PGG Wrightson Limited (PGW) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the PGG Wrightson annual results and market update. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Stephen Guerin. Thank you. Please go ahead.

Thank you, Christian. Good morning, and welcome to PGG Wrightson's results briefing for the year ended 30 June 2020. I'm Stephen Guerin, Chief Executive of PGG Wrightson. It's my pleasure today to provide you an overview of our results for the 2020 financial year. With me on the call are Peter Scott, our CFO; and Julian Daly, Senior Manager, Corporate Affairs, who's also our Company Secretary. Before I start, I'd like to thank the PGG Wrightson's employees on behalf of the Board and the executive team for their continued hard work and dedication, especially during this extraordinary year. We're proud of how our people responded to the period of the COVID-19 lockdown and by how they continued to serve our customers and communities during this disruption. We have provided -- we have proved we could play it safe in our workplaces by implementing practical procedures and controls in response to the pandemic. Our people experienced a variety of situations during the initial lockdown period, the majority of our workforce operated either on-site as essential workers or from home. We're also encouraged by the uptake of technology platforms, which showed the agility of our people. I'd also like to take this opportunity to thank our customers who supported us during this period and adapted to our changing operating protocols. We are committed to serving our customers and the communities in which we live and operate. During this call, I will summarize this year's financial results, our trading performance, key themes and initiatives and some thoughts on the year ahead. Afterwards, I will open the session up for questions. Before I cover off the key points from our announcement, please note, our financial reporting has changed and result in an impact of the new lease accounting standard with the sale of the Seed & Grain business. Firstly, the new lease accounting standard was adopted from 1 July 2019, using the modified, retrospective approach with the change only impacting the current period and not the comparative period's profit and loss, cash flow statement and financial position. Secondly, the results for the sale of the Seed & Grain business were included in the comparative period. In addition, I will refer predominantly to operating EBITDA as the key measure of our performance, but also -- I will refer also to our ultimate bottom line of net profit after tax and the formal GAAP measure. Further details can be found in our full financial statements. Operating EBITDA of $45.2 million -- our operating EBITDA of $45.2 million was included in IFRS 16. Excluding the impact of leases adjustments, operating EBITDA was $23.4 million, which was within our guidance range and similar to last year's results. Net profit for the year ended 30 June 2020, was after tax of $7.8 million. Earnings per share of $0.105 was based on a basic and diluted earnings per share on issued ordinary shares at the end of the financial year. In August 2019, PGW made a capital distribution to shareholders of $234 million from proceeds on the sale of its PGG Wrightson Seeds. Our trading performance. As you'll be aware, this was a year of 2 distinct halves. During the first half to 31 December 2019, the business traded well to record operating EBITDA, excluding the impact of the new accounting standard for leases, of $23.7 million, which was up 33% on the prior comparative period. And a net profit after tax of $12.8 million from continuing operations. Our second half trading result was impacted by COVID-19 and the consequential operation disruption caused by the global pandemic. While the results of this financial year was not what we had targeted at the start of the year, it nevertheless reflects well on the resilience of the business, our people and the support for their customers in what has been an extraordinary year. To deliver a trading performance similar to last year after the level of disruption we had experienced is heartening and demonstrates that the business is in good health. I'll now give you more detail in regard to the 2 business -- 2 operating business groups, being Retail & Water and the Agency businesses. Retail & Water business. Operating EBITDA was a pleasing $34.7 million. Excluding NZ IFRS 16, it was $22 million. And on a comparative basis, it was up $2.7 million on the prior year's results. We continue to see anecdotal evidence of market share gains attributable to our strong technical offering and our customer service. Our customers value the support they receive through our field representatives who are supported by our technical R&D teams, very well supported by our in-store network. Our employees responded well to the pandemic lockdown and various alert level restrictions. They adapted quickly to a little bit operating protocols to protect the safety of our employees and