Earnings Call: H1 2021

Feb 23, 2021

Good morning, everyone. Welcome to the P and G Rights' results announcement for 6 months results for the period ended 31st December 2020. I'm Stephen Guerin, the Chief Executive Officer of PGG Wright, and I'm pleased to provide you an overview of our interim results for the 2021 financial year. Joining me on the call today are Peter Scott, our CFO and Julian Daly, our General Manager of Corporate Affairs, was also our company secretary. I want to acknowledge the whole PGT Horizon's team, what has been extremely busy 6 months for the 2021 financial year 1st 6 months for 2021 financial year. Their continued resilience, commitment and passion is heartening. And on behalf of the Board and executive team, thank you very much. I'll summarize our results for our current year and then there will be time for questions. During my presentation, I will refer predominantly to operating EBITDA, which is a non GAAP measure that allows us to best describe the business operations. I will refer also to our ultimate bottom line net profit after tax, a formal GAAP measure. The key results to note are revenue of $499,300,000 which is up 6% Operating earnings before interest, tax, depreciation and amortization, known as operating EBITDA of $42,100,000 up $7,400,000 or 21%. Net profit after tax of $18,000,000 was up 41%. The Board have declared a fully imputed interim dividend of $0.12 per share. We've seen very strong performances from our retail, livestock and real estate businesses. We have a strong balance sheet and improvement in cash flows from the prior comparative period. We have reconfirmed our full year operating EBITDA guidance of around 57,000,000 dollars Turning to the trading performance on a business unit basis and give you some further context there. Firstly, our retail and water business. Our retail and water business includes our fruit feed supply stores, rural supply stores, water business, our agitrave wholesale subsidiary business. The 1st 6 months of the 2021 financial year provided a very good start with all business years with the retail water trading ahead of the corresponding period last year. Operating EBITDA for this group was $35,800,000 up 15% and the revenue was $413,400,000 up 8% on a solid performance in the first half last year. Superior technical ability of our staff and a very stable workforce, while well supported by our technical expertise and R and D teams have contributed to an increase in market share. Growth has been very growth has also been supported by the uptake of our new PGW e commerce offering, which was launched in June 2020. While our non orders are relatively small channel for us at this time, we see orders come from all quarters of the country, which serves to increase the awareness of our product range as well as influencing in store purchases and attracting new customers. In Rural Supplies, we have seen solid growth across most categories. The outlook for our Rural Supplies business is teetered with sheep and beef farmers cautious about the mix company schedules, which are back on last year. However, the dairy farmers have been more positive with solid payouts expected. The forecast remains very positive for our fruit free supplies business with positive returns for the sector and stability of prices being obtained by our growers. Crops not affected by the recent weather events are in good health, with harvest for a number of significant crops underway or commencing shortly. The horticultural sector continues to be buoyant, experiencing good yields, profitable returns and positive outlook, which is further driving investment and further development. Our market leading food free supplies business is diversified across a range of crops and continues to adapt to our customers and market needs. We're heartened by the improvement of our water business in the first half trading results, followed the restructure of the business undertaken at the beginning of this financial year. It's pleasing to see these early positive signs and we see room for further gains for our water business as we focus on growing our service offering. We're conscious of the challenges with international supply chains given widespread disruption caused by the impacts of COVID-nineteen. We are remaining vigilant in the space and doing what we can to mitigate supply risk for agro trade and wholesale business. Our stores have reviewed their forecast and stock levels and are ordering for early delivery to assist the continuity of supply in coming months. And that's more about the spring trading conditions from July onwards rather than the remaining trading business months of this financial year. Our agency business incorporates the livestock, wall, real estate and referral commission businesses. Trading for our agency business group delivered an operating EBITDA of $9,500,000 for the 1st 6 trading months of the 2021 financial year, an increase of 44% compared to the same period last year and revenue of $84,800,000 in line with the same period last year. With many parts of the country coming out of drought conditions, we saw a number of farmers rebuilding their capital stock numbers. Moira prices of widespread rains throughout the South Island have created good conditions for plenty of feed on farm, still relating farmer confidence. Strong global demand for dairy persists with farm cap prices continuing to rise and underpin confidence in the dairy sector. With capital available to support growth of our go stock livestock grazing program for trading and finishing beef and sheep, we have increased the promotion of our go stock offering. With good demand for this