PGG Wrightson Limited (PGW) Earnings Call Transcript & Summary

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

Thank you, operator. [Foreign Language] Good morning, and welcome to the PGG Wrightson results briefing for 6 months to 31 December 2022. My name is Stephen Guerin, the Chief Executive Officer, and I'm pleased to provide you an overview of our interim results for the 2023 financial year. Joining me on the call today are: Peter Scott, our CFO; and Julian Daly, our General Manager of Corporate Affairs, who is also our Company Secretary. Before discussing our operating results for the half year, I want to comment briefly on Cyclone Gabrielle and the scale of the impact of these weather events that is emerging. Our thoughts and wishes go out to our PGW team, clients and communities who have suffered loss during the devastating cyclonic conditions that have battered much of the North Island. The safety and wellbeing of all who have been affected by these extraordinary conditions has been our priority. Beyond that, we will be looking at ways in which PGW can support our team, clients and rural communities as they assess the impacts and move into the recovery phase that follows. Despite the initial shock and the scale of the devastation, we know that the framework of our rural communities is strong and resilient and we will stand with you as these challenges are faced, as we have done in the past. Now turning to our financial results, our trading performance, key themes and initiatives for the period, and I will discuss some of the thoughts on the year ahead. Then there will be time for questions and answers. During my presentation, I refer to predominantly our operating EBITDA, which is a non-GAAP measure that allows us to best describe the business operations. I will refer also to our Oxford bottom line, our net profit after tax, the formal GAAP measure. The key results known are: our operating EBITDA of $47.8 million, up $0.4 million or 0.9%; revenue of $585.8 million, up $33.4 million or 6%; net profit after tax or an impact of $21.2 million, down $1.3 million or 6.4%; total shareholder returns of plus 3.4% for the period. The full imputed dividend of $0.12 per share has been declared by the Board. Our record operating EBITDA for the first half year result was the strong performances from our retail businesses. Operating EBITDA guidance has been reduced for the full year to around $57 million. The half year result included new revenue and earnings highs for our Retail & Water Group which generates the majority of its earnings in the first half of the financial year. This was partially offset by challenges in our Agency business, in particular our Real Estate business. The overall trading performance reflects the healthy state of the Group and demonstrates the value that our customers see in the technical expertise of our people and PGW's full-service offering. It is pleasing to see results that reinforce we are strategically on the right track as a business and are perceived as the leaders in the field in the sector. I'll just now start by covering trading performances for our business units, beginning with the Retail & Water businesses. The Retail & Water business incorporates Rural Supplies, Fruitfed Supplies, Water, and Agritrade brands. The first 6 months of the year have seen continued growth building upon the momentum we have been gathering for some time. Operating EBITDA for Retail & Water was $48.9 million, up $5.2 million, and revenue was $500 million, up $31 million. We continue to see an increase in market share with new clients moving to -- their business to us. We regularly hear that this is attributable to the superior technical ability of our people and the high level of customer service we offer. We maintain a stable sales force which is well supported by our specialist technical and R&D teams. Our professional development program is designed to raise the sales and service performance of our frontline staff, including all our Store Managers, Customer Service Representatives, and field representatives. The logistical issues of getting product in at the right time for the season persists, and we continue to work with our suppliers to bring in product earlier where we're getting to avoid delivery delays. After a record year last year, our Rural Supplies business has continued to trade well. Revenue was up on the prior comparative period. While some of this is related to price increases in fertilizer and agricultural chemicals, we have continued to see our market share growth. It has been a frustrating season for many with wet conditions and little respite over the 3-month critical spring growing window. Given the tough season through to December for most of the country with continued rain, cooler temperatures and localized flooding, the team have done exceptionally well, despite COVID-19 absentees, staffing shortages, and supply chain issues. Our new Rural Supplies brand campaign aims to communicate our store teams and technical field representatives' passion for helping our clients and local communities under the tagline, "Working alongside you, every season this year -- every season of the year." The campaign portrays the way stores and those in the field work closely with their clients. We are an integral part of the local communities we live and