BAM portfolio within the group will continue to improve the mix of products sold within the business and ideally the margin opportunity within the business. We're continuing to invest in our people and the technical capability and strength of the organization is well proven, particularly in the Ireland-U.K. context, but we have some very good people right across the group from a technical selling perspective, and we've been hugely investing in training and improving the skill sets of both our Continental European teams and also our Brazilian teams and continuing to invest in technical specialists to improve sales in both those segments. So the business is focused on people and driving forward the business in recruiting the best people within those businesses. And finally then, quite apart from our use of digital technology, which continues to improve in terms of use of our products across the group, we're also investing in technology in a number of areas. So significant investment in Dynamics 365, which is our new ERP across our Ireland, U.K. geographies, investing in technology in a number of our other businesses to improve either sales or technical capability of the group and the business continues to see opportunity to improve the sales but improve data and data gathering as part of the technology process there. And in terms of growth investments, we mentioned on our Amenity service offering, we're happy that there is a strong pipeline of potential acquisitions within the Amenity segment initially focused on U.K. and Ireland, but we do see the opportunity to broaden the Amenity business out to Western Europe over the course of the next few years. Growth in our biologicals business, and apart from investing in our plant in the LATAM business, we also see the opportunity to research and do near market trials and a very significant number of products within our U.K. businesses and also looking at partnering with a number of biological providers for distribution within the U.K. and Continental Europe agri businesses. We are looking at the opportunity to acquire businesses in the ecology services space, and we're hopeful that over the next 6 months, we'll have an acquisition in that space. And from a landscaping perspective, the Green-tech business has shown us the way in terms of opportunity within that segment. And we think there are a number of potential bolt-ons within the landscaping area that will continue to drive further growth within the landscaping part of the business. So again, that should supplement our immunity offering over the course of the next 12 to 18 months. So to summarize, FY '22 was a fairly challenging year from an inflationary perspective in terms of energy challenges, various different disruptions to fertilizer and supply of crop protection products over the course of the year. And the business has been well managed operationally with the supply chain sourcing challenge addressed and I suppose the volatility of raw material prices being well managed through the year. We see, I suppose, the global macroeconomic environment being a challenging environment for the foreseeable future. It's likely to persist into the bulk of FY '23. And I suppose even looking at some of the challenges that sterling has faced over the course of the last few days is characteristic of that, and I'm sure there will be many other challenges to be faced by the business in the coming 12 months. But we are comfortable given the good balance sheet position that we have to increase both the dividend and launch the share buyback in the coming months. And we see ourselves continuing to invest in both opportunities for organic growth and also some specialist capability in good adjacencies, which we feel that we can grow into and will also benefit the rest of the group. And the business is well set, we think, to deliver on the financial, strategic and ESG objectives that we set out at the recent Capital Markets Day with very strong financial returns overall, a good cash conversion ratio and strong cash generation across the group and a well-positioned balance sheet, leaving us in a good position to withstand any of the various challenges that no doubt the market will throw at us in the coming months. So that's where we stand as of today. We're happy to take questions and open up the call to questions now, if that's okay. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) The first questions come from the line of Jason Molins from Goodbody. -------------------------------------------------------------------------------- Jason Molins, Goodbody Stockbrokers UC, Research Division - Food and Beverages Analyst [2] -------------------------------------------------------------------------------- Sean and TJ, congratulations on a great set of results. A couple of questions from me. If we just start off on farm sentiment across some of your main markets, particularly in the context of where output prices are, but then we've also got the backdrop of cost inflation that the farmers are facing and kind of clearly on the interest rate costs, just some color on what you're seeing there? And then just specifically on the fertilizer market, maybe a few comments whether that's around supply chain and product availability, given some changes that we've seen in the last few months or more recently in the