PGG Wrightson Limited (PGW) Earnings Call Transcript

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

Thank you, [ Harmony ]. [Foreign Language] Good morning, and welcome to the PGG Wrightson results call for the financial year-ended 30th of June 2024. It's a beautiful day in Christchurch here and thank you for your time this morning. I'm Stephen Guerin, the Chief Executive Officer of PGG Wrightson. It's my pleasure to today provide an overview of our financial results for the year-ended 30th of June 2024. With me on the call today, I have Peter Scott, our CFO; and Julian Daly, our General Manager of Corporate Affairs and is also the Company Secretary. Before I start today, I'd like to acknowledge the immeasurable loss PGG experienced in April this year with a passing of Grant Edwards, the General Manager for Wool. Grant dedicated 40 years to the business and his leadership will leave a large influence on the business. As a stalwart of the wool, his passion for the industry was unwavering. Grant was highly regarded by his peers and chaired various industry bodies. Grant was navigating industry and politics to ensure outcomes were good for growers, the wool industry and the PGW business. We also want to acknowledge the very sad passing of Victor Schikker, a valuable member of our livestock team. Passed away in recent days having given nearly 50 years of quality service to the business and our clients. Our thoughts are with Victor's family at this difficult time. During the call today, I will cover this year's financial results, our trading performance, key initiatives, and some thoughts on the year ahead. There will be time for Q&A at the end of the call. Key measures of performance I will refer to is operating EBITDA, but I also refer to net profit after tax, also known as NPAT, a formal GAAP measure. Further details can be found in the financial statements. Headline results for the year-ended 30th of June 2024 are operating EBITDA of $44.2 million, down $17 million on the prior financial year. Net profit after tax or NPAT of $3.1 million, down $14.5 million on the prior financial year. Revenue of $915.9 million, down $59.7 million on the prior financial year. No FY '24 final dividend has been declared. Turning to performance. The agricultural sector continues to navigate persistently challenging conditions and this volatile environment is reflected in PGW's financial results. PGW's operating EBITDA is $44.2 million is back on strong trading results of recent years. This is largely a product of economic environment that is being felt across the sector. We often say that PGW prospers when our farmer and grower customers do well. The customers have faced difficult conditions over the past year and consequently, this is reflected in our results. PGW has done well to continue to hold and grow share in the markets in which we operate, but we have seen farmers and growers cutting back where they can and deferring discretionary spend. We have continued to support our customers with all their essential production requirements, but the sector is in the grips of a period of austerity where non-essential and discretionary spend has been paused. Despite the challenging environment, our receivables have held up well and we are pleased with the health of collections. Gross margins have also largely remained steady across the business. Most of the agri sector has been impacted, some have been harder hit with sheep farmers experiencing soft export demand and weaker commodity pricing and the rural real estate market going through a particularly quiet period. Based off of PGW's revenues, a 6% decline in revenue from the prior comparative period represents the first drop in PGW's revenues since FY '18. Retail & Water businesses accounted for the majority of the revenue decline. There remains a carryover effect from the devastation caused by Cyclone Gabrielle last year with areas in North Island have not been replanted. Symptomatic of the market sentiment, the Federated Farmers Farm Confidence Survey released in July recorded the second lowest confidence levels ever with 33% of farmers making a loss, only 27% making a profit and 39% breaking even this year. The 4 greatest concerns for farmers were noted as financing costs, volatile commodity prices, regulatory compliance and input costs. PGW recorded a net profit after tax of $3.1 million, noting this was negatively impacted by a one-off non-cash of $900,000 deferred tax expense due to the change in legislation for tax depreciation on long-term commercial buildings. The agricultural sector is cyclical and we have seen these ups and downs before and remain positive about the longer-term prospects of the sector. Based upon current indications, the rural servicing market in New Zealand looks like it will remain subdued throughout the current calendar year. There are however some positive signals with inflationary pressures easing and input costs stabilizing. We are also optimistic about long-term demand for sustainably produced, safe and trusted sources of food and fiber and see New Zealand growers well placed to support this growth. Given the continued difficult trading conditions impacting the sector and wider economy, the Board has not declared a final dividend for the year. In view of the current operating environment there has been increased focus within PGW on cost control measures, monitoring of expenses such as travel, vehicles and recruitment. The continued implementation of our company-wide business approval program simplified PGW's IT systems continued through the year. There's now corporate testing phase. There are a significant investment with both operating expenditure and capital expenditure components. Program will simplify our technical IT environment and standardize business processes, apply great efficiencies and better utilization of our data. Go-live is expected to occur in FY '25. During the year, our retail pricing and [ match tracking ] for