operate in. Our people go the extra mile to help farmers meet their aspirations, combined with their technical knowledge delivery on value on-farm. Our Fruitfed Supplies business has also had a strong first 6 months of the financial year and continues to grow and set new benchmarks. This has not been without its challenges as the season has influenced by climatic conditions. It was extremely wet in the North Island which hampered spring growing crop and the ability of clients to work their properties. An unseasonably heavy frost in October caused significant damage into the wider Bay of Plenty and Waikato regions, and impacted kiwifruit and blueberry crops. Wet weather in December also impacted vegetable crops, making harvesting difficult. Growth in the horticulture sector continues and we are seeing new investments over the last few years now coming into production. Our large corporate client base continues to grow, and these clients often seek a full year's program of crop protection and nutritional requirements with the establishment of long-term supplier agreements with PGW. Returns in some sectors have been challenging in the second half of the 2022 calendar year. Both the apple and kiwifruit industries have experienced reduced returns through price drops and fruit quality issues. Fruitfed Supplies won the Indevin/Villa Maria Legends Supplier Award at their annual prizegiving. It is encouraging to receive this recognition from a prominent industry participant who values our people and their excellent service through a difficult season. Our Water & Irrigation business continues to consolidate market share through new clients and repeat customer. The team has focused on enhancing the customer experience through all front, end parts of our business. This has helped in capturing infield service opportunities through identifying system upgrades and offering these advanced benefits to our clients, such as pivot panel upgrades enabling client mobility and overview of remote farming irrigation systems. Supply chain issues continued throughout the period with most irrigation equipment sourced from offshore. Wet weather during the period hindered some scheduled maintenance work. Agritrade, our wholesale business division, celebrated its tenth year anniversary in September 2022. Given Agritrade's size and strong growth, this milestone presented the opportunity to review the structure of the business, with a reset and refocus to enable future profitable growth. Agritrade increased its revenue compared to the prior period as sales for some lines of product occurred later in the season due to the delayed and cooler start to the growing season. I now want to turn to talk about the trading performances of our Agency businesses. Our Agency business includes Livestock, Wool, and Real Estate. Agency delivered an operating EBITDA of $3.6 million for the first 6 months of the 2023 financial year, a reduction of $3.8 million compared with the same period last year. Revenue was $84.7 million, up $2.4 million compared to the prior period, influenced by the mix of sales versus commission revenue. The first 6 months of trading has been impacted adversely by weather, coupled with overseas market uncertainty resulting in reduced meat schedules. The meat schedule softened with a drop in sheep and lamb felt the most keenly. There was a reduction in processing capacity caused by processing delays in the meat companies. Overall, there was a drop in the volumes of stock traded. Both volumes enjoyed a good spring growing season with animals held on farm longer, creating stronger demand for -- and prices for cattle. Beef prices held up well and volumes were on plan. Exceptional grass growth throughout most regions in the country saw large amounts of supplementary feed being made. Our livestock supply chain conditions and strategy progressed over the first 6 months of the financial year, with some new initiatives added to our existing strong and valued partnerships. During the period GO-STOCK celebrated 2 significant milestones with 2 million lambs purchased on GO-LAMB contracts, and 300,000 cattle procured through GO-STOCK beef launch -- since launch. Farmer awareness and use of the GO-STOCK is continuing to grow and is assisting sheep, beef, dairy, and deer clients with their cashflow management needs. GO-STOCK enables them to free up capital to invest in other areas of the businesses. Bidr, which now launched its saleyard product in 2021 -- and now livestreams auctions from 8 saleyards throughout the North Island. We have seen further uptake in our hybrid, genetics, saleyard, and on-farm machinery sales. Continued growth in the dairy market saw bidr utilised for a number of 'In Milk' sales in September and October, with strong sales bookings in the second half of 2023 financial year. These have contributed to an increase in account sign-ups and website traffic. PGW deer velvet sales made earlier in the season had strong pricing on the back of contracted demand with overseas buyers, particularly contracts for Super A velvet destined for South Korea's growing health food market sector. Growers benefitting from these contracts countered the weakness of the Chinese deer velvet market beset by pandemic disruptions. Demand for these elevated prices has driven up supply volumes to PGW Velvet. Consequently, confidence