PGW - PGG Wrightson

[Snoopy]

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

I am pleased you made the distinction between 'poorly performing farmers' and 'farmers with higher leverage'. They are of course quite different things.

A well performing farmer who knows how best to turn paddock into animal mass may be able to get away with more leverage, than a farmer without the favourable land type or knowledge to make it work. By contrast a poor farmer, who doesn't know how to get the best out of their land, might still do OK if the financial leverage on the farm is not too high.

I do wonder about 'Go-Beef' and 'Go-Lamb' though. Sometimes what seems to be a good idea on paper can have unintended consequences.

Example 1/ If PGW are financing the buying of stock at a price that ordinarily a farmer bidding for that stock cannot afford, then you will drive the stock price at the PGW Saleyard higher than it would otherwise be. Superficially that sounds good for PGW. But why would another farmer who didn't need to 'borrow to buy stock', buy there? Why not go down the road and buy your stock at the Allied Farmers Saleyard where you aren't bidding against others who can't afford to bid? Aren't PGW just driving the smart farmers away to the competition, when those smart farmers realise they don't have to pay as much for their cattle beef and lamb if they shop elsewhere?

Example 2/ A farmer uses the PGW 'Go-Beef' or 'Go-Lamb' finance package, to 'rent' an extra paddock of animals. But suppose growing conditions get difficult with too much rain and pugging. Wouldn't it make sense for this farmer to feed up their own title animals first ahead of those animal rented from PGW? After all, PGW have an arrangement to buy back 'their rented animals though the saleyards no matter what weight they end up at at a certain time. Whereas the farmer who feeds up his own animals first can sell them at any time through any channel and can choose to whom and to where they sell to maximise profits. Furthermore if any animal gets sick you can bet the farmer will call the vet to their own animals first, and leave PGW to take any consequential disease loss on the rented animals.

SNOOPY

[kiora]

You're pretty close to summing it up Snoppy. Good when beef/lamb prices are increasing,risky when dropping. PGG one would assume would know the risk,facted it in and still win.Its the farmer who will have the lower margin.

[Snoopy]

Well, well - 'The Dewd' is on his way out

New CEO next year

Or maybe this year? Ian Glasson is taking over after the AGM:

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PGG Wrightson Limited ("PGW") a leading provider of agricultural products, services and solutions to growers, farmers and processors in New Zealand, Australia and South America, today announced that Ian Glasson has been appointed Chief Executive Officer. Mr Glasson's appointment takes effect from 1 November 2017 and completes the leadership succession plan following the resignation of current CEO, Mark Dewdney.

Mr Glasson is an experienced executive with significant career experience in the agribusiness and branded food sectors across several international markets. He joins PGW from his previous position as CEO of Gold Coin Group/Zuellig Agriculture where he was responsible for running a portfolio of agricultural businesses with sales in excess of a billion dollars that included animal feed operations and farming ventures throughout South-East Asia (including in China) and CB Norwood, a farm equipment business in New Zealand and Australia.

PGW Chairman, Alan Lai stated: "Ian brings impressive qualifications for leading an agricultural business such as PGW and we are pleased to have him join the Company." In addition to his record of success at Gold Coin, Ian was CEO of Sucrogen (formerly CSR Sugar) for seven years and has held Managing Director roles with Goodman Fielder and Gresham Rabo. He spent the first 16 years of his career in the oil and gas sector with Esso and Exxon Mobile in Australia and the US.

"Ian will remain an external Director of SunRice one of the largest branded rice food companies in the world, and is looking forward to relocating to Christchurch with his family for his role at PGW."

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Am slightly disappointed an internal candidate didn't get the job this time. Bosses have been parachuted into PGW for as long as I can remember, and this time we get an Aussie to boot! I am far from convinced the business needs yet another shake up at this point. Yet Glasson sounds an able guy from the CV, so we must give him a honeymoon. I still reckon they should have recalled former CEO Tim Miles, while he is still on the payroll. to work through the tail of the ten year contract the board at the time gave him.

SNOOPY

[Snoopy]

You're pretty close to summing it up Snoopy. Good when beef/lamb prices are increasing, risky when dropping. PGG one would assume would know the risk, factored it in and still win. It's the farmer who will have the lower margin.

I am not sure that is quite what I am saying Kiora. Is 'knowing the risk' enough compensation for 'not knowing the outcome'? Let me see if I can make my point more clearly.

If lamb and /or cattle prices are rising this should be good for all farmers, very true. But are the prices for all lambs (I'll use this as my example) rising equally?

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CASE 1/ If a farmer has:

i/ fully owned lambs and rented lambs AND
ii/ there is plenty of cheap feed available THEN
iii/ there is every reason to believe that the owned lambs and rented lambs will do equally well. This scenario will be good for PGW as they will get higher prices for their lambs at first sale time and prices as good as farmer owned lambs at resale time. OTOH.....

