PGG Wrightson Limited (PGW) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the PGG Wrightson Limited annual results announcement. [Operator Instructions] I would now like to hand the conference over to Mr. Stephen Guerin, Chief Executive Officer. Please go ahead.

Thank you, Melanie. [Foreign Language] Good morning, and welcome to PGG Wrightson's Results Briefing for the Financial Year ended 30 June 2022. As I've been introduced, I am Stephen Guerin, Chief Executive Officer of PGG Wrightson. It's my pleasure today to provide an overview of our results for the 2022 financial year. With me on the call are Peter Scott, our CFO; Julian Daly, our General Manager of Corporate Affairs, who is also our Company Secretary. The '22 year saw the PGW across the result -- across the country step up and deliver our exceptional service to our clients in what was a challenging environment. It is reflected in our exceptional results. I thank all of our PGW team leaders from across the country who have contributed to our results on behalf of the Board and Executive team. Today, I'll cover this year's financial results, our trading performance, key themes and initiatives and some thoughts on the year ahead. There'll be time for questions at the end of the call. The key business outperformance, I will refer to as operating EBITDA and I'll also refer to net profit after tax, also known as NPAT, are formal GAAP measure. Further details could be found in our financial statements. The key results for the year ended 30 June '22 are operating EBITDA of $67.2 million, up $11.1 million or 20% on last year; net profit after tax of $24.3 million, up 11 -- or sorry, up $1.6 million or 7% on last year; revenue of $952.7 million, up $104.9 million or 12% on last year. Fully imputed dividend of $0.16 per share has been declared. Our other group strategic measures are we had some financial growth measures, and we achieved a positive 38% total shareholder return, exceeding our target of 10%; achieved CPI normalized EBITDA growth -- EBIT growth of 29%. Normalized EBIT excludes impairments and nonoperating gains or losses. Our total safety measures -- our total achieved recordable injury frequency rate, or TRIFR, saw a reduction of 3% since the baseline year of FY '20. Our customer experience scores achieved a positive 5-point improvement of PGW's group Net Promoter Score from last year's survey. Turning to our trading performance. Our exceptional financial year results are a record for the business and is a result PGW's team is very proud -- PGW team were very proud of, especially after a challenging year we've had. Like all businesses, we've had to navigate managing COVID protocols, dealing with high proportion of health-related staff absences, responding to supply chain challenges and resourcing our business at an extremely tight labor market. Since we first identified our operating guidance for the financial year in October 2021 of around $53 million, we have raised guidance on 3 occasions with the final amounts with the beginning of May this year of around $66 million. We are delighted to have exceeded this and achieved an operating EBITDA of $67.2 million. This is an outstanding result and an increase of $11.1 million or 20% on last year's strong results. NPAT in this financial year was $24.3 million, which was up $1.6 million or 7% on last year. Importantly, these results were achieved as a result of significantly higher revenue growth of circa $105 million or 12% from FY '21, with margins broadly in line with last year. This time last year, we launched our group strategy, which builds on our proud heritage and strong fundamentals while focusing on the fast-evolving landscape for agricultural growth opportunities. Our 8 strategic pillars provide a targeted focus, and we've embedded this into our operations. The strategy leverages our collective nationwide reach and scale, also leveraging our differentiated offering. In particular, our cloud-focused technical offering, innovation focuses on growth in our market -- to grow our market share and further cement PGW's position as leaders in the field. Business highlights. It was pleasing to see PGW recognized earlier this year as a finalist in the 2021 Deloitte Top 200 business awards for outstanding change in business performance among the largest companies. During the year, we refreshed our websites, our client online account services portal, a newly designed client online account services portal. The new websites have a consistent contemporary design and provide an improved experience for all users. Our updated client account services portal provides its advanced functionality with the capability to add new features and functions over time. We've also initiated our company-wide business improvement program that will simplify PGW's IT systems and streamline our processes so that we are more flexible and secure and efficient when it comes to fundamentals of our operations and customer service. The programming work -- this programming work is underway. This project work is underway, and it will span several years. And we look forward to operational benefits and efficiencies that this will deliver. I'll now discuss our 2 largest business units: Retail & Water and Agency. Firstly, the Retail & Water business, this business incorporates Rural Supplies, Fruitfed Supplies, Agritrade and Water. Retail & Water's operating EBITDA was an impressive $52.5 million and up $15 million on the prior year. Our Retail & Water business performed extremely well and achieved outstanding results with new highs. Our core focus remains to add value to our clients' businesses, and much of this is through the superior