PGW - PGG Wrightson

[percy]

What happens in the diary sector probably won't have a huge effect on PGW, as a large percentage of dairy farmers don't use them. As far as the retail stores go, they service a lot of the sheep and beef sector and also the orchard. So the wet weather could definitely affect

The dairy sector accounts for between 22% and 25% of PGW's revenue,so it is significant.

[winner69]

But when Winston has meddled with Monetary Policy and the NZD down to usd50 cents farmers will be creaming it.

[Snoopy]

My understanding is that El Nino leads to dry weather on the east coast of NZ and is more frequently occurring while La Nina leads to west coast dry weather and is less frequent. La Nina would increase the risk of very dry summer in areas like Waikato.

Living in Canterbury, I tend to be Canterbury-centric in my thinking Rossimarnz. So yes, I accept that 'La Niña' may not be ideal in the Waikato. However, in my experience the worst multi-year droughts do occur in the east (Canterbury and Hawkes Bay). Droughts in the Waikato tend to be shorter. And on the West Coast of the SI, a whole lot more rain, courtesy of El Niño, is generally not what West Coast farmers want.

So I stick with my claim that overall, El Niño is the weather event that does more damage to agriculture nationwide.

SNOOPY

[Snoopy]

Basic eps is stated at 6.1 cps but strip out the $9.6m gain on sale of property which the company has ostensibly admitted will not repeat to the same extent next year and we get eps of 4.86 cps.

Not sure where the other Beagle got his property sales profit $9.6m adjustment figure from. But property sales are certainly an issue and not something I would consider comes under the heading of 'Operating Earnings'. These property sales from the current sell down program have been happening over FY2015, FY2016 and FY2017. Looking at the 'Property Plant & Equipment' section of the respective Annual Reports over the last three years, I get the following property plant and equipment 'sales' and 'profits' figures:

	FY2015	FY2016	FY2017	Total
Assets disposed of	$2.972m	$22.390m	$16.359m
Gain on disposal	$0.96m	$4.99m	$8.74m	$14.69m

That total gain on disposal ties in nicely with a comment made in AR2017 on page 8:

"Our property divestment program which began in 2015 is largely complete. So far we have realised $43m from the programme by selling (and in some cases leasing back) property that had a net book value of $29m."

I note that: $43.5m - $28.5m = $15m, which ties in with the the tabulated $14.69m gain.

It looks like I have some property adjustment sales to make to obtain the 'real' underlying operating earnings for the company for FY2015, FY2016 and FY2017. I fear that I have work to do on the superannuation plan adjustment too. The 'cashflow' didn't change, but the profit went up because this was an adjustment only made to 'reserves'? Financial engineering at its best?

SNOOPY

[Snoopy]

Super fund liability down to $16m. Good effort

I think it really nice that current shareholders front up to pay the pensioners - many who retired many years ago and many who worked for companies PGW don't even own now.

One day they should bite the bullet and wind the scheme up and just pay everybody out - ongoing liabilities won't go away in a hurry ...but they are hoping.

One important procedural change in the account statements this year is related to the PGW internal super fund(s). Whenever the presentation of the accounts changes for no "change in accounting rules" reason, this hound's nose gets into action. The official explanation for the change in presentation this year is reported as follows:

"Previous expensing of the return on plan assets for the 2014 through to the 2016 year (Snoopy note: if this expense ends up being negative then profits increase) have now been recognised through other comprehensive income."

That sounds quite technical. So to see what is going on, I think it is useful to look at a 'before' and 'after' example. I present the profit and loss statements for FY2016, first as presented in AR2017 and then the same result as presented in AR2016 (before the FY2017 presentation adjustment).