popular livestock trading solution, we expect see further demand and utilization of Go Stock. Better continues its commitment to offering buyers and sellers of livestock as a seamless online trading experience with their bidding on farm or sale yacht auctions. Following the launch of the on farm hybrid auctions for on farm and auctioneer sales, Vota has announced will expand its offerings into mainstream with options and sell yards from April 2021. Uncertainty around global markets and the effects of COVID-nineteen are causing farmers to have more to take a more conservative approach than normal in the cattle and land trading space. The venison market has been affected with schedules having been reduced by over half for most companies only processing if they have orders. All three to our real estate business. All three categories of our real estate business, including the rural lifestyle and residential experienced the strongest 6 months of sales in the past 6 years. Every sector of rural, particularly sheep and beef grazing and finishing properties experienced significant activity that dairy farmers also enjoyed high dairy farms also enjoyed high interest. The outlook for our real estate business for the second half of the financial year remains positive, subject to the availability of listings, especially within the lifestyle and residential centers. We anticipate there will be steady inflow of rural properties with new rural listings coming into the market for the traditional autumn selling period. Our wool business. PGW wool continues to proactively navigate the depressed crossbred wool business associated with international demand challenges, supply chain issues accentuated by impacts of the global pandemic. Despite these challenges, operating EBITDA for the PGW Wall was up modestly compared to the same period last year. Thinking about environmental and sustainability issues. During the first half of the financial year, the Retail and Environmental Strategy Group has been involved in a range of projects. They have studied and summarized our new healthy waterways legislation and ran more than 40 Internet internal virtual train sessions across the country, updating and informing many members of our business units about the immediate changes to policy and the effect it will have on our customers and their operations. The team have also worked on recycling initiatives with their store network with the new Alexandria Rook fruit feed supplies rural supply store being set up as a trial site for new environment and meaningful practices around waste management. At a national level, the team have contributed various bodies in developing sustainability policy by contributing and interacting with Ministry of Primary Industries, Minister for the Environment and Environmental Protection Authority and end recovery. Thinking about our people, Leading Safety undertook a PGW Group wide safety and well-being review in July 2021 to assist PGW's progress in our approach to safety and well-being in the areas of strategy, framework, culture and compliance. The findings have helped reshape our safety and well-being strategy roadmap, which will be focused for the remainder of the FY 2021 and beyond. The key objective of our safety and well-being strategy is to ensure our senior leaders have visibly demonstrated their commitment to this through their actions. 2 activities our senior leaders actively anticipated at our sites, our safety leadership walks and conducted critical control checks to learn and understand what could be done to help improve our safety performance. These are designed to engage with team members in the field while observing how work is done, their effective controls are, which we refer to as our critical risk standards, have been able to limit it to keeping our people safe. As part of our cultural verdict, we've also reviewed our response to the announcement of the global COVID-nineteen pandemic and lockdowns. It's pleasing to know that our people consider our response to the COVID-nineteen lockdowns was very well managed and has been alongside the valuable lessons we learned. Most pleased to leave the review highlighted the talents of our people with a recurring theme there was willingness to adjust and get on with what was required in some challenging and uncertain conditions. The key recommendations to ensure PDW is being prepared for subsequent mockdowns or other large scale disruptive events have been taken on board to aid our preparedness. A number of actions have been implemented, including the refreshing of our business continuity policy and business resilience initiatives. The COVID-nineteen response working group remains in place and meets regularly to modern develops and consider developments as they arise, including Sunday a week ago, when we swung into action with the announcement of alert level changes. I will turn to now turn to a detailed discussion around the financials. Our cash flow and debt. Cash flow from operating activities for the period of 31 December 2020 saw a $3,900,000 inflow and $19,800,000 improvement an $18,800,000 improvement on the prior period's results. Capital expenditure was 1,500,000 dollars 3,000,000,000 lower than comparative period, with cash flows from disposal of property, plant, equipment and investments totaling $500,000 Net interest bearing debt as of 31st December 2020 was 39,200,000 dollars which was 34% lower than December 2019. PGW renewed and extended its banking facilities during the reported period. Dividend. Following the strong performance of the business over the first half of the year, the Board have declared a fully imputed interim dividend