among farmers helped raise the stakes in stag sales held in January 2023. PGW's young talented livestock auctioneers achieved a trifecta by winning first, second, and third in the 11th annual Auctioneers Competition at Canterbury Park in November 2022. Fallout from the COVID pandemic continues to challenge the strong wool industry, especially values and associated worldwide demand. Growers encountered increasing costs on the back of falling crossbred wool prices. The merino season has been supported by good value contracts with brand partners and robust fine wool auction prices. Growth in our wool contract business supports our grower client base with contracts delivering premiums over market prices. PGW has achieved share growth in the New Zealand merino wool market. International travel has returned with several of our large overseas customers visiting New Zealand. It has been beneficial to renew contact and highlight the quality of wool our growers produce through visits to our clients. PGW's wool export business, Bloch & Behrens, has done a good job in negotiating with overseas customers and local growers to ensure contracted obligations have been fulfilled. The Bloch & Behrens team have again been able to visit customers overseas, with more trips planned related to this financial year. By working directly with retail brands both nationally and internationally, the team continues to build the key relationships to support our grower clients. The volume of bales procured and sold are on par with the same period last year. The farm property sales continued within the sheep and beef sector with a larger number of high value sales in excess of $20 million. Dairy sales improved during the first 6 months of the financial year, however, there were not as many higher value sales traditionally supported through corporate activity. Residential and lifestyle sales experienced a significant slowdown throughout all markets. The real estate market was impacted by a general negative sentiment owing to rising interest rates, the decline in property demand and sales, mismatch of vendor-purchaser expectations, shrinking buyer pool, and the raft of regulatory challenges coming to the rural sector. As a result, earnings from our Real Estate business were significantly back from the buoyant market seen over recent years, and this explains the majority of the reduction in earnings for the Agency Operating Segment. We relaunched and refreshed the PGW Real Estate website which has a modern design that allows an easy accessibility and navigation around listings, articles and more on the site. In addition, it gives us more flexibility to grow and develop features and functionality in the future, ensuring that we remain competitive and meet the changing needs of our target market. PGW Real Estate increased its footprint in Wairarapa and Central Hawke's Bay through several real estate business acquisitions. Turning to cash flow and Debt. Cash flow from operating activities saw a $35 million outflow. This compared to a $17 million operating cash flow -- outflow for the prior comparative period. Working capital balances built during the spring were consistent with the seasonal build in prior years. However, compared to the prior comparative period, these were higher as a result of supply chain challenges and price increases. We grew our GO-STOCK grazing receivables by $7.2 million versus the prior comparative period. We increased our banking facility limits by $30 million to provide prudent headroom and to also fund potential growth opportunities. Capital expenditure was $6.2 million, an increase of $4.6 million versus 31 December 2021, which included investment in our Business Improvement Program which we will be discussed below. In addition, the Group made higher income tax payments as a result of the strong FY'22 financial performance. As a result, net interest-bearing debt was up $48.6 million compared to 31 December 2021 at $95.5 million. In response to the positive earnings performance delivered during the first 6 months of the financial year, the Board declared a fully imputed interim dividend of $0.12 per share which will be paid on 4 April 2023 to shareholders on PGW's share register as at 5:00 p.m. on 27 of March 2023. A total shareholder return for 6 months to 31 December 2022 was plus 3.4%. Our full year strategic total shareholder return target is plus 10% per annum. Total shareholder return is calculated based on the movement in share price during the 6 months continue on December 2022, plus dividend cents per share paid, divided by the opening share price. As a business we seek to continuously improve the safety and wellbeing of our people, and we are currently embedding a strategy to support safety improvements. With the guidance of our people, we have started redeveloping our critical risk program, establishing regular Toolbox Talks to share key topics and learnings, reenergizing our contractor management and introducing an Executive Leadership Safety Award to acknowledge those going above and beyond to improve health, safety, and wellbeing at PGW. Our Wellbeing Action Group undertook a survey of our people to better understand what wellbeing means to them and what they want from a wellbeing program. With a revised Learning and Development strategy and resourcing, we continue