PGW - PGG Wrightson

[percy]

I would expect farmers will check this platform out along side PGW and ALF's, and decide which one suits their needs.

[Snoopy]

Is PGW's livestock business about to experience an 'Uber' like disruption? https://stockx.co.nz/ I appreciate there are other business channels within PGW but in many cases the relationships that these other business channels leverage are initially formed in the stock agent side of the business.

From p17 in PGW AR2019"

"Innovation continues to be a focus for the Livestock team with a major project coming to fruition during the year. PGW’s new online livestock trading channel, bidr®, was delivered to market during the last quarter of FY2019. bidr® has the potential to be a gamechanger in the livestock trading market with strong interest from the industry to date. In addition, digital tools for the highly mobile Livestock team were delivered throughout the year to keep agents up to date with the latest market intelligence."

This looks like PGW have something equal to 'StockX' in their arsenal already. PGW have an additional advantage in that they are able to provide in house finance via their GoBeef and GoLamb programs. More information on StockX is here:

https://www.nzherald.co.nz/farming/n...ectid=11856447

I see Heartland are financing purchases through StockX. That will anger PGW who had signed up with Heartland to do all of their financing through Heartland owned "PGG Wrightson Finance". However, with PGW setting up their own in house finance operation again under another name (GoBeef and GoLamb) it is no less a competition challenge than PGW management deserve.

"The soundness of purchases is helped by StockX's secure online environment, standardised descriptions for each class and category of livestock, funds settled through an independently audited trust account and user-based feedback on buyer and seller completed transactions"

Is there a way outsiders can follow the 'user based feedback' so we can judge how well this new platform is going?

SNOOPY

[Rossimarnz]

For me there is potential for this to become something similar to what the Trade Me real estate platform has become. It starts out as a platform for individual farmers, followed by the independent stock agents before becoming a platform for the more traditional stock agent companies. While not replacing the traditional companies it does force them into a more transparent and competitive platform. The traditional model at the moment probably has a valid selling point that it has access to the most buyers which is a critical factor when selling. If overtime they all end up on the same platform this advantage is negated somewhat.

[Balance]

For me there is potential for this to become something similar to what the Trade Me real estate platform has become. It starts out as a platform for individual farmers, followed by the independent stock agents before becoming a platform for the more traditional stock agent companies. While not replacing the traditional companies it does force them into a more transparent and competitive platform. The traditional model at the moment probably has a valid selling point that it has access to the most buyers which is a critical factor when selling. If overtime they all end up on the same platform this advantage is negated somewhat.

Farmers and trading platform?

Try farmers and livestock trading with the freezing companies.

Too smart for that nonsense.

[Snoopy]

From the May 9th 2019 announcement to the market

"On settlement of the Seed and Grain business PGW repaid its bank facilities while the Board assessed the appropriate quantum of the capital return. Prior to making a formal recommendation to shareholders, new bank facilities will be arranged and shareholders will be provided with detailed explanatory information to assess the merits of the proposal. These materials will inform PGW shareholders about the proposed capital distribution and the pro-forma financial position of the company post-distribution."

Given that after a $235m capital repayment to shareholders, PGWRR should be able to run 'debt free'(*), I wonder why they even need new bank facilities?

SNOOPY

(*) Having just sold off the store network, the resultant leases are now - no doubt - waiting to appear on the PGWRR balance sheet as debts, that to the new accounting standards regarding leases has created.

This 19th June post of mine couldn't have been more wrong. I do note that we haven't yet seen the impact of 'lease debts' appearing on the balance sheet. That will make things even worse. But having sold the seed business, and bolstered the balance sheet of shareholders in the process, PGW have left their own balance sheet in what I would kindly call a 'stretched position'. Relative to income PGW are more heavily indebted than in any time over the last ten years. The seed business has gone and that will make earnings from the 'rural rump' that is left more volatile. We have heard today that the likes of 'StockX' are ready to disrupt the PGW livestock arm, currently its biggest earner. I think PGW are under pressure. How can this weakening of the balance sheet at a most critical time have happened?