U.K. and how you think farmers are looking to deploy given, I guess, where you saw volumes over the last 12 months? -------------------------------------------------------------------------------- Sean Gerard Coyle, Origin Enterprises plc - Group CEO & Executive Director [3] -------------------------------------------------------------------------------- Thanks, Jason. I would say, in general, farm sentiment is pretty good. Clearly, grain and oilseed prices have been very strong over the last 9 months. And that, I suppose, coupled with probably reasonably good import prices over the course of the year. So some farmers may have bought fertilizer ahead of some of the larger price increases that we would have seen over the course of the fiscal year for Origin meant that farmers, in general, have done well in the arable sector and in the oilseed sector, particularly in the Brazilian marketplace. And likewise, dairy is the predominant crop and grass is the predominant crop here in the Irish marketplace and dairy is the predominant output. Milk prices have moved up appreciably over the course of the year as input prices were reflected in those prices. So generally speaking, I would say farm sentiment has been positive and farmers have done reasonably well over the course of the last 12 months. It does become increasingly challenging as the full year cycle of fertilizer prices, in particular, has impact on the coming 12 months. And I would think that part of the challenge that we've seen is reduction in fertilizer usage. So there is some resistance to the types of raw material price increases that we've seen. We've had a fallback in fertilizer sales of just north of 20% over the course of the last 12 months. And demand can be somewhat moderated by high prices in fertilizer. But the reality is, with gas prices being where they are, there's a huge amount of production off-line. CF, apart from closing one of their U.K. plants completely, has pretty much closed the other plants to production now because of the gas price cost. So production of ammonium nitrate in that context or nitrogen in that contract is very limited domestically in the U.K. and a number of producers across Europe, Yara and Borealis and various other producers who you know, have heard of, have also either curtailed production or stopped production in individual plants because of the high gas prices. So that has led us to go and source material further afield than we would have necessarily had to in the past. That includes larger vessels coming from countries much further afield. We're taking in product from Canada and the U.S. on the fertilizer front, which previously, we generally would not have done given the transition time and the duration of travel to the Irish and U.K. marketplace. And we're taking in product from much further afield. North Africa, Turkey, Greece were generally markets that we would have dealt with, but they wouldn't have represented as big a proportion of our fertilizer book as they do now. So we are having to source products from further away and typically on larger vessels than product, which would have come from near market Europe in the past, and that's a feature of the fertilizer supply chain at the moment. And there has been a transition from manufactured fertilizer into more urea-based products, which are coming from those geographies. So ammonium nitrate or CAN is now being substituted for urea and coated urea in many cases. So a transition to a different source of nitrogen in those circumstances. Do you want to touch on cost inflation generally and maybe CP inflation and other cost challenges across the group? -------------------------------------------------------------------------------- T. J. Kelly, Origin Enterprises plc - Group CFO & Executive Director [4] -------------------------------------------------------------------------------- Yes. So I mean, clearly, a key feature of FY '22 as we lined as the inflationary impacts on raw materials coming through on the fertilizer book. From a CP perspective, I suppose, generally across the regions, the impact in terms of pricing was somewhat more limited, albeit we have seen more pricing inflation pressure come through at the back end of the year and into the early part of the FY '23 season. So we'll obviously keep that monitored. I mean, it does come back again to the general on-farm sentiment, liquidity on farm and willingness and ability of the farmer to invest to optimize yield in the context of other very strong commodity output prices. So clearly, we've seen some level of demand disruption as a result of fertilizer pricing, both in the CP and heat bases, we haven't seen any significant negative impact as yet as a result of greater inflation coming through. But that's something, as I say, we continue to monitor through the season. -------------------------------------------------------------------------------- Operator [5] -------------------------------------------------------------------------------- The next questions come from the line of Kevin Fogarty from Numis. -------------------------------------------------------------------------------- Kevin Christopher Fogarty, Numis Securities Limited, Research Division - Analyst [6] -------------------------------------------------------------------------------- Just a couple of