PGW - PGG Wrightson

[Snoopy]

Yes it was, but the Q and A isn't found elsewhere.

It is now ;-)

SNOOPY

[nztx]

And then there is the overhanging larger foreign stakeholder with a habit of trying to rule the roost
also to consider on top of domestic market conditions


Who knows -- a prolonged economic drought with little happening / improve on the rural scene might even persuade them to head for the exit door ..

[Snoopy]

One of the Analysts was really getting into them for details.

Q/ (Jarden) Results are down in the first half, but despite the negative projections and commentary, you are still projecting the second half result will be in line with the previous year. What are your assumptions behind this? (Snoopy note: This is an interesting question because subsequent to this half year presentation, full year result forecasts were in fact downgraded again).

Talk about a one way conversation exercise in obfuscation! (it took four follow up questions to the one quoted above before our analyst got his answer). I sort of understand it, because you don't want to give too much away to your competitors. But I reckon if you had two trainee blood donor technicians and you sent one into 'cubicle A' with Steve Guerin and the other into 'cubicle B' with a large river boulder, there is no way you could be sure that the larger blood donation would come out of 'cubicle A'!

If we take what Steve said at the half year result analyst briefing about the contribution of 'Agency', -principally 'Livestock'- , holding up during 2HY2024 at face value, yet PGW came out with a third profit downgrade barely a month later, I think it is most likely this downgrade came from the other business segment: 'Retail & Water'. That is what would come of farmers 'closing their wallets early' which anecdotally sounds like what might have been happening. It sounds very out of sync with what has happened in previous years though. But we do live in interesting (farming) times.

SNOOPY

[Snoopy]

I open this post with a disclaimer. I am not a farmer and I have never been to a PGW saleyard auction. But if I want to forecast where PGW is going over FY2025, I need a better understanding of the livestock business. So I may be making a fool of myself in this post (feel free to correct me). But here goes.

In all the PGW reports I have read mentioning livestock, the emphasis is always on the sale of cattle (be they for meat or diary) and sheep. This is not surprising as they are the two most widely farmed four legged herbivores on New Zealand. But we also farm pigs and deer in some numbers. Why are those animals never mentioned? The closest I have come is seeing references to PGW auctioning off 'deer velvet' but never deer. Why is that? Pigs are more multiplicative breeders and seem to be less fussy about their feed. So do pig farmers never need to trade their animals? Do they just feed them up and send them straight to the works? I would be interested to know.

This leads to what I call my 'first foolish assumption' which I am calling 'FA1'. "All of the trade through the PGW saleyards is sheep and cattle". Perhaps other animals do go through the saleyards. But what I am saying that in percentage terms, the headcount of these other species of animals is so small, we can forget about them in the overall revenue picture.

In AR2023 on p27 we learn:
"Over 350,000 cattle and 2.3 million lambs (have been) purchased via the GoStock (finance) program since it launched during the 2016 financial year."

I now make 'FA2', that the GoStock numbers are indicative of the animals passing through the PGW saleyards.

If I look at the beef and lamb New Zealand lamb price guide.
https://beeflambnz.com/sites/default...%20%284%29.pdf

This is showing me that over the 2017 to 2023 period, lamb prices averaged about $140 per head. (I will call that FA3)

Moving on to the beef and lamb recorded cow price over that same period,
https://beeflambnz.com/sites/default...%20%283%29.pdf

the cows seem to have been selling at around $3.80 per kilo. For animals averaging 180-195kg in weight (average 187.5kg). So cows traded at $713 per animal (I will call that FA4)

Now I combine all four of my 'foolish assumptions' to make a guess at the indicative turnover going through those PGW saleyards.

350,000 x $713 = $249,550,000 = $250m (cattle)
2,300,000 x $140 = $322,000,000 = $320m (sheep)

This works out at a split of 44% cattle and 56% sheep in dollar terms. This is of course before the much touted 28% fall in lamb prices which has been punishing our sheep farmers recently. From a keyboard farmer, does that make sense?