some products was implemented and we're now in the first stage of realizing implementation benefits. A comprehensive back tracking service continues to be requested by our clients and this is a chance for our retail stores to set themselves apart from our competitors in the area of traceability. Moving to the D365 platform, the majority of our systems will provide a more stable, efficient platform for our business. I'll now comment specifically on our 2 business groups; Retail & Water and Agency. First is the Retail & Water business. The Retail & Water business incorporates Rural Supplies, Fruitfed Supplies, Water, and Agri trade. Retail & Water's operating EBITDA was $41 million, down $13.1 million or 24% on the prior year. Revenue of $733.6 million, was down $51.7 million or minus 7%. As previously noted, Retail & Water experienced a drop in demand with farmers and growers alike reducing their spend in response to market conditions. Despite the more challenging market conditions, our retail business continued to consolidate market share in most categories. Even in the most difficult times customer feedback and market research indicators support the view that PGW is on the right track and compares favorably to our competitors in regard to our professionalism, technical knowledge, and service. When budgets are tight, we understand the heightened need for our customers to optimize value from their spend. In that context, our focus on providing the best technical advice and expertise along with leading innovation becomes even more important and differentiate us -- differentiate customer proposition. Over the course of the year, Retail & Water business refreshed its 5-year strategy. Strategy focused on areas that will generate real growth and value and set the business up to respond to changing needs of our clients. Underpinning our strategy is the strength of our offering in core competencies in important categories of seed, ag chem and fertilizer alongside our sustainability credentials. For the Rural Supplies business, we introduced our self-led R&D model during the year. We currently have a strong footprint in horticulture R&D and moving to extend our capability into the rural services parts of our business in a product-focused R&D. Additional R&D trials have been selected. Work has commenced in this area. We continue to invest in our store development with the opening of new sites in Timaru for our Retail & Water businesses, together with the bulk store extension at Geraldine. These new developments provide improved work environments for the benefit of our people and our clients. These developments further demonstrate our commitment to support farmers and growers throughout regional New Zealand. We also invested in upgrading the Waimate store, along with future upgrades [indiscernible] stores. Our Fruitfed Supplies business even with the trading conditions we experienced over recent times, our Fruitfed Supplies network has continued to set the standard for market. Business achieved its best performance in crop monitoring services and our ag chem category recorded its second highest sales year. The impacts of Cyclone Gabrielle continue to be felt. A number of our clients in the Gisborne and Hastings areas lost large portions of their crops in 2023 and therefore less inputs were required in the new season. Some clients lost their entire season's crop last year impacting their cash flows and income into the season. Returns for some crops have been softer. The apple, avocado and kiwifruit industries have experienced reduced returns, with prices obtained for some varieties at levels not experienced for several years. The drop in returns resulted in reduced spending for past season with some product lines. Despite a good harvest, yields for wine growers were lower with this year's harvest back 21% on last year's tonnage. The water and irrigation business, the economic pressures constrained speed and irrigation systems upgrades. Less transaction activity the water team took the opportunity to engage with plants and analyze opportunities. Our service team has been [ time ] foster relationships through our on farm conversations, advising on irrigation orders and system operations. PGW water continues to invest in specific infield training for our technicians. This has increased client referrals with new and rotating clients across the service branches. Our agri trade wholesale business division experienced a solid financial year. There's been a strong focus on improving our operations within the business through optimizing logistics function, encouraging bulk ordering and inventory reduction to concentrate on preferred pipelines. Due to lower incidence of [indiscernible] for livestock over the past season, there are fewer sales of our [ priority type ], which affected our agri trade performance. Our second business unit, Agency. Our Agency group incorporates the Livestock, Wool, and Real Estate businesses. Operating EBITDA was $12.3 million, which was down $3.8 million or minus 23% on the prior year's strong result. Revenue was $180.7 million, which was broadly in line with the prior year's result, down just $8.1 million or minus 4%. Our Livestock business was impacted by the tougher macro-economic conditions. Elevated on farm inflationary pressures and input costs led to subdued purchasing from farmers and a noticeable reduction in bull sales. Sheep prices were back significantly due to subdued export demand from China coupled with an increase in supply from Australia. These factors combined to reduce commission revenue. Lower stock volumes were traded in the North Island, as a feed surplus throughout much of the year led to farmers holding livestock for longer. Whereas cattle trading was robust in the South Island, with tallies up slightly compared to the prior fiscal year as drier conditions led to increased stock turnover. Whilst pressures on sheep prices is anticipated to continue into the current