questions for me in terms of -- you focused a lot in terms of, I guess, transitioning the product portfolio. What does it mean for you think sort of future investments or capital requirements of the group going forward? And are there any restrictions or challenges around, I guess, kind of labor availability and skills to develop that portfolio further? And then I guess as a follow-up to that, M&A probably sort of form part of that, as you mentioned in the presentation. But I guess, I just wondered if you could share what kind of differentiation you think future acquisitions might bring to the group as opposed to perhaps what's been done in the past? -------------------------------------------------------------------------------- Sean Gerard Coyle, Origin Enterprises plc - Group CEO & Executive Director [7] -------------------------------------------------------------------------------- Thanks, Kevin. From a product portfolio perspective, I don't envisage any major labor challenges arising out of that. I mean, there's a couple of aspects to any transition. One would be products that we don't own the IP on. So we continue to be a distributor for a significant number of major manufacturers and also smaller manufacturers within the crop protection space. And it's about selecting and driving changes within the mix of products that we distribute to attempt I suppose to improve margin within the business. And the principal challenge here is driving a product transition that aligns with a better sustainable outcome for farmers and for customers, but also maintains an improved margin from that perspective. And generally speaking, new products, including biologicals, including bio products, tend to carry higher margin opportunity than a more standard or a more commoditized product set. So improving the product portfolio when making that transition on the crop protection side and indeed, on the fertilizer side represents margin opportunity. It doesn't change the demand for labor in any way. It does mean that our sales teams in Continental Europe, in Brazil and [others] in those markets need to be more technically prepared and capable of selling the product set. In terms of M&A and ownership of IP and ownership of product sets, we think that we can acquire new products within the portfolio similar to what we've done in our Fortgreen business and similar to the types of acquisitions that we have looked at in the past where IP can come at not at the expense of our traditional distribution relationships. So we see, for example, distribute a range of products in the U.K. called [Clean Crop], which is whole manufactured on our behalf by a third party, which is our IP and making the transition from a product perspective to own IP products in those circumstances. And equally on the fertilizer side, the complex blending capability that we have and the technical coating and delayed release capability that we add to our product set means that essentially, we can drive slightly higher margins on the same ton of products by improving the technical complexity of the products. So that's all important. So we see ourselves enhancing the business from a margin perspective and from a growth perspective through acquisitions, which add technical capability. We have plenty of products within the portfolio, Kevin, that attract single-digit gross margins or gross margins, which are not necessarily the most attractive. While they're necessary to have within the portfolio and farmers demand them, it's about migrating part of the mix into a more technical product over time and improving margin. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- The next questions come from the line of William Larwood from Liberum. -------------------------------------------------------------------------------- William Larwood, Liberum Capital Limited, Research Division - Research Analyst [9] -------------------------------------------------------------------------------- Congratulations on the strong set of results. 2 fairly quick ones from me. Just in terms of -- you just spoke about it there in terms of product mix, particularly looking at LATAM, obviously, the CRF facilities come online. Is there any more margin dilution to come as a result, as that mix shifts any further? And then also just you mentioned sort of the plant in Poland being constructed in FY '23. Just wondering if you could share some details on cost and exact timings on that. -------------------------------------------------------------------------------- T. J. Kelly, Origin Enterprises plc - Group CFO & Executive Director [10] -------------------------------------------------------------------------------- Yes, Will, just on the LATAM product mix, I mean, as you would have seen this year, we did suffer some margin contraction as a result of the expansion in the CRF portfolio, which structurally has a lower gross margin than the traditional BAM and PNM portfolio of products. And as Sean said, our ambition is to grow our capabilities in both sides of that business. So we will look to do some, again, modest capital investments to expand our CRF production capacity in the region, and we also -- and we are also in the process of investing in further biological capabilities. So the extent to both of those go out further in terms of volume, if CRF goes at a slightly