Devgen NV Announces its Business and Financial Results for the Year Ending 31 December 2010
Key figures
- Revenues increased from € 18.4 million in 2009 to € 20.6 million in 2010, an increase of 12%.
- Earnings before interest, taxes, depreciation and amortization (EBITDA) further improved from € -5.9 million in 2009 to € -3.9 million in 2010.
- Net loss for the year amounted to € 7.1 million as compared to € 8.5 million in 2009, a decrease of 16%.
- The cash position of the company decreased from € 45.8 million at year end 2009, including € 5.6 million cash restricted in its use to € 28.8 million at year end 2010. The € 28.8 million include € 5.9 million cash restricted in its use.
As previously reported, 2010 was a difficult year for Devgen's seed business in India. Cyclically low demand for sunflower in both the 2009 and 2010 dry seasons impacted heavily on revenue growth. Costs of seed production were high, partly due to unfavorable weather conditions and partly due to reduced production efficiencies in new areas with new staff and growers. Improvements in production systems, product portfolio and efficient positioning and tracking of products in the market were implemented throughout 2010. As a consequence, the ongoing production season (Dec. 2010 - Apr. 2011) is progressing well with improved efficiency and is on track to deliver substantial growth in production volumes and reduced cost of goods.
During 2010 Devgen achieved substantial progress in the 5 core value drivers of its business plan.
Value driver 1: Hybrid rice
Since 2005, Devgen's biotech and breeding teams have been working to create and deliver the next green revolution to the growers that cultivate 60m Ha of rice in India and S.E. Asia.
Since the 1990's the productivity of rice growing, has not kept up with population growth, nor with land and water availability and the progress offered by modern agriculture. There is a widening gap between productivity growth and growth in demand. The seed industry addresses this problem by developing high yielding hybrid rice for Indian and Southeast Asian markets.
Hybrid rice has been successfully adopted in China (60% adoption rate) while in India and S.E. Asia adoption has not grown beyond a few percentage points. In India the market for hybrid rice has been stagnant at ~16-17.000 ton since 2008, or ~1 million ha out of a total of 44 million Ha. This is principally because the current generation of hybrid rice varieties does not provide sufficient yield increase over elite varieties and lack grain quality and other agronomic properties. At the same time the current generation of hybrid rice seeds in India and S.E. Asia has a much higher cost of seed production, 2 or 3 fold higher than hybrid rice seed in China, resulting in much increased business risk and low profit margins.
Two core value drivers of Devgen's business plan are the creation of a new generation of hybrid rice seeds that overcome these deficiencies and the creation of proprietary market access for these products in India and S.E. Asia. During the past 5 years, Devgen's R&D team has conducted a fundamental redesign of high yielding hybrid rice. Devgen's Next Generation Hybrid Rice seeds (NGHR-seeds) were tested in 2010 in the field and the results obtained provide important proof of concept that this hybrid rice technology indeed has the potential to drive the accelerated conversion of varietal rice to hybrid rice:
- NGHR-seeds have 10% yield advantage over the industry's current best hybrids in the market;
- Seed production yields of NGHR-seeds are on average double those of today's industry average.
In 2011 and 2012 Devgen will continue to test hundreds of NGHR's in key markets and prepare for a 2013 market launch in different market segments in India and S.E. Asia.
Devgen believes this NGHR platform can sustainably provide the innovation and productivity increases that India and S.E. Asia need and can develop into a value driver for both farmer and shareholder. Today the need to increase food production in a changing environment, of which the increasing food prices are an immediate consequence, is an important global issue.
Value driver 2: Biotech rice
In addition to developing the Next Generation Hybrid Rice (NGHR)-seeds, Devgen anticipated the need to increase insect resistance, herbicide tolerance and drought/heat tolerance in rice to a level that is beyond what can be achieved with classical breeding. Therefore, starting in 2006, Devgen has been creating a portfolio of such biotech traits using Devgen's own technology as well as in-licensed technologies. These traits are being introduced in NGHR germplasm. In 2010 Devgen advanced several insect resistant and herbicide tolerant rice events from the research stage in Belgium to the development stage in India. In addition, Devgen's Singapore scientists selected several abiotic stress tolerant events for advancement to India in 2011.
Incorporated in Devgen's NGHR-seeds, these traits will further underpin Devgen's value proposition to farmers by enabling the farmer to grow rice using less pesticides, requiring less water and maintain higher yield under environmental stress conditions such as those resulting from climate change and reduced availability of water. Market entry for these traits is targeted for 2016.
Devgen has a portfolio of additional abiotic stress and yield traits in research phase that is expected to form the basis of a sustainable pipeline of biotech traits for rice.