footage year, there is an expectation we'll see robust trading across the major stock types, as farmer confidence improves and the spring season arrives. We saw continued growth in our partnerships with food processes of increased volumes in terms of cash out across all of our key procurement arrangements. Our GO-STOCK grazing program continued to see positive demand. GO-STOCK frees up capital for farmers allowing them to invest in other areas of their businesses. Robust returns were generated from GO-STOCK, but continued to prove popular with sheep, beef, dairy and deer farmers. Our [indiscernible] business delivered another good trading performance with new contracts entered into both local and international buyers. Visits of key clients to South Korea and China by myself, the General Manager of Livestock, our National Manager have strengthened relationships, identified opportunities for further growth. Our bidr database of buyers continued to show healthy development. This growth is driven by continued demand for online bidding and livestreaming of cattle sales at sale yards and on-farm auctions, with especially strong demand in livestock genetics markets. We have regular livestreaming from 13 sale yards around the country and a growing number of on-farm auctions with over 950 auctions streamed during the year. Our bidr business strategy was also reviewed and refreshed over the course of the year. New markets and user friendly functionality will be explored in the next year to underscore the benefits of bidr and bring to agricultural markets to extend our auction footprint further. The investment in proprietary technology continues. [indiscernible] indispensable for our livestock staff as a source for all internal resources in inflation. PGW's livestock agOnline livestock app has seen increased classified livestock listings on our website. Our wool business, with a sad passing of Grant Edwards and [indiscernible], 2 stalwarts of the wool industry also retired. The North Island Wool Manager, Allan Jones retired after 57 years and South Island Wool Manager, Rob Cochrane retired after 50 years. In fact, Allan spent the entire career at PGW and its predecessor companies. A depth of experience and expertise managed throughout the business as demonstrated by the strong results of our wool business this year. These have delivered a degree of stability for wool growers with some wool types approaching 3-year highs. Although, significant scope for [indiscernible] remains. [indiscernible] wool made steady competition for fine wool buyers with solid wool prices. Cross brand wools finished the season with some positive signs as well prepared cross brand faces command premiums. Very strong wool sold through what is possible for growers. As we go to the start of the new season, there are large volumes of on stock and inventory. Our wool export subsidiary, Bloch & Behrens Wool New Zealand Limited saw an increased interest with their flagship, Wool Integrity New Zealand offering to some well known local brands coming on board. The review of our leadership and operating structure of our PGW wool business was initiated during the year. The leadership team has now been aligned with a view to implementing professionally focused future strategy for wool business. Our real estate business, this has been a particularly challenging year for the rural real estate market. Momentum in the market remained subdued with farm sales significantly down on the prior year. Economic climate was impacting farm and agricultural land prices and produced a mismatch between vendor and purchaser expectations. Macroeconomic conditions have also impacted the livestock market as the [indiscernible] in North Island. However, South Island held up reasonably well especially in south where there was growth compared to the prior year. Livestock bulk sales have slowed significantly post the pandemic. Some exceptional quality listings have been brought to market, sales are heavily influenced by values achieved in large metropolitan areas. Sheep and beef property sales are slowing due to low farm gate returns. The dairy sector has saw some momentum with increased interest in dairy properties listed following the uplift of the forecast farm gate milk price. Uncertainty is also evident in the horticultural with fewer listing than expected. Our share of the real estate markets held up despite the challenging conditions that have been felt across the industry. The real estate businesses continue to target organic growth, share growth through targeted recruitment, particularly the lower North Island, where we have increased our footprint along the East Coast. [indiscernible] we are also expanding our residential offerings, particularly in Mid and South Canterbury. First half of the current financial are expected to remain challenging, particularly in the rural market where it certainty remains in limited listing stocks. However, dairy sales are predicted to continue their steady growth and residential and lifestyle property markets have also expected to exceed gradual upswing as interest rates ease and confidence returns. Credit to our people, we recognize that our people are our greatest asset and focused on driving a cultural excellence and safety ensuring employees are supported, engaged and able to perform and invest. We refreshed our people strategy to prioritize future workforce needs and then attracting and retaining talent against the backdrop of evolving markets and societies. We maintained our commitment developing our workforce through targeted investment and competency based and technical training skills. Our core leadership program, To Lead, has continued and this year we've launched a new management skills training. This is a series of standalone training modules that build capability in our key people processes. We have built our offering of courses that support career pathways in PGW and build readiness for promotion. Health, safety and