Accounts published this month by the Northern Ireland-headquartered livestock nutrition group Devenish for the year ended May 31, 2020 reveal a dramatic setback after years of meteoric growth. Not only did revenue decrease for the first time since 2013, the group also recorded an operating loss of £1.7 million and increasing debt costs left it with a pre-tax loss of £5.8 million.

Both in absolute figures and in margin terms, the 2020 financial year was the worst of the past decade for Devenish – and unlike its last loss-making year in 2015, there wasn’t a once-off research and development tax credit to cushion the blow.

When The Currency reported on Devenish’s previous year results in August 2020, these accounts were still being compiled. At the time, company executives acknowledged a slowdown in the striking performance achieved in previous years. A fire at Devenish Nutrition’s primary warehouse and distribution centre in Belfast in November 2019 was mentioned in a post-balance sheet footnote to the accounts closed on May 31, 2019, but did not feature in successive interviews on the group’s performance.

The incident has now emerged as a major drag on its 2020 accounts. “The fire has been a real challenge,” Devenish chief executive Richard Kennedy told The Currency this week. “That, and working through the claim, has been a large part of what we've been doing, and that that had a huge material impact on our profitability,” he added, praising the resilience of the company’s workers through the combined disruption caused by the blaze and the pandemic.

“For last year's accounts, there was only a couple of months of Covid, but there was six months of the fire,” Kennedy said. In addition to £10 million worth of stock destroyed with the leased warehouse, wider business interruption amounted to multiples of this, he added. He declined to share precise figures because they are still under discussion with the insurer, but cited “phenomenal” figures. “It's a multi, multi-million-pound claim. And even at that, there is a sense that it's underinsured and there's further actions to be taken on that.”

In accounting terms, the group’s 2020 accounts reflect £2 million in exceptional uninsured costs from the fire in the six months following the incident. While this is a large chunk of the losses, there were other factors, too. 

Operating profit more than halved before exceptional costs were taken into account. And these exceptionals also included nearly £1 million “arising from a restructuring program,” including redundancies – though overall employee numbers continued to grow to 571, excluding joint ventures.

There has also been some renewal on the board of the group’s central consolidating company Devenish (NI) Ltd. One year ago, within three months of each other, the group’s secretary and executive vice-chairman in charge of finance, Peter Wallace, and director and chief financial officer Donal McAteer resigned their positions. Existing executive director Gerad Finnegan then took on the role of CFO.

Since then, Deloitte’s former boss in Ireland, Brendan Jennings, became a director last October. “Brendan has had a very long association with us and he has experience in agribusiness from a Deloitte point of view,” Kennedy said. He has known Jennings since he audited the feed company where he and Owen Brennan worked in the 1990s before they acquired Devenish in 1997. Brennan is Devenish’s majority shareholder and executive chairman. “We felt Brendan would know us, could challenge us, would see our strengths but also our weaknesses and ensure that we have that challenge around the board, but also the support, the encouragement – ‘Is this relevant?’ It's all very well and very easy to to to charge down road, but you want to have an independent voice.”

Kennedy played down the scope of the restructuring plan reported in the group’s accounts. “We’re always restructuring, whether you call it restructuring or readjusting,” Kennedy said, with people and expertise moving around the group and occasionally leaving it altogether. However, he denied reports carried by The Currency last year suggesting Devenish’s US business was in particular need of restructuring. “The US is growing very well. We’ve just opened, as part of that, a new plant in Mexico,” he said. After Devenish’s main bank, NatWest/Ulster Bank, registered a fresh charge over the group’s US subsidiary last month, Kennedy said this was part of the “ongoing bank relationship – there’s nothing further”.

Kennedy illustrated evolving opportunities in the US with an example. “When we went to the States the first time and we talked about antibiotic-free chicken, they thought we were nice people from a very strange part of the world with very unusual accents, and very unusual ideas. But then two or three players, like Chick-fil-A, just one day said: ‘No more antibiotics.’ And it just changed.”

The demand for particular feed ingredients, such as those made by Devenish to command higher prices from enhanced health and environmental claims, depends in part on regulation. Asked whether he had seen a change in this area since the election of US president Joe Biden compared with the previous four years, Kennedy said he had – and he expects large-scale tipping points with the 10 processors controlling up to 80 per cent of poultry production in the US facing increasing consumer demand for “more authentic transparency”: “The scale allows them to make massive changes. A company of our size – we hang on to the coattails and hopefully make a return on that.”