SNOOPY

[SailorRob]

I open this post with a disclaimer. I am not a farmer and I have never been to a PGW saleyard auction. But if I want to forecast where PGW is going over FY2025, I need a better understanding of the livestock business. So I may be making a fool of myself in this post (feel free to correct me). But here goes.

In all the PGW reports I have read mentioning livestock, the emphasis is always on the sale of cattle (be they for meat or diary) and sheep. This is not surprising as they are the two most widely farmed four legged herbivores on New Zealand. But we also farm pigs and deer. Why are those animals never mentioned? The closest I have come is seeing references to PGW auctioning off 'deer velvet' but never deer. Why is that? Pigs are more multiplicative breeders and seem to be less fussy about their feed. So do pig farmers never need to trade their animals. Do they just feed them up and send them straight to the works? I would be interested to know.

This leads to what I call my 'first foolish assumption' which I am calling 'FA1'. "All of the trade through the PGW saleyards is sheep and cattle". Perhaps other animals do go through the saleyards. But what I am saying that in percentage terms, the headcount of these other species of animals is so small, we can forget about them in the overall revenue picture.

In AR2023 on p27 we learn:
"Over 350,000 cattle and 2.3 million lambs (have been) purchased via the GoStock (finance) program since it launched during the 2016 financial year."

I now make 'FA2', that the GoStock numbers are indicative of the animals passing through the PGW saleyards.

If I look at the beef and lamb New Zealand lamb price guide.
https://beeflambnz.com/sites/default...%20%284%29.pdf

This is showing me that over the 2017 to 2023 period, lamb prices averaged about $140 per head. (I will call that FA3)

Moving on to the beef and lamb recorded cow price over that same period,
https://beeflambnz.com/sites/default...%20%283%29.pdf

the cows seem to have been selling at around $3.80 per kilo. For animals averaging 180-195kg in weight (average 187.5kg). So cows traded at $713 per animal (I will call that FA4)

Yes, beef trading at significantly less than 20 years ago and that's NOMINAL.

So farmers are getting a fraction of what they got 20 years ago which is insane.

While supermarket beef is near all time highs.

I have been looking for the data on beef farm gate prices going back 30 years or even 20 years but so far zero luck.

[Marilyn Munroe]

Snoopy your claims pigs are not fussy eater is correct, but pig farmers are fussy what they feed their livestock.

If you want to live a rich and varied life do not ask a pig farmer to explain feed conversion ratios.

Boop boop de do
Marilyn

[Toddy]

Snoopy

What episode of Jeremy Clarksons farm are you up to.

Make sure you screenshot the whiteboard workings and apply to PGW.

Just joking.

[blackcap]

From my limited knowledge of being to sale yards etc, it is mainly beef and sheep I see there.

I think Deer would have a field day (pardon the pun) jumping out of the pens...

Not sure why pigs don't go that route but I think it is because generally pig farmers are of the larger variety and they go straight to the works...

[Snoopy]

I am concentrating on EBITDA, because that is the figure that PGW itself likes to quote. Operating EBITDA for FY2023 was $61m, and I would like to think of that as a 'base year' (FY2022, when everything freakishly aligned, was higher at $67m). The PGW EBITDA forecast for FY2024 was downgraded from the 'base year' to $52m, then $50m and most recently $43m. Thus the profit downgrade from our base year is $61m-$43m=$18m.

I want to draw attention to the sub-sections of the agricultural market that have received negative comments in HYR2024. These are likely to have been the drivers in the three EBITDA downgrades the company has issued over the last twelve months. And if we are looking for EBITDA to recover again over FY2025, these areas are where the recovery will most likely come from.

The reported negative changes in 'Agency' are as follows

Sub Sector Report: Sheep

From HYR2024 p4
"Our Agency segment results were again impacted by the weak real estate market and softer commodity pricing, particularly in sheep and lamb markets where prices were back 28% year on year."