of $0.12 per share, which will be paid on the 24th March 2021 to shareholders on PGW's share register at 5 p. M. On the 3rd March 2020 one. Turning to some other initiatives we have operating in the business. Last Friday, we announced our new joint venture relationship with BrokerWeb Risk Services Limited, known as BWRS. That was announced internally to PGW and the marketplace. It will take PGW's customer referrals and providing sorry, B WRS will take PGW customer referrals and provide leading insurance braking services to them for the wider rural community. The relationship has a strong strategic fit for us given that BWRS already have a solid presence in the rural sector and our associate will provide an excellent opportunity to deliver another important talent service to our customer base. BWRS's brokers have local knowledge, access to market leading insurance products, risk advice and our customers will benefit from. Both PGW and BWRS placed outstanding customers service at the center of everything we do and focus on building enduring relationships by working with NIMA together to deliver outstanding service. Turning to the outlook. Global markets continue to support Brazil's primary exports and international supply chains, which may pose some challenges in the short to medium term. Following the rollout of Vaccines, our trading market continues sorry, following the rollout of Vaccines, our trading markets to our trading market countries, we anticipate this will ease over time. While these dynamics are at play, we are seeing reasonable confidence from our farmers and grower customers and remain optimistic about the prospects for the sector. Although there will always be unforeseen events, PGW and the country are in a stronger position than we were at the outbreak of the virus last year to navigate this. The directors are very pleased with the progress achieved in the first half of the financial performance of the business. We remain cautiously optimistic about the remaining financial year and believe the country is well the company is well placed to deliver our 2021 full year operating EBITDA guidance of around 57,000,000 dollars We'll continue to keep the market updated as the financial year progresses. Our 20 21 half year report is available on the Stock Exchange website under our PNGW ticker. The growth of our business will not be possible without the ongoing commitment of our PGW team. On behalf of the Board and the executive team, I want to thank our 1800 exceptional individuals who get out of bed every day thinking about our pharma clients. And with that with their support, we can deliver the results we have to our shareholders, and we thank the team for that. That brings to close the formal part of our presentation. And we now open the line for questions through our operator. Thank you. Thank you. Ladies and gentlemen, we will now begin the question and answer session. And our first question comes from Guy Hooper from Forsyth Bar. Your line is now open, Guy. Yes. Thank you. Good morning, everyone. Well done, team, on a good interim result. It looks like a very strong Agency result in the half. Can you give us a bit of a breakdown of that performance? How much of it is driven by something, I guess, a bit more one off in nature like the rebuild of the capital stock versus underlying growth in Agency? I'll get Peter to give you a bit of detail there, Guy. Thanks for the question. I just want to clarify a point. Also referred to the 44% lift in the Agency business, the first half trading results actually significantly driven out of the retail result. If I refer back to our operating EBITDA, the group was $42,100,000 Of that, the retail's result was $35,800,000 So the agency result was up significantly from a percentage perspective, but year on year, but the result at the group level was actually driven out by the return on Waterbrook Group. Peter, could you just refer to Guy's question a little bit more detail around the agency result? Yes. So if I look at the agency result, Guy, then I would say a couple of things. The livestock was sort of half year on half year. So December, the previous year, about flat, but wool was up close to $1,000,000 and real estate was up sort of $3,000,000 So that sort of accounts for us going up from sort of $6,500,000 to $9,500,000 So as Stephen said earlier, real estate has had a huge 6 months, probably one of the best that we've seen that makes that's the biggest difference in an agency when you compare half year on half year. The second half of the year, Guy, is a livestock story. Yes. That drives the results in the second half as stocks come off farm and move into the meat company supply chains. And of course, we have dairy herd settlements across the late April, May window as well. So that's a much a factor in the second half. Operator, do we have any other questions? Our next question comes from Christian Bell from Gordon. Your line is now open, Christian. Yes. Hi, team. Well done on the result. My first question, actually just following off the back of Guy, if I could just piggyback. Just within agency, do you guys make quite a good margin on the real estate business, hence why margins expanded quite materially half on half? Yes. Short answer there is we do, Christian. The a couple of things. It's driven the margin determination is higher than some of our other business units. It's also a business unit that has very little working capital in it. So, yes, a true agency model in that respect. The margin determination can come from the mix of properties. If you're selling there's no surprise that this is just commercial reality. If you're selling