Seaweed Omega-3 and carbon farming

Back home, the strategy is more proactive. This week, Devenish is launching Humanativ, a joint venture with Canadian biotech firm Mara Renewables to promote the production of Omega-3 DHA-enriched meat and eggs. “It’s the next step in the commercialisation of the work we did with the Royal College of Surgeons showing that by providing sustainable algal oils and Omega-3 in animal feed, the products from those animals deliver improved consumer outcomes, so improved health, improved eyesight, improved heart, and improved brain,” Kennedy said. Mara, meanwhile, specialises in producing the nutrient-rich oils for this purpose from seaweed.

Initial filings suggest that Humanativ is based at Devenish’s research centre in Dowth, Co Meath and owned through a subsidiary of the group’s headquarters in Belfast, with convertible debt funding from Mara.

Later this month, Kennedy says Devenish will bring a carbon farming solution to the market under the Agrinewal brand. As previously reported, the company has been developing technologies to deliver both a reduction in emissions and an increase in the carbon stored in soils and vegetation at its Dowth livestock research farm. 

“We have real commercial engagement now with large global players to provide solutions in those areas,” Kennedy said, expecting “really substantive and tangible partnerships” to materialise with the Agrinewal announcement later this month. “What I see at the moment is that we are moving now to commercialize and monetize the portfolio of technologies that we have evolved and developed,” he added. The company is already known to sell products and services to clients such as the Carbery dairy co-op in Co Cork to help them reduce their environmental footprint.

Cash flow, debt and equity

Kennedy expects Devenish to return to profit in fiscal year 2021. In the meantime, Devenish has had to finance both the immediate cash-flow turbulence arising from the losses posted for 2020 and continuing research and development. In the short term, its use of overdrafts jumped by £11 million last year and loans owed increased by £1.4 million after talks with Ulster and Danske Bank.

Filings show that Ulster’s parent NatWest obtained additional security from the group in May 2020, as reported last year. It was at the time of those negotiations that Devenish saw the resignations of Peter Wallace and Donal MacAteer, its top executive directors on the finance side. 

Shortly after these events and the close of 2020 accounts, the European Investment Bank last June released its second €14 million tranche of a €40 million debt package agreed in 2018. The EIB loan is unsecured and repayable six years after each tranche drawdown. Funds are released subject to project milestones relating to the development of solutions for sustainable agriculture.

Filings show that Brian and Kieran McCracken, the twin founders of the BA kitchen furniture manufacturing business in Co Tyrone, also rolled over a £2.3 million loan for the development of Devenish’s joint venture in Turkey at the start of this year. Kennedy said this existing mezzanine funding agreement with the McCrackens continued after “slight changes and readjustment”.

The increase in short-term debt left the group’s net current position in the red by £1.6 million on May 31, 2020. In the longer term, it was well funded and fully solvent with £23.6 million in total shareholders’ funds bulked up by the accumulated profits of the past, but its debt rose further with the latest EIB drawdown. It is now time to look for “less expensive funds,” Kennedy said. 

“We've quite a few potential investors coming and saying, ‘Well, we need this now, how do we structure it?’”

Richard Kennedy on ESG investment

He is now clear that this means outside equity investment in Devenish. As of February this year, the group was owned by Owen Brennan (77.8 per cent), Peter Wallace (7.9 per cent), Kennedy himself (5.3 per cent) and smaller minority stakes for directors Cory Penn and Patrick McLaughlin and for Colm McCotter, who sat on the board of the group’s main trading company Devenish Nutrition until his resignation last year.

Filings show that Brennan bought out one of his earlier partners, Eilir Jones, in 2019, and acquired some shares from Wallace and McCotter as they reduced their stake on January 20 this year. Brennan owns the resulting 17.1 per cent group shareholding indirectly through a new company created at the start of these transactions two years ago, Devenish (NI) Holdings Ltd.

Kennedy said this was part of the normal legal and financial arrangements of the group. Asked if this vehicle had a role in the current search for new equity partners, he said it hadn’t. 

In March, Kennedy announced the appointment of Goodbody “to explore a number of options with potential financial investors and industry partners”. As of this week, he said he has met interested parties from Ireland, the UK, continental Europe and the US, but declined to comment on the target funding to be raised because discussions are ongoing.

“It has opened up quite a few avenues that we probably didn't realise”, he added, especially from investors seeking to verify the environmental, social and governance (ESG) credentials of the companies they back – though he acknowledges that this presents challenges in itself because investors, especially private equity firms traditionally sharply focused on financial returns who are now trying to establish models for ESG investment. 

“It's not just about Ebitda now, for businesses long term, it's going to be about the same tangible measurement of ESG credentials,” he said. “We've quite a few potential investors coming and saying, ‘Well, we need this now, how do we structure it?’ – that's the process. We're pleased with how this process has gone and is evolving.”