Dutch compound feed millions in perspective

While ForFarmers and Agrifirm traditionally open the books for the past year in March, De Heus usually does so a few months later, in a sheltered environment. At De Heus, the results were significantly increased in corona year 2020. Turnover increased to more than €171 million and amounted to €3,22 billion. At the bottom line, €125 million remained on the profit and loss account of compound feed brothers Co and Koen. The financial performance of De Heus is therefore significantly above that of competitors ForFarmers and Agrifirm.

How much is earned in your own country?
Although it is not so noticeable in the individual news reports about the millions in profits, the differences in results are considerable. De Heus, ForFarmers and Agrifirm are all active internationally, yet the Netherlands remains the most important country in terms of turnover for all of them. The share our own country adds to the companies' final results varies per company. In other words: there is a difference in the margin that the parties achieve in the Netherlands.

De Heus is the absolute leader in the compound feed world in terms of total turnover and profitability. The family business from Ede has managed to further expand turnover and profitability at a stable pace in recent years. De Heus realizes approximately a third of its turnover in the Netherlands. This domestic turnover added approximately €2019 million to the company's results in 2020 and 30. This was at a significantly higher level in 2018. At that time, a net result of just €48 million was achieved in the Netherlands. These results may also include some turnover realized outside the Netherlands or not related to feed production. However, the majority of turnover does come from this.

The significant increase in dividend payments is striking. While €2018 million was transferred to the family's private accounts in 9, this amount rose to €2020 million in 40,4. In addition to the current management, Co and Koen de Heus, a sister of the pair also owns shares in the company.

ForFarmers

ForFarmers' results have been under pressure for several years. The company suffered from a number of incidental setbacks. However, the company is performing quite solidly in its home market of the Netherlands. ForFarmers realizes approximately 55% of its turnover in its own country. However, the contribution to profit is much greater. Although the figures cannot be traced back entirely to the Netherlands (processed in the Netherlands/Belgium cluster), these two countries added approximately €2020 million to the result in 62. The fact that this amount is higher than the profit of the entire ForFarmers Group is due to a significant negative book result from the activities in Germany and Poland. This depressed the figures of the entire ForFarmers Group.

A significant portion of the dividend that ForFarmers pays out comes back to members/customers of the FromFarmers cooperative and ForFarmers employees. The annual figures show that approximately 52.000.000 pieces are in the hands of members/customers. In total there are more than 95.000.000 shares in circulation, which means that 55% of the dividend goes to members of the FromFarmers cooperative and employees of ForFarmers. The fact that the additional dividend payment appears quite high in relation to the net result is because ForFarmers bases the dividend on a percentage of the underlying profit, which is higher than the final result before taxes.

Agrifirm

Agrifirm's results have been quite stable in recent years. Although turnover increased somewhat, the net result is around €50 million, with a downward trend in 2019. Agrifirm realizes 60% of its turnover within the Netherlands. The major difference with the two aforementioned competitors is the significant share of turnover that Agrifirm achieves from its plant activities. These are less important at De Heus and ForFarmers.

Unlike De Heus and ForFarmers, Agrifirm's annual accounts cannot determine what the domestic and foreign activities contribute to the final result. Inquiries with the cooperative from Apeldoorn also provide little clarity in this regard. The company does not want to provide any insight into this for competitive reasons. Agrifirm reports the following: "Agrifirm is financially strong and healthy. Although compound feed volumes in Europe are under pressure, Agrifirm proactively anticipates this, so that this is not at the expense of margins and feed costs for members remain competitive." The company adds that an 'uncontrolled change in legislation could lead to major financial problems throughout the agro complex and could have consequences for Dutch or even European food production'.

Agrifirm's dividend flows back in its entirety to its members/customers. The company is the only one of the three companies that still has a fully cooperative organizational structure.

The table below shows the net profit margins as a percentage of turnover, as achieved in 2020.

Results viewed through investor glasses
The sector often believes that a lot of money is earned in the production of compound feed, in contrast to primary farms. The million results fuel this way of thinking. But are the figures interpreted correctly? After all, the turnovers are high. We asked analyst Guy Sips of KBC Securities how the figures are viewed from a financial perspective. Although Sips is not an analyst for De Heus and Agrifirm, his story also says something about the general position of compound feed companies.

Is it justified if agricultural entrepreneurs believe that a lot of money is made in compound feed, are the margins high?
"I obviously understand the idea, but I personally don't think so. The margins that ForFarmers, for example, generates in the business are wafer-thin. In recent years we saw that when incidents occur, such as low water levels and incorrect purchasing positions in 2018 and 2019, it result is immediately under significant pressure. The company is therefore unable to absorb financial setbacks in such a way that returns remain at the same level. It is not possible in this industry to simply keep sales prices, and therefore margins, at the same level. by increasing sales prices."

Are the margins also low compared to other industrial sectors?
"Yes, we can certainly say that. In my work I also follow companies that are active in other industries. We can conclude that more money is being created elsewhere. At ForFarmers we talk about an Ebitda of around 3% to 3,5% per tonne of compound feed, that is not generous. These funds must also be invested in the future, in a capital-intensive sector. To have future prospects, you must therefore be extremely efficient in your business operations."

How do the margins compare to competitors abroad?
"Margins in the compound feed industry are low everywhere. For example, if we look at ForFarmers in the UK and Germany, we see that even lower profits are achieved. The Dutch companies De Heus, Agrifirm and ForFarmers are able to efficiently produce compound feed in the Netherlands. There is a lot of livestock farming in a relatively small area. That gives advantages. At European level, these three companies are on the podium when it comes to efficiency. It does not mean that the margins in compound feedland are high, but it does mean that they know how to organize the process as most efficiently."

Can a limited reduction in the livestock population be accommodated by companies without this putting pressure on margins?
"I think that companies are also taking into account that the livestock population will shrink slightly. However, there are still plenty of opportunities for further efficiency gains. Think of merging production in fewer factories and the like. We even see that keeping it manageable and reducing of costs are crucial in this industry with low margins."

Are the margins sufficient for long-term development prospects?
"Given the decent free cash flows, there is development potential. But it is good to realize that we are talking here about the three companies that are at the top in Europe in compound feed production. This means that production has to be done elsewhere with less margin due to a lower efficiency level. That could hinder the development of other companies in this sector. This will bring about further consolidation of the sector."