Value driver 3: Market access in India and S.E. Asia
India
In order to build a sustainable market access for its Next Generation Hybrid Rice (NGHR)-seeds and its Biotech Rice traits, Devgen started its seed business in 2008 - after acquiring certain seed assets in Rice, Sorghum, Sunflower and Pearl millet in India and Philippines in 2007. Today Devgen has state of the art breeding and testing capabilities that create and evaluate hundreds of hybrids each season. Devgen established seed production infrastructure including access to growers in all key production areas managed through strong IT and QA systems. Devgen markets two premium seed brands through 600 distributors and more than 20,000 retailers across India. This organization has now reached the maturity and critical mass to deliver solid growth going forward and has the potential to be profitable in the near term.
In 2010, Devgen has expanded its Hybrid Rice business in India by 25% in value and reached a number 3 position (behind Bayer Cropscience and Pioneer Hi-Bred Int.). Devgen's hybrid rice portfolio is premium with respect to yield, taste, drought tolerance and suitability for mechanized seeding and harvesting. In 2010 a series of new high yielding proprietary products that can be produced more efficiently were selected for market launch in 2011. They further upgrade Devgen's Hybrid Rice portfolio to a higher level of profitability and consumer acceptance and are a solid foundation for launching Devgen's NGHR-seeds.
Rice is a seasonal crop in India and the company needs a year-round presence in the market. Devgen has therefore built premium pipelines and product portfolios in three geographically and seasonally complementary crops: Sorghum, Pearl millet and Sunflower. These crops represent 60% of seed revenues today. However as Devgen's NGHR-seeds are expected to drive conversion to hybrid rice, these crops are to become a relatively smaller but still important part of Devgen's portfolio. Together these three crops are planted on 20m ha in India and offer a good potential for value increase, especially as both pearl millet and sorghum are highly tolerant to heat and require less water than other grain crops. Considering the demands on water resources, land use and climate change impact, we expect that these crops will increase in importance over time.
Building on its output of three years of consistent innovative research, Devgen has broadened and upgraded its product portfolios in each of these 3 crops. This drives the potential for leadership and sustainable annual high single digit growth in value in each of these crops:
- in 2010, Sorghum sales grew by 24% (volume) in a market shrinking by 35%. Devgen achieved undisputed market leadership with its premium product portfolio gaining 40% market share (value). New products were identified in 2010 that are expected to fuel sustained high single digit value and volume growth in the coming years. This includes DJ4005 targeted at the 5 million ha winter Sorghum segment that today is purely varietal, i.e. not hybrid.
- In Sunflower, Devgen achieved 34% market share in a market that was at its cyclical lowest (25% of normal). This decline was due to price pressure from edible oil imports making farmers shift to production of other crops and rains up to the middle of December in key Sunflower growing states made it impossible for farmers to plant their preferred Sunflower crop. Industry analysts expect the Sunflower market to recover in value and volume starting in 2011 and Devgen is well positioned to take advantage of this recovery.
- In Pearl millet, Devgen had in 2010 in essence a presence in the southern market segment only, amounting to 15% of the overall market (Devgen's total market share is 3-4%). In 2010 Devgen's R&D efforts to breed products that address the remaining 85% market proved to be successful:
- Devgen launched 'Tilak', suited for essentially all Pearl millet growing areas
- Devgen identified new products to launch in the major Northern and Western market segment.
In 2011 Devgen thus will have a market presence in more than 80% of the Pearl millet area offering the potential for double digit value and volume growth.
South East Asia
- In Indonesia Devgen built a nucleus of product support, seed production and R&D teams during 2010. Together with its partner PT Sang Hyang Seri (Persero), Devgen launched its first hybrid rice seed, DG 1 SHS, in 10 key rice growing markets across Sumatra, Java and Sulawesi, and received positive feedback from the growers. In 2011, Devgen targets to launch DG 2 SHS and increase volumes of DG 1 SHS. In addition Devgen will conduct in-country pilot seed production as a first step in the process of building systems and training growers. This is expected to form the basis to become a leading supplier for hybrid rice in the country with the third largest potential hybrid rice market (12m ha) after India and China.
- In the Philippines Devgen entered its second sales season for Masuwerte® and further built the production teams and systems. Several new products are expected to receive registration in 2011 and several new premium rice hybrids with improved cost of goods and farmer yield were identified for 2012 launch. Devgen's NGHR-seeds are expected to be launched in 2014 in the Philippines.
- In Vietnam Devgen progressed in 2011 several hybrids from research to national registration trials. One premium proprietary hybrid that is Brown Plant Hopper resistant (BPH is a major pest across S.E. Asia), high yielding and fully adapted to S.E. Asian grain quality was identified. This is now being fast tracked across S.E. Asia for 2013 launch. Start of commercial activities in Vietnam is envisaged as of 2013.