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CASE 2/ If a farmer has:

i/ fully owned lambs and rented lambs AND
ii/ feed on farm is limited and/or expensive to buy in THEN
iii/ there is every reason to believe that the owned lambs will do better than the rented lambs. So PGW will do worse when the rented lambs are resold, because their sell weight will be lower. If PGW had sold the lambs outright the first time those lambs came into the PGW saleyards, then the lower 'first sale price' might have been offset by a higher 'resale price'. So in this case the 'Go Lamb' financing has probably not increased PGW profits.

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CASE 3/ If a farmer has:

i/ fully owned lambs and rented lambs AND
ii/ the situation changes between buying and reselling the lambs in a way that that feed becomes scarce THEN
iii/ there is every reason to believe that neither the owned lambs nor the rented lambs will do well.

If the result of the weather deterioration is that the farmer has to sell lambs, then PGW will probably insist that the farmer sells those rented lambs first. As the owner of those lambs PGW could lose 'biological capital' even if that loss is offset by auction fees at both ends of the transaction. However, the farmer will be most beholden to their bankers, not PGW. Bankers may insist that the farmer sell down their own lambs, but at another (e.g. Allied Farmers) saleyard where the lamb price isn't so depressed by all the in 'in house' PGW lamb sales. This could leave our farmer in a much weaker position unable to take advantage of PGW's lamb rental scheme in the future.

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So in summary:

1/ PGW could lose the support of the well capitalised farmers who will go to other saleyards to buy their lambs at less inflated prices (Case 1, Case2 and Case 3).
2/ PGW could lose the support of the less well capitalised farmers, because they have become substantially weakened by buying into lambs on a leveraged basis at the wrong time (Case 3).
3/ PGW could suffer a 'capital loss' on their biological assets (lambs they have rented out). (Case 3)

For PGW, Case 3, looks like a 'lose', 'lose' 'lose' scenario, not uncommon in any leveraged business when the market tide goes against you. Perhaps our hapless farmer may even end up with a greater margin on their 'owned lambs' verses the margin PGW got on the 'rented lambs'? But if all the lamb sales result in losses, whether our hapless farmer has done 'better' or 'worse' than PGW, won't help our farmer recover. PGW has in effect leveraged our hapless farmer one step closer to bankruptcy through their 'Go lamb' finance scheme.

'Go Lamb' and 'Go Beef' looks to me like it is no different to any other form of leveraged financing, with all the 'good' and 'bad' that can come from such schemes. Due to good farmers potentially moving their business, it may not be positive for PGW shareholders even in good times.

SNOOPY

[Snoopy]

(The underfunded pension plan) 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.

I have come to the conclusion that I should reverse the change in result presentation of the pension liabilities when I judge the future prospects of this company. But to do that I need to fully understand how the changes were made.

It was in AR2016 p61 that PGW stated:

"During the period, the group made a commitment to provide certain contributions to the 'Defined Benefit Liability' over a five year period (FY2017, FY2018, FY2019, FY2020 and FY2021). As a result of this commitment, the defined benefit liability now includes the impact of ESCT (Employer Superannuation Contribution Tax) on the committed contributions."

The committed contributions on ESCT were listed as follows:

ESCT on committed contributions - short term	($2.642m)
ESCT on committed contributions - long term	($2.372m)

If we regard 'short term' as within twelve months, how does this tie up with the actual payments made into the scheme by PGW?

The cashflow statement in AR2017 (being the ensuing 12 months after the above commitment was made) shows the "Lump sum contributions to the defined benefit plan (ECST inclusive) totalled $7.551m. If I assume that this payment was fully taxable at the company tax rate of 28%, then :

$7.551m x 0.28 = ($2.114m)

This falls short of the ($2.642m) I might have expected from AR2016. Does this mean that PGW, at EOFY2016, were going to put more money in this year? But for some reason scaled their contribution back from what was originally envisaged? Or does that tax 28% rate not apply for superannuation payments, because those superannuation payments will ultimately pass to individuals who have a higher marginal tax rate? Working the numbers from the other direction:

(Forecast tax paid)/(Actual tax Payment) = ($2.642m)/($7.551m) = 35%

That seems quite a high tax rate for superannuitants. So perhaps my theory of a higher tax rate applying to these funds is not right?

Returning to the AR2016 results, the differences noted in my post 4135 under 'non-operating items' and the apparently related 'income tax adjustment' would indicate that the defined benefit Scheme(s) over FY2016 made a NPAT of $5.835m and produced an associated income tax liability of $1.634m.

I note that: $1.634m/$5.835m = 28%, which is the company tax rate.

Yet the fair value of plan assets actually went down over FY2016, from $57.498m to $ $52.702m (note 19, AR2016). How do I reconcile those two positions?

It seems that those in the scheme who are not yet retired, despite it being closed to new participants, are still able to add to their scheme positions. Likewise those that are already retired are receiving payouts from the scheme.