to invest in our people through multiple skills and leadership-based programs to foster the strength of our internal pipeline of talent. During the period, we launched our refreshed Max Rewards loyalty program. As well as a brand-new look, our clients have an enhanced shopping experience, membership tiers, and access to wider member benefits as part of the program. Max Rewards members have shared their appreciation for having the ability to earn points and receive benefits as they spend with PGW, and they have been pleasantly surprised by the extensive catalogue range. As a result of the Max Rewards program, customers are expected to increase their spend, transact across a wider range of business units, and improve the customer lifetime value. With the first half of the financial year being the busiest time of the year, our Retail teams -- for our Retail teams, the program was launched with the slow and steady approach, with further membership drives planned for later in the year. Following the Materiality Assessment undertaken last year, we have been engaging across the business to redefine our Sustainability Strategy. These workshops have contributed to the creation our Sustainability Strategy reporting framework across the 3 pillars of Environmental, Social, and Governance, or ESG. ESG Working Group reviewed the United Nations Sustainable Development Goals, or SDGs, to determine which SGDs have the most relevance to our Corporate Strategy, Sustainability Strategy, and Materiality Assessment. This work is continuing as we determine the actions, targets, and metrics to measure our progress on achieving the SDGs most relevant to our operations. We are continuing with the implementation of significant investment with both operating expenditure and capital expenditure components to our company-wide Business Improvement Program to simplify PGW's IT systems. And totally we know this is project softest. This program will simplify our technical IT environment and standardize business processes. We expect the program to go-live in FY'24. As we think about the outlook for the financial year to 30 June 2023, we do so with the benefit of a stronger trading performance over the first half, with PGW well positioned to capitalize upon the opportunities ahead. While noting the extraordinary good 2022 financial year, we hold a degree of caution looking forward for the remainder of the financial year, given the volatility in the macro-operating environment. New Zealand's farmers and growers are currently facing a range of uncertainties and headwinds. 2 recent rural confidence surveys conducted prior to Cyclone Gabrielle have reported farmer confidence levels at some of their lowest sentiment levels since surveys began. Our clients are experiencing an environment with rising interest rates, tightening credit, increased input costs, labor shortages and supply chain disruption, an uncertain geopolitical and domestic regulatory landscape, and adverse weather events, including the extraordinary impacts of Cyclone Gabrielle that have hit the agricultural and horticultural sectors hard over large parts of the country. The full effects of these dynamics are yet to be assessed. Despite these uncertainties and reasons for caution, we also see plenty of positive fundamentals in the medium to longer-term outlook for agriculture and horticulture. PGW is also very well placed to support the sector through its challenges and the opportunities that will come. COVID-19 restrictions have been lifted and borders have opened. Supply chain disruption should ease, and it is anticipated that inflation will come off its peaks during the course of this year. Demand for New Zealand's primary exports will remain through all these challenges. The primary sector has performed well and the PGW Board is pleased with how PGW has traded. There is strength in the diversity of the PGW's portfolio of businesses and the way in which the business is executing on its strategy. On balance, the PGW Board's outlook remains cautious. We see some resoftening based upon the macro factors outlined and accordingly recalibrate our forecast operating EBITDA guidance for the financial year to 30 June 2023 at around $57 million. These results would not have been achieved without our dedicated team of passionate people who have supported each other throughout the year and the challenging conditions in which we have operated. On behalf of the Board and Executive team, we thank our team for living our values and providing exceptional service to our clients and for making a positive contribution to the rural communities in which we live and operate. We thank our team for existing loyal -- and existing loyal and new clients who have put their trust in us. We strive to go the extra mile to ensure the success of our clients' business. We appreciate the support of our suppliers who have worked with us to ensure that our clients received their orders on a timely manner. We acknowledge our shareholders and we are committed to achieving our strategic priorities to deliver value on your ambitions. Our 2023 half year report is available on the PG stock exchange website under the PGW ticker, but also on our PGW website. That bridge concludes the formality of our presentation, and I open the call for questions. Back to you operator. Back in your heads.

