PGG Wrightson Limited (PGW) Earnings Call Transcript

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

Thank you, Ashley. Good morning, and welcome to PGG Wrightson's results briefing for the financial year to 30th of June 2023. I'm Stephen Guerin, as has been introduced by the operator, Chief Executive Officer for PGG Wrightson. So my pleasure today to provide an overview of our results for the 2023 financial year. It's a beautiful day here in Christchurch [indiscernible] just sort of Hudson Spring after the tree in full blossom [indiscernible] the hope that spring is ahead of us. Today, I have with me Peter Scott, our CFO; and Julian Daly, our General Manager of Corporate Affairs, who's also the Company Secretary. I'll be covering off the financial results for the period ended 30th of June, our trading performance, key themes, initiatives and some thoughts on the year ahead. There'll be time for questions to answer at the end as has been announced by the operator. The key measures of performance I refer to is operating EBITDA and also refer to net profit after tax, also known as NPAT in the formal GAAP measurement. Further details on this can be found in our financial statements. The year's results for the 30th of June 2023 include operating EBITDA of $61.2 million, which was down $6 million or 9% on the prior financial year. NPAT of $17.5 million, down $6.8 million or 28% on the prior financial year. Revenue of $975.7 million, which was $23 million or 2% up on the prior year. Fully imputed dividend of $0.10 per share, bringing a total of $0.22 per share for the full year. This is the second-strongest trading performance for the business since PGW Seeds divestment which was bettered only by last year's record results. Turning to a bit more detail around our operating performance. This past year was set against a challenging backdrop. PGW delivered strong financial results for the financial year. These results were realized with margins broadly in line with the comparative period. The resilient performance of PGW in the volatile market conditions is perhaps the most basic aspects of this result. Strong operating performances were generated in most business units with livestock, wool and water all experiencing solid demand. Rural Supplies that Fruitfed Supplies, again, experienced a standout performance. This exception was our Real Estate business, which continues to operate in difficult market conditions. Macro trading conditions for the year have been volatile with increased input costs and inflationary pressures, fallen commodity returns for our clients, a wet and cold spring delivered frosts, which affected the number of crops. Two cyclones through late summer also resulted in significant crop and rural infrastructure damage in the North Island. In the context of these market conditions, we are heartened by the performance of the business, which -- in which the financial results reflect. We're proud of the way our team responded to the demands experienced in their regions and the extraordinary efforts of many in the way they supported each other, our clients and their communities in need. Since the launch of our refreshed Max Rewards program in November 2022, membership growth has been steady with data for increases in applications followed agricultural events, as well as a brand-new look our clients have an enhanced shopping experience, membership tiers and access to [ wide ] benefits as part of the program. The Max Rewards program differentiates our client offering and the consumer agri-business market. The business improvement program to simplify our IT systems made good progress with this first phase successfully implemented on schedule in July 2023. The main components of the program is expected to be completed in FY '24, which is currently targeted for around February or March 2024. The benefits expected from the consolidation of systems and renewal of the processes are greater efficiency, flexibility, better utilization of our data and our system security. Through the financial year, PGW's property managers transitioned to a specialist facilities manager. These specialist facilities provides to engage contract just to want to take property related works, provide efficiencies and enhances our capability to deliver official peers of maintenance work in a great degree of compliance assurance. I'll now talk specifically to the 2 business operated groups within PGW. That's the Retail & Water Group and the Agency businesses. Retail & Water businesses incorporates Rural Supplies Fruitfed Supplies, Water and Agritrade. Retail & Water's operating EBITDA was an impressive $54.1 million, up $1.6 million on the prior year or 3%. Revenue was $785.3 million, was up $24 million or 3%. The financial year has been another record year for the Retail & Water business. Increased