technical ability of our people. Through the year, we continued to invest in training of our people from both a technical and sales perspective. Our commitment to the personal development and upskilling of our staff supports a very stable and knowledgeable workforce. As customers see the value in the expertise of our people, we continue to see new clients coming into the stores and asking reps to come out on-farm and orchard. This continues to reflect in the incremental market share gains we're seeing. To achieve these results, our team have moved -- our team had moved increased product volumes through their supply store headway. Our investments in our logistics model have assisted us in delivering product on-farm and orchard in a timely and efficient manner, which ensures that our workforce had more time to give our clients valuable advice. COVID-19 has caused increased uncertainty and stress especially for the frontline teams. As COVID-19 spread through the regions, we had kept [indiscernible] to keep their stores open and with reduced staffing levels. We developed a plan to be able to deal with [indiscernible] and staff moves between stores [indiscernible] to keep the doors open for them and our services operating. Our teams have been incredibly resilient with a key focus on servicing our clients at the times of extremely challenging and moving environment. Supply chain disruptions have continued and have impacted the timelines in sourcing products. Being able to get the right products to our clients at the right time has highlighted the importance of strong relationships we have with our suppliers. To help mitigate supply chain risks, we have also sourced product earlier and carried more inventory than we would have historically. Our e-commerce channel has tripled its sales revenue and the number of orders in the second year of operation. A positive flow on impact of perceived and raised awareness on our product range outline has continued to boost our in-store cash sales and increase the number of product and project inquiries we've received through this channel. Work has commenced on our new build for our retail stores at Richmond, Nelson. And planning is underway for Timaru in [indiscernible], for this store in Timaru of [indiscernible]. These are replacement stores for our existing footprint. It was an outstanding year for the Rural Supplies business. Through our client-focused offering, we have seen growth at a relatively tough market. Rural Supplies has sustained the momentum of recent years and has investigated opportunities to expand footprint to adjacencies and categories that we see unmet client demand. Our reps continue to increase their usage of technical -- our technical platforms, which streamline their day-to-day activities and make interactions with clients more efficient. Investment in our people continues through training with a focus on sales to ensure we are supporting our clients with the right advice and the right products for the job and providing the same place with welcoming environment in store. Our advertising provided Rural Supplies and our people to showcase their expertise in the field, and we have had more stores and reps than other service in the sector. Our stores and people are part of the local communities in which they operate, and PGW as a rural business is proud of its investment on the regions. Our Fruitfed Supplies business had another excellent year with operating EBITDA and revenue achievements. We maintain a high market share across most of the horticulture sector categories and continue to build relationships as a key supplier of winery inputs into the viticulture industry. We continue to see significant investment by clients in large horticultural developments. Fruitfed Supplies has been well placed to benefit from these developments in supporting the supply of a significant amount of capital development. May of the developments that we have assisted with over the past few years are now coming into production, and Fruitfed Supplies is seen as the local -- logical partner for customers as their investments transition from product development into production. Our corporate client base is expanding. We have given -- we have a large number of long-term supply agreements in place with our corporate client base. Land-use change continues with a number of growers included in the corporate market, diversifying their portfolios and investing in horticultural sector. The vegetable sector is a growth opportunity for the Fruitfed Supplies business, and we have increased our market share in this area with a number of targeted initiatives. The [ full market pay ] included [ care pay ] for both the brand and service offered at refreshed Fruitfed Supplies we delivered during the year. Our Technical Team has conducted a record number of trials across the industry looking for new products and chemistry that will help support our clients into the future. A focused sales trading program was rolled out to increase knowledge of our frontline staff. Our Agritrade business, which is the wholesale business division, manufactures, sells and distributes products to improve farmer and grower production. Agritrade has continued to perform well over the year. This was despite the COVID and supply chain disruptions, with continued challenges have caused volatility in sourcing products and price increases that have been borne by the total supply chain. During the year, the Agritrade business introduced 12 products that are new to New Zealand market which were commercialized, including Cervidae, a triple deer drench which is the only registered deer product in this [ venison ] market and has animal