The $235m capital repayment we shareholders got was well down on the $292m proposed in the Korda Mentha report (detailed on p36). I would have thought the suggested capital repayment we didn't get would have boosted the PGWRR balance sheet to the extent that all medium term worries were removed. Yet, somehow millions of dollars worth of capital must have been leaking from PGW in recent years, out of the headline sight of shareholders, to bring them to the precarious capital position that PGW is in today. So how did it all unfold?

SNOOPY

[percy]

Year 2020 forecast equity ratio is 46%.Very sound.

[Snoopy]

Somehow millions of dollars worth of capital must have been leaking from PGW in recent years, out of the headline sight of shareholders, to bring them to their precarious capital position PGW is in today. So how did it all unfold?

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. The ten year picture is shown below.

In the table below, I am effectively looking at the pension schemes as a 'black box' and observing the cashflow that comes in and out. The information in this table can be found in the respective annual reports under the header "Defined Benefit Asset/Liability" (e.g. Note 20 in AR2017).

PGW Pension Plan(s) External Cashflows

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	$1.199m	$7.119m	($6.010m)	$1.109m
2018	-$7.722m	$3.011m	$1.170m	$4.181m	($8.914m)	($4.773m)
2019	-$5.883m	$8.455m	$1.268m	$9.723m	($14.044m)	($4.321m)
Bold Total		$17.386m

Why have I highlighted the contributions of PGW to the pension plan over the last three years only? In the FY2017 report, PGW states:

"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."

So for the years 2016 and older, the money that PGW have pushed into supporting the pension plan has been taken out of the headline profits. To show what has happened, 'Basic Earnings Per Share (Continuing Operations)' was listed as 5.3cps in the AR2016 'Statement of Profit & Loss'. Yet the equivalent comparative figure, also relating to FY2016 in AR2017 was 5.8cps. This difference was solely due to the removal of a $5.835m 'Remeasurement of Profit and Loss' (offset by a $1.634m 'Deferred tax on remeasurements of defined benefit liability') making a net -$4.201m 'item that will never be classified to profit and loss'. [see my post 4135 on this thread for more detail]

Yet this $4.201m pension plan propping is 'real cash' that otherwise would have been available to shareholders to pay higher dividends, or shore up the capital position of the company. If we study the cashflow statements for the last three years, the actual cash required to prop up the pension plan is more than finds its way into the pension plan:

	Cashflow Lump Sum Contribution to Plan {A}	Contributions paid into Plan {B}	{A}-{B}	({A}-{B})/{A}
2017	$7.551m	$5.920m	$1.631m	21.6%
2018	$2.842m	$3.011m	-$0.169m	-5.9%
2019	$10.274m	$8.455m	$1.819m	17.7%
Total	$20.667m	$17.386m

I do not understand why the 'cash flow attributed to propping up the pension plan' is not the same as the 'contributions paid into the plan'. Anyone know? But whether the cash lost by shareholders doing this is $20.667m or $17.386m, it is still a lot of money. The lions share of PGWs base bank debt of $30m going forwards in fact.

Still, at least this hidden cash drain behind the scenes has shored up the pension plan at long last -right?
Unfortunately not, because the ten year government bond rate, a key driver in calculating the required pension fund asset position since the balance date of 30th June has declined further from 1.69% to 1.23% as I write this. Also the earnings capacity of the company has approximately halved due to the sale of the seeds division. That means the record low pension scheme deficit of $5.883m (approximately $6m) will still require an equivalent percentage of profits to be raked off as the $12m deficit at EOFY2017. And that means, after approximately $20m has been spent propping up the pension plan, the effective position of the pension plan for PGW shareholders now is no better than it was at EOFY2017!

SNOOPY

[Snoopy]

Somehow millions of dollars worth of capital must have been leaking from PGW in recent years, out of the headline sight of shareholders, to bring them to their precarious capital position PGW is in today. So how did it all unfold?

Note 18 of AR2019 contains a very interesting disclosure:

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Corporate Structure review

Following the divestment of the Seed & Grain business the PGW Board commenced a review of the corporate service model for the business. The Group has recognised costs of $3.02 million, expensed through non-operating items, in respect of the recalibration. As at 30 June 2019, a provision of $1.74 million was held and is included within accruals and other liabilities above.