faster pace than biologicals, you might see some further modest compression in margin. But ultimately, our goal is to keep it in that low to mid-teen margin level at an OP margin percentage level. And that's really a function of the fact that the cost to serve in Brazil is high, interest rates are high. Cost of debt is not insignificant and hasn't been over the last 12 months and combine that with a relatively high local tax charge, the economics of the returns are such that you need to be generating margins in that low to mid-teen levels to make the economics of the investment work. So that's very much our focus. We're ambitious in terms of both but also need to ensure that the margins maintain in those kind of low to mid-teen ranges, as I said. And that's our plan of the business out over the next 12, 18 months or so. From a Polish perspective in terms of the investment in the new FoliQ plant, we are still at the design stages in terms of the plans there. But in terms of costs of the investment, we think about that in the contest, kind of, I'd say, low to mid-single digit millions, kind of the EUR 4 million to EUR 6 million, EUR 4 million to EUR 5 million range as an investment in the facility there. So modest, I would say, in the context of the overall capital capacity of the group. But again, and this for the returns of that business and the product set FoliQ can generate for us. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- The next questions come from the line of Daan Arends from Kepler Cheuvreux. The line got disconnected. We are going to take the next question. The next questions come from the line of Anne Margaret Crow from Edison Group. -------------------------------------------------------------------------------- Anne Margaret Crow, Edison Investment Research Limited - Director [12] -------------------------------------------------------------------------------- Congratulations on a great set of results. I was wondering if we could go back to [VF 9], and if you could take me through that movement in volume again and the impact of the situation in Ukraine and just piece that out again. I wasn't able to write quickly enough to take note. -------------------------------------------------------------------------------- T. J. Kelly, Origin Enterprises plc - Group CFO & Executive Director [13] -------------------------------------------------------------------------------- Yes. I mean as you can appreciate, it's been very much a year of 2 halves in the Ukraine context with the start of our second half, obviously coinciding with the start of the war in the region. And really, what we've seen is a kind of precipitous decline in volumes in the second half of our fiscal year from early March. Overall, volumes in Ukraine back about 1/3 on a full year basis. But really, that's not reflective of the impact that we're seeing going into our Q4 into our May, June, July period where we would have seen overall volumes decline north of 70% in Q4. So a precipitous decline, I would say, but it's been, as you can imagine, very much in the first instance about the safety and well-being of our staff, which has been the primary focus. We have in parallel with that being managing the balance sheet in terms of exposure around working capital. That's a process that is ongoing. The business at the moment, I suppose, is running very -- on relatively modest volumes compared to previous years. And given the tightness of liquidity in the market, it's very much a cash market at the moment, but volumes, as you can appreciate, significantly back on where they would have been historically. -------------------------------------------------------------------------------- Anne Margaret Crow, Edison Investment Research Limited - Director [14] -------------------------------------------------------------------------------- Okay. And if you were to strip out what was happening in Ukraine and look at volumes overall for 2022, what would that look like? -------------------------------------------------------------------------------- T. J. Kelly, Origin Enterprises plc - Group CFO & Executive Director [15] -------------------------------------------------------------------------------- Yes. As I touched off of in the presentation earlier, what we've seen is overall volume decline of about just over 5.5%. If you strip back the impact of Ukraine, that volume decline just reduced to just under 3%. So that just gives you some sense of the impact of the Ukraine volumes in the overall group. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- The next question comes from the line of Daan Arends from Kepler Cheuvreux. -------------------------------------------------------------------------------- Daan Arends, Kepler Cheuvreux, Research Division - Equity Research Analyst [17] -------------------------------------------------------------------------------- I had a single question on the news that broke earlier this week about the new government in the U.K. looking to review the post-Brexit agricultural subsidy plans. So one option being discussed is moving away from, let's say, a major economy more towards -- or revert rather to EU style payments based on simply acreage. So I was wondering to get your view on how important is it for you to not see revert of these plans? And how would it impact maybe also