STATEMENT OF PROFIT OR LOSS (For the year ended 30 June 2016)	From AR2017 ($m)	Difference	From AR2016 ($m)
Continuing operations
Operating revenue	1,181.624		1,181.624
less Cost of sales	(854.871)		(854.871)
equals Gross profit	326.753		326.753
add Other income	0.725		0.725
less Employee benefits expense	(156.148)		(156.148)
less Research and development	(4.515)		(4.515)
less Other operating expenses	(96.390)		(96.390)
add Equity accounted earnings (losses) of investees	(0.244)		(0.244)
equals Operating EBITDA	70.181		70.181
adjust for Non-operating items	4.151	+5.835	(1.684)
less Fair value adjustments	(0.232)		(0.232)
less Depreciation and amortisation expense	(9.170)		(9.170)
equals EBIT	64.930		59.095
less Net interest and finance costs	(10.474)		(10.474)
equals Profit from continuing operations before income taxes	54.456		48.621
less Income tax expense	(10.466)	-1.634	(8.832)
Profit from continuing operations {D}	43.990	+10.6%	39.789
Discontinued operations
Profit (loss) from discontinued operations (net of income taxes)	(211)		(211)
Net profit after tax {A}	43.779		39.578
Other comprehensive income/(loss) for the period
Items that will never be reclassified to profit or loss
add Changes in fair value of equity instruments	5.433		5.433
less Remeasurements of defined benefit liability	(10.666)	-5.835	(4.831)
add Deferred tax on remeasurements of defined benefit liability	2.987	+1.634	1.353
equals {B}	(2,246)		1.955
Items that are or may be reclassified to profit or loss
less Foreign currency translation differences for foreign operations	(8.513)		(8.513)
add Effective portion of changes in fair value of cash flow hedges	3.888		3.888
less Income/deferred tax on changes in fair value of cash flow hedges	(1,088)		(1,088)
equals {C}	(5,713)		(5,713)
Other comprehensive income/(loss) for the period, net of income tax {A+B+C} or {E}	(7.959)		(3.798)
Total comprehensive income for the period {D}+{E}	35,820		35,820

What we have here are two very long columns of figures both adding up to the same thing. This is the kind of thing that makes accountants smile. That's because generally when two long columns of figures add up to the same thing, it means they have done their job correctly. A nice little bonus is that 'Net Profit from Continuing Operations' has gone up by 10.6% with the new presentation format. That is sure to make the shareholders feel all warm and fuzzy. Yet, I wonder if some of that new warmth is at the expense of a little accounting fuzziness?

SNOOPY

[Snoopy]

Yet, I wonder if some of that new warmth is at the expense of a little accounting fuzziness?

Sometimes it is possible to prepare the accounts in two different ways to the same accounting standard, and both ways are equally valid. Which presentation that is best to accept is largely dependent on the perspective of the reader.

The new presentation makes sense, because the distortion of operating profits due to the movement of the underlying balances of the employee retirement schemes, is not related to that year's 'farm servicing environment'. It is nonsensical to criticise current operations management because of adverse movements in a multi-year future focussed retirement scheme. Yet there is something I find very uncomfortable about looking at the results in this new way.

What makes me feel uncomfortable is the movement of the change in 'defined benefit' (that means pension) liability to the section where it is 'never to be reclassified to profit or loss'. And I think that includes lump sum contributions from shareholders to defined benefit plans (Not made in FY2016, but a $7.551m lump sum contribution made in FY2017). The pension liabilities are real cash liabilities that must be met in the future. It doesn't seem right to group these with other etherial liabilities, like 'Foreign currency translation differences'' and 'Fair value adjustments' which generally have a long term zero sum expected value by the time the underlying financial arrangements run their course. In complete contrast pension liabilities are a real liability for current shareholders which won't be extinguished until the very last employee or spouse who draws a PGW pension becomes subterranean slow release fertilizer. Pension liabilities, unlike the interim 'mark to market' changes in value of financial arrangements are not something shareholders can back away from.

Of all the NZX listed companies that have in house pension plans, I don't know of one in a worse position than the PGG Wrightson plan. It has been underwater for the entire existence of PGG Wrightson.

Financial Year	Pension Plan Deficit EOFY	PGW Contribution {A}	Members Contribution {B}	Total Contribution {A}+{B}	Benefit Paid {C}	Net Cash Movement {A}+{B}-{C}
2009	-$13.680m	$1.709m	$1.556m	$3.265m	($11.111m)	($7.846m)
2010	-$18.206m	$3.127m	$1.651m	$4.778m	($5.631m)	($0.853m)
2011	-$16.970m	$3.622m	$1.378m	$5.000m	($4.980m)	$1.398m
2012	-$26.264m	$2.727m	$1.363m	$4.090m	($3.819m)	$0.271m
2013	-$20.819m	$1.402m	$1.364m	$2.766m	($6.412m)	($3.646m)
2014	-$13.528m	$1.427m	$1.337m	$2.764m	($4.709m)	($1.945m)
2015	-$14.665m	$1.301m	$1.300m	$2.601m	($5.304m)	($2.703m)
2016	-$20.715m	$1.204m	$1.254m	$2.458m	($3.482m)	($1.024m)
2017	-$12.271m	$5.920m	$1.119m	$7.119m	($6.010m)	$1.109m

The pension plan deficit is a long tail of shame for shareholders, but also a long term worry for shareholders who must eventually meet the bill. Consequently it is a real underlying risk to shareholders as this debt is over and above the already substantial bank loan liabilities that PGW has. I don't think 'sweeping it under the carpet' by changing the profit presentation format is the right way for shareholders to look at the situation.