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Once again a recognised cost of $3.02m has been diverted through 'non-operating items'. That is fair, but it does keep a very significant loss of money for shareholders out of the limelight. Putting the remaining balance in 'Accruals and other liabilities' will obfuscate this loss in a basket to be forgotten in future years. Yet it is real cash that shareholders have lost, and a real contribution to the weakening of the company structure going forwards.

SNOOPY

[Snoopy]

Somehow millions of dollars worth of capital must have been leaking from PGW in recent years, out of the headline sight of shareholders, to bring them to their precarious capital position PGW is in today. So how did it all unfold?

This one caught out more than one company, but the cost of putting it right for PGW was nevertheless severe! At least this faux pas was not hidden from shareholders. It was up front in the profit and loss statement. From AR2018, Note 20 explains:

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Holidays Act 2003 - Remediation Costs

During the period the Group recognised an $8.06 million provision for remediation costs of historical liabilities under the Holidays Act 2003. The Group has engaged the services of an external advisor and a law firm to assist in determining the level of the provision. Work on determining the final liability is not yet complete. The provision is included within Employee entitlements above, and represents the Management’s best estimate of the remediation costs.

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Note 20 goes on to list employee entitlements rising from $31.163m at EOFY2018 from $22.946m at EOFY2017, a rise in value of $8.217m, most likely almost entirely due to the Holiday's Act debacle.

Then one year later, from note 18 in AR2019, we learn:

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The Group has now completed the remediation work and has made remediation payments to current staff and those terminated staff for which the Group has been able to make contact with. Following these payments the remaining provision has been released apart from an amount of $1.20 million which continues to be held in respect of terminated employees for which the Group is yet to make contact with.

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From the 'Statement of Profit and Loss' for FY2019, the amount written back was $2.303m. So the original provisioning was conservatively generous and the final capital used to sort out this sorry affair was:

$8.060m - $2.303m = $5.757m

Nevertheless that was a not inconsiderable capital ejection that otherwise might have been available to shore up the capital position of the company.

At EOFY2019, $16.821m was the amount listed under 'Employee Entitlements' under 'Trade and Other Payables' at EOFY2019. This represents 'Employee Entitlements' from the NZ based rural retail and livestock operation only, the 'Employee Entitlements' from the seed division having been hived off. If we take the FY2018 'Employee Entitlements' for the whole operation, including seeds, and subtract the holiday act entitlements accounted for at the time -and today's remaining total- we get:

$31.163m - $16.821m - $8.060m = $6.282m

This figure gives some indication of the 'Employee Entitlements' that might have been transferred to the 'Seed Division' after its sale.

SNOOPY

[Snoopy]

Somehow millions of dollars worth of capital must have been leaking from PGW in recent years, out of the headline sight of shareholders, to bring them to the precarious capital position that PGW is in today. So how did it all unfold?

In note 18 of AR2019, we learn of another capital loss shuffled into non-operating earnings.

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Onerous lease

The Group has recognised a provision in respect of property leases entered into that are now considered onerous. An onerous provision of $1.88 million has been expensed within non-operating items and represents the Directors’ best estimate of the expected excess of costs over benefits for the remaining term of the lease contracts.

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This doesn't seem consistent with the treatment of lack of holiday pay. Workers are employed to operate the company and building's are leased so that workers can operate out of them. I would have thought that both should be operating expenses or alternatively, because both adjustments are in theory one offs, both should be non-operating expenses. I don't see the logic in having different treatments for both. But let's carry on.

$1.88m is not a huge loss on its own. Yet this loss comes in the context of PGW owning a huge swag of their retail premises, and selling them off to raise capital, while consummately entering lease back arrangements to reduce debt. Of course, the net effect of all this will be undone by the new IFRS accounting rules for leases in the next accounting period. The new rules means that operating leases will now appear on the balance sheet as capitalised debt. The point I am making is that this particular lease loss looks like it could be a back flip on a very recent lease deal. And that doesn't inspire confidence in the short to medium term planning from the company.

SNOOPY