the sustainability strategy and the expansion of the product portfolio if we would see a reversal to simple payments based on acreage? -------------------------------------------------------------------------------- Sean Gerard Coyle, Origin Enterprises plc - Group CEO & Executive Director [18] -------------------------------------------------------------------------------- Thanks, Daan. Yes, I'm not sure that the strategy that's been announced by the U.K. government is necessarily one that will pertain for a 10- to 20-year period. And obviously, when we're looking at the opportunity to make strategic investments, we'll be looking in the long term rather than any short-term changes in agricultural policy. A change which focuses on payment per hectare and food security and food production isn't necessarily a bad thing for our agricultural customers. But longer term, I have no doubt that environmental impact of farming and the environmental challenges posed by food production will also be a feature of government policy, albeit it may not be a focus in the term of the current government, which is for another 2 years. So we, I think, are not unduly hurt by any transition back to just a payment per hectare and focus on food production in the U.K. context. I think that's not necessarily a bad thing for our customer base. But at the same time, we've got to have one eye on the future and one eye on the environmental challenges that the globe faces. I mean all governments have made commitments at COP26 and various commitments under carbon, I suppose, reduction plans, which will need to be delivered on and will need to be recognized at some point in the future. And while the immediate challenges of food scarcity and food security may change policy for a short period of time, I've no doubt that the environmental aspects of food production will come back on the agenda in short order. -------------------------------------------------------------------------------- Operator [19] -------------------------------------------------------------------------------- (Operator Instructions) Our next questions come from the line of Roland French from Davy. -------------------------------------------------------------------------------- Roland French, Davy, Research Division - Food Analyst [20] -------------------------------------------------------------------------------- I've got 3 questions, if I could. First pertains to fertilizer. You called out that you're sourcing product, I guess, from regions further than you typically stretched to, so namely Canada and the U.S., and that brings longer lead times. Just wondering, are those orders effectively back-to-back with your customers? Or are you taking that price risk over the time frame? And that's the first question. Second question is just on farm activity. Have you a sense around key products or regions, how much stock might be carried over from the prior season and whether that's a risk to application through FY '23? And then finally, just on European margins, you talked about lifting margins in context of product mix. I'm just wondering can you give us a little bit more detail there, i.e., how much more exclusive or owned products you're selling and how that's being achieved? I'll leave it there. -------------------------------------------------------------------------------- T. J. Kelly, Origin Enterprises plc - Group CFO & Executive Director [21] -------------------------------------------------------------------------------- Okay. Roland, I'll maybe get the first question in terms of the longer lead times. I think there's certainly a couple of dynamics that play with sourcing product from further markets as Sean touched on, typically they're larger vessels is one factor. The other piece we're seeing is that there's given pricing inflation, credit limits do come into play and probably being shipped against cash is another feature, which obviously puts an additional strain on working capital. I suppose more broadly in terms of back-to-back nature of the business, I would say that probably needs to be kind of looked at in the context of both the Ireland and the U.K. markets. Again, the U.K. market, typically, we work on relatively shorter lead time. So if you like, kind of inherently it is somewhat more of a back-to-back type market in that the lead times are shorter, offtakes are on a more routine recurring type basis as opposed to the Ireland market, which typically holds product and inventory for longer up to the kind of peak offtake period which start during the start of the calendar year each year. I would say one of the things we've noticed this season is that orders in an Ireland context are slightly stronger. So to that extent, that is partly a function of farmers trying to procure product with concerns around scarcity of supply, but also we are actively more actively managing that offtake pattern as well such that we are monitoring the order book relative to our purchasing position. So I would say, yes, there is certainly more of an intent to be a back to back as possible. It isn't obviously 100%. It's not a 0-sum game, but it is certainly more in the thinking of our commercial teams and commercial organization given the relative risk around the sudden correction or a sharp correction in market. And I suppose the other dynamic we've