sales were recorded in the animal health, fencing, general merchandise and horticultural categories. We transacted increased business volumes with the same level of staff, which is something we are very proud of and a testament to the commitment of our team members. Our clients appreciate superior technical ability of our people, who are backed by a dedicated research and development team. We will continue to build this point of difference to ensure we can maintain and increase our market share. Global supply chain disruptions following COVID-19 caused us to carry higher levels of inventory to ensure we could provide our clients with the right products at the right time. Elevated inventory levels caused some challenges with storage and working capital management. As international shipping delays are easing, there is more certainty regarding delivery timelines. We have adjusted inventory levels given that we do not need to carry the same quantities of buffer stock as was considered necessary in the prior year. Rural Supplies recorded its best performance ever exceeding last year's record result, with strong sales across a range of categories. We continue to grow market share and delivered an outstanding result in a shrinking market. To achieve growth on last year is an exceptional result given the climatic challenges and demonstrates the strength of our Rural Supplies business. Our people are passionate and motivated to go the extra mile for our hardworking clients. We are winning new business and seeking opportunities with key accounts in animal health, forestry and the ever-changing landscape of our traditional business. The wet spring contributed to additional Ag chem sales in our Fruitfed Supplies winery and horticultural merchandise businesses. Our market share also increased in the vegetable sector, which is an important area we have targeted for growth. The damage caused by spring frosts and floods across most -- across many parts of the North Island and the impact from Cyclone Gabrielle in the Tairawhiti and Hawke's Bay regions will impact the Fruitfed Supplies business over the next few seasons. However, the long-term outlook for horticulture remains positive. Our Fruitfed Supplies strategic plan focuses on adapting to changes in the industry, capitalizing on category growth, how we proactively and strategically adapt to land use change. The Water business' strategic focus is to add value to clients' businesses by the growing services delivery with the best technical advice. We're the market leader with the most technically-skilled workforce as verified by our global supplier of Valley and the Valley -- and the only current Valley Certified Field Technicians and Certified Valley Designers in New Zealand. Our Sales and Design crew are actively targeted irrigator upgrade options and inquiries for infill irrigation are increasing, specifically where clients see the benefit of fixed grid solutions. Agritrade, our wholesale business division, celebrated its 10th anniversary in September 2022 and showed good growth over this period. This financial year has seen another lift in sales revenue with growth across horticulture inputs and animal health products. Our range continues to expand as the suppliers look to us to supply product given our large logistics function and growing reach to merchants and vets across the country. Turning to our Agency business. The Agency group incorporates the Livestock, Wool and Real Estate businesses. Operating EBITDA was $16.1 million and was down $5.8 million or 26% with the prior year's strong result. Revenue was $188.8 million, which was broadly in line with the prior year's result, down just $0.6 million. Our Livestock business achieved a solid performance in a difficult market. Whilst there were challenges through softer sheep pricing, significant wet weather events in North Island and declining tallies in some stock lines, there were also positive outcomes for the year. The wet conditions contributed to a greater pasture growth than normal which created unseasonal trading during the summer and autumn seasons. Revenues received for cattle were robust, with higher prices received compared to the prior year. This was driven by healthy pricing achieved throughout the year, which was assisted by abundant feed and increases in export volumes. Sheep pricing was below expectations throughout much of the year, as demand was slow to recover in our key export markets. GO-STOCK, our grazing program, which frees up capital in order that farmers can invest in other areas of business achieved another record year with the highest balances recorded in terms of values and tallies. GO-BEEF, including the new Go Prime Beef (sic) [ GO-BEEF PRIME ] offering, and GO STOCK DAIRY performed well. During FY '23, 2 significant milestones were reached with over 