health treatment care for [indiscernible] into the dairy cattle market that was launched to Australia. International shipping delays combined with domestic logistics issues caused challenges. The fragility of the international freight system and increased costs highlighted the importance of the strong relationships the team had with our supply partners, which assisted to ensuring the flow of products into -- or inputs into our clients. The implementation of our Water Strategy has continued to increase business with new and repeat clients. Technology initiatives include improving our client asset management system and online tracking of builds to increase efficiencies in project delivery. Product shortages and shipment disruptions caused delays in project delivery, and this is expected to hinder project completion in the near term. Our water technicians completed certified training with Valley Irrigation, resulting in the team being the only valley distributor in New Zealand who can offer an extended 8-year warranty program. Our team are also -- were also awarded with Valley 365 Asia-Pacific largest subscription seller provider award. Turning to our Agency business. Our Agency business incorporates the Livestock, Wool and Real Estate businesses. Operating EBITDA for this business group was $21.8 million, which was down $3.3 million on the prior year's strong trading results. Our Livestock business performed well in a challenging climate with higher revenue and operating EBITDA achieved. In particular, the South Island recorded its strongest trading performance in a decade. Solid values were reached in all categories, especially cattle and sheep, and compensated for reduced volumes through meat processors. During the year, the GO-STOCK DAIRY was launched. GO-STOCK DAIRY is the extension of our GO-STOCK grazing contracts, which are continuing to grow with increased uptake with transacted stock volumes at their highest levels. PGW's online trading platform, bidr, continued to grow its database of buyers. This was bolstered by the successful launch of livestreaming of cattle sales at a number of saleyards throughout the country as well as continued demand for our on-farm hybrid auction coverage. Although the velvet business experienced shipping delays and port closures in China, the outlook is positive with further sales growth predicted in Asian markets. During the year, the PGW velvet team exported our first-ever dry or processed shipment of velvet to China. The Deer Team was successful -- had a successful year also with both live sales and prices -- price rises in the market. Venison prices are now recovering back to near the 5-year average and are forecast to lift as logistical challenges on the chilled markets in the United States and European markets reduce. Strong and cross-bred wool market prices remain challenging and have been accentuated by pandemic-related disruption negatively impacting on demand. Fine wool prices remained solid with merino being supported by high-value grower contracts and healthy auction values. Our wool contract business and our grower client base benefited from fine wools, organic wools and cross-bred lambswool contracts delivering good premiums to our clients. We saw an increasing -- pleasingly, we saw increased volumes on wool exported compared to last financial year. The team did well managing the wool price through our 4 wool stores to our overseas clients in what was an extremely difficult season. We are pleased with the continued growth of our PGW Wool Integrity program, which provides quality, sustainable [indiscernible] potential marketplaces around consumer expectations. To demonstrate our belief of the future of the sustainable and biodegradable fiber, we have invested in employing 2 traders into our Wool business. The Real Estate business has enjoyed another successful year. Whilst returns in the residential and lifestyle channels have been challenging, sales volumes at our rural properties have been strong. The growth of our rural property market segment benefited from increased market value and market share, and the number of property sales exceeded $30 million, with property achieving a record of over $2 million per canopy hectare. We anticipate continually strong performance of the rural market with favorable spring appraisals and listings due to continual horticultural growth and carbon, forestry interest in sheep and beef properties. Sales of residential and lifestyle segments should maintain [indiscernible] as tougher conditions with the build sector may see those who are going to build redirect interest to existing builds. The business expanded during the year through the acquisition of Real Estate New Zealand, a real estate business at Ashburton and [indiscernible] real estate office built in the new premises. Returning to our people. This business operates through the success of our people. As of 30th of June, PGW reported 1,844 people. These included casual, fixed-term and commission and permanent staff. We recognize the importance of our robust [indiscernible] developed initiatives, and we continue to ensure our programs are fit for advancing the group strategy. The wide range of suite of safety, well-being, sales, leadership and management skills as well as technical competent courses available to our people, both in person and through our [indiscernible] modules, were encouraging -- were encouraged by the growth of depth of expertise of our business. Our continued focus on investing in our people to provide them with the tools of competences to succeed in their roles sees us introduce and advice people and safety strategy at FY '23 to best support the refreshed