PGG Wrightson Limited (PGW) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the PGG Wrightson Annual Result Announcement Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Stephen Guerin. Thank you. Please go ahead.

Thank you, operator. Good morning, and welcome to the PGG Wrightson annual results briefing for the year ended 30th of June 2021. I'm Stephen Guerin, the Chief Executive Officer of PGG Wrightson. And it's my pleasure today to provide an overview of our results for the 2021 financial year. With me on the call this morning is Peter Scott, our CFO; and Julian Daly, our General Manager, Corporate Affairs and who is also our Company Secretary. On behalf of the Board and the executive team, for a start, I'd like to thank our PGW employees for their continued and tireless work and commitment to the business. Some of our employees were again affected by COVID-19 in the February lockdowns in Greater Auckland where 4 of our stores [ in the zone ] were classified as essential services. Two of our saleyards were also affected, with our Tuakau saleyards, though set to operate, will be on a limited sales basis. Our teams reacted brilliantly and reestablished the lockdown protocols that we had in place previously. Also I want to acknowledge the support of our customers. Through their continuous support, the results that we're about to talk about are possible. 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'll open up for a question-and-answer session. I will predominantly refer to operating EBITDA as a key measure for our performance, but I will refer to our ultimate bottom line of net profit after tax, the formal GAAP measure. The key financial results for the group year ended 30th of June included revenue of $847.8 million, up $59.8 million or 7.6% year-on-year; operating EBITDA of $56 million, up $13.8 million or 33% year-on-year; net profit after tax or NPAT of $22.7 million, up $15 million year-on-year. We've declared a fully imputed final dividend of $0.16 per share, payable on the 4th of October. We've seen very strong performances from our Retail, Fruitfed Supplies, Livestock and Wool and Real Estate businesses. The group has a strong balance sheet and operating cash flows leading to lower interest -- net interest-bearing debt at the balance of 30th of June 2021. Continuing strong demand and pricing for New Zealand produce is underpinning our outlook, performance and confidence of farmers and growers in the agri sector. Our team and the business have again proved that they are leaders in the field in supporting our customers and the agri-sector and rural communities to deliver excellent results. The financial year started and finished strongly with the operating EBITDA of -- at $56 million, up $13.8 million or 33% on last year's COVID-19 impacted results. PGW also delivered NPAT of $22.7 million, which was up $15 million year-on-year. These results further vindicate the decisions taken over the last 2 years in divesting the Seeds business and the commitment and recalibration (sic) [ concomitant recalibration ] of our cost base and systems. Directors are particularly pleased that the business has backed up its strong first half result and has continued to trade well over the second half. This result reflects the collective efforts of the dedicated team we have through the business, who are passionate about agriculture, supporting our customers and the role the sector plays in New Zealand. We have seen just how important and critical to New Zealand's success the primary sector is, and this has come into stark focus with the global pandemic. I'll now discuss 2 operating business units, Retail & Water and then Agency. Our Retail & Water operating EBITDA was very pleasing at $37.5 million and was up $4.3 million on last year's prior results, which is an increase of 13%. Both the Rural Supplies and Fruitfed Supplies businesses traded very well. We have continued to increase our market share. Much of this growth can be attributed to the superior technical expertise of our staff backed up by our leading product range. We have a very stable workforce who are well supported by our specialist technical and R&D teams. A significant challenge that we have and many businesses face is around the much publicized supply chain disruption, which is being felt through -- around the world. This will continue to work -- have an impact on the time lines of sourcing the product and grower inputs as well as our exports offshore. Our team continue to work assiduously to proactively minimize supply chain disruptions to our businesses and customers. Our teams have been working collaboratively with our key suppliers, securing and taking product into stock earlier and working with customers to lock in their seasonal requirements 3 to 6 months earlier than would ordinarily be the case. The Rural Supplies business experienced particularly strong growth this year, which is a fantastic result in a highly competitive marketplace. This success is attributable to both the new customers who have shifted business to PGW but also growth in our market share as customers respond positively to our value-added technical offering and advice. We have employed some great new talent in the business, who have brought fresh ideas and, in some instances, new business. Our sales culture has grown through increased investment in our people by providing more training opportunities across all levels of our business and with the focus on sales and service. Our Fruitfed Supplies business has again registered another record year for both operating EBITDA and revenue. The business is diversified across