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

Just a few questions from me. My first one is related to the new guidance. So just -- your initial guidance was around $62 million with some cautious optimism. Obviously, it's come down to $57 million. Can you just sort of provide some color as to what has actually driven the downgrade? Like, are you able to sort of explain the split from the original guidance between Retail & Water and Agency and what the new split is, just to give an idea of where the weakness is predominantly coming from?

So the majority of the weakness, you're right, is an Agency. And really, it's specifically in Real Estate, pretty well publicized to the market and the Real Estate, especially in residential and lifestyle blocks. The other one is actually in livestock, so sheep and meat prices, as Stephen mentioned, it had been hit for over the last few months. So the livestock performance over December and January dipped and was impacted by those falls and commodity prices for sheep. So I'd say that the Retail & Water business is pretty much similar to what it was -- reasonably similar to what it was, but the Agency businesses will be -- we're expecting to be back by 30 June.

So I mean, given the Retail & Water is kind of the primary growth driver anyway, I mean, you're probably -- I mean, it's probably quite a good outcome given the circumstances. Would you comment on that?

Yes. I agree with that, Christian. Just to give you some context, Christian, sheep prices are back about 90% year-on-year. So just to repeat that sheep price is back about 90% year-on-year. That's the market price. So we're operating at an agency model. So we just reflect the movement -- reflects and our business as well. Cattle price remained pretty steer, and then -- those constraints in the volume, that's been passing through that because there's good grass growth. And we only transact -- get revenue with the animals move, by the move between farm or move between farm and processes.

And I mean, remember that -- Christ, I was just going to say remember too that Retail & Water was -- specifically retail and supplies a lot of the first half of the year financial story. The second half is quite dependent on Agency results. And things like our forward sales are similar to previous years, were like dairy by -- they're not at the sort of the really extremes that we had, say, last year. So that's all impacting on our revised…

There is a third factor, of course, Christian, it's the impact of Cyclone Gabrielle and -- course of the year. We're right at harvest mode. You'll see the pictures as well coming out of the Hawke's Bay with apple trees up to the waste, so to speak at water. And water impact is that for Water business that's really a live assistant -- there's a lot of unknowns to that space.

Yes. I mean that -- yes, that sort of leads me to the second question, the impact of the cyclone. And obviously, it's sort of, unfortunately, what the other significant part of the horticulture industry in Hawke's Bay, at least for now. I mean, do you sort of -- how do you sort of think about that going forward? Do you benefit from the rebuild? Or are you sort of a bit more -- or are you worried about the industry sort of not fully recovering from this? Or how are you kind of thinking about the mix, the more medium-term element for horticulture as a result of the cyclone?

