PGG Wrightson Limited (PGW) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the PGG Wrightson Half-Year Results Announcement Public 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. [Foreign Language] Good morning, and welcome to PGG Wrightson's results briefing for the 6 months to 31 December 2021. I'm Stephen Guerin, the Chief Executive Officer for PGG Wrightson, and I'm pleased to provide you our overview of our interim results for the 2022 financial year. Joining me on the call are Peter Scott, our CFO; and Julian Daly, our General Manager of Corporate Affairs, who is also our Company Secretary. I will summarize the financial results, our trade performance, key themes and initiatives for the period, and I will discuss some thoughts on the year ahead. Then there will be time for some questions. During my presentation, I will refer predominantly to operating EBITDA, which is a non-GAAP measure that allows us to best describe the business operations. I will refer also to ultimate bottom line, our net profit after tax, the formal GAAP measure. The key results for the period of note are: revenue of $552.4 million, up $53 million or 11%; operating EBITDA of $47.4 million, up $7.8 million or 20%; net operating -- sorry, net profit after tax, or NPAT, of $22.5 million, up $5.5 million or 32%; total shareholders returns of plus 55% for the period; increased fully imputed interim dividend of $0.14 per share, an increase of $0.02 per share compared to the comparative period; record first half year result; a very strong performance from our retail and real estate businesses; a strong balance sheet that continues to support the growth ambitions of the business and renewed and extended bank facilities; increased operating EBITDA guidance for the full year of $62 million. These record results of PGW are extremely pleasing and reflects the excellent performance of the business over the period. Our impressive results are a testament to the incredible efforts of our team in what has been a very disruptive and challenging half year. During the period, we launched our strategy reset and outlined our PGW Group's strategic priorities that will direct our focus, differentiate our offering and strengthen our position as a market leader in our sector. I'll now turn to the business unit operating results starting with the Retail & Water business. The first 6 months of the 2022 financial year have resulted in the strongest first half trading for Retail & Water on record. Our businesses has traded well ahead of last year, which include new highs for some months. Operating EBITDA for the Retail & Water Group was 50 -- sorry, was $43.7 million, up $10.1 million or 30%, and revenue was $469 million, up $55.6 million or 13% on the strong performance over the first half last year. Commodity prices in general and across the sector for New Zealand primary exports remain positive. Whilst the degree of volatility in international markets continues, which disrupted supply chains, inflationary pressures and the global pandemic, our business is diversified and continues to adapt to our client and market needs. Our focus remains on value added to our clients' businesses by supplying products and services and providing the best technical advice. Our market shares remained strong in key market segments, and we continue to pursue targeted growth. We remain focused on our clients and our strong culture, and our technical expertise is written by our clients as a key point of difference. We continue to see new clients coming into stores or contacting our rep force and ask to come on farm or orchard. As a business, PGW has responded to the current market dynamics and actively seeking to mitigate supply trade risks by keeping our stakeholders informed. We've seen clients buying products earlier than usual to either lock in lower prices or secure product availability. The cost of these products through the supply chain are increasing due to inflated freight charges. To ease the supply chain risks, we have been sourcing products earlier and carried more inventory as well as working closely with our suppliers to product -- on product forecasts and availability. Our Rural Supplies business results and -- were even better than that of a strong comparative period for both revenue and operating EBITDA. We have had growth in both categories -- in most categories, especially the key agronomy areas. Market share gains continue and the team enjoys welcoming new clients at our stores. Some of the increased growth is attributed to sales being pulled forward due to the uncertainty of supply, price increases and COVID-19 pandemic uncertainty. Farmers have been prudent by making sure they have the product when they need it. Whilst some sectors have enjoyed increased returns, some have been softened due to increased product imports. The first 6 months trading results for our Fruitfed Supplies business has seen continued strong growth. Favorable climate conditions at the key spring period have resulted in most crops being in good health with positive yields expected. These market and environmental factors continued to attract investment and development in the horticulture registry. As the developments come into production, we are seeing increased demand for the products and technical services we provide in the sector. Continued technical trading of our water sales and services teams throughout the winter of 2021 is delivering results with increased client retention and referrals. This technical trading is to continue to focus in the Rural Water business as we see irrigation componentry becoming more advanced. It is anticipated that we'll continue to see supply chain delays in sourcing some water and irrigation componentry during the expected 24 months. Our Agritrade Wholesale business division has had a good first 6 months with key products and categories all performing well. This is particularly pleasing given the supply chain disruptions we have accounted throughout 2021, which are continuing into 2022. The Agritrade team continues to work diligently to get the required products into New Zealand and into the rural network in a timely manner. Whilst this has usually meant planning our requirements much further in advance and landing products earlier, it has also given us some opportunities as we have seen other products in short supply or unavailable in the New Zealand market. Turning to our Agency business. Our Agency business incorporates livestock, wool and real estate businesses. Trading for our Agency group, which is weighted towards the second half of the financial year, delivered an operating EBITDA of $7.4 million for the first 6 months, which is a reduction of $1.9 million compared to the same prior period. Revenue was $82.2 million, which is slightly lower than the prior comparative period. For the Livestock business, the first 6 months activity has been impacted by wet weather conditions in the North Island. COVID-19 restrictions including saleyards being closed during Alert Level 4. There was a small decline in sheep and cattle numbers through -- although stock values were strong during the period. We have an impressive cohort of young auctioneers progressing through the ranks. Of the 8 auction -- 8 contestants vied for the 10th Annual Heartland Bank Young Auctioneers' Competition, 4 represented PGW. PGW secures a quinella, taking out first and second places, and it is pleasing to see such a talented group of auctioneers covered through our ranks. We continued to reinvest in the business through upgrades in our saleyard network and investment in new technologies to assist our agents better service clients. Our Velvet business has seen some shipping challenges in the second quarter, but overall strong velvet pricing and improvement in venison prices bodes well for the period ahead. Two new GO-STOCK products were launched in recent months to meet the demands of our clients. Our new GO-BEEF Prime and GO-DAIRY Max & Light products are proving popular and contribute to the overall GO-STOCK balance increasing by over $5 million compared to the comparative period. A lot of clients use the product year-on-year, which is welcome a sign that the GO-STOCK is seen by many as