350,000 cattle and 2.3 billion lambs purchased through the GO STOCK since its launch during 2016 financial year. The Velvet business achieved a strong performance, achieving its best results ever. This was achieved through increases in volumes traded in South Korea -- with South Korean health food customers. China's extended shutdown caused slower sales which reduced prices on the prior year. With all Velvet stock sold and exported, it remains a profitable income stream for deer clients and continues to grow in both production and quality. Our Genetics business achieved some outstated results with its bull sales. The team is investigating the value add of "beef over dairy" strategy, which will benefit dairy farmers seeking genetics that shorten gestation, maximize ease the birth and increased profitability of cattle. Overall, our Wool business had a solid year with total bales procured into store in line with last year. Wool growers continue to be negatively impacted by cross-bred wool prices. PGW Wool had another steady fine wool season, growing market share supported by high value long-term merino contracts with growers. The real estate market has experienced one of the toughest years in some time, with higher interest rates, stricter regulatory requirements, softening commodity prices and uncertainty regarding the outcome of the general election in October 23, all contributing to negative sentiment of the rural property market. This was reflected in operating results for the Real Estate business with decline in market activity leading to specifically fewer sales being made than in the prior financial year. On a positive side, we have maintained our market share and increased -- in fact, increased share in some regions. Our people are key to making this business a success. As at June '23, PGW had 1,572 permanent and temporary, included fixed term employees and 323 casual commission agents, giving us a total of 1,895 people in our team. Our people are the heart of the business, and their efforts continue to ensure PGW is a Great Place to Work as it develops great people, we have a place on behalf of our clients and the local communities in which we operate. Investing in our people is a strategic imperative for PGW as we supported developing our team members to be able to deliver all their strategy. Three key pillars of Leadership & Expertise, Safe & Certain, and Recognition, provide the benefits of our People & Safety strategy. We have revitalized our leader development and technical trading programs. We have made improvements in our safety resources and systems. In the past year, we concentrated on our leadership development, health, safety and well-being culture, leadership with fundamentals, sales trading, team culture and a wide range of e-learning courses. Turning specifically to safety above at PGW. This continues to take -- we continue to take a disciplined approach to controlling our critical risks in our revised health and safety and well-being of our [indiscernible], and our resourcing model has made significant progress this past year by engaging and learning for those who are close to unified critical risks. It's also encouraging to see an increase in our people go above and beyond their contributions to health and safety environment, which has been demonstrated through received excellent examples of other benefit solutions initiatives across the business which includes [indiscernible] comments for our both executive safety leadership recognition [indiscernible]. Turning to environment and sustainability. PGW provided by environment of sustainability embedded with the PGW's group strategy. PGW was pleased to release our sustainability strategy through to 2030 for the past year. Strategy establishes PGW's positions a range of key environmental, social and governance issues as well as targets through our greenhouse gas emissions, fleet management, energy efficiency and other social governance metrics. PGW has committed to reduce its operations of Scope 1 and 2 greenhouse gas emissions by 30% by FY '30 from its FY '21 baseline. As part of this commitment, PGW has undertaken a comprehensive process to cut -- starting the emissions profile, including [indiscernible] external assurance of these numbers. PGW has defined larger sources of emissions and put in place a series of strategic actions to address these over time. PGW also committed to transparency to public reporting as [indiscernible] report to the Global Reporting Initiatives by the GRI standards. GRI standards assist organizations to understand and communicate their impacts on a range of issues such as climate change, human rights and corruption today a few of the requirements of the status. There have been a number of governance changes over the past year. [ Lee ] stepped down as chair of [ Audit ] Committee on