wellbeing. In the past year, our commitment to enhancing our safety culture has continued to be a priority. We strengthened our foundation of workplace safety in partnering with impact training to deliver 2-day program focusing on health, safety and wellbeing fundamentals. This program provides employees with practical insights and skills from works, safer and healthy working environment. We also created our safety induction training program, mental fitness for work and online modules to reduce critical risk management as a priority and significant progress is made in defining a safe practice expectations. We work closely with the business to create a [indiscernible] culture and feedback from this year's safety and wellbeing [indiscernible] real improvements in these areas. Sustainability duty. FY '24 marks the first year that PGW will produce a standalone sustainability report which will be based alongside the annual report on PGW's website at the end of September. Reporting will support PGW's commitment to provide increased transparency through public sustainability disclosures. The State of Mind report provides our stakeholders with disclosure on sustainability performance and activities over the past financial year, including our climate-related activities. Climate-related disclosure compliance after our New Zealand Climate standards issued by the external Reporting Board, include information on governance, strategy, risk management metrics for targets. Sustainability is a key strategic pillar for our PGW strategy. The FY '24, our sustainability strategy was refreshed to align with PGW's matured progress. The key initiatives including the formulation of our group and sustainability commitment with representation from across the business, including reporting the reduction of PGW's operational greenhouse gas emissions and a commitment to transparency and action advanced [indiscernible]. Turning to governance and executive team changes. PGW Board had a number of membership changes over the past year. Lee Joo Hai stepped down as chair and a member of the audit committee on the 4th of July 2023 and retired from the Board on the 24th of October 2023. Lee served as a Director since the 31 of October, 2017. U Kean Seng was appointed as acting chair on the 4th of July 2023. He stepped down from that role when Garry Moore was appointed chair of the Board on the 16the of February 2024. PGW executive team had 3 changes this year following the sad passing of Grant. He was our General Manager of Wool. Rachel Shearer, our General Manager of People and Safety, took over the role of General Manager of Wool Acting and Sarah Mears became General Manager of People and Safety Acting. Turning to our balance sheet and cash flow debt. PGW recorded operating cash flows during the year of $57.7 million, which was $32.2 million higher than the prior year. Key drivers of the higher operating cash flows were reduced GO-STOCK balance from that recorded in June 2023 together with lower income tax payments. Capital expenditure of $22.8 million was $5.7 million higher than the prior comparative period. This spend included the continued investment in our IT systems business improvement program and the acquisition of our co-owners' half-share in Frankton sale yards in the Waikato. Our net interest-bearing debt was $59.2 million as at 30th of June 2024, a reduction of $6.1 million from the prior comparative period. PGW renewed and extended its syndicated bank facilities during the year through to 2026. These facilities provide extended term and working capital limits and allow for growth in our GO-STOCK book. PGW paid a final dividend in FY '23 year of $7.8 million on the 3rd of October 2023. No FY '24 dividends have been declared in the view of the continuing difficult trading conditions impacting the primary sector and wider economy in New Zealand. Thinking about the outlook, looking ahead, the rural servicing market in New Zealand remains relatively challenged in the near term but is expected to see moderate growth over the longer term. Commodity prices remain relatively volatile and underpins a cautious approach from growers and farmers. Geopolitical tensions are continuing to contribute to volatility. A slower than expected recovery of the key Chinese export market continues to dampen commodity prices. Economic pressures through elevated funding costs remain as interest rates continue to exert pressure on the agricultural sector. Interest rates and inflationary relief is expected to come as global economic conditions stabilize. This should lead to more manageable debt servicing and predictable inflation. With this backdrop, PGW expects to see continuing subdued demand for agricultural inputs and services over the short term while producers face these challenges. Over the coming 18 months we would anticipate these pressures to ease and increasing demand for rural inputs and services as farmers and growers invest in their productive operations. MPI expects New Zealand's food and fiber export revenue to grow to a new high of around $67 million by June 2028 from circa $55 billion recorded this year. [indiscernible] producers are celebrated for their ingenuity as they develop innovative solutions to improve efficiencies. PGW's market-leading technical offering and retail network allows position to support our clients, expanding their businesses to meet their export growth. Too soon to forecast trading performance for the year and we're expecting a better placed to provide guidance in FY '25 following the start of an important spring trading period at our Annual Shareholder Meeting in October 2024. PGW's annual and sustainability reports will be available on the stock exchange website under our PGW ticker and on our website at the end of September. This concludes our 2024 financial results presentation and I'd like to turn the call for questions. Thank you very much for listening and back to you, operator for questions process.