customers. And in the periods since lockdown, we have been serving new customers visiting our stores and they're seeing the benefits from a strong service culture. We successfully launched our e-commerce website in June this year, allowing customers to transact online, and we're seeing increased customer interest and appetite for this channel. Our Rural Services business and market-leading Fruitfed Supplies business again performed well. Our business is diversified across a variety of crops. It continues to adapt to market needs with Fruitfed Supplies by attaining strong market share in grapes, pipfruit, stone fruit, kiwifruit, and we are increasing our presence in avocados and cherries, which continue to see capital investment. We also continue to get advancements of the viticulture market with ongoing grape developments. The outlook for the coming year remains positive for retail business. Returns and yields for horticulture sector are positive, with stability in prices being obtained by our growers, which is highlighted by record levels paid for the recent kiwifruit license tenders. This optimism continues to see a large number of horticulture developments taking place throughout the country with implementation of land use changes, and we are seeing much of this development coming into production. This includes larger corporate growers diversifying their portfolios and investing in other areas. These developments have resulted increased opportunities across the core categories we supply to our customers. Our independent Agritrade wholesale business continue to see a growth year-on-year, with revenue up in the same period last year. This was achieved through growth in our existing range as well as product acquisition and improving distribution services of existing suppliers looking to Agritrade to get their markets -- products to market. We've continued to progress our retail premises renewal program across the country, with improvements and upgrades and implemented number of rural towns as well as having 4 new store developments of the pipeline in this coming financial year. These are in Taupo, Mayfield, Darfield and Alexandra. Our water -- the financial year for the water business was challenging. Target of on-farm credit and lack of new water schemes has continued to put pressure on our water business. Structures under Level 4, Level 3 reduced the business to providing residual services only, which also impacted negatively on revenue. Turning to our Agency businesses. The Agency Group incorporates livestock, wool and our real estate businesses. Trading for this group is weighted towards the second half of the financial year. Operating EBITDA was $15.7 million. Excluding IFRS 16, it was $8.4 million, compared to $15.9 million for the comparative year's period. Our livestock business experienced a strong first 6 months underpinned by buoyant livestock trading volumes and values. In the second half of the year, widespread drought conditions resulted in high demand and the shortage of processing capacity. The pandemic impacted supply chain in international markets, and further restrictions on processing capacity were implemented when the country went into lockdown at Level 4. These events, together with significant impact caused through the temporary closure of saleyards under Level 4 and Level 3 lockdowns, had a significant impact on the livestock business. The benefits of our real-time bidr online trading platform came into stark focus during the lockdown, where -- which necessitated and showcased the advantage of this channel and innovation. The bidr team responded well, accelerated modifications to the platform to permit access for new users in response to demand as well as the launch of our new hybrid auction option. We see a real potential for the bidr platform moving forward, and we see this innovation is important for this livestock sector. Request for our Go grazing contracts continued to grow strongly with the balance peaking at just under $50 million. Customer demand for the convenience of versatility of the Go program continues, and we suspect to see further growth in the current year. Our PGG Wrightson's Wool business came through a difficult year with depressed crossbred wool prices and associated worldwide wool demand challenges accentuated by the global pandemic. The pandemic is arguably the most significant issue the wool industry has experienced in a generation, and it has impacted the international wool supply chain. This has resulted in decline in wool demand, orders and prices across all wool types. As a consequence of the pandemic, our wool brokering business has facilitated the sale of less wool bales at lower margins. Farmer growers have elected to hold wool rather than sell into the current market. Additionally, wool auctions were placed on hold for 2 months. We believe the long-term outlook for wool should be positive due to wool's natural properties, especially given the increased focus of consciousness on a sustainable natural fibers. The rural real estate market