AGL - Accordant Group. was previously AWF Madison, Allied...

[winner69]

AWF's full year result is due at the end of May,so not far away.
I expect they will surprise us.
However,I very much doubt it will be a pleasant surprise .

You probably be right there percy .....even worse than they have already indicated?

[percy]

You probably be right there percy .....even worse than they have already indicated?

For shareholders I hope I am wrong,but I would guess it will not be better.

[Snoopy]

AWF cash flows over the last 4 years. These redone in a way that better represents cash flows from day to day stuff and those associated with acquisitions and funding.

Winner, while I accept your figures, I don't think that I would compile such a chart in quite the same way. The property plant and equipment expenses that you have deducted may have been spent in the current year. But the benefits to the company should flow to AWF shareholders for many years. It doesn't make much sense to me to subtract those figures (* with one exception, see paragraph end) from operational cashflow for just the current year to measure the cash generating ability of the company. It would make a lot more sense to me if you compared the sum of PPE expenditure over, say, a five year period to the equivalent depreciation and amortisation of property plant of equipment over that same period. (*) Where your calculation would make sense is if the company is in danger of running out of cash, to the extent that it would compromise the AWF's ability to keep operating as a going concern. But I think we can both agree, that with no pressure on the banking covenants, there is little risk that this will happen.

I always like looking at how much of free cash flow gets paid as dividends

In AWFs case the amount paid in dividends invariably exceeds cash generated on a day to day basis (excluding cost of acquisitions)

There is plenty of positive operating cashflow to pay dividends on an annual basis if you don't subtract the P.P and E expenditure.

AWF have essentially had To increase debt to keep paying the dividends. That’s how I see it anyway.

That is a fair view and you are entitled to it. But it would be equally fair to say that AWF have increased their debt to 'create a bigger machine' with the acquisition of both Madison and AbsoluteIT, which is the way I would look at it. The increase in borrowings wasn't exclusively 'tagged' to increasing dividends.

Note that changes in debt and the capital raised is slightly more than what they spent on acquisitions ...the extra gone to keep the dividends up

All figures below are from Winner's table:

Change in Debt (EOFY2017 to EOFY2015):	$32.383m - $18.608m = $13.775m
Capital Raised	$13.563m
Total Cash Resources Raised	$27.338m
Acquisitions FY2014 to FY2017 (Cash Spent):	$26.627m + $6.000m + $9.903m = $42.530m

Your table figures don't back up what you are saying Winner! Mind you I suspect you need to use the debt figures from EOFY 2013, not EOFY 2015 to align the change in debt with the acquisition cashflow over a comparable period!

SNOOPY

[winner69]

Snoops - as I said yesterday depreciation and amortisation (and a few other things) are not part of (ie not included) in Operating Cash Flows ...and yes PPE is an investment to hopefully produce future profits (be it replacement stuff or some new technology)

You will note I have kept cash movements for acquisitions and funding seperate.

What the top half of the table reflects is how much cash (not profit) AWF generate from day to day operations (Operating Cash Flow) and what they do with it like buy some new computers and stuff (PPE) to keep the business going and then how much they give to shareholders as way of dividends. Anything left over either used to reduce debt or saved up for a rainy day.

So what I’m saying Snoops is that in FY17 they generated $7.7m in cash from day to day operations of which they spent $3.0m on new computers and other PPE which leaves $4.7m spare and then they gave shareholders $5.3m which was $0.6m more than they generated. See where I am coming from. They have done this for 3 of the last 4 years - to the tune of $3.8m in total. Where did the divie money come from I ask

But FY18 will be different eh

PS - all numbers from Cash Flow Statements - just set out different

[Snoopy]

Snoops - as I said yesterday depreciation and amortisation (and a few other things) are not part of (ie not included) in Operating Cash Flows ...and yes PPE is an investment to hopefully produce future profits (be it replacement stuff or some new technology)

You will note I have kept cash movements for acquisitions and funding seperate.

What the top half of the table reflects is how much cash (not profit) AWF generate from day to day operations (Operating Cash Flow) and what they do with it like buy some new computers and stuff (PPE) to keep the business going and then how much they give to shareholders as way of dividends. Anything left over either used to reduce debt or saved up for a rainy day.

