PGW - PGG Wrightson

[Balance]

PGW retail arm doing OK but competitors losing money


In their respective financial years to the end of June, Farmlands recorded a loss of nearly $680,000, while Ruralco's net loss after tax came in at $2.1 million.

https://businessdesk.co.nz/article/f...nflation-bites

The hits just keep coming at the agricultural sector, unfortunately.

Latest is China's decision to ban frozen deer velvet from June 2024. Dried velvet can still be exported but the China importers prefer frozen.

https://www.nzherald.co.nz/the-count...EQPATPSRAIPEE/

That's after lamb prices dropped 'hard and fast' this year, impacting sheep farmers' incomes by over 20%+.

https://www.rnz.co.nz/news/country/5...-than-expected

Then, there's El Nino around the corner with farmers quitting stock units ahead of the hot, dry and windy conditions expected over summer.

[Toddy]

I cut my expenditure with PGW by 90 percent and Farmlands by 30 percent. Just went without.

Whenever I did go to PGW, the car park was empty. So surprised that they have outperformed Farmlands.

Oh for one of those cushy Wellington Government Department contracting jobs with no measurable outcomes.

[Snoopy]

The full year time periods that I have listed below are not exact matches. This is because the PGW financial year ends on 30th June and the ELD financial year ends on 30th September. I first saw the Elders version of this information in the Elders November 2023 Analyst Briefing Day Presentation. So I thought it would be worthwhile comparing how PGW's equivalent statistics panned out over the near similar time periods.

I note that, since 14th December 2022, Elders has acquired a strategic 12.5% stake in PGW. However, as far as I can tell from the FY2023 Elders annual report, the results from this investment are reported as 'Equity accounted profits', which fall below the revenue line in the income statement. Thus there is no 'cross contamination' of PGW revenue reported within the Elders revenue results. Neither is there cross contamination of 'sales costs', because PGW sales costs are included in PGW equity earnings.

'Gross profit' (or 'Gross margin'), as defined by Elders, is 'Underlying EBIT' plus 'administration and distribution' costs (AR2023 p13). PGG Wrightson does not express gross profit in this way. So it needs to be calculated from the constituent information in the annual report (details in table notes). I present the comparative table below:

Elders verses PGG Wrightson comparative performance table

	FY2019	FY2020	FY2021	FY2022	FY2023	Four Years of Change (Annual compounding)
Elders Revenue	$A1,626m	$A2,093m	$A2,549m	$A3,445m	$A3,321m
Elders % Revenue Change YoY	N.A.	+28.7%	+21.8%	+35.2%	-6.50%	+104% (+19.5% p.a.)
PGG Wrightson Revenue	$NZ798.8m	$NZ788.0m	$NZ847.8m	$NZ952.7m	$NZ975.7m
PGG Wrightson % Revenue Change YoY	N.A.	-1.35%	+7.59%	+12.4%	+2.41%	+22.1% (+5.12% p.a.)
Elders Gross Profit (1)	$A346m	$A430m	$A518m	$A640m	$A605m
Elders % Gross Profit Change YoY	N.A.	+24.3%	+20.5%	+23.6%	-5.47%	+74.9% (+15.0% p.a.)
PGG Wrightson Gross Profit	$NZ29.074m (2)	$NZ33.918m	$NZ55.391m	$NZ60.738m	$NZ60.486m (3)
PGG Wrightson % Gross Profit Change YoY	N.A.	+16.6%%	+63.3%	+12.4%	-0.415%	+108% (+20.1% p.a.)
Elders Admin. & Distbn. Costs (%ge of earnings)	$A278m (80%)	$A317m (74%)	$A363m (70%)	$A421m (66%)	$A448m (74%)
Elders % A.& D. Costs Change YoY	N.A.	+14.0%	+14.5%	+16.0%	+6.65%	+61.5% (+12.7% p.a.)
PGG Wrightson Admin. & Distbn. Costs (%ge of earnings)	$NZ18.867m (64.9%)	$NZ18.867m (55.6%)	$NZ20.357m (36.8%)	$NZ23.092m (39.0%)	$NZ26.977m (44.6%)
PGG Wrightson % A.& D.Costs Change YoY	N.A.	N.A.(4)	+7.90%	+12.4%	+13.4%	+43.0% (+9.35% p.a.)
Elders Underlying EBIT (5)	$A67.341m	$A106.109m	$A155.476m	$A151.579m	$A156.684m
Elders % EBIT Change YoY	N.A.	+57.6%	+46.5%	-2.51%	+3.37%	+133% (+23.5% p.a.)
PGG Wrightson Underlying EBIT	$NZ10.207m	$NZ14.854m	$NZ35.034m	$NZ37.646m	$NZ33.509m
PGG Wrightson % EBIT Change YoY	N.A.	+45.5%	+136%	+12.4%	-12.2%	+228% (+34.6% p.a.)