a number of crops, and we continue to adapt to customer and market needs. The horticulture sector is growing and remains buoyant, and we are continuing to see investment and development. We enjoy impressive market share across a broad range of horticultural crops, with particular strengths in grape, pip fruit, stone fruit and kiwifruit. We've continued to grow in the avocado and cherry sectors. Our core focus remains to add value to our clients' businesses through the technical ability of our technical horticultural representatives or THRs, as we refer to them internally, by supplying specialist products and services. Our technical expertise offering is differentiated by expert technical and R&D teams who support our in-field and store teams. This team conducts a number of trials through the industry, investigating new products and chemistry to assist our growers and engage with industry bodies and prove products in New Zealand market conditions. Our wholesale subsidiary, Agritrade, which manufactures, sells and distributes its products, continues to demonstrate positive momentum. Maintaining inventory during the worldwide supply chain disruption created by COVID-19 caused Agritrade to place orders and receipt stock earlier than usual. Whilst the inability to travel internationally has hampered product development opportunities, it is nevertheless pleasing to note that 5 new products were registered during the year and are being commercialized. We have reshaped the Water business to align with market conditions. This has resulted in an improvement in EBITDA comparative to the previous year. Our full-service water and irrigation packages to customers through our Rural Water business have seen an increase in sales. However, shipping delays will likely push out some delivery time lines into the short to medium term. Turning to our agency business. Our Agency business incorporates the Livestock, Wool and Real Estate businesses. Trading for this group is weighted towards the second half of the financial year. Operating EBITDA was $25.2 million and was up $9.5 million on prior year's results. This is an impressive increase of approximately 60.6%. The Livestock business has maintained market share throughout the country with the South Island achieving a very solid result especially within the sheep and beef sector. During the year, strong values were achieved for sheep farmers, and dairy farmers also achieved increased payouts, which in turn supported our Livestock business. Our deer business experienced good velvet season where values offset lower venison prices. We expanded our GO-BEEF AND GO-LAMB product offering and launched GO-DEER. Next year, we expect to add to our GO-STOCK range with GO-DAIRY, which we anticipate will be well received in our GO-STOCK offering. bidr, which is our virtual saleyard, has run over 400 auctions and sold approximately $50 million worth of livestock since its launch in June 2019. bidr continued its significant software development. And in F '22, livestreaming from our Fielding; Stortford Lodge, which is in Hawke's Bay; Wellsford; and Frankton saleyards, will be launched with others to follow as we roll out the technology. Excellent Livestock Genetics results throughout the year culminated in the bull sales auction series with bidr's hybrid platform coming to the fore. PGW Wool has done a very good job of navigating through the ongoing challenges that have been accentuated by the COVID-19. Our team worked closely with growers to reduce the stockpiles of crossbred wool, and we did see some benefit from improved pricing in the second half of the year. Export subsidiary, Bloch & Behrens, worked diligently with our overseas customers to ensure contracted obligations to our growers were fulfilled. Real Estate business has seen particularly strong demand across all sectors of the rural property market, which has been fueled by lower interest rates. This resulted in the Real Estate business experiencing its best returns by over a decade at both operating EBITDA and gross commission income levels. We also have seen early signs of positive spring sales to the rural sector with higher-than-normal appraisals taking place with earlier spring listings occurring, which we expect will turn into continuing solid demand for the first 6 months of FY '22. With strong commodity values in the rural sector, we anticipate a number of retirement and succession initiated listings coming to the marketplace. The shortage of residential and lifestyle listings may continue with the current low interest rate environment as a contributing factor. Key programs of work to enhance the culture and develop our people have continued over the past year, with a focus on leadership, safety and well-being and [ finishing ] our people-related systems and processes. With the revised leadership brand and associated training and culture programs, we have made positive steps and have elevated leadership across the business by focusing on the behaviors and PGW values that help our people become the kind of leaders they and others wish them to be. Our continued investment in training and development demonstrates our commitment to providing our people with tools and training to be safe and confident in the roles with an eye on personal growth and future development opportunities. Safety and well-being remains a cost focus of the organization throughout the year with the commitment from the executive team to keep it that way. Yes, we're pleased to see our total recordable injury frequency data see reduced -- reductions of 28% year-over-year or 51% since FY '21 -- sorry, FY '18. Following