Value driver 4: Devgen's nematicide
In its nematicide business, Devgen achieved significant progress by bringing its products, Devguard® and Enclosure®, to a broader market:
- Devgen's nematicide was launched in the US for use on peanuts. Positive feedback from farmers and a high profile in the trade press increased market awareness. Application protocols are being further optimized to enhance the versatility of application options of Enclosure® in 2011.
- In Europe, the EU commission approved Devgen's request to update the Directive 91/414 adding the use of iprodione as a nematicide. This was essential for Devgen's submission of the Annex III dossiers for Devguard® in Europe, and also important to support regulatory approvals outside Europe. Thus a key milestone was achieved in the progression towards market introductions in important vegetable growing countries in Europe.
- Regulatory reviews are in progress with initial approvals expected in the course of 2011 in more countries and for a wide range of crops.
As farmers are faced with a shrinking portfolio of nematicides and fumigants. The market uptake and validation of Devguard® and Enclosure® strengthens Devgen's confidence that its new nematicide plays a significant role in providing the farmer with a sustainable nematode management solution.
Value driver 5: Devgen's new technologies and collaborations
Devgen continues to innovate in crop protection research and environment induced stress tolerance research for its own crops and providing technology to corporate partners. Over time, drought and heat stress have become important areas of expertise. In this context Devgen initiated collaboration with IRRI (the International Rice Research Institute) in Q1 2010 and is expanding its facilities in Singapore, Kenya and India.
Devgen's turnover in the seed business was under pressure during 2010 due to multiple challenges including anomalous weather conditions and changing crop economics for farmers. Both conditions impacted extremely hard the sunflower growing in India, which up to date has been an important contributor to Devgen's turnover and gross margin. Sunflower oil prices and acreage of sunflower planted fluctuate in a 4-5 year cycle which in 2010 hit an all time low. Low sunflower sales more than neutralized the substantial growth in volume and turnover of hybrid rice and both grain and fodder sorghum. The positive impact of the growth realized in the Philippines year-on-year, the first export sales to Indonesia, and nematicides sales in Turkey and the US were compensated by the reduced sales in India.
Income realized through research and technology deals increased from € 9.2 million in 2009 to € 12.5 million in 2010. Research and technology income results from the collaboration with Sumitomo Chemical Company and the agreement Devgen has with Monsanto Company.
The gross profit (loss) from sales of goods amounted to € -0,6 million (or -7% of revenue from the sale of goods) in 2010 as compared to € 3.1 million in 2009 (or 34.4% of sales of goods). Gross profit was impacted 3-fold in 2010:
- Cost of Goods (Cogs) of almost all crops, with the exception of sorghum, was affected by difficult production conditions. In addition high cost for rice were incurred due to in field training of new staff and contract growers and the expansion into new production areas as an investment in future volume growth.
- In order to maintain the highest product quality standards, Devgen implemented a stringent policy on obsolescence in all crops.
- Sunflower prices dropped significantly due to the unfavorable crop economics for the farmers growing this crop resulting in considerably lower margins realized on the lower volumes.
As a result of the above the total gross profit dropped to € 11.9 million from € 12.5 million in 2009, a decrease with € 0.6 million. The decrease in gross profit from the sales of goods was nearly entirely compensated by higher revenue of € 3.3 million out of research and technology deals.
Operating expenses and other operating income
Research and development expenses have further decreased with € 1.6 million or 16%. Lower expenses are due to the progression of the nematicide program into pre-commercialization phase. R&D expenses for the rice breeding programs remained at the same level in order to support the expansion of the seed business.
Marketing and distribution expenses amounted to € 4.5 million in 2010 as compared to € 4.3 million in 2009 due to the geographical expansion of the seed and the nematicide business.
General and administrative expenses in 2010 decreased to € 6.1 million down from € 6.3 million in 2009. This decrease is entirely due to significantly lower share based payment expenses.
Other operating income, mainly relates to rent income (€ 0.3 million) and sales of thrash seed (€ 0.1 million) for comparable amounts posted in previous years. In addition a plus value was realized on the contribution in kind of part of Devgen's remaining pharma assets into Amakem NV (€ 0.5 million).
Net results
EBITDA (earnings before interests, taxes, depreciation and amortization) for 2010 improved to € - 3.9 million from € -5.9 million.
The impact of low sunflower seed sales, the higher cost of goods and the obsolescence charges was more than offset by both higher income out of research and technology activities and lower R&D expenses.