a large scale property, dollars 10 plus 1,000,000 I don't quite know the specific numbers, but you're going to pay a lower commission than, say, you were selling a lifestyle block. That's just the nature of the marketplace. So our mix what we saw in the 1st part of the trading month sorry, 1st part of the trading year, the 1st 6 months, We probably saw a weighting towards lifestyle properties and residential properties. So our margin improved as there was a sentiment around move to the regions and move into lifestyle blocks. So our margin improved in that space. As we saw the latter part of the 6 months conclude, there was confidence in securing larger rural properties. And we saw, as a result, the mix of sales. We saw a larger an increased number of larger properties sell and our margin naturally declined a wee bit as far as that's concerned. But it is a good margin business for us. So if the and you do see the activity within the property sector keeping strong going forward? What gives you confidence over there? The nature of sales that we're seeing, so and we're seeing properties that have been on the market for some period of time sell. We've seen the days listing timelines in terms of anything up to that $7,000,000 to $8,000,000 is not too much difficulty selling. The properties in and above the $10,000,000 take a bit longer, but there is interest in there. We've got a shortage of supply in terms of as we ended the come out of the Christmas period, there was a shortage of supply. We are seeing that ramp up now as people think about the autumn selling window, which is another one for the marketplace. So we look at that on a daily basis, we have inquiries, we have a table a lead table around inquiries, listings, and we can monitor that data. So that's what we're seeing. It's telling us, Christian, that there's good demand there in the forthcoming period. Christian, it's Peter here. Just one other comment on that is we are actually seeing the real estate team is seeing pressure on values increasing a little bit as well. And that actually, of course, leads to an increase in not necessarily margin percentage, but certainly an increase in the earnings that we get from our real estate business too. Right. Okay. And sorry if I'm a bit ignorant on that stuff, but just I don't know what I was going to say. Yes, just for the rural real estate, is that more dairy kind of stuff? Because otherwise, why would why is there more yes, is that coming from dairy for the rural as far as the need? Good question. And I'll actually get on to explain comment about our residential point as well, just in the context of what's going across New Zealand. The demand is across all areas, across sheep and beef, horticultural, lean and dairy properties. There's no particular sector that's actually a standout there, Christian. So yes, thank you for that question. The just to clarify, which we're referring to residential, but ours is what I call rural residential. We only operate in rural locations. We're not in the big markets of Auckland, Wellington, Christchurch, for example. And it is a limited number of areas. So we and that's because the PGW brand in those rural locations is well recognized by farming communities with family, etcetera, looking to buy properties. Why is the activity good in the meat sort of sector when prices are so low? It's a good question. It's there just seems to be an interest in farming because of diversification away from some of the other investment options. And to follow-up that point, some of the ability to for banks in terms of lending to a sheep and beef farmer, they are actually restricting some of their lending in terms of what they're prepared to lend. But these are properties that have been purchased with equity. So it just seems that people are wanting this diversification away from other investment opportunities that are around. Right. Okay. Cool. Understood. And then just moving into retail and and water. What I don't understand is how are you seeing investment? Well, correct me if I'm wrong. Is there investment across the entire sort of retail sector? But then what I don't understand is when you look at national rural lending figures, they're quite significantly down. So are you able to sort of connect the dots there for me if that's possible? So two things there. We would say that the lending sorry, the capital investment is heavily weighted towards the horticultural sector. We're not seeing the same capital investment take place in the rural sector. And in the horticultural sector, if you look at where the investment is coming from, it's coming from multinational viticultural companies and a number of, let's call them, the go to market with equity investments, so the MyFarms type investments that you see advertised and those sorts of investment offerings. So it is equity funded out of mom and dad funds or other international equity funds. So it's that sort of stuff. So you wouldn't necessarily see it settling in debt lending for banks. Right. Okay. Okay. And so just expanding on that. Just noting the sort of weakness in rural sorry, in rural commodity prices really. Why do you still why is there still growth in that part of the business? Because we have the nature of our offering is a science based lead offering and we are picking up market share in that space. Okay. So it's a market is it more of a market share thing as opposed to a natural market growth? The market is I would say the market is in terms of the chicken bank market is relatively flat. There is some increased confidence in the dairy sector. But those 2 are quite a length from a rural supplies activity perspective. But