continue to be challenged with lower volumes at all sectors throughout the financial year, while lifestyle and residential markets in provinces remained positive. Notwithstanding these challenges, the macro conditions, PGG Wrightson's Real Estate improved market share in its key lifestyle segment and rural regions. With the reduced trading and disruption in our real estate, water and livestock and wool businesses over the period of the COVID-19 lockdown, PGW applied for and received $4.1 million, follows through the government wage subsidy scheme. Turning to our people. During November, our head office located to the premises in Christchurch International Airport Campus. A new purpose-built building that has allowed us to bring staff together in one location after previously being spread across 2 separate Christchurch locations. Staff had responded positively to this move and the new work environment, which is set up well to facilitate collaboration and make better use of technology efficiencies through online conferencings, sourcings, et cetera. We refreshed our people-related strategic pillars along with corporate structure, the view undertaken after the divestment of the PGW Seeds business last year, which centralized corporate functions and embedded new ways of working. Key programs of work to enhance our culture over the year included developing a clearly defined PGW leadership brain, a new leadership development framework and program, introducing our refreshed induction program and delivering improvements to our people and the process to best leverage existing systems. In recognition of the priority PGW places on its people and responsibilities as a good employer, all employees as at 1st of July 2020, are now paid at least equivalent of a living wage. Safety and wellbeing. Three years into our safety and wellbeing strategy, we continue to engage our people to transform their culture into one of citizenship by embedding the cognitive behavioral safety program, Zero Incident Process, otherwise known as ZIP. Over the past year, we have introduced the critical risk standards to our framework, and we are embedding control business to prevent serious harm events. These are our ongoing programs of work as we continue to develop our culture. Moving to a centralized operating structure has provided greater consistency in standardization to our safety and wellbeing development, with leadership accountabilities continuing to be focused with each operational business unit. We continued to see a positive improvement in our benchmark performance measures for safety incident events with a reduction of lost time frequency rates of 25% and a reduction in our total recordable injuries of 30% for this year when compared to our 2017 baseline. Vehicles remain the single-biggest risk area where our people face every day. This year, we have completed a comprehensive review of our vehicle strategy alongside our vehicle and driving critical risk standards. There's been multiple initiatives introduced to ensure our ongoing safety of our people, including a targeted approach to develop a safer driving culture, such as the introduction of a development of driver competency training program. Of growing importance to our -- it's our objective to understand a better way to better the impact our business has on the environment, whilst ensuring we maintain compliance with operating requirements. During this financial year, we established a new environmental policy, and we're now actively working on the development of the environment compliance management framework with improvement objectives being developed for the year ahead. Governance changes. Ronald Seah retired from the Board on 31st of August 2019, having served as Director for slightly under 7 years. The Board acknowledged and thank Ronald for his contribution as a Director. At the Annual Shareholder Meeting on the 27th October 2019, Rodger Finlay was reelected as Independent Chair and David Cushing and Sarah Brown as independent directors. As a result, 3 of our 5 directors are independent. I'll now turn to the financials. Before I talk about the financials, let me remind you of the implications caused by the introduction of the new lease accounting standard NZ IFRS 16 and also the divestment of the Seed & Grain business. Firstly, the new lease standard was adopted on 1 July 2019, is the modified retrospective approach with the change only impacting the current period and not the comparative period's profit and loss, cash flow statement and statement of financial position. For this financial year, operating leases are now recognized on balance sheet with the right-of-use asset and corresponding lease liability recorded. Rental payments for operating leases are now treated as interest in principal repayments with associated depreciation of the right-of-use assets. It's important to note, this has no net cash impact. It is for financial reporting purposes only. It is also excluded from our bank covenant ratios and dividend calculations. As a consequence of this change, PGW's operating EBITDA, interest and depreciation expenses all increased. Secondly, given the sale of the Seed & Grain was completed on 1 May 2019, the results from that business are included in the comparative period ended 30 June 2019. In the statement of profit and loss, we have removed the impact of Seed & Grain from the retrospective profit and loss lines, and disclosed Seed & Grain results in a separate discontinued operations line. This includes the 10 months results for the year ended 30 June 2019. The statement of financial position, the balance sheet and comparative 30 June 2019 result includes the Seed & Grain business reclassified as assets of liabilities held for sale. The statement of cash flows and the comparative 30 June 2019 period includes Seed & Grain business. Cash flow and debt. Cash flow from our operating activity was -- on pricing activities was $34.2 million inflow. Capital expenditure for the year until 30 June 2020, was $11.9 million, which was $4.6 million lower than the comparative period for the prior year. The spend has been continued and seen continued investment with IT including a bidr online trading platform and e-commerce offering. It's important to note that as a seasonal business, our working capital requirements typically increased significantly over the spring and into summer in line with the demand of farming inputs in New Zealand. Whilst the second half of the financial year was challenging due to factors including widespread drought conditions, supply chain issues from livestock, and meat process and the global pandemic, we nevertheless kept a disciplined cash flow measurement. This resulted in our being able to maintain a present debt position of $33.1 million as at 30 June 2020, with an improved overdue debtor percentage compared to the prior financial year. It's also worth noting that the recalibration of our corporate support functions realized in excess of the anticipated $2.5 million cost savings for the financial year. This means we start our financial -- sorry, we start our seasonal build of working capital for the current financial year with a sound position. We continue to look for efficiencies in our operations on an ongoing basis. As part of our continued improvement to recalibrate the cost base, the Board resolved earlier this year to capture savings through trimming the Board to 5 members and reducing some director fees. The combined effect of these changes and the result of Director fees levels reduced by approximately 18%, being calculated on an annualized basis. Distributions. The Board are pleased with the manner of which the business has come through the year. However, the trading results are back on pre-COVID expectations and the effects for the global pandemic are continued to be felt. We remain optimistic about the prospects for this agriculture sector, and it is prudent to be weary given the degree of uncertainty being experienced through much of the world. In view of that background, the Board is determined to make -- take a cautious distribution approach in the interim, while greater uncertainties obtained about how these events will flow through to impact demand for agri imports in the year ahead. Reflecting on the extraordinary nature of the year and the ongoing global challenges and the fact that the company has made a net loss of $4.9 million in the second half, the Board has determined not to pay a final dividend. However, the Board intends to resume the repayment of regular dividends when the market stabilizes. And finally, I'd like to comment on the outlook for the remainder of the year. Whilst there is scope for optimism with strong demand for price in New Zealand agricultural export qualities, there remains a degree of caution with continuing volatility of global markets. Consumers in some key export markets have been shielded from the impacts of COVID-19 through unprecedented fiscal support, which has underpinned retail spending on food. However, with infection rates continuing to increase globally and the secondary lockdown's occurring, a degree of uncertainty remains as to how this will impact trade flows through the coming year. In this context, while it's too early to provide guidance about expectations for the 2021 year, there's a healthy measure of optimism with solid production returns continuing in dairy, red meat and horticulture. We're seeing growers and farmers gear up for the busy spring period, and we expect to be in a position to provide a trading update at the time of our Annual Shareholder Meeting in October. Our 2020 annual report will be available at the stock exchange website under our PGW ticker and our website at the end of September. Thank you. On behalf of our Board and management team, I want to extend the thanks to our customers, suppliers and shareholders and most of all, our staff for their ongoing support. This concludes the formal part of our 2020 presentation. I would like to open the call for questions. Christian, I hand back to you, and that is it for us. Thank you.

[Operator Instructions] Your first question today comes from the line of Adrian Allbon from Jarden.

Wondering if you could handle 2 questions for me. Firstly, across the second half, would it be fair to assume that the COVID disruption at EBITDA level was broadly about sort of $10 million of EBITDA. Like I've sort of come to that estimate by effectively taking your first half guidance, sort of full year, sort of comparing it to what you've delivered and then sort of netting back, I guess, the $4 million of Crown subsidy?

Yes. Adrian, it's Peter here. It's rough -- that is a rough estimate. I think if you go back to our previous guidance, we were giving EBITDA, excluding IFRS 16, of about $30 million. Obviously, we ended up with sort of $23.4 million. And if you take off the $3.15 million with the wage subsidy, because, remember, we've got $4.1 million, but actually, we've got close to $1 million included in July, because it's spread from the time of application, which was the 28th of April. So if you take that $3.1 million off that $23.4 million, that does get us back to about -- would get us back to about $30 million at previous guidance. So yes, you are roughly right. But excluding the wage subsidy, it probably was about $10 million.

And Peter, just following on from that, was most of that -- would most of that $10 million be sort of centered in the livestock business?

Yes. So if you think about the profile of our earnings, Adrian, you're right, most of our earnings in the first half, of course, is a retail story, particularly the retail sector in terms of the horticulture-related supplies. The second half is an Agency story, and that's dominated by livestock, particularly sort of through April, May, when we had our very goods sales. But you're spot on, it is an Agency story. And we saw prices actually pull back a little bit from early in the calendar year in terms of prices for red meat. And we also saw the drought impact us, plus the COVID-19 pandemic as well. So that was impacting supply chain, too. And then, of course, we had -- we closed our saleyards, which is our biggest source of sort of EBITDA or revenue for the livestock for about 6 weeks, I think, in total. So yes, it's definitely a livestock-dominated story for the second half. You would actually have to say that wool prices impacted it to an extent as well, Adrian. So wool prices certainly came up from the latter part of the financial year.

And about those wool prices, fell about 20%, 25% depending on the wool type.

So those 2 combined really did impact our second half results in terms of EBITDA.

Okay. And then just related to that, I mean, as we sort of think about the FY '21 year, I mean, you wouldn't -- I mean, just to touch, what if we wouldn't be assuming anywhere near that sort of impact occurring? Is there any other sort of -- I know there's lots of ups and downs in your business given the nature of it. But do you have any sort of material factors we should be thinking about in terms of the '21 outlook?

No. At this point in time, the -- what we're seeing is a relatively normal spring, but it is early days. The main planting windows are ahead of us. The main -- from an arable perspective and the crop management windows for the horticultural world, we're only seeing early blossom out at the moment, for example, the stone fruit crops. And so there's quite a significant period of on-farm activity to take place. But at the moment, the activity in terms of our store networks and our livestock networks is what gets us at normal. But it's early days.

And then maybe a question for Stephen, just in terms of -- how should we think about the equity story of PGW now? Obviously, you've been at the seeds business like 3 years, what is the management -- what is the Board and management trying to sort of achieve here?

In terms of the strategy for the business going forward?

Yes.

Yes. Okay. The focus really when the Seed business was sold, the Board talked about a traditional stock and station business, in terms of that's what we are. But having said that, we have a focus around technology. So we have our online trading platform for the livestock area. But we've introduced our e-commerce platform, and we've seen the growth of our Go product in terms of on-farm finance opportunities for our customers. So they are real opportunities of growth for us, followed by some of the traditional things that we've done around our Agritrade business and the new product opportunities in that space. So sticking to our core business, but growing the edges of that. And that -- particularly that Go product range around -- for our livestock opportunities, supply chain activity within livestock and capital equipment for, let's say, horticulture, are areas where we see opportunities, particularly with the way the banks are looking at the rural sector at the moment.

Okay. And just like broadly speaking, like the modernization through some of those platforms of the traditional stock and station business, like how much of that would sort of -- as a sort of a cannibalization, I guess, of, I guess, the traditional earning streams. I know it's difficult to tell, but in just some broad terms.

It is the early days. The registry in our retail e-commerce, we're registering a lot of new customers being in the livestock market. Just the nature of the way that the livestock market operates, they generally have jobs or off-property incomes. So therefore, getting to our store network is going to be challenging given the times of days that we operate. We don't operate in normal retail hours. So we are seeing new customers in that space. For the bidr platform, in part, that is a cannibalization on what goes through the yards -- saleyards, but there are new customers coming to us who don't want to send to yards, and they want us -- they don't want to send to yards, because they've created general health issues, transport issues, stress on animals, et cetera. And we are providing an opportunity for the sell-through of our platform, which we haven't seen previously. So that's been good. So it is -- that's too early to tell. But the bidr world is mixed between new and existing, whereas e-commerce to date has all been new customers.

Your next question comes from the line of Guy Hooper from Forsyth Barr.

Look, firstly, just on the retail and water part of the business. Can you just give us a bit of color on the contribution from the Fruitfed business, I guess, firstly, to the result, but secondly, just as a portion of the growth from that part of the business?

Guy, it's Peter here. I'd say the Fruitfed part of the business would be roughly half of the retail EBITDA earnings. And certainly, there has been growth year-on-year. I don't know the exact percentage off the top of my head, but there certainly has been growth in the last -- over the last -- probably quite consistent over the last few years, actually.

About 4 years, I would say, growth has been consistent. The growth has been consistent for 2 reasons. Firstly, the water culture. Planted areas in Fruitfed grapes has increased over those 4 years, probably those crops. The second, in recent times, we're seeing increased areas of cherries and avocados. And some of our initiatives that are around the Canterbury area with mainly these changes within the vegetable sector, for example. So the growth has been driven out of those, yes.

We just kind of looked at the growth in percentage terms, Guy. It's started getting up towards sort of 5% to 10% for Fruitfed. So it is really good, to be honest.

That's a last -- that's a growth on last year. Yes.

Yes. Okay. And then maybe just touch on, one, your sort of ongoing gearing targets in the balance sheet. And then secondly, I mean, you highlighted a degree of uncertainty and caution relating to COVID-19 and the -- just the agri sector, in general. How are you feeling about the health of your receivables book?

I think the health of our receivables book has probably pleased us on the positive side. I think we were expecting -- we were quite cautious about our debtors' book. But you see that we ended up with $16 million worth of cash in the bank. Now we -- over the last probably 2 or 3 weeks in June, we kind of -- we're pretty cautious and so ended up with more cash in the bank than we had sort of expected. And if you think about our debt ratios, in terms of EBITDA, it's impacted by the fact that the actual EBITDA number. So being at $23.4 million versus a guidance of, say, $30 million and then our debt being probably a little higher than we had estimated internally, and that is impacting us a bit in terms of our ratio. But it's not -- hasn't deteriorated to the extent that it causes us concern. We're in a good position to start the new seasonal buildup. So the EBITDA does impact that ratio, I guess, for sure.

I think I'd add, Guy, that we've taken a cautious approach in our positioning of the year-end story. We've got some large trading months ahead of us. That's going to see working capital increase from the -- in the business as we move inventory into the business and we'd add on the farmers' needs. There's a lot going on in the world and in New Zealand, and we want to be cautious about that. But actually, if you look back at our historical collections, we're in a pretty good place. The other observation I would make is that we're on farm every day. We're there growing alongside our clients, growing crops. We're there moving animals on and off farm. So we have a good, live understanding of where our clients are actually at on an ongoing basis every day. So yes, we're seeing trends happening on the farm. We're able to actually, perhaps earlier, to manage a bit the exposure as best.

Yes. And remember that our facility is $120 million, and we're starting at sort of $33 million. Admittedly, a little higher than -- but not too much higher than what we really have been expecting. So we've got a lot of room to go through the seasonal buildup through spring. So we think we're in a pretty good position. And of course, the banks actually -- of any sector, the banks like the agriculture sector compared with some of the others that are struggling a lot more.

And actually, the $30 million includes our Go.

Yes. It includes our Go book as well. So if you took the Go book offer, that will be -- it should be in a cash position.

[Operator Instructions] We have a question from the line of Christian Bell from Jarden.

Just following on from Adrian's earlier question around the impact of COVID being around about $10 million mark. Just taking into account the cost savings that you've experienced in the most recent year. Is that okay -- can we actually assume that the impact of COVID is actually slightly higher than the $10 million and more like $12 million or so?

I thought $10 million -- I thought Adrian's calculation of $10 million was pretty good actually, Christian. Yes, there were some savings that came out of COVID-19, and we obviously didn't travel through the whole month of April and some of March as well. And we did restrict -- and sort of, even through May and June, it was much less travel. And we do actually been on farm, there is quite a lot of travel that's involved, whether it's actually not just air travel, it's when you've got our agents out on farm. So we did have some lower costs in there. But I think $10 million is probably roughly right without going into too much detail on it.

There are no further questions at this time. I'd like to hand the conference back to today's presenters. Please continue.

So thank you all for making time available for us. And I appreciate I've had a number of people on the call, and thanks for the questions. And if you do have anything you want to follow through with Peter and to maybe, myself, certainly feel free to do that. Our contact details are available on our websites. Thank you, operator. That's the end of the call from our perspective today.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.