Using post 5704 as a reference:
Lamb 'Agency' revenue = 0.56 x 0.47 x $188.803m = $49.7m (Estimated sheep auction revenue over FY2023). If sheep volumes were not affected but sheep prices dropped by 28% this figure would be projected to have reduced to (1-0.28)$49.7m= $35.8m over FY2024. That equates to an EBITDA drop of: $49.7m-$35.8m= $13.9m YOY.

In summary, from an investor perspective, I feel as though it is best to assume that the last year's decline in 'Agency' is permanent.

The reason why revenue comes straight off profit (in the quote above) is that there is no incremental cost saving in running less sales lots through an established and existing auction platform.

If the lost EBITDA from Agency cannot be recovered over FY2025, is there some other part of the business that can 'bounce back' to offset that? I say yes and it comes from reversing the FY2024 downgrade in 'Retail & Water', particularly the grower based sub section. The relevant aspect of the HY2024 downgrade in 'Retail and Water' is reported below.

Sub Sector Report: Horticulture

From HYR2024 p8:
"The apple, avocado and kiwifruit industries have experienced weaker demand and declining client returns, with prices at levels for some crops not seen for several years."
From HYR2024 p13
"The outlook for horticulture is positive with good kiwifruit, apple and pear crops expected to be harvested. Kiwifruit is predicted to deliver improved quality fruit with higher volumes compared to last year."

The impact of Cyclone Gabrielle is rolling away into the prior period, which should result in growth in FY2025. Particularly helpful for kiwifruit growers is the NZ free trade agreement with Europe which will progressively come into effect over CY2024. It sounds like horticulture is in for at least a short term rebound.
35% of 'Retail and Water' over FY2023 amounted to: 0.35x $785.298m = $274.854m (Estimated horticulture revenue over FY2023)

Refer to post 9656 and you will see that 'retail and water' revenue is always skewed towards the first half. In FY2023 that skew was 64%/36%, for a total revenue of ($785.298m-$1.151m-$0.363m)=$783.784m. Apply that same split to FY2024 and total retail and water revenue is an expected ($478.301m-$0.387m-$0.207m)/0.64 = $746.417m. The difference year to year is: $783.784m - $746.417m = $37.367m,

Using the FY2023 EBITDA margin for 'Retail and Water' of 6.9%, this equates to incremental profits of: 0.069 x 0.35 x $37.367m = $1m. This is the expected incremental EBITDA should horticultural sales return to FY2023 levels, but other retail sales remain flat at FY2024 levels into FY2025.

The rise in corporate costs since FY2022, detailed below, which subtracts from EBITDA, is unlikely to be pulled back. So we aren't using that $2m figure in any adjustment calculation.

Corporate Costs

The cold conclusion is that underlying operating corporate costs have risen by $2m over two years. That corporate cost increase sounds permanent.

This means that if animal farming continues in its funk for another year, but horticulture improves back to FY2023 levels, then EBITDA for PGW over FY2025 becomes: $43m + $1m = $44m. yay! (given the magnitude of the potential EBITDA increase, using capital letters to express my joy would seem an overkill.)

SNOOPY

[SailorRob]

I am concentrating on EBITDA, because that is the figure that PGW itself likes to quote. Operating EBITDA for FY2023 was $61m, and I would like to think of that as a 'base year' (FY2022, when everything freakishly aligned, was higher at $67m). The PGW EBITDA forecast for FY2024 was downgraded from the 'base year' to $52m, then $50m and most recently $43m. Thus the profit downgrade from our base year is $61m-$43m=$18m.






If the lost EBITDA from Agency cannot be recovered over FY2025, is there some other part of the business that can 'bounce back' to offset that? I say yes and it comes from reversing the downgrade in 'Retail & Water', particularly the grower based sub section. The HY2024 downgrade in 'Retail and Water' is reported below.



The rise in corporate costs since FY2022, detailed below, which subtracts from EBITDA, is unlikely to be pulled back.

What would Munger say about their use of EBITDA and then an analysts subsequent use due to their use?

May as well just use Revenue!

Unless this business is extremely capital light then makes sense not to use BS earnings.