SNOOPY

[Snoopy]

For the sake of PGW shareholders - I'm not one - it's to be hoped that there are still a few PGW executives who remember the mistake they made several years ago in selling their then Finance division to Rabobank, only to discover that this loosened - and in some cases severed links with a lot of farmers and gave Rabobank the start they needed in becoming a strong competitor in rural finance.

They wouldn't make that mistake again, would they?

Picking up on Macduffy's question of January 2011, of course the finance division 'PGW Finance' was sold to Heartland. However, the PGW AR2017 contains a glowing reference to the new 'Go-Beef' and 'Go-Lamb' products created by PGW during FY2016 (from a zero base in November 2015 to an asset balance of $32 million as at 30 June 2017, yet not mentioned in AR2016) that:

"continue to grow strongly. During the year 187,964 lambs and 33,983 cattle entered the scheme." (AR2017 p2)

So what is 'Go-Beef' and 'Go-Lamb'? It is a scheme where farmers buy beef cattle and/or lamb through their local PGW Livestock Agent. However, in a novel twist, the farmer does not have to pay for these animals up front. Instead they truck them off to their farm to fatten them up and PGW puts the 'farmer bought' animals on their own books and the farmer 'rents' their new stock. A few months later the fattened livestock returns to the PGW saleyard, the lamb/cattle are on sold, and PGW clips the auction ticket - again.

For 'Go-Beef' beef cattle the average time spent on farm is 185 days, while for 'Go-Lamb' lambs it is 104 days. The business is not entirely seasonal and there is significant demand for this service over a rolling twelve month period. All this was explained by Mark Dewdney on the post result conference call following the release of FY2017 results. Mark also noted that the same service has been offered previously via the Heartland bank owned PGW Finance with very little take up.

Dewdney noted that 'Go-Beef' and 'Go-Lamb' were good business for PGW, because they locked the PGW Saleyards onto both ends of the deal, and made a commission increment on the borrowing rate they charged farmers, thus 'clipping the ticket' three times.

As a further point of reference there is this quote from AR2017 p6 is notable for its omission of any reference to the Heartland/PGW Finance agency unit:

"In terms of performance of other businesses within Agency of which Livestock and Wool form part, our Real Estate and Insurance referral businesses each performed well and broadly in line with the corresponding period last year."

And next from AR2017 p17 where Heartland is mentioned:

"Our Insurance and Finance businesses earn commissions from legacy businesses sold to Aon Insurance and Heartland Bank. We have placed increased emphasis on improving these working relationships and exploring opportunities to grow both partnerships through referrals for new business."

Am I reading too much into all of this to suggest that the agency arrangement with Heartland is not performing to expectations and not meeting the needs of farmers? Or is the alternative interpretation, that Heartland have evaluated the risk of the 'animal renting' business and have decided it is not worth encouraging. Consequently this implies Heartland might judge PGW's latest move into "fattening animal finance" as reckless! Is Heartland or PGW right? What do shareholders think?

'Go-Beef' and 'Go-Lamb' certainly look like "PGW Finance Chapter Three" to me!

SNOOPY

[winner69]

Snoops - do fattened cattle always sell more than they did 104 days prior?

[kiora]

Snoops - do fattened cattle always sell more than they did 104 days prior?

Typically .5 to 1 kg live weight gain per day,paid on carcass weight so half this gain /day.BUT typically this finance will be used by poorer performing farmers or farmers with higher leverage/riskier

[Snoopy]

Snoops - do fattened cattle always sell more than they did 104 days prior?

If they don't then PGW could take a leaf out of the Heartland book when it looked like their cow loans were going bad last year. Was it Geoff who suggested they just kill the dairy cows to get the meat? Effectively moving the 'below market' cows up the value chain? Is Mark Dewdney handy with a butcher's knife?

SNOOPY