the 4th of July 2023. U Kean Seng was appointed acting Chair of Audit Committee while an independent Director Sarah Brown was assumed a role of Deputy Chair. Mr. Lee has announced he will retire from the Board from October 23 Annual Shareholder meeting and has served as director since 21 October 2017. The board and management thank Mr. Lee for his contribution over his tenure. At Annual Shareholder Meeting on 18th of October 2022, Meng Foon and Garry Moore joined the Board as independent directors, Mr. Moore is also a member of the Audit Committee. Cash flow and debt. PGW recorded operating cash flows during the year of $25.5 million, which was up $1.8 million higher than the prior year, impacted by higher income tax payments on last year's exceptional result, together with higher funding costs. PGW invested in working capital during the year, including implementation of our strategy to grow our GO-STOCK receivables book to $74 million as at 30 June 2023, an increase of $7.9 million or 12% higher from 30 June 2022. Capital expenditure of $17.1 million was $8.4 million higher than 30 June 2022. This increase was driven by significant investment in our IT Systems Business Improvement Program, which includes both operating expenditure and capital expenditure components and is due to go live in the FY '24 financial year. Our net interest-bearing debt was $65.3 million as at 30 June 2023, an increase of $32.5 million from the prior comparative period. Shareholder distributions. The Board have prepared a full imputed final dividend of $0.10 per share. The dividend will be paid on 3rd of October 2023 to shareholders of PGW share register at 5 p.m. on the 15th of September 2023. This will effectively bring the total fully imputed dividends for the year to $0.22 per share. Turning to the outlook. There's a significant degree of volatility of the global economy and international markets currently. New Zealand like many of our key trading partner nations are committed to taming inflation with central banks lifting interest rates. The effect of this monetary policy is being felt with inflation levels beginning to trend lower but with elevated interest rates raising borrowing costs. Growth in emerging economies is forecast to increase faster than developed countries. Our longer-term outlook is positive with the government projecting steady growth for New Zealand's primary exports and revenue projected to reach $62 billion by 2027, which is up from $56.2 billion for the year to 30 June 2023. As a market leader in the agri sector, PGW is in a strong position to assist our client growth -- clients grow their businesses as they respond to export demand. Our country's farmers and growers are renowned for their resourcefulness and their pioneering spirit, continues with creating new solutions to adapt to climate change and become more efficient. Regardless of the regulatory framework that is ultimately adopted, the primary sector will adapt and continue to enhance its social license to operate. It is too soon to forecast trading performance for the year ahead, but we hope to be in a better place to provide guidance for FY'24 following the start of the important spring trading period at our Annual Shareholders Meeting in October 2023. In the meantime, we do note the following positive signals: PGW continues to pick up market share and we see this in key categories and in new client enquiry and business. Maize orders for the coming spring are strong and tracking ahead of the same time last year. The viticulture sector had a good harvest and New Zealand wines are in demand internationally with new plantings planned and Fruitfed Supplies business is well placed to support the growers. We are well positioned operationally as we move into the current financial year, we see continuing volatility and softening commodity prices for our clients and even more challenging macro market conditions out over the short to medium term than experienced in recent years. A positive trading results in the markets, we have seen over the past year, just the incredible dedication and resilience of our PGW team. Through our One PGW philosophy and the nationwide team pull together serve our clients, communities and each other in some incredibly fine circumstances. It was especially gratified [indiscernible] typically ingenuity demonstrated by our colleagues to support those impacted by cyclone. We could not have delivered the outcome without all support of our clients and suppliers that was -- what was another -- was a year with business. PGW's '23 annual report will be available on the stock exchange website under the PGW ticker and our website at the end of September. This concludes our financial results presentation and are open the call for questions. Thank you very much. And Ashley, I'll turn the call back to you.