Notes

1/ Elders gross profit has been adjusted to remove equity accounted profits.

2/ EBIT(Admin) for FY2019 for PGW was $17.478m (AR2020 p41, referred result). However, I believe much of this was tied in with PGW's sale of their seed division that was sold in that financial year. So instead I will use the figure for FY2020: $9.016m. Over the years, the freight cost has only been disclosed for FY2023, FY2022 and FY2021. For FY2020 and FY2019 I have assumed the freight cost as the same as FY2021 ($9.851m, AR2022 p53, reference data from previous year)

Sample calculation for FY2019:
Gross Profit = EBIT(P&L) + EBIT(Admin) + Freight = $10.207m + $9.016m + $9.851m = $29.074m
(Note that for the EBIT figure from the Profit and Loss Statement, I have used the referred and adjusted figure from AR2020)

Sales Administration and Distribution Costs for FY2019 = EBIT(Admin) + Freight = $9.016m + $9.851m = $18.867m

3/ Sample calculation for PGW gross profit as follows for FY2023:
Gross Profit = EBIT(P&L) + EBIT(Admin) + Freight = $33.509m + $12.052m + $14.925m = $60.486m (EBIT(Admin) is from 'Segmented Results', Freight expense from Note 2: Cost of Sales)

Sales Administration and Distribution Costs for PGW for FY2023 = EBIT(Admin) + Freight = $12.052m + $14.925m = $26.977m

4/ Not applicable because due to lack of detailed information I have assumed the PGW YoY figures to be equal.

5/ Underlying EBIT calculations for Elders (excluding equity accounting profits):
FY2023: $138.868m + $8.913m + $23.019m - $14.116m = $156.684m
FY2022: $170.010m - $14.277m + $8.571[/m - $12.725m = $151.579m
FY2021: $157.708m + $0m + $8.755m - $10.897m = $155.476m
FY2020: $104.065m + $0m + $9.325m - $7.281m = $106.109m
FY2019: $60.415m + $2.468m + $10.771m - $6.313m = $67.341m

SNOOPY

[Snoopy]

I am surprised at how much lower the sales and distribution costs are as a percentage of sales at PGW. Could it be that ELD are measuring administration costs in a different way, by including more 'local branch administration' in their administration figures? Could it also be that Elder's distribution costs are higher, because the country of Australia is so much bigger? There is no easy way to know the answer to such questions. So probably the 'year on year' (YoY) trends in the figures are of more interest than the 'actual quoted numbers'.

PGW and ELD service very similar product markets, albeit with their retail presences ensconced in different countries, New Zealand and Australia respectively. Structural differences between the two companies include:
a/ ELD owning the Killara Feedlot, which is a company owned grain fed beef fattening facility (Refer AR2023 p32, $13.7m/$691m means Killara provides 2% of ELD gross profit). By contrast in NZ, cattle are all fattened up by the farmers and usually on grass.
b/ ELD owning 30% of the 'Clear Grain Exchange' in Australia where buyers, sellers, and their agents, can bid or offer grain at their price in an open and transparent electronic market with secure settlement (gross profit $1.1m - refer AR2023 p29, $1.1m/$691m = 0.2% of ELD gross profit). Again PGW has no equivalent investment. (Trivia fact: Between 2009 and 2016 the 'Clear Grain Exchange' in Australia was wholly owned by the listed 'New Zealand Stock Exchange').
Neither of these differences are material in comparing PGW to ELD, although the Titan AG subsidiary (40% of ELD EBIT for FY2023 see paragraph below) might be!

Since selling their seed business, PGW has been focussed on optimizing its remaining retail network and organically growing its market share. Elders, by contrast, has made 43 'bolt on acquisitions' in the four year period under analysis. And these smaller acquisitions do not include the two much larger acquisitions of AIRR (Australian Independent Rural Retailers), a rural wholesaler, and 'Titan AG': an Australian based producer and supplier of crop protection and animal health chemicals and fertilizer bought over the period (PGW does not have an equivalent arm to 'Titan AG'). 'Titan AG' has actually been an exclusive supplier to Elders since its inception in 2006. The 'Titan AG' acquisition was part of Elders policy of 'backward integration', where they look to invest in their own supply chain. In addition to its physical assets, Titan possesses intellectual property to the extent of 163 Australian Pesticides and Veterinary Medicines Authority (APVMA) registrations in connection with its product range, which complements the 23 APVMA registrations already held by Elders.