So what I’m saying Snoops is that in FY17 they generated $7.7m in cash from day to day operations of which they spent $3.0m on new computers and other PPE which leaves $4.7m spare and then they gave shareholders $5.3m which was $0.6m more than they generated. See where I am coming from. They have done this for 3 of the last 4 years - to the tune of $3.8m in total. Where did the divie money come from I ask

But FY18 will be different eh

PS - all numbers from Cash Flow Statements - just set out different

Winner, I am not saying you are wrong. I am saying you can look at the cashflows in an alternative way.

1/ First you pay out your dividends out of operating cashflow. This can be covered with no borrowing.

	1HY2015	2HY2015	1HY2016	2HY2016	1HY2017	2HY2017	1HY2018	Sum Total
Net cashflow from operating activities	$8.330m	-$2.145m	$6.495m	-$4.437m	$11.399mm	-$3.773m	$11.879m	+$27.748m
Dividends paid	-$1.986m	-$1.916m	-$2.660m	-$2.392m	-$2.636mm	-$2.602m	-$2.705m	-$16.987m

You can see that there is plenty in the kitty to do this, not withstanding operating cashflow tending to be negative in the second half year.

2/ Next you borrow some money to add to what coperating cashflow you have left to make up what you need to invest in P,P & E.

Looked at this way, the borrowing is done to 'invest in the business'. Although the business has lost the balance of their cash generated and now have a bank loan, they have gained 'some new computers and stuff '. And for each $1 invested in PP&E, they will hopefully earn a lot more than $1 in the future from each $1 that has been invested. Looked at this way AWF are optimizing their balance sheet gearing and planning for the future - being responsible. Sounds much better than 'drawing down the house mortgage to pay the grocery bill', which seems to be the viewer angle you are coming from with the same data.

SNOOPY

[winner69]

Snoops - i’ll wait until we know what H2 looks like before I critique your numbers ...but I think we will agree to disagree anyway.

Like that bit about about drawing down the mortgage to pay for the groceries, quite good ......although a better analogy might be increasing the mortgage to buy the computer or fridge or TV that needs replacing (also bought by increasing the mortgage a few years earlier). That’s being responsible by optimising the household balance sheet!

[winner69]

AWF have more than respectable ROE and ROIC numbers

So respectable that it deserves a higher P/B of 1.5 where it is now.

[Snoopy]

Like that bit about about drawing down the mortgage to pay for the groceries, quite good ......although a better analogy might be increasing the mortgage to buy the computer or fridge or TV that needs replacing (also bought by increasing the mortgage a few years earlier). That’s being responsible by optimising the household balance sheet!

The concept of analysing a company by looking at cashflow has a certain raw appeal. Profits are ultimately important. But a company can manipulate declared profits several ways:

1/ By classing a bad debt as collectible when it is not.
2/ By carrying goodwill on the books using optimistic future sales scenarios when those sales levels will be very difficult to achieve.
3/ By setting up bad debt provisions that allow the shifting of profits from one financial period to the next.

However, cashflow is 'day to day' important, because having a cash dividend deposited into your bank account is a gold standard kind of investment return that cannot be manipulated. Money in your bank account is tangible and spendable, contrasting with declared profits that amount to an indirect promise of a return of cash in the future.

I want to carry on with Winner's analogy and imagine you as a homeowner are running an in house business putting your tweenagers out to work selling lemonade at the end of the driveway, while simultaneously giving them free spending (pocket) money. Now tweenagers demand some pocket money, and generally use their accumulated (lack of) wisdom to make poor decisions and waste it, or use it on instant gratification. Nothing wrong with that, it is all part of the learning and budgeting experience. From a homeowners perspective, the pocket money paid out is analogous to a company paying dividends to shareholders. Once the pocket money is paid out, all control of what happens to it passes from the homeowner's hands.

To support the lemonade venture, our homeowner uses some leftover household cashflow, plus bumps up the mortgage to buy a brand new fridge. As well as being more efficient than the original fridge, it is much bigger to hold the vast litres of ice cool lemonade to satisfy the summer satiated pedestrians walking by the end of the driveway. Selling lemonade becomes a highly profitable home business for our homeowner. When discussing their finances, the homeowner could say:

1/ they borrowed money from the bank to pay the tweenagers pocket money (which doesn't sound too responsible) OR
2/ they could say money was borrowed from the bank to buy a new fridge to support the home business venture (which sounds much savvier).