generally speaking, you would say it is relatively flat. Okay. Cool, cool. And sorry, actually just skipping back into agency, the highest stock numbers in the first half, you did mention before that the second half is typically your peak period for livestock trading. But the stronger first half in livestock, do you expect that to pull back the second half peak? We've taken that into account into our forecast. So we've seen year on year, we're seeing falls in values of animals by about 10%, Christian. So and we've taken that into account with our forecast. So Is that In the second half Sorry, Christian, I was just going to say remember the second half too does include where we have dairy herd sales as well in April, May that period there. Dairy herd prices are actually holding up okay. Okay. And that potentially might lead in to my next question, which is more of an overall type of one, but it might be that might be one of the reasons. But why is the why you so you've maintained guidance after quite strong first half. Why is the implied second half quite weak given such a positive start? Yes. Look, it's the nature of our business actually, Christian, that the first half is heavily weighted towards retail and water and they roughly make up sort of 80%, 85% of our result. And that so that does actually influence our overall results for the full year. And it's the way that our business is actually configured. So If you think about the farming cycle, Christian, our retail and water business, we have planted crops, we're managing crops through the spring and spring. And that we have a high weight in that volume wise. We come to this point in the year calendar what is the calendar farming calendar, crops are being harvested. We step out of the process at that point in time, but we have we do have our livestock where we'll start to pick up from a trading perspective and the dairy herd. So the second half of the year is about livestock. The retail world yes, there are people still buying retail inputs, turning, for example, autumn agronomy inputs for regrassing as maize crops come out of harvest. But the weighting is the natural cycle of both business units. The retail business falls in its weighting and the livestock business increases its weighting. But the food businesses are not the same size. And that's just the reality that plays the results that we see. Okay, cool. But and sorry, I'm looking at things on a pre IFRS basis. So I'm looking at it from a first half EBITDA of 31 dollars going to full year of $35,000,000 So the implied $4,000,000 of EBITDA per year for us still looks quite weak when you take into account the seasonality when you compare it to previous years and especially after such a strong period? Like are you guys just being overly conservative given the current trading? Or are you able to elaborate on that a little bit? Yes. So one thing that happens, Christian, is that, as Stephen said, livestock comes through in the second half of the year, but you've got fixed costs that remain in our biggest business unit, which is retail. So you actually have an EBITDA loss, for example, in June for the month of June alone. So that's why actually it might look really skewed towards the first half. But that is the case that is skewed way towards the first half. I know it's skewed, but it looks like when you compare the second half to previous second half, which would also have that skew, it looks I mean, this looks a little bit weak. If you look at it from a $4,000,000 it's $4,000,000 in the second half? Yes. It is we haven't necessarily looked at the last the second half well, the second half of last year was actually obviously influenced by lockdown. So that's probably one that we would discount to an extent. And then going back several years, we would have had seed and grain in the Aerocourse as well. They were an awesome autumn part. But it is we definitely in the retail business, it's almost when they get to sort of May June, they're just incurring fixed costs and there's not very that much trading in those months for retail. Correct. Okay. Cool. Understood. Thank you. I'm sorry sorry to go on. No, no, it's okay. It's okay. It's a fair question, actually. Fair question is what we're cautious over the business and how do we We ask ourselves sort of that one. Cool, If I could, I've just got a couple more questions. So just bear with me, please. So the better margins this period, do you think they are sustainable going forward? Yes. And is that predominantly with an agency that's kind of based on real estate activity and retail and water, is that that based on? Well, the point we is respect to agency, it's that point earlier on around the mix of properties from a real estate perspective. In respect to retail, it's around the product mixes that we've got. We're seeing new innovation chemistry come through in that space and as environmental footprints are considered and new chemistry does cost more non maturity around margins. There has to be a return on investment that the companies international research companies make in the space. Okay, cool. And just what does growth look like going forward? And if it's possible, are you able to sort of pull out 2 main drivers of that like from an earnings perspective? And yes, will it come from retail and water agency and then top line or margin growth? You talked about up to June or beyond June, Christian? Like in the next couple of 2 to 3 years. Right. Okay. Okay. We would see the main drivers of our revenue improvement in the business ongoing improvement in the business coming from the retail and water business and then followed by the livestock