the external review of our Leading Safety -- by Leading Safety on our group-wide safety and well-being strategy, we have refreshed our road map to incorporate the key recommendations that were identified. We've included a continuous improvement focus to strengthen PGW's safety and well-being leadership capability. PGW is committed to protecting our natural environment for future generations. We are aware of the changing focus of farming and increasing pressure on the sector to operate in an environmentally sustainable manner. Many of our activities are designed to support more sustainable farming practices. Our overall strategy and framework for environment reporting is evolving, and we have a range of initiatives to play -- in play to assist and achieve that purposes -- those purposes. Of growing importance is the need to further understand and evaluate PGW's impact on the environment. And we recognize the need to report our environmental footprint, in particular our carbon emissions. We have established a working group to develop an inventory of PGW's emissions, and we've engaged Toitu Envirocare to assist us on this journey. The outputs from this work have supported -- will support the development of PGW's environment and sustainability strategy and will assist in setting environmental goals and reduction targets based on the risk and opportunity. The Board have made 2 changes to the leadership during the year. David Cushing retired from the Board on the 23rd of February 2021, having served as director and Chair of the Audit Committee for the past 2 years. The Board has acknowledged and thanks David for his excellent contribution as a director during this period, and I personally thank David for his support during his time on the Board. Dr. Charlotte Severne recently joined the Board as an independent director on the 18th of June 2021. PGW has experienced strong operating cash flows during the year, which benefited from good operating EBITDA performance and a focus on working capital management and particularly our receivables. This focus has seen PGW's overdue debtors balance continuing to track at historically low levels with our book in very good shape. Capital expenditure of $6.8 million was $2.3 million lower than FY '20 and was impacted by a slowing in the implementation of projects as a consequence of COVID-19-related disruption. Our net interest-bearing debt was approximately $6.5 million at 30th of June 2021. And this is the lowest recorded at June 30 in over a decade, excluding 30 June 2019 with the proceeds from the Seeds sale held in the fund -- the trust. Based on the strong year -- full year earnings, the Board has declared a fully imputed final dividend of $0.16 per share. The dividend will be paid on the 4th of October 2021 to shareholders of PGW share registered at 5pm on the 10th of September 2021. This will effectively bring the total imputed dividends paid for the year to an impressive $0.28 per share, I'm sure all shareholders will be delighted about. Turning to the outlook for the F '22 financial year. As a business, PGW is clear about its strategy for driving growth through providing our customers with sector-leading expertise and innovative solutions for their farming and production needs. We look to lead the market through specialist knowledge and technical expertise of our people. We do this through investing in their capability and identifying and bringing to market new products that we source and prove in New Zealand market conditions. Our customers value PGW's technical offering and see this as a distinguishing service, and we'll continue to develop and foster. Our strong balance sheet allows us to contemplate earnings-accretive growth ambitions, both internal and external. The rural outlook is positive for the sector and strong farm gate -- with strong farm gate and commodity prices. Robust demand is expected to continue for lamb and sheep meat, and cattle prices are anticipated to remain high. There is confidence in the dairy sector with positive outlook for next year and solid payout predictions. Looking ahead, the Board is confident that PGW is well placed to continue to grow. We've recently undertaken an internal review of our PGW strategy and have reset our group objectives and priorities we are rolling out through the business currently. This exercise has served to confirm a number of key themes that are continuing to drive the improved performance of the business. Key to this is the continued focus on the technical expertise of our people, technical offering which differentiates us from our competitors. There does remain a degree of uncertainty globally and increasing geopolitical risks and as the new variants of COVID-19 emerge. Implications from the pandemic will continue to impact consumer markets and global supply chains. PGW is committed to supporting our customers through these ongoing challenges and has demonstrated that it could do this effectively and profitably. We would hope to be in a position to provide further guidance with our expectations of the F '22 year at our Annual Shareholder Meeting at the Hawke's Bay in October. Our 2021 Annual Report will be available on the stock exchange website under our PGW ticker and our website as at the end of September. Finally, on behalf of the management team, I would like to extend our sincere thanks to our customers, suppliers and shareholders and, most of all, all of our staff for their continued support of the company. That ends the formal part of the presentation. I'll now open the call to questions, and I'll hand the call formally back to the operator. Thank you.