group strategy. Three key pillars of leadership and expertise, safety [indiscernible] and recognition are the anchors of the strategy and provide a foundation for the coming 3 years. Our people's can-do attitude as we responded to COVID-19's constantly evolving challenges was appreciated as we best managed the challenging environment to ensure everyone's safety and well-being of our teams and our communities. The pandemic was shocking to our business in a myriad of ways, and we're proud of our team leaders committed to the business, suppliers and communities under very demanding circumstances. Two key programs which were successfully reestablished after COVID-19 lockdowns have been our PGW Academy and training programs, which focus on developing our talent pipeline and our training program, which combines proven principles of what is critical for the PGW content. With a revised safety and wellbeing road map and resourcing model, PGW is honoring our commitment to continuous improvement and our vision to embed a safety culture of citizenship, whereby safety is a core part of everyone's role and a shared responsibility. Our core side of the road map has ensured that we have a disciplined approach to the control of our critical risks. We've partnered with HSE Global, who spend time with our people to best understand the first half of the risk management challenges they face at their daily work and to identify new opportunities for improvement. Our Zero Incident Process or ZIP training program sessions continued across the country. Our total recordable injury frequency rate, or TRIFR, reduced by 3% since the base year of 2020 baseline. Turning to environment sustainability. PGW has been working hard to progress our sustainability duty. During the year, the environment, social and governance, or ESG, working group engages colleagues across the business and with our suppliers to determine PGW's carbon emissions. They have an established process in place to capture emission so we can report all these in the future. We undertook a materiality assessment to determine what ESG factors are important to our stakeholders and material to our business objectives and activities as well as our societal and environmental impact. Further information on our materiality assessment will be included in our annual report. The PGW Board had one change to its membership during the year. PGW's Chairman, Rodger Finlay, retired from the Board on the 3rd of June, having served as a Director at the Board for 3 years. The Board of Management acknowledge and thank Rodger for his leadership during the period. On the 1st of July 2022, Meng Foon and Garry Moore, 2 of the Board's independent directors. Garry is also a member of the Audit Committee. Turning to our statement of financial position. PGW recorded operating cash flow through the year of $23.7 million, which benefited from our strong operating EBITDA performance. PGW Group has invested in working capital during the year, growing the range of our GO-STOCK receivables to $66.1 million as at 30 June 2022, an increase of $20.2 million or 44% from 30 June 2021. In addition, our inventories were $20.6 million higher at 30 June 2021, which affects a conscious decision to provide product available for clients to get the higher values for inventory. Capital expenditure of $8.8 million was $2 million higher than June 2021, which was impacted by a slowing in the implementation of projects as a consequence of COVID-19-related disruptions. Our net interest-bearing debt was $32.8 million as at 30 June 2022. PGW renewed and extended its banking facilities for a 3-year period in late 2021. The Board is delighted with this year's financial result and declared a fully imputed final dividend of $0.16 per share. The dividend will be paid on 3 October 2022 to shareholders on PGW's share register at 5 p.m on 9 September 2022. This will effectively bring the total fully imputed dividends for the year to $0.30 per share. Turning to the outlook. The profitable run for New Zealand's agri sector looks likely to continue through the remainder of 2022 and into the coming '23 calendar year. However, inflationary pressures on input costs will likely translate to reduce on-farm profits. So the exporters will still need to navigate high shipping costs and challenging logistics. While input prices are increasing, rising food prices are expected to be beneficial overall for New Zealand's agri sector. With a predominance of pasture-based production, New Zealand's dairy, sheep and beef farmers are relatively less exposed than international peers to the disruptions to grain markets from a geopolitical unrest. In the near term, most agricultural industries are facing similar pressures to other businesses, including tight labor market and disruption to production from ongoing challenges presented by the pandemic. Labor shortages are constraining production, including limiting fruit harvesting and leading to delays in the meat processing sector. These macro factors, coupled with concerns related to the raft of regulatory and compliance change impacting the rural sector have resulted in recent poll results that show record lows in New Zealand farmer sentiment. After a very wet winter so far, soil moisture levels are currently ranging from between normal to above -- to well above normal across most of the country. On balance, this would -- should be positive for the sector and PGW as we look towards the approaching spring season. PGW is well positioned to assist our farming clients with their cultivation needs as they gear up their operations for production as we move towards the warmer production months. Taking into consideration