business. And I'll come to you, come as to why that is. Firstly, the size and scale and reach of our retail and water business, the innovation in terms of our R and D programs. We'll see the investment that's taking place taking place and will continue to take place around horticulture crops. Those crops become permanent in about the 2nd year, and therefore, they require good levels of ongoing input every year to maintain the crops. And that's our sweet spot. Yes, the capital developments are a good place of revenue order for us, but managing crops going forward is what we do best and as our PGW sweet spot. It's a comment that I've made previously. We are good at bringing new innovation and science to the marketplace in this area. We look and have product on our trial programs that are 5 years in advance of market release. So we are leading innovators in that space and we probably have the best understanding of what's going on in that area. Turning to the livestock area, why in that space? We've got varying initiatives going on in the supply chain space. We have our go stock facility and we have a marketing. We have we've booked that from 0 a couple of years ago, dollars 0 on our book, but we've got headroom in our balance sheet and we've got facilities in place now for mid-thirty million dollars and that will build as we go out to this end of this financial year. And we see the opportunity moving forward in that space for us to facilitate that. And that's a revenue stream that we see opportunity to build. There is some product innovation that we've got in that area. We haven't we are positioned to announce that today, but we've got some further product innovations in that space. Then we go to our better online trading platform. And then we've got other agencies using that business. So not just PGW, there are 6 other agencies outside of PGW that allows us to be more efficient around how we operate our livestock business. So that would be the 3 big areas that we would see opportunity for growth, Christian. Okay. That's fantastic. Super helpful. Thank you for that detailed explanation. That's real good. And like to just to back that up, are you going to be increasing your CapEx spend? We're in the process of considering our budgets right at the moment. We wouldn't see significant increase at the moment around CapEx spend based on what we have spent on an annual basis. We have we try and ensure that we get the right balance between the performance of the business and the returns to shareholders. There's always a tension on those things. We've got 92 stores in their in our footprint. We've been up on an upgrade program for those over the last couple of years. We I've opened the I have had the pleasure of opening Mayfield and Alexander store last week. I'll open the officially open the Tapway store this week. We've got Darfield on our radar, which is we'll move into the new Darfield site in about the end of March. But we tend to do a certain number of projects every year rather than doing we do 3 or 4 projects a year. We manage our CapEx in that way rather than spending going out for 10 projects, for example. Right. Cool. And then just a final one. What did so end of last year, when you raised your guidance, you also said that you'd pay a dividend of at least $0.10 per share. Why have you gone for $0.12 when guidance hasn't actually changed? If you look at our headroom position available in the business, the rep just felt that we in terms of the marketplace, we measure our market in December sorry, when we give market guidance in December, we're always actually cautious and we don't want to over egg the omelet in terms of market expectations. Having seen the results at the end of December alongside the January results and given the balance sheet strength that we have, and the fact we paid no dividend also in the for the year ended 30 June 2020, the directors felt there was a prudent opportunity to reward shareholders for their patience. Perfect. Sweet. Thanks, guys. Appreciate your patience. Sweet. So thank you. It's okay. Cheers. There are no further questions at this time, Stephen. I'm sorry, we have a question from Mark O'Connor from O'Connor Corporate. Your line is now open, Mark. Yes. Hi, Peter. That was a good result. You made a comment earlier in the presentation about retail business about increasing market share. Can you make some comment around what's driving that, please? It's Steven here. Thanks for your question. I'll answer that question. Firstly, it's our people. We've invested strongly in our people. It's the science we have behind our programs, our research programs, and just continued focus on delivering good science based solutions to customers. And we've seen that resonate with customers as they see the challenge around their environmental the ways that they operate their farms and their properties from an environmental perspective. Good science will assist them in terms of their challenges that they have, but also assist them in terms of the quality, crop outcomes or pasture growth that they achieve. And they they just they are that that story is resonating with them very well. So it's probably us talking about our story so much, not so much about us talking about what others may be doing in that space, but the site story is certainly resonating with customers. Alright. Thanks very much. Thank you, Albert. It doesn't appear that we have any further questions. If that's the case, happy to, if he wants further clarity on, happy to email it through to us. But otherwise we will end the call. Thank you all for listening for us today. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.