But both of these explanations could be seen as correct though, depending on how an outside observer chooses to see the historic path, along which the homeowners cash was spent.

On the day cash is cash. Whether you give $500 out as pocket money, or put that $500 towards a new fridge, $500 cash will come out of the household bank account. However, no business person plans to invest $500, with a business plan to only recoup $500 from that investment. There has to be a profit at the end of the year. It is the new fridge that enables the selling of the lemonade and our little home business able to operate. After eight years, perhaps a new fridge will be required to allow the lemonade business to continue. Our hapless home owner may once again be forced to draw down the house mortgage to buy it. At this point the value of the original big fridge has been lost (cash value zero). But what hasn't been lost is the utility of using that old fridge over the preceding eight years. Yes the original big fridge capital has gone. But the cashflows from selling the lemonade over an eight year using that fridge were very real.

So what is the moral of this story? On the day, the negative cash effect of giving tweenagers pocket money OR spending that money on a new fridge is the same. But over time, the fridge delivered a positive cash return to our homeowner, while the pocket money simply disappeared (from our homeowners perspective). Thus although all cash starts out as being equal, over time it can end up not being equal. Or coming back out of the analogy, offsetting cash taken in over a one year period with cash spent on something that will produce a return over a multi year period is akin to subtracting apples from apples (from a snapshot perspective) but subtracting oranges from apples (from a multi year perspective).

SNOOPY

[Snoopy]

Winner wrote: "Note that changes in debt and the capital raised is slightly more than what they spent on acquisitions ...the extra gone to keep the dividends up"

All figures below are from Winner's table:

Change in Debt (EOFY2017 to EOFY2015):	$32.383m - $18.608m = $13.775m
Capital Raised	$13.563m
Total Cash Resources Raised	$27.338m
Acquisitions FY2014 to FY2017 (Cash Spent):	$26.627m + $6.000m + $9.903m = $42.530m

Your table figures don't back up what you are saying Winner! Mind you I suspect you need to use the debt figures from EOFY 2013, not EOFY 2015 to align the change in debt with the acquisition cashflow over a comparable period!

The following is an HTML rendition of Winner's 'post 560' table, with a couple of relevant end of year net debt figures thrown in:

AWF Madison Cash Flows $000
Day to day Operations	2013	2014	2015	2016	2017
Operating Cashflow {A}		4,486	6,185	2,058	7,626
PPE Expense {B}		-1,107	-841	-224	-2,950
Free Cash Flow {A}+{B}=(C)		3,379	5,344	1,834	4,676
Dividends Paid {D}		-4,859	-3,902	-5,052	-5,286
Cash Retained from Operations {C}+{D}		-1,480	1,442	-3,218	-610
Acquisitions and Funding		2014	2015	2016	2017
Acquisitions (E)		-26,627	-6,000	0	-9,903
Increase/Decease in Borrowings {F}		29,880	-9,000	-803	12,500
Capital Raised {G}		0	13,563	0	0
Cash Impact {E}+(F)+(G)		3,253	-1,437	-803	2,597
Net Bank Debt (EOFY)	29,310	27,537	18,603	21,870	32,383

Winner has looked at what is happening on an individual year basis. But what would happen if you looked at what has happened over the four year period, starting at EOFY2013 and ending at EOFY2017?

Change in Debt (EOFY2017 to EOFY2013):	$32.383m - $29.310m = $3,073m
Capital Raised	$13.563m
Total Cash Resources Raised	$16,636m
Acquisitions FY2014 to FY2017 (Cash Spent):	$26.627m + $6.000m + $9.903m = $42.530m

During the period, AWF acquired the Madison business for $36m and AbsoluteIT for $14.718m, of which $3.420m is still due to be paid in FY2018. The amount paid out for these new assets, which have created a much bigger 'earning machine', was $47.298m over four years. Yet the net bank debt is only $3.073m higher. This is quite a different picture to the one that Winner presented of a company constantly increasing debt so they can afford to pay dividends. I can't see any evidence here of dubious or desperate financial practices over a multi year period.

SNOOPY

[winner69]

Snoops ...you haven’t counted the $29,880 increase in borrowings in 2014

Should have noted (to save confusion) I only put the Net Bank Debt figure for information. From that Slide 8 and couldn’t be bothered going back to 2014.