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

Just a few questions from me. So, just to start with, so EBITDA margin was down 1.5 percentage points, while gross margin was actually flat. So, what were for that difference down to? Like is it the result of operating leverage and/or were there some added fixed costs during FY '24?

Peter here, Christian. Yes, the margins were slightly reduced in the livestock area. And that depends on the mix of basically some of our product sale side for Velvet. Some of it is sold in [ principal ], some of it is sold in commission rate. But the EBITDA margins themselves, there's still some of the costs, while were constrained and as much as possible, there are still some occupancy costs such as insurance rates, but that's sort of nature that actually still increased a bit more than what we would have -- with inflationary pressures that went up higher than we would have liked that, that's for sure.

The likes of the insurance market, still, kind of, back to that point around development. There was a lot more volume on to the China market on principal position, which impacts our overall stock margins. Rest of the business units were actually pretty flat year-on-year.

Does the principal versus commission stuff, does that come through in gross margin or EBITDA margin only?

It comes -- actually comes through mainly in gross margins, but it will still fall sort of down through to the EBITDA margin overall as well, mostly to gross.

So, given -- so sort of taking that into account, given the gross margin was largely stable, can we basically assume that you've largely been able to pass on your own cost inflation and had some earnings recovery -- that's largely top line driven from here?

I think Christian, it's difficult in these environments to actually pass on all of the inflationary pressures on to our customers. And certainly, we've been doing our best to control costs as much as we can. You'll see there that there's a lot of restrictions that we've put in on travel recruitment, for example, or recruitment has to go through Stephen as CEO for approval, best replacements or ever new ones. So, we've done our best actually not to pass on, as best we can not to pass on the inflationary pressures to customers because we realize that they are under a huge amount of pressure themselves with really high interest rates and tough commodity pricing.

Okay. So, what's the kind of mind, like given you sort of had some, you sort of hit the principal agency theme and then you've got the other occupancy type costs? And it feels like some of those costs that you've been putting on restriction on kind of more of the sort of indirect level. What's the kind of key lever that you've been able to pull to keep your gross margins stable?

It's the technical offering that we do. As I commented on the -- in the commentary, we -- customers are under pressure. They will switch off the discretionary spend items. If you think about farming operation, things like fencing and we've seen some reduction in spend in the areas like of capital fertilizer because the last 3 years or so, there's been a lot on capital fertilizer. You could go a couple of years without spending so much in that area. But the key spend around permanent crops, feed crops, those sorts of things, they value the fact that PGW can provide good technical service, provide quality product to achieve the mix of returns in a really tight market. So, that's where we make the difference as far as our business is concerned.