an integral part of their farming operations. Bidr, our online sales platform -- hybrid auctions are seeing growing usage with dairy herd disposals and deer sales, in addition to the stud and ram sales. Since the launch of the saleyard live streaming during the first 6 months, bidr user base has grown by 30%, which is mainly due to commercial buyers that see the value of nationwide reach. Introduction of picks and runouts, a common way of selling livestock in saleyards at on-farm auctions, means that the functionalities that bidr did not previously offer are now available in the online platform. In addition, an insurance offering has been added so that clients requiring insurance for higher value animals can access insurance cover at point of purchase. The first half of the financial year for real estate saw substantial growth in rural sales, especially during the second quarter. It is the best result for rural sales we have seen in many years and have seen significant -- which has been significant in heartland rural areas. Our market share increased throughout the country, especially in the South Island, with some significant results. There has been an increase in land sales greater than $10 million within all sectors, which has not been evident in the marketplace for some time. We've seen good interest in all sectors from prospective buyers, and sheep and beef properties continued to be at high demand. Our buyer pool at all sectors is more diverse than previous years, which indicates positive interest in the rural sector. Our lifestyle and residential sales are on par with prior period -- the prior comparative period, which is encouraging, especially given the shortage of listings and the competitive environment we are operating in. We experienced good growth in key provincial locations throughout both islands, which is a testament to our experienced sales force. COVID-19 did challenge some of our Northern operations with restrictions placed on movements and operating rules. The merino wool season was supported by garment trade contracts and solid auction prices. However, crossbred wool values continued to be depressed, and this is accentuated by shipping challenges and impacts of the pandemic felt in manufacturing and retail markets worldwide. The team continues to support grower clients faced with tough market conditions. The Wool Integrity New Zealand brand relationships continue to grow with New Zealand farmers and overseas clients. Bloch & Behrens New Zealand Limited, PGW's subsidiary export company, saw growth in export volumes compared to the same period last year. The team is working on several new initiatives, and the price premiums obtained for our organic wool supply agreements have contributed to the increased number of clients. It's pleasing to note the increased awareness of wool and natural -- wool's natural, sustainable and biodegradable attributes from our overseas clients. Turning to our balance sheet. Our cash flow from operating activities saw a $17 million outflow, following divestments in working capital, including the carrying of higher levels of inventory and higher tax payments. Capital expenditure was broadly in line with the prior comparative period at $1.7 million. Net interest bearing debt as of 31st of December 2021 was $46.9 million. PGW renewed and extended its bank facilities for a 3-year period during the late 2021. Now dividend. Following the pleasing performance of the business over the first half of the financial year, the Board declared an increased fully imputed dividend of $0.14 per share, which will be paid on the 1st of April 2022 to shareholders on PGW's share register as at 5:00 p.m. 28 March 2022. Environment and sustainability here at PGW. Fruitfed Supplies is the largest supplier to New Zealand's wine industry. And during the period, our Blenheim store was accredited AA level British Retail Consortium Global Standards, BRCGS, certification for our winery products. As an important part of the supply chain, we follow through processes to ensure our manufacturers and suppliers have globally recognized food safety credentials, which are externally audited. To maintain our market, it's imperative that we meet the needs of our clients in this regard. By gaining BRCGS certification, we have demonstrated our commitment to our clients, and is a distinct advantage to secure new business. Over time, we aim to replicate the certification to all our winery serving sites -- the Fruitfed Supplies business. Our stores in Marlborough and Hawkes Bay worked alongside Agrecovery New Zealand, growing rural recycling programs to trial free product -- free plastic recycling with specific ag-chem and nutrient bags of low-density polyethylene. This initiative of offering more sustainable alternatives of disposal enhances services to our clients and strengthens our commitment to the environment. Following the success of the trial, recycling these bags is now available at these 2 regions and will be extended nationwide in the near future. Talking to our people and safety and well-being duty. Our COVID response working group has continually evaluated and determined the steps we take as an organization to ensure the ongoing safety and wellbeing of our people and clients in response to the evolving risks and challenges the pandemic presents. The PGW Academy, established in 2006, focuses on developing talent from the company to expand employees' knowledge base and grow their expertise. Since its creation, over 270 people have participated in the program and have gone on to enrich PGW and the wider agricultural and horticultural sectors. Alongside our trainee programs, the Academy is one of our key platforms for fostering talent within PGW, and we're encouraged by the high talent these programs have attracted. Developing the expertise and knowledge of our people is a key point -- key priority, which is aligned with our strategy of being the market leader in our technical offering and support. Towards the end of 2021, we launched our refreshed online account services portal, which provides clients access to their statements and invoice details. The refreshed portal provides enhanced functionality, better visibility and improved site navigation as well as the opportunity for us to add new features and functionality in the future. Our corporate website has a contemporary design and is more intuitive, easier to navigate and provides some experience for users. The refreshed website is more representative of the depth and breadth of our business. Turning to outlook and market guidance. The directors are pleased with the first half results as encouraging -- and they are encouraged by the positive outlook for New Zealand's agricultural and horticultural sectors. There continues to be high overseas demand for red meat, and a record payout is forecast for dairy, and demand for horticulture exports remains buoyant. The Ministry of Primary Industries is predicting New Zealand's food and fiber export values will exceed a new high of $50 billion in the year ended 30 June 2022. This context at a macro level provides us confidence that our clients and the sector are well placed as we look forward to the remainder of this financial year and in the medium term. As a business, PGW is performing well. It is clear that our strategic -- it is clear about its strategic priorities. The cons of potential COVID disruption and we executed on our plans to effectively and see quality growth in our business and earnings. Based on the solid platform, the Board have determined to again raise our full year guidance for the year ended 30 June 2022 to around $62 million at operating EBITDA level. Notwithstanding these fundamentals, we remain cautious about the potential impacts of Omicron, continued global supply chain restrictions and increased input costs, which could have some degree of influence on our results. We will continue to keep the market updated as the financial year progresses. Our 2022 half year report is available on the stock exchange website or under our -- under our PGW ticker, or also available on the PGW website. Thank you. That concludes our briefing for the moment. I'll hand it back to you, operator, for any questions.