Taking a closer look at the reference table above, the effect of the acquisitions on revenue at Elders has been dramatic with overall company revenue surging, even as the traditional Elders retail network saw sales fall back to FY2016 levels (refer PR2023 (November), slide 10 - although part of this may have been due to transfer pricing, now that ELD own such a major supplier as 'Titan AG'). The growth in revenue over the four reference years at PGW has been smaller. But we are looking at organic growth at PGW, not growth bumped up by supplementary business purchases. The percentage rise in gross profit was higher at PGW, probably because there would have been no workplace 'cultural integration issues'. The little things that always accompany new business units being brought 'in house', as would have occurred at Elders.

SNOOPY

[winner69]

Something wonky eh when you say -

Gross Profit = Revenue - Costs. So what about the costs? At PGW, over the study period, these rose by: $26.978m - $18.867m = $8.111m.
Meanwhile revenue rose by $975.7m - $798.8m = $176.9m. So, all things being equal, Gross Profit should have risen by $176.9m - $8.111m = $168.8m over the study period. What actually happened? The gross profit rise was $60.486m - $29.084m = $31.402m.

[Snoopy]

Something wonky eh when you say -

Gross Profit = Revenue - Costs. So what about the costs? At PGW, over the study period, these rose by: $26.978m - $18.867m = $8.111m.
Meanwhile revenue rose by $975.7m - $798.8m = $176.9m. So, all things being equal, Gross Profit should have risen by $176.9m - $8.111m = $168.8m over the study period. What actually happened? The gross profit rise was $60.486m - $29.084m = $31.402m.

That bit below my name sign off is the 'work in progress' Winner. Stay tuned!

SNOOPY

[winner69]

While looking at AR to se where some of your numbers came from I notice the old Superannuation Fund seems to be in better shape than previous years. Good they still contributing to the old timers and in some cases their partners

Also note that %age female employees has increased from 39% in 2019 to 46% in 2023

All good eh

[Snoopy]

Gross Profit = Revenue - Costs. So what about the declared costs?

At ELD, over the study period, these rose by: $448m - $278m = $170m. (AR2023 p13, AR2020 p113, referred figures)
Meanwhile revenue rose by $3321m - $1626m = $1695m. So, all things being equal, Gross Profit should have risen by $1695m - $170m = $1525m over the study period. What actually happened? The gross profit rise was $619m - $352m = $267m.

At PGW, over the study period, the equivalent costs rose by: $26.977m - $18.867m = $8.110m.
Meanwhile revenue rose by $975.7m - $798.8m = $176.9m. So, all things being equal, Gross Profit should have risen by $176.9m - $8.110m = $168.8m over the study period. What actually happened? The gross profit rise was $60.486m - $29.084m = $31.402m.

As you can see, reflecting my above observations, the first line in the table below for each protagonist, being ELD and PGW respectively, did not add up for either company. They are not even close, with the profit projections being more than five times too high. This is not surprising as there are other costs that have risen, in addition to just administration and transport, across the studied time period. In the remainder of the table below, I have itemized the rises in these other costs for PGW and ELD.

	Incremental Revenue	less Incremental Costs	equals Summed Incremental Profits	c.f. Declared Incremental Profits
ELD FY2019 to FY2023	$A1,695m	($A170m) (2)	$A1,525m	$A267m
ELD Cost of Sales		($A1,192.475m)
ELD Employee Expenses		($A74,148m)
ELD Other operating expenses		($A3.368m)
ELD Net Interest		($A8.880m)	$A246m	$A267m
PGW FY2019 to FY2023	$NZ176.9m	($NZ8.110m) (2)	$NZ168.1m	$NZ31.402m
PGW Cost of Sales		($NZ138.495m)
PGW Employee Expenses		($NZ11.388m)
PGW Other operating expenses		($NZ13.063m)
PGW Net Interest		$NZ1.843m	$NZ6.997m	$NZ31.402m

Notes

1/ Referenced numbers from AR2019 are from the referred values in AR2020, some of which have been restated from AR2019.
2/ Administration costs and Distribution (Freight) costs only.