these issues, we remain cautiously optimistic about the financial year ahead. Consumers in countries that have had continued -- that have and continue to remove restrictions want high-quality and safe food that our farmers and grower clients produce throughout New Zealand. The reopening of New Zealand borders to travelers should over time help to ease the tight labor market. The war in Ukraine has tightened the global commodity market. And although there have been recent drops in the global dairy auction, elevated dairy prices are expected to remain. The negotiations for the United Kingdom and EU Free Trade Agreements have concluded and provided further clarity for our exporters. New Zealand producers are renowned for their technical innovations to improve the quality of their produce and PGW is well placed to support our farmer and grower clients in this space. Overall, we consider the macroeconomic indicators for the New Zealand agricultural sector as positive. It's too soon to provide meaningful guidance, but the Board intends to update expectations for FY '23 year at our Annual Shareholder Meeting in October. PGW's 2022 annual report will be available on the stock exchange website under our PGW ticker and our website at the end of September. We are extremely grateful to our people's dedication to service our clients. Our continued growth will not be possible without the ongoing support and hard work in what has been a very challenging year. To our clients, we thank you for your loyalty and the trust you place in our business and our people. We want to acknowledge our suppliers, who have been exceptional in making sure we have the products we need at the right time to service our clients. Finally, thank you to our shareholders for your continued motivation for PGW. We remain focused on delivery of our strategy and creating value for you. This concludes our 2022 financial year presentation. I will now open up the call for questions. Thank you very much for taking the time to listen to us today. Thank you. We're now ready for questions.

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

Stephen and team, well done on a good result. Just a few questions from me, if I could. Firstly, when you say -- in the outlook statement, when you say you are cautiously optimistic, does that mean flat but hopeful for growth? Are you able to sort of elaborate on what you're implying here?

If we look at our business ahead, we're expecting some softness in some areas. Today, we've talked about softness at our real estate area. We've probably got some concerns, Christian, around the processing ability with -- from our big companies, so the premises, just given the reality of the supply chain, labor, the plants. So that's certainly impacting our optimism from a volume perspective. Price-wise, we are -- commodity prices are strong for agriculture. It affects some portion of our clients' speed as they look to manage their costs. So some of their input costs, they would be -- we are seeing some cautiousness in that space. If you look at dairy prices, they are forecasting $9 plus. But the costs of production are up from $8 after this, sort of [ mid-8s ]. There is a cautiousness. It's been a weak winter. That's sort of the big sentiment there. So we are cautious. We think flat with some upside opportunity as the winter improves.

Yes. No, that's helpful Because that's sort of -- that was sort of segueing into my second question around on-farm inflation tracking higher than consumer inflation. But yes, so at what point do you have to sacrifice your margin? And do you envisage that pet name any time soon?

We're very cautious of this, Christian, because we've been doing this for 150 years. And as a business, we don't -- we see ourselves in partnership with our customers. If you look at our margins, our margins have been stable. Even though we've had revenue growth of $105 million, circa $105 million, our margins have been stable. So we've managed the results and freight costs. We have passed on freight costs. We've always passed on freight costs. But we've also absorbed costs, but we've also maintained our margins. So we haven't priced grounds to the space. But it is fair that clients are thinking about those input costs. Some of those don't come from us, of course. One of the bigger input cost is fuel, and that's not a category. We do sell fuel, but it's not a category that is big for PGW. And farmers source a lot of their fuel directly from fuel companies and other parties. So we do see some caution around perhaps some of the fertilizer prices. We're seeing some decisions. It's a bit early yet, but with the conversations clients as they go on, should I give the -- a lot of capital fertilizer over the last few years. The good thing from PGW's perspective, though, is we are operating beyond that horticulture space. They are period crops so they need to look after them. They are seeing -- the clients are seeing droughts around the world in farming systems. And they are looking to ensure they have winter feed and summer feed. So we've got good forward demand for our maize crops, which we planted late September into October. So the demand is up slightly on -- the crop orders are up slightly on last year. So that suggests positivity and that they need to ensure that they've got feed available for their farms -- sorry, for their edibles. And as I said, there's period of crops like kiwifruit, apples, et cetera. Those clients are the long term of business. They're going to look after the crops and those crops will go to the export market. So there is a degree of certainty here alongside some cautiousness around the discretionary spend.