The operating loss improved to € 6.2 million from € 7.9 million in 2009 and the net loss from operations in 2010 amounted to € 7.1 million as compared € 8.5 million in 2009, an improvement with € 1.4 million or 17%.
Cash flow
Devgen's cash and cash equivalents, including restricted cash of € 5.9 million, amounted to € 28.8 million on 31 December 2010, as compared to € 45.8 million on 31 December 2009. Total cash used amounts to € 17 million.
Cash used in operations in 2010 amounted to € 14.7 million, as compared to cash provided by operations of € 10.8 million in 2009[1]. The net operating cash drain (operating loss + amortization and depreciations + share based compensation) amounts to € 4.5 million. The use of working capital amounts to € 10.2 million and includes:
- Use of the cash received from Monsanto Company for an amount of € 8.0 million;
- Increase of seed inventories of € 1.7 million, mainly due to higher sunflower inventories at year-end,
- Inventories at hand for the nematicides operations for an amount of € 0.8 million;
- Decrease of trade and other receivables for an amount of € 1.6 million;
- Decrease of trade and other payables for an amount of € 1.3 million.
- Other cash generated: € 0.3 million
In 2010, the net cash used in operating activities amounted to € 15.3 million including interest paid of € 0.6 million in 2010. In 2009 cash provided by operating activities amounted to € 10.2 million1
Cash used by investing activities amounted to € 1.0 million in 2010 as compared to € 1.2 million in 2009.
Cash flow from financing activities amounted to € -0.2 million in 2010 (resulting from issuance of new debt and debt repayments in 2010) as compared to cash provided by financing activities for an amount of € 12.8 million in 2009.
Net cash outflow from currency translation differences in 2009 amounted to € 0.5 million as compared to € 0.3 million in 2009.
As a result from the above, a net decrease of € 17 million in cash and cash equivalents was recorded during 2010.
Consolidated balance sheet
The balance sheet total at 31 December 2010 amounted to € 63.2 million compared to € 80.1 million at 31 December 2009.
The balance sheet at 31 December 2010 has a solvency ratio (equity vs. total assets) of 64 % (versus 59% at 31 December 2009). The cash position amounts to € 28.8 million (including € 5.9 million restricted cash).
Inventories related to commercial seed and to raw material and finished product at hand for the nematicide business at the end of 2010 amounted to € 5.0 million as compared to € 2.4 million at the end of 2009.
Trade receivables decreased slightly from € 3.9 million in 2009 to € 3.7 million at the end of 2010. Other current assets and deferred charges decreased from € 2.4 million in 2009 to € 1.5 million at the end of 2010.
Total available cash and cash equivalents decreased from € 45.8 million in 2009 to € 28.8 million at the end of 2010, including € 5.9 million cash restricted in its us, an increase from € 5.6 million in 2009. The amount of € 5.9 million includes a cash pledge of € 4.6 million provided as guarantee for an overdraft facility (working capital) of INR 238 million (€ 4.0 million) of which € 1.5 million has been taken up as per 31 December 2010.
Deferred income amounted to € 6.9 million at year end 2010 as compared to € 15.2 million at year end 2009, and is fully related to the cash received in advance with respect to research and technology agreements.
Outlook 2011
Devgen expects that significant growth of top and bottom line can be achieved in its seed business in 2011.
Investments in R&D to build the Next Generation of Hybrid Rice, and biotech traits as well as crop protection and abiotic stress research will be slightly increased.
Devgen is confident that the company will be able to finance its operations for the next several years.
About Devgen nv
Devgen's mission is to enable farmers to sustainably grow more food on less land, with less water, agrochemicals and labour.
Devgen uses advanced biotechnology and molecular breeding technology to make high yielding seeds and crop protection solutions with a superior environmental profile. Devgen brings this technology to the market in the world's major food and feed crops through two complementary strategies:
- licensing Devgen technology for use in corn, cotton and soy and selected other crops in exchange for R&D funding, and milestone and royalty payments;
- producing and selling its premium hybrid seeds in major field crops such as rice, sunflower, sorghum, and pearl millet, in the Indian subcontinent and South-East Asia.
In its Crop Protection unit, Devgen developed an agro-chemical product that protects crops from damage by parasitic nematodes. This nematicide was launched in Turkey and in US.
Incorporated in 1997, Devgen has offices in Ghent (Belgium), and has subsidiaries in Singapore, Hyderabad (India), General Santos (Philippines), and Delaware (US), totaling about 280 employees.
For more information please contact:
Thierry Bogaert, CEO / Wim Goemaere, CFO
Tel. +32 9 324 24 24 / Tel. +32 9 324 24 24
Thierry.Bogaert@devgen.com
Wim.Goemaere@devgen.com