Reference Calculations

ELD

i/ Cost of sales as quoted (includes employee costs which I remove):
FY2023: $2,716.576m - $284.649m = $2,431.927m (cost of sales, excluding employee costs)
FY2019: $1,280.242m - $177.163m = $1,103.079m (cost of sales, excluding employee costs)

Distribution costs are removed, as below:
($2,431.927m-$370.478m) - ($1,103.079m-$234.105m) = $1,192.475m

ii/ Employee expenses: ($284.649m-$77.682m) - ($177.163m - $44.344m)= $74.148m
Note that I have removed administration costs from the declared employee expenses, because 'administration expenses' have already been accounted for. Note that 'Corporate Services and Other Costs' EBIT from the segmented result at Elders is an approximation but not equal to the separately quoted 'Administrative Expenses' figure (AR2023 p83).

iii/ Other operating expenses: $3.368m - $0m = $3.368m.
The listed other operating expenses appear to be one off transition expenses unrelated to the operational performance of the business. I have therefore ignored them.
For FY2023, I have reclassified the 'interest on lease liabilities' of $3.368m as part of rent (an 'other operating expense'). 'Interest on lease liabilities' was part of a change in accounting standards under IFRS16, which did not apply to the FY2019 year.

iv/ Net Interest (excluding lease liability interest): ($23.019m-$3.368m) - $10.771m = $8.880m



PGW

i/ Cost of sales less freight: ($722.849m-$14.925m) - ($579.280m-$9.851m) = $138.405m

ii/ Employee expenses less administration: ($137.561m-$12.052m) - ($123.137m-$9.016m) = $11.388m
I have removed the segmented non-operating expenses (see Segmented Results) from 'Employee expenses', as I have used these to represent administration charges that I have already accounted for.
I believe that administration expenses have been distorted over FY2019 because of seed division de-merger costs. I have therefore used the equivalent figure from FY2020.

iii/ Other operating expenses: ($54.590m+$3.800) - ($45.327m) = $13.063m.

For FY2023, I have reclassified the 'interest on lease liabilities' of $3.800m as part of rent. 'Interest on lease liabilities' was part of a change in accounting standards under IFRS16, which did not apply to the FY2019 year.

iv/ Net Interest (excluding lease liability interest): $5.036m - $6.879m = -$1.843m



--------------------------

As you can see, despite my inclusion of additional cost increase information, the tables still do not add up. But there is a reason for that. I haven't included any impairment adjustments, nor revaluation of forward exchange contracts. And in the case of PGW I may have double counted the increase in administration expenses by deducting the labour element of that twice (there is no way to know this as in the segmented results section, the labour element is not separately declared). Whatever, the point of the table was not to get the 'estimates' and the 'actual changes' in expenses exactly agreeing. Rather, the point was to put up the magnitude of changes in the administration and distribution costs, as highlighted by Elders, into a wider perspective against the changes in other costs.

It is quite clear that the rises in these 'other wider incremental costs' absolutely monster the rise in freight and administration costs at both PGW and Elders. The obvious question presents itself: Why did Elders bother singling out the changes is distribution (freight) and administration costs at all, given how insignificant they are in the 'bigger cost picture'?

SNOOPY

[Snoopy]

It is quite clear that the rises in these other incremental costs absolutely monster the rise in freight and administration costs at PGW and Elders. The obvious question presents itself: Why did Elders bother singling out the changes is distribution (freight) and administration costs at all, given how insignificant they are in the 'bigger cost picture'?

I think ELD have a different management mentality to PGW. The fact that Elders headline their profit announcement by reporting business unit 'gross margin' (that means business unit costs have already been deducted at the division level) suggests a 'core and satellite' style of management. By contrast, PGW is more integrated. This different approach may go back to the Dewdney days at PGW, where then CEO Mark Dewdney introduced the 'One PGW' vision. The vision of 'One PGW' was to use the reach of the PGW field representatives to refer clients, with needs outside of the representatives immediate sales responsibility, to other members of the PGW team who could help them. I did find it slightly ironic that after 'the Dewd' left 'One PGW' quickly became 'Two PGW' with the sale of the seed division. But no doubt the cultural change in the PGW team that remained was embedded by then.