So, you are squeezed on a sort of cost and inflation side of things, but your technical offering has been able to -- I guess, your sort of, while you're sort of suffering on the cost of goods sold, you are able to offer higher value services, which are kind of offsetting some of those input costs?

Correct. If you're a farmer or an orchardist and you could produce a better quality crop, you can feed your animals long enough. For example, in the South Island, it's been quite dry, so they've wanted to get crop in the ground and get it planted and make sure they make themselves summer safe, so to speak, in a declining market where you've got less fruit available. If you're a horticulturalist, you want that fruit to be of quality because that's how you're going to maximize your own cash flows back into the system, so we can add some value on that process to our customers.

So, next question. So, the second half performance was below PCP, so the momentum heading into FY '25 is actually probably more challenging than it was going into FY '24. So, do you think FY '24, [Technical Difficulty] as a sort of, guess, well, not guess, but sort of your sense of whether FY '24 is the trough or can things actually get worse from here?

My personal view and hope is that FY '24 is a trough, Christian. Why do I say that? A couple of factors. Firstly, we have the carryover effect of cyclones that was impacted on part of the areas last year and farmer cash flows. So, we're seeing some replanting start to take place. Secondly, the harvest qualities that come off the crops, generally speaking, whilst the volumes have been down, and we've actually been pretty good and if you look at the [indiscernible] talked about $50 million more trays in the marketplace is one example. So, that's going to provide additional cash flow back into our customers. We look at things like the were great crop whilst it's back 31% from a volume perspective, it's probably the best vintage we experienced from an [indiscernible] perspective. That's going to drive some premium returns for growers. You come back, at the moment, we're seeing as we speak, some of the high prices from a beef market perspective. So that's driving more and we're seeing more calves being reared this year because they see certainty in the marketplace. There's a little bit of an uptick in sheep pricing, although we're not in the peak spread window yet for that. But if you look at some of the commentary that's coming out of the international market space, particularly out of Europe and the United States, sheep pricing has started to tick up and we've seen that some of the questions going through the yards for our animals at the moment. Then invisible macro aspects of reduced interest rates, et cetera. That's been a real driver from farmer's perspective. So, those sorts of things are -- we've had some improvement in dairy pricing, et cetera, as well, of course, as the driver in the sector.

No, no, no. Sorry, I don't mean to cut you up.

Sorry, if I look at what we're seeing at the moment, then you sort of look about international market trends, there could be some point of a few things that are pointing in the right direction.

Okay. So, I guess just to sort of summarize, if I could, attempt to. Like, I guess, FY '24, a lot of sort of discretionary items were already put on hold. So, they can't -- I mean, I guess they can't be put on hold any further more than what they already are. And then there's some green shoots in terms of commodity prices for beef and -- chicken beef. And then you've also got potentially some support coming from some replanting taking place post the cyclone from last year and some in a decent harvest quality, which should also improve trend. So, you kind of got some, I guess, the green shoots from better commodity prices, the replanting and then, hopefully, interest rates start to come down as well, which I guess would help the confidence story.

Yes, correct. And -- sorry, I actually just reflected on other line items in there as well, Christian which I'll say is that -- government -- the change of government in November, which is quite later in our calendar year, we've seen some quite activity in our sector as we come into the new year as the government sort of settled in, which has also helped to improve farmer sentiment and some things around lake management and waterway controls and so forth. And so some other regulatory stuff that's impacted on the sector, which is going through some of the farmer sentiment surveys as well. So, those sorts of things get confidence and certainty and et cetera.

I mean this is -- my next question was sort of partially being answered by what we've just spoken about, but just trying to think about other factors that might support a better result in FY '25. Some of those things we just spoke about, in particular, sounds like horticulture replanting could be quite helpful. But also just wondering -- I think you mentioned it in the call, but I slightly missed it, the investment spend on your IT system, are you expecting any cost out from that in FY '25?