SNOOPY

[Snoopy]

Returning to the AR2016 results, the differences noted in my post 4135 under 'non-operating items' and the apparently related 'income tax adjustment' would indicate that the defined benefit Scheme(s) over FY2016 made a NPAT of $5.835m and produced an associated income tax liability of $1.634m.

I note that: $1.634m/$5.835m = 28%, which is the company tax rate.

Yet the fair value of plan assets actually went down over FY2016, from $57.498m to $ $52.702m (note 19, AR2016). How do I reconcile those two positions?

It seems that those in the scheme who are not yet retired, despite it being closed to new participants, are still able to add to their scheme positions. Likewise those that are already retired are receiving payouts from the scheme.

p63 in AR2016 provides more details on the profit and loss factors that moved the pension scheme balance about over FY2016. Using this I will try to reconcile what happened.

Opening Fair value of Plan Assets	$57.498m
less Benefits paid by the Plan	($3.482m)
add PGW Top Up Contribution	$1.204m
add Member Contributions	$1.254m
add Current Service Costs and Interest	$2.063m	(This is odd because I would expect 'service costs' to be a negative value. Could it be they have been offset by 'interest earned? (1))
less Expected Return on Plan Assets	($5.835m)	(A very strange piece of jargon IMV. Why would the expected investment return be negative? Was the actual return negative?) (2)
equals Closing Fair value of Plan Assets	$52.702m

(1) The line below shows 'Current Service Costs' to be $1.083m and 'Interest' of $0.529m adding to $1.612m. This is not in agreement with 'Current Service Costs and Interest' being $2.063m. However both of these are listed as positive 'expenses' which should add negatively to the plan asset total as I might have expected.

(2) This negative return appears to be unique to FY2016. The 'Expected return on plan assets' both over FY2015 and FY2017 are both positive as I might expect. What was it that 'apparently' caused this huge loss in FY2016, when investment markets were so favourable?

The total movement in plan assets was:

$57.498m - $52.702m = -$4.796m

Yet the figures from the profit and loss statement that I derived were a profit of $5.835m together an associated income tax liability of $1.634m, which doesn't tie up. I must say that I am finding this pension scheme representation in the books all rather baffling....

SNOOPY

[winner69]

Awfully complicated isn't it snoops but I'm sure its clear as mud to the PGW finance team (and actuary)

Like that ($5.835m) is the difference between expected returns (the long term return assumption) and actual returns. Now that's got you confused eh

What you trying to show anyway?

[percy]

Awfully complicated isn't it snoops but I'm sure its clear as mud to the PGW finance team.

What you trying to show anyway?

.Classic.Looking forward to Snoopy's answer,,,,,,,,,,,,,,,,,,,,,,,if he knows??...lol

[Snow Leopard]

...

add Current Service Costs and Interest	$2.063m	(This is odd because I would expect 'service costs' to be a negative value. Could it be they have been offset by 'interest earned? (1))
less Expected Return on Plan Assets	($5.835m)	(A very strange piece of jargon IMV. Why would the expected investment return be negative? Was the actual return negative?) (2)

...

...
(1) The line below shows 'Current Service Costs' to be $1.083m and 'Interest' of $0.529m adding to $1.612m. This is not in agreement with 'Current Service Costs and Interest' being $2.063m. However both of these are listed as positive 'expenses' which should add negatively to the plan asset total as I might have expected.

(2) This negative return appears to be unique to FY2016. The 'Expected return on plan assets' both over FY2015 and FY2017 are both positive as I might expect. What was it that 'apparently' caused this huge loss in FY2016, when investment markets were so favourable?...

...Like that ($5.835m) is the difference between expected returns (the long term return assumption) and actual returns. Now that's got you confused eh...

I am just going to keep quiet, occasionally look in on how this is 'progressing' and possibly allow myself a few smug moments.

Best Wishes
Paper Tiger

[Snoopy]

Awfully complicated isn't it snoops but I'm sure its clear as mud to the PGW finance team (and actuary)

Like that ($5.835m) is the difference between expected returns (the long term return assumption) and actual returns. Now that's got you confused eh

Yes :-(

What you trying to show anyway?

I think the cash liability of the pension plan is a risk issue for PGW. I think one way to account for this is to take this potential cash liability and subtract it from the operating profit (as was in effect done in FY2016 and previous years). The cash liability may not completely align with the 'hit on profit' liability. But at least the cash liability is easier to understand. I have amended my post 4186 to show what has happened in 'cash terms' to the pension plan since FY2019. It is fairly obvious that in general cash has been bleeding out of the plan over the years, while the expected final deficit of the plan remains stubbornly high. My objective is to figure out what the cash drain for PGW shareholders is likely to be in the future. I will then make some suitable adjustment to operating profit going forwards.

SNOOPY