Going back to the original post in this series. -5494-, I think PGW comes off quite well by comparison. EBIT has risen more than administration and distribution costs for both protagonists. But EBIT has risen far more relative to those cost rises at PGW. That could mean less senior staff with roles not directly connected to the productivity of the business at PGW (there aren't a lot of people at PGW looking for businesses to acquire is an example). It could mean more farmers coming to pick up their purchased goods at their own expense. Whatever the reason, it is good news for PGW, over this four year study period at least.

But now some comment on the other cost metrics, the costs that are far more significant but not highlighted by Elders. All the comparisons are from the full four year period under study, using information from post 5498:

Incremental Revenue/ Incremental Cost of Sales

ELD: $1,192m/$1,165m= 1.023 or + 2.3%
PGW: $176.9m/$138.5m= 1.277 or + 27.7%
The higher the increase in the sales, compared to the increase in costs, the better: A win to PGW.

Incremental Cost of Sales/Incremental Employee Expenses

ELD: $1,165m/$74.15m = 15.7
PGW: $138.5m/$11.39m = 12.2
The lower the increase in cost of sales outside of the increase in employee costs the better. It means the increase in pay, or the creation of new employee positions,has been worth it. The 'greater expertise' which the company is paying for is 'paying off' - by minimising other cost increases in the sales process. A win to PGW here, although there is not much in it.

Declared increase in profits/Increase in Interest Bill

ELD: $267m/$8.880m = 30.1
PGW: $31.402m/$1.843m = 17.0
There is nothing wrong with increasing the borrowing within your business to expand your retail footprint and hence profits. But the higher this number, some might say the wiser your expansion strategy has been. A win to ELD on this metric

Change in summed operating expenses/Increase in admin and distribution expenses

ELD: $1,269.991m/$170m = 7.47
PGW: $162.856m/$8.110m = 20.1

Note: Summed operating expenses are as follows:
ELD: $1,192.475m + $74.148m + $3.368m = $1,269.991m
PGW: $138.405m + $11.388m + $13.063m = $162.856m

This last statistic, a win to PGG Wrightson, is consistent with my 'hub and spoke' management theory. Namely that Elders has a strong head office core. Whereas in the case of PGW a lot more of the direction of the company is left to decisions made by trusted managers at the company branches. Yet even at Elders, incremental cost increases at the branches dwarf increases at head office and distribution costs by more than seven times.

The only way I can make sense of Elders highlighting administration costs is that they are not really connected to the day to day branch operations and that distribution costs are largely outside of the control of the company. Thus such costs should not be layered onto individual business divisions, when assessing the efficiency of those divisions in operation. That means that Elder's decision to highlight the administration and distribution was perhaps because those costs had 'fallen out of the cost tree', yet still had to be listed and accounted for 'somewhere'. Listing A&D costs as a group wasn't necessarily the result of a decision that listing administration and distribution costs as a separate and combined declaration was a good idea.

For PGW investors, it is nice to know that 'our' company is being more efficiently administrated than Elders, even if it took unfavourable comparative declarations, highlighted in the Elders reports, for us to find this out!

SNOOPY

[Snoopy]

The following commentary piece was written on 23rd October 2023:

"While some parts of the rural sector are recovering from last summer’s cyclones there is also concern about the potential for drought conditions in the coming months due to El Niño weather patterns. Demand in key export markets has declined. These factors combine to hamper confidence and reinforce cautiousness as farmers and growers anticipate the impacts on the profitability of their business operations."
"Although the sector faces a challenging year, this is nevertheless balanced by strong medium to longer-term fundamentals. We expect to see improvement as the economies of our key export markets recover. The global population and demand for protein is projected to show continued growth and the fundamentals for the agri-sector remain sound."

Another commentary piece came out on 13th November 2023 and read like this:

"FY24 brings the potential for declines in summer crop production outside of irrigated areas, as result of dry and El Niño conditions. However, some margin recovery in Rural Products can be expected as input prices, particularly fertiliser and crop protection, have returned to more sustainable levels."

"The outlook for Agency Services anticipates growth in cattle and sheep volumes, underpinned by currently high national herd and flock numbers, and production. Cattle prices are forecast to increase in the medium term as export prices rise in line with the anticipated US herd rebuild, while lamb and mutton prices are forecast to remain subdued. Wool prices are expected to remain steady"
"In Real Estate, continued challenging market conditions may place further pressure on cropping land turnover. Interest rate pressures may also see potential for subdued demand for regional residential properties."
"Financial Services expects to see continued uptake of livestock funding products."
"We expect some of the market headwinds experienced in