PGW - PGG Wrightson

[percy]

Actual Equity Ratio at balance date: Total Equity / 'Total Liabilities + Equity' = $156.702m / $459.453m = 34% "Not so Sound" Hmmmm.

SNOOPY

Agree.34% equity ratio. "Not so sound." Hmmm indeed.Difference between total assets and total equity is liabilities,So more debt.
Neither was receiving $4.1mil from the Govt.
Only positive was the operating cash inflow of $34mil

[Rossimarnz]

Agree.34% equity ratio. "Not so sound." Hmmm indeed.
Neither was receiving $4.1mil from the Govt.
Only positive was the operating cash inflow of $34mil

Percy this is a business that has a strong seasonality to it. Is the positive cashflow a function of the seasonality rather than a reflection of the core business?

[percy]

Percy this is a business that has a strong seasonality to it. Is the positive cashflow a function of the seasonality rather than a reflection of the core business?

Yes...........................
Half year cash flow negative.
Full year cash flow positive.
I really only brought it up as posters were concerned at the negative cash flow at the half year.
PGW's CFO told me at the time it would correct at the full year, as it did.

[Snoopy]

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!

As I predicted, the PGW pension plan continues to career out of balance. 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}
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)
2020	-$9.838m	$0.692m	$0.832m	$1.524m	($5.031m)	($3.377m)
Bold Total		$18.078m

Why have I highlighted the contributions of PGW to the pension plan over the last four 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 four 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%
2020	$0.0m	$0.692m	-$0,692m	NM
Total	$20.667m	$18.078m

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? I suppose it is the same in FY2020 ;-P. But whether the cash lost by shareholders doing this is $20.667m or $18.078m, it is still a lot of money. It accounts for all of PGWs long term bank debt of $20m going forwards in fact.

Still, at least the long term 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 2019 has declined from 1.57% in AR2019 to 0.91% in FY2020. The pain hasn't stopped either because as of today, nearly two months on from the balance date, the ten year cash rate is down to just 0.67%!

Very importantly, the earnings capacity of the company has approximately halved due to the sale of the seeds division. In this drought year in particular, earnings have collapsed to just $5m. That means the pension scheme deficit of $9.838m (approximately $10m) will need two years of PGW profits to be diverted to close the funding gap. The effective position of the pension plan for PGW shareholders, and even pension plan beneficiaries, must now be of significant concern. Yet in June 2019, the Group announced that they had brought the Plan to an 'actuarial equilibrium position', because they have their own calculation standards that are better than IFRS standards (apparently).

SNOOPY

[winner69]

Hey Snoops ......probably a few guys in this photo still collecting their pension from PGW

I’d hazard a guess that most of the pensioners worked for companies PGW no longer own but generous current shareholders keep paying their pensions ...cool eh

[Snoopy]

Note 18 of AR2019 contains a very interesting disclosure:

------

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.

-------

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.

Note 6 in the annual accounts show the company's response to Covid-19

"The Group's financial performance for 2020 has been significantly impacted by COVID-19. Whilst the Group's retail stores and warehouse supplies facilities continued operating as an "essential service" during all of New Zealand's alert levels, the Group's Water, Wool, Real Estate and Livestock saleyard businesses were closed at alert level 4 and only reopened under alert level 3 following strict protocols. The Group received $4.11 million under the Government’s COVID-19 wage subsidy scheme which is aimed at supporting employers affected by the COVID-19 lockdown to continue to employ staff. $3.15 million of this subsidy has been recognised in the profit or loss within the Employee Expenses line, with the remaining $0.96 million being recognised as deferred income on the balance sheet as at balance date."

Sure enough , if we turn to note 17 in the annual accounts, there is $0.958m in 'wage subsidy waiting to be paid out' sitting on the balance sheet as a liability.

If we want to remove the effect of the government subsidy from operating performance, we might consider that $4.11m 'grant provided by Grant' as a debt, albeit a 'virtual debt' that doesn't have to be repaid. This is because if the government had not come up with the money, then PGW would have had to borrow $4.11m to pay those wages. Next year 'virus willing' PGW will not be receiving $4.11m in wage subsidies. The exact amount of subsidy they will receive we can probably glean from half year report to December 2020, when it comes out. But right now a new $4.11m in cost is built into the operating cost of the company. And as soon as the government stops paying that, corresponding debt will appear on the PGW books that will have to be offset by a permanent incremental improvement in earnings, or cost cutting.

This isn't a debt issue yet for PGW, but it is something to keep an eye on.

SNOOPY

[percy]

Actual Equity Ratio at balance date: Total Equity / 'Total Liabilities + Equity' = $156.702m / $459.453m = 34% "Not so Sound" Hmmmm.

SNOOPY

Equity ratio.?
Tricky.
34.1% or 44.81%..?
Big difference.
Excluding the impact of NZFRS 16 leases [ as clearly pointed out on page 6 of the annual report] it is a very healthy 44.81%
ie Total assets $354,071 and total equity $158,650
Yet under NZFRS 16 leases. 34.1%
Total assets $459,453 and total equity $156,702.
Something we will have to get used to.

[Balance]

Snoopy has been writing doom & gloom about PGW for over a year.

I would be selling the hell out of the stock if I write the same doom and gloom!

Yet he claims to still be a shareholder in PGW?

DYOR.

[Getty]

Hey Snoops ......probably a few guys in this photo still collecting their pension from PGW

I’d hazard a guess that most of the pensioners worked for companies PGW no longer own but generous current shareholders keep paying their pensions ...cool eh

So these hard working gents are now costing us circa $10M?
If anybody can supply me their names and addresses, I will visit them, thank them for their service, and shall we say, pension them off.
All in the interests of fiscal responsibility of course.

Dr JPG.

Profits before people.

[Roberto the Brickie]

I am more concerned with the cash management practices at PGW than the pension scheme. The pension scheme is a problem but not one that the current management were responsible for implementing, they just inherited the problem. However I can't understand why a New Zealand domiciled company with no overseas subsidiaries would have $17 million cash on hand, yet still have $30 million short term debt. I can forgive the long term debt of $20 million as break fees would probably apply for early repayment. This makes no sense to me, surely the banking syndicate are charging a higher interest rate for borrowing than investing. Common sense would say this cannot be the case as why would they continue trading and losing money.
So I can only conclude that the cash management team of PGW have been asleep at the helm. In my business, cash is always king, and the first thing that I am looking at every day especially in tough times. I have lost some faith in PGW thinking about this, especially on a reporting date. I would have assumed that this would have been a focus area for management ahead of the pension scheme.
Would be really happy if people have a different opinion to me to share as this really causing me some concerns.