[Operator Instructions] Your first question comes from Christian Bell from Jarden.

First one from me. How much of the growth is from pull forward? And do you have any sense for the level of inventory stocking by your customers? Is that, for example, 6 months versus 3 months usually?

The pull forward that we've seen -- Christian, thanks for the question, is into the autumn window. So the in-harvest mode right at the moment, a lot of cereal crops are covered of, and the horticulture crops just, obviously, the strawberry stone fruits have come off. But key crops of apples and a bit of cultured grape crops and kiwi fruits. So plants have been secured. Those -- that product that they need for the autumn window included the likes of ground that's going to go back into a grass seed for May. So a lot actually they've got it in the next window. Out into the New Year, there's been a wee bit of pull forward for some of the animal nutrition products, but it's not a significant number, Christian. We don't -- we certainly don't hold that stock. That stock doesn't come into New Zealand until across the winter period.

Okay. So you...

And Chris, the second part of your question was around how much do we -- how much are our clients holding. They -- the clients, say, they're holding their old stocks for the autumn period, but we don't have a measurement on what our clients hold in stock. But I'd make the observation. Their ability to store stock on farm is actually quite limited from a regulatory perspective because the volumes that they would need to hold, et cetera, is limited as well as security on farm, making sure that it doesn't move with the night, so to speak.