seen is that in an Irish context, the trade generally has been quite in terms of volumes, again, for that reason of concern around being caught on the wrong side of a sudden downward correction in the market. So I would say, prudent, disciplined buying and embedded in that, yes, is more of a sense of being as back-to-back as possible. But I would say it's not 100% sum, but it is -- we are certainly working and the commercial teams are working to be as closely matched as possible. From a farm activity perspective, Sean, do you want to... -------------------------------------------------------------------------------- Sean Gerard Coyle, Origin Enterprises plc - Group CEO & Executive Director [22] -------------------------------------------------------------------------------- Yes. We think there's not a huge amount of stock on farm compared to certainly fiscal '20 coming into '21 when there was no opportunity to apply product because of the weather, you had a carryover of stock on farm. In this last 12 months, the reality is you had fertilizer prices increasing as the year went on, crop protection and seed pricing and grain being the, I suppose, key driver of feed price increases, those moving up over the course of the year. So any stock on farm that would have existed is likely to have been exhausted. You're not going to see a significant carryover of on-farm product as a result of that. So no, I don't envisage that there's a huge amount of carryover product on farm. And then margin mix, I think you're going to take that, TJ, will you? -------------------------------------------------------------------------------- T. J. Kelly, Origin Enterprises plc - Group CFO & Executive Director [23] -------------------------------------------------------------------------------- Sure. Yes. So there's a few pieces in that, Roland. I mean, we spoke before about an ambition to get the Continental European business up to margins similar to the U.K. and Ireland segment. I think that's a journey. But it is, as you rightly point out, partly enabled by driving an improved mix in terms of higher margin products in the portfolio. What we -- one of the factors we've seen in FY '22 is that we have -- when you strip out the Continental European business, the impact of Ukraine, we have seen some margin accretion, and that was delivered into Poland and Romania context despite selling more product for cash margin, which is typically a lower margin, but that's really a function of better liquidity on farm. So despite that, we have managed to get modest margin accretion in the year, but that's also reflective of a better mix in the portfolio in terms of higher-margin products. So we'll continue to push that and continue to push more higher margin, higher end products that's in the FoliQ range in favor of over more commoditized type products. So again, a goal of getting into that kind of 5% range similar to the U.K. is the long-term ambition. But there's a lot of enablers behind that that are required, which back to some of the comments that Sean made earlier around investing in people and capability. And we did -- again, within the year, what we've seen is an overall approximately 30% growth in our BAM portfolio across the businesses coming out of the likes of the FoliQ, Greens. So again, we'll continue to drive and push for that type of growth year-over-year, and that in turn then will improve the margin mix within the CE segment. -------------------------------------------------------------------------------- Sean Gerard Coyle, Origin Enterprises plc - Group CEO & Executive Director [24] -------------------------------------------------------------------------------- And that compares to mid-single-digit percentage growth rates in our core CP portfolio. So it's growing faster than the core portfolio. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- We have no further questions at this time. I hand back the conference to you for any closing remarks. -------------------------------------------------------------------------------- Sean Gerard Coyle, Origin Enterprises plc - Group CEO & Executive Director [26] -------------------------------------------------------------------------------- Okay. Well, thanks very much, everybody. We're obviously out on the road show for the next few days. So hopefully, we get an opportunity to meet some of you face-to-face. It's great to be going out and meeting people face-to-face again rather than doing these calls by video link and Teams. So we will be out on the road in the next few days. As I mentioned, this is a strong set of results and delivered by the team right across the group with all segments contributing very strongly to the growth in the business. And it has been a challenging year, but a tremendous outcome. And we look forward to growing and developing the group in the direction that we're seeking to in the next 12 to 18 months, delivering on some of those objectives that we've set out. With that, we'll close the call, and thank you very much. -------------------------------------------------------------------------------- Operator [27] -------------------------------------------------------------------------------- Ladies and gentlemen, that concludes our conference call for today. Thank you for participating. You may now disconnect your lines. Thank you.