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

So my first question is despite some early quarter indicators that you've kind of pointed out, it does feel like you're managing expectations down, which is understandable in the current environment. So just trying to understand how just given farmer sentiment is really low, and it has been for a long period of time now, I guess. Just trying to understand how bad things could be? How bad were things have to be for EBITDA in FY '24 to have a floor in front of that?

Pretty bad.

That will be quite a -- that would be seriously, let's not [indiscernible] question.

Okay. Okay. Yes. So the scenario that you're kind of -- are you budgeting for setting -- managing expectations for that is better than that type of scenario?

Correct.

Okay. I know it's useful. And so I guess just to dig into that a little bit more. The last time farmer sentiment was so low, I think it was [ during the Q3 ]. Acknowledging that the Retail & Water business would have changed a lot since then, are you able to sort of give a like-for-like comparison between the Retail & Water business in 2009 versus what it is in 2020 -- what it will be in 2024, but what kind of -- what's changed since then?

A couple of things, Christian, because I was actually leading the Water business -- so I took a lead the water business in 2010 for a period before becoming CEO. And current CEO 2023, Retail & Waters business. That was the time, there was a sort of lack of clarity of strategy. There was an alignment through the business. We did have such a focus around our R&D capability and technical support for our people. The size and footprint of the Fruitfed Supplies business was different. There's been significant land use change in terms of the areas -- planted areas and the viticultural space and the Fruitfed areas we've targeted the market, the vegetable market and our market share, as a result, has improved significantly. We've also grown our Agritrade footprint in terms of our product availability and range within the business. And that's also assisted the business to grow accordingly. And as I said, that's a result of a clear strategy, execution through the business, support of our people and some of those operational things that we've talked about. We've done some more [ settlements ] around improving their footprint as well in terms of what our look and feel of our stores. But at the end of the day, clients, we offer a lot to make decisions to do businesses we've got capability and credibility of your people.

And I guess the follow-on question would be, I guess, I'm sort of gearing towards the Retail & Water still. What proportion of that business would be more consumable-type items and hence, would be more defensive like given the items that farmers can't do without during the year? So what kind of percentage would be, I guess, more defensive than -- as opposed to more discretion?

I get the question. We probably don't use the word consumer, but I understand why you might use it, Christian. We talk about the core agricultural inputs that required. For example, if you think about a crop or the permit crop, implanted crops or maize crops or viticulture crops, et cetera, they have requirement every year for input sales [indiscernible] viticulture seem if you're growing those crops, for example. So they are reasonably well predicted because they are part of areas. There are a certain number of animals you need feed just to make sure in New Zealand. So we have a good proportion. It's weighted towards a good half a portion of demand that is required year in, year out. Having said that, there is discretionary spend each year. And you see that particularly in the categories such as fertilizer. To some degree, you see it in the [indiscernible] area and those sorts of things. Obviously, the [indiscernible], they have replacements because of damaged infrastructure. But if you heard the economic environment, you will reduce your spend on things like [indiscernible], for example. You may reduce some of your capital fertilizer spend as well. And so that's -- the third factor, of course, is the nature of the season. The weather and climate conditions are calm. So with [indiscernible] heat, which we believe the being the forecasters, moving -- weather pattern from what we've experienced last year, although we see that play out. So summary, there is a degree of certainty around the spend because those are crop -- customers need to protective crops, the permit crops and they need to plant feed crops for animals for the [indiscernible] curious about this time next year.

So what's the percentage would you put on the discretionary type items like is it 20% of your sales or...

I have to go -- and I don't have that number on my fingertips, Christian, it would be part of that message. Yes. [indiscernible] 20%, I think that base that Christian based off my -- as my career at PGW, I was 25 years in the retail business. It's based on gut feel rather than some science, but I do have a lot of experience in it.

Yes. I mean it's all I'm kind of looking for just a rough kind of guidance...

Be that 15% to 20% category question.

Yes. And it was in the sort of more core inputs like, is there any wiggle room for farmers to pull back on that? Just I mean, obviously, it's tough times at the moment, so just trying to understand that a little bit.

They do have some wiggle room of the season as it plays out. So winter season will see a higher speed, a dry season will spend -- see some different types of spend. And then the handsome choices in terms of the [indiscernible] of [ 3% ] to without getting into product names. The glyphosate market, there are premium-branded products that are at a higher price. So there are the more -- there are grades that are available at cheaper price [indiscernible] choices but they still be the glyphosate.

Okay. It's awesome. And then on the agency side, obviously, real estate was the kind of key detractor this year. And the total EBITDA was $16 million. Are you able to say how much of that was real estate? Just to give us an idea of kind of what this year is given that next year is kind of looking like it's going to be pretty depressed as well, and are they on the real estate?

It's about [ $5 billion. ]

It takes a lot of the actual variance to be honest, Christian, between last year's operating EBITDA result for Agency and this year's. The [indiscernible].

It does get a bit what difference would put that, Christian, is the operating cost for our IT program work, which is in the FY '23 result, FY'22 because, as you know, with IT programs at work versus now split between OpEx and CapEx. And yes, the Real Estate business does pick up a little bit of the cost as well.

And so how much -- what is the total OpEx spend for the IT project that's going to the P&L? What was it in FY '22?

It was roughly $3 million, so that would -- in the previous year, it was only about $700,000, for example.