We're cautious, Christian, to reestablish an orchard. You're talking about a 4-year turnaround by the time they have infrastructure. Now, sheep and beef property loses the feed line and could replace those pretty quickly. Orchards, a lot more time consider, to reestablish, getting infrastructure in place, getting rootstock for wines or apple trees. And they're getting those trees planned at underground and our underway in production. So it's not part -- of course, we start delivering for our clients. It is really too early because some of these areas may not be replanted. But there is -- we have seen over the last few years, longer term commitment, the growth of the horticultural sector. So I'm optimist the industry will reset. And we have a good client base there that is well committed to the industry, and they will reset the business, but it could take the next year or so, given the right at harvest is going to be a bit of an assessment, but longer term we have a higher degree of conference. But we are of course over the next year or so around what it might look this.

Yes. Okay. Yes. Because -- I mean because I guess the second half was $5 million of EBITDA, as I mean, is a relatively weak run rate compared to where you've been in the last couple of years going into next year. So I mentioned -- all things considered, are you -- I guess it's probably likely that you would be planning for a result in FY '24, it could be potentially weaker than this year?

We're just working through that now, Christian. We just wait through that process now. But having said that, we are seeing further development in other areas around the country, of course. There is still ongoing investment and good demand for land and redevelopments in both Canterbury and Marlborough and around horticulture and in [indiscernible]actually. So there are other areas that have continued to grow.

I guess is the case for -- significantly -- for significant growth going into -- or getting back to the $67 million EBITDA level next year, I mean, it looks like it's probably quite high.

Yes, but it's what we challenged initially.

And then just the -- just on the Agency business for this year, first half '23. The revenue was up, but the earnings were down. Can we basically attribute that to a mix impact because the real estate agents -- the real estate business is higher margin than the one, sir?

Yes, Christian, that's right. It actually -- all the real estate business is on a commission basis whereas the net -- some of the products that we do in livestock, such as to see available -- some of those we what we don't touch rather than on -- just on commissions.

But it is between the livestock and...?

Mainly between livestock and real estate business.

And then, I just have one more question. With -- I mean the outlook -- I mean, commodity prices have obviously come back in the last few months, but I guess, the global kind of growth outlook has slightly improved start of the year. But at the same time, costs have just continued to increase more and more. Are you kind of getting to a point where you -- that PGW has to start adding margins? Or is it more likely that your margins will sort of hold that sale, it's more going to be a sales-led decline in growth? Because -- well, guess what I'm trying to say, what's the more likely scenario? I imagine lead to sort of downturn in growth or a sales lead?

So you're quite right. I'll just deal with -- deal with a question of different parts. I hope to answer it fully, Christian. Yes, you're right. We have seen the commodity prices soften. That's both through horticulture crops. We mentioned apples and Kiwi fruits. And -- the fruit I should say, not Kiwi fruit. There's probably really early indications over the last week or so that land might be moving up a little bit. So we're encouraged by that, but it is really early slides, but that's due to the reopening and particularly the Chinese market. The commodity prices have risen, and quite right, although we are starting to see a little bit of softening on some products, particularly in the fertilizer space, there is still some future price rises to come, we believe, based on what we're hearing, particularly products that are coming out of Europe because of some of the peer challenges there. Our end margins will be relatively stable. If you look through the results, you would get to the detail, and you'll see that end margins relatively stable. And that tells that were to be -- and the feedback we're getting from the field says that our clients value the expertise. They are -- that we're getting versus some of their competitors. So they are prepared to pay for the product or -- and because typically it's the volume of crop we're getting, et cetera, the quality of crop, it makes sense. So we're quite pleased we're able to hold up the end margins and what is the -- what those commodity price rises apply [indiscernible] and input cost margin.

[Operator Instructions] There are no further questions at this time. I'll now hand back to Mr. Guerin for closing remarks.

Thank you, operator. It's a beautiful day here in Christchurch where I'm calling from, some 30 odd degrees. I'm very cautious that we have colleagues and communities in the Hawke's Bay East Coast of warfront that are struggling right at the moment. Our thoughts go out to them and our team with our supportive them. Thank you for listing to our results for the half year, and we'll talk to you again in August. So thank you all.

That does conclude our conference for today. Thank you for participating. You may now disconnect.