Okay. That's helpful. And I mean, with the sort of you alluded to the onset of inflation or cost inflation, do you plan on passing that on to your customers?

Yes. And you'll see some commentary in rural media, if you appreciate, Christian. You don't follow that closely as we do. But there's commentary about cost rises that the farmers are seeing in the sector. And if you note here, margins, our margins are fairly stable as well.

Yes. Okay. So you plan on just basically passing all. And then just in terms of guidance, you kind of just, from the first question, said that some of that pull forward was the autumn window, which I guess, falls in the second half. I would agree. So what are the assumptions for the uplift in guidance? Is it a combination of livestock getting pushed into the second half, offset by some of that demand pull forward in the first half?

Christian, it's Peter here. The basis really is -- really our year-to-date position. At the end of January, really, we were seeing farmers actually pull forward those sales, as Stephen said. So they're getting ready for autumn, but they've already actually purchased it from us. So we haven't really shifted that much of livestock into the second half. It's still -- I mean, the second half is definitely an agency story and specifically on livestock. So we've still got dairy head sales to come through in sort of April, May. But the main reason for the listing guidance is really where we've got to in terms of where we're at year-to-date.

Obviously, built on that strong market share that we're having on retail question, and good demand for the real estate sector, et cetera, as well.

Cool. Sorry, so January and February to date have continued to be strong?

Yes.

Yes. Appreciating, of course, Christian, that January and February compared with the spring months for the retail side of the business. I know we're nowhere as big as the spring months, but they had -- January was good, and we're still continuing to trade well in February as well.

Correct.

Cool. And then just the last one for me. Sorry, it's a bit long winded. But just given the current environment where high commodity prices are more due to supply chain than demand, and that when supply chains ease, then end prices will likely ease as well. But it also appears that activity in the rural property market is above trend, combined with interest rates rising going forward. Just wondering, how do you guys think about growth going forward? Like are you confident you can continue to lift earnings once the support of backdrop eases? And if so, what would be the main drivers?

So you're right, it's a long-winded question, Christian.

Basically...

But it's a good question, Christian. So yes, as prices ease back, that will impact on our business. That's a reality. And agriculture can be a cyclical business. But notwithstanding that, a couple of things that we would have in play in this space. Firstly, we have the market share gains that we have seen. Those are real. So we are taking market share of our competitors. And we -- so we are taking a bigger slice of the point. And we continue to see that those tick up. And there's a number of ways we measure that. There's no single one we'll point to depending on which sector you're in. Secondly, the horticultural sector. We are very strong in that sector. Those are permanent crops. And that is a sector we are seeing real growth in land use change. We are the beneficiaries of that in that regard. The other point of the space is ensuring that -- what's our product mix look like. And we -- as we see food trends around the world, we're ensuring that the products that we bring to marketplace respond to those trends. And they do provide us a margin opportunity because they are new technologies. If we go back to our strategy, our strategy is actually to look for growth initiatives of the business and the balance sheet allows that. And we have -- we are active in that space. We haven't announced it to the marketplace, but we -- our radar scan is out there, and we continue to work through those opportunities.

Okay. So basically, you're confident that market share, plus horticulture strength, plus product mix should be enough to offset real estate once it sort of eases and perhaps beef and dairy, those prices sort of subside a bit too? Is that kind of a...

Yes, based on what we see today. Yes, that's right. Yes.

Okay. And sorry, just with some of the larger property sales that you kind of mentioned in your commentary above $10 million? I mean, is that -- could some of it be to do with carbon farming? Are you seeing land use changes towards trees?

Yes, we are, Christian. We have sold some properties that have gone to the trees. And that does impact on some of our businesses, but also sold properties abroad into -- going into horticulture. But as I said, there's also a strong interest in the sheep and beef sector, properties that have been sold as sheep and beef properties and going to remain sheep and beef properties.

[Operator Instructions] There are no questions at this time. Please continue, presenters.

Thank you, operator. So just in closing, I would like to make a couple of comments. The Board, the executive team are proud of the results, and they are a dedication -- sorry, testament to the dedication of the resilience of our team. And we want to thank them for their contribution, alongside the loyalty of our clients, and lastly, to our shareholders, for their faith at the ability for us to execute on our strategic priorities. That brings the call to an end. If you do have any subsequent questions you think about then, we're certainly available through our inquiry page to take those. So thank you all for your time today. Thank you, operator.

This concludes today's conference call. Thank you for participating. You may now disconnect.