[Operator Instructions] Your first question comes from Guy Hooper.

Congratulations on what's a strong result. I guess my first question is just around the supply chain disruption. Could you possibly give us a bit more color on how that's affecting you? I mean you talked about helping farmers lock in seasonal requirements. Is that creating a pull forward? And if so, where is it -- a pull forward in sales? Or is it a pull forward into the level of inventory that you're holding?

Thanks, Guy. So a couple of things there. Firstly, we haven't seen a pull forward in sales. What we're seeing is a pull forward in customer signaling to us the product volume demand and the timing of need. That's allowed us to work with suppliers to ensure that product is in country at the appropriate time. In most situations for our products, we do have a couple of alternative sources of supply. So once you know the demand, you can actually work through as to what those logistics are. Customers don't like to see products stored on farm any earlier than they actually need it for a couple of reasons. Firstly, there's particularly some cash flow implications for them. The security issues on farm, but more importantly, there's actually regulatory issues around how much volume that they could actually store on farm as well, so whereas our store network can manage that more effectively because we're set up for that world. How it's playing out for us is that we're seeing price increases for shipping costs, and we're seeing logistical challenges. Product that you would normally -- may normally take 3 to 4 weeks from the shipping out of the Asian markets or the U.S. markets is taking 6 -- I'm sorry, 8 to 12 weeks. So that means we have to plan more from a logistical perspective where that would go, I'd say. Our inventory at the moment, we've -- we're holding more inventory than we were at the same time -- this time last year, Guy. But we have budgeted that into our cash flows, and -- but we're not exceeding those expectations right at the moment. So we're there or thereabouts of what we thought would happen. But we -- the spring demand, particularly our rural services business, is ahead of us, and this is an active watching brief for us. On the outward supply side, of course, in our wool market, we're a direct exporter of wool. So it's a matter of us with supply companies, we have seen supply disruption. Wool is least perishable. So critical supplies, we can work a bit easier in that space. Of course, we're not in the process [ on our end ] for meat production. So that question, best directed to the meat companies in that space. Hope that answers your questions, Guy.

Yes. No, that was great. Good amount of detail. I guess just on those, I mean cost pressure is a pretty common theme across all industries, particularly labor and freight rates. I mean how are you seeing this year? And what sort of, I guess, pricing power do you have? And I guess as a bit of a follow-up, I mean how is the sector as a whole absorbing those cost pressures?

We are -- Guy, like all sectors, there's a point that becomes where you're kind of able to absorb costs, but we are going to see costs move up in the sector. And that's not obviously product. That's a little bit of a surprise. Having said that, we do have 2 strong national competitors that operate in the marketplace against us, and they do operate a cooperative model or the cooperative model is -- does have a focus around price. So that will equally keep us honest in that space, Guy. I guess in reality, the message is there's going to be price pressure, but I probably won't get in detail a whole lot around technical market, positioning with our pricing. You probably understand that.

Yes. No. And I guess just one more from me on the working capital. I mean there's a reasonable increase in payables. Can you give any more color around that?

I'll turn that question over to our CFO, Guy.

Yes. Thanks, Guy. Look, I think, as Stephen said, we have -- we are conscious of our inventory levels and probably are holding them a little bit higher than we would normally -- under normal circumstances happening to us. So we have got a bit more in terms of payables, and that's really probably the main reason. We've actually got quite a lot of obviously accruals in there as well. So that's the main reason payables probably a little higher than previous years.

Your next question comes from Tina Morrison.

I have 3 questions. I'll just roll them all out. The first, I just wanted to clarify if the $0.28 dividend for the year is a record, and I wanted to know if you have considered paying back the wage subsidy. And I'm interested in your view on carbon farming.

Thanks. Just taking a note of those.

Sure.

So the first question was...

$0.28.

The $0.28.

I think from at least my time, Tina, here at PGW, it's the highest I've seen apart from, of course, the capital return to the shareholders, but that would be the highest dividend I've seen from PGW. Julian Daly, our Company Secretary, has been here longer than me, but I don't recall seeing...

For an annual period from my time here as well.

Yes. So we'd have to go back through all the records, Tina, to actually absolutely verify that. But certainly in the time that we've been here, it's the highest we've seen.

And I've been here a wee bit longer. And that's my recollection as well apart from the capital redistribution at the time of the Seeds sale.

Which course isn't a dividend, but it is a return to shareholders.

And also, you have to assess that against since the consolidation of our share register. So the largest dividend since the consolidation of our share register. So I think now [ this is -- yes ].

Did that answer the question for you?

Yes.

Yes.

Yes, yes.

Second question was around the consideration to the wage subsidy repayment. Yes, that was considered by the Board. That was a discussion that the Board did have. Their position is that they are not going to -- we're not going to repay the wage subsidy. I could leave the answer at that, but I won't. The logic to that is that PGW, in terms of the sort of -- be a bit technical about this, we made an assessment around the requirement for a 30% reduction in earnings...

Revenue.

Revenue, I should say. And we made our assessment after we'd actually seen that reduction. We did not pre-assess. We made the assessment after the reduction had actually taken place. And we took the subsidy in respect to the -- our business units that were closed during that period. Those business unites were our Livestock business, our Real Estate business and our Wool businesses. So there's no surprise that we saw a 30% reduction. And that was in the first wage subsidy period, not the second one that was -- second one. We did not take the wage subsidy in respect to our retail or our shop network or our corporate functions. We also kept all employees employed within the business. And we paid people 100% of the wage entitlements through that period in full on time. And as a result of that, we met the definitions that were set out -- the criteria that were set out within the program of work. And we also -- there was no dividend declared to shareholders in that -- for that particular period as well. So as a result, the Board settled where they've settled. Your question -- your third question was around carbon farming. Can you perhaps expand just a bit more on that if you wouldn't mind? I don't know if -- I think I know what you mean, but perhaps explain a bit more.

So you might have seen in the news recently Beef + Lamb -- the Beef + Lamb report about carbon farming. And what they're talking about there is the sale of whole farms for carbon offsetting. So not about farmers putting some of their farm into forestry, but the sale of whole farms going into forestry for carbon offset.

Yes, yes, yes. Okay. I thought that's where you were coming from. Thank you for that further clarification. So I've got a couple of news there. Firstly, the people -- decisions that people make around their private properties, that's a decision that they have to reflect on. That's not a decision that PGW would -- could take a view on. Having said that, we would acknowledge that there has certainly been a movement in land into forestry. And we have -- we've got data around that. That was, as you set out, in the Beef + Lamb report. And we've seen that report being true that we've seen that impact on our business. That's changing the number of animals that our livestock business could -- is available to transact. So there's an impact on us from that perspective. There's a flip side impact, of course, that will result in carbon reduction. So there's a positive and negative in that space. PGW'S view, of course -- view, though, is that we'd like to see that the land use types in terms of land and classes of land are not the higher-quality ones. That's -- and I know that the government has put some [ effort ] and work into that area. We have seen, of course, not all production -- rural production land has moved into carbon. We have seen movement of land into horticulture and not -- no way into the extent of forestry, of course. But there is a benefit to PGW in that space for our Fruitfed Supplies business.

Your next question comes from Christian Bell.

Yes. My first question was just how much of the revenue growth or sales growth, 8% this year, was from market share gain if you're able to give a sense on that?

I can't give you a number on that. We have -- I can't give you a specific number on that, Christian. But we have -- we do have, in fact -- [ we're going to lose Christian ]. Can I leave -- can you leave that question with us, Christian? We'll try and come back to you on that one, eh?

Okay. Well, I mean like just could you roughly say like 50-50 between that and other things? Or is it...

I would like to come back to you on that one, Christian.

Okay. And then just talking about future growth, so I need just...

I think it's spread out across the retail businesses in [ southeast ].

I mean like do you expect to see similar market share gains, say, in FY '22 as you did in FY '21? Or like how are you actually going to go -- where is the growth going to come from in the future?

So we are seeing -- we continue to see market share, gains, Christian. We are seeing market share come from our competitors, and we're seeing market share come from -- or increased profitability come from the move into horticulture. Horticulture -- reality is horticulture crops are more profitable for PGW than we would see for pastoral farming. So -- and as you see for production there of kiwifruit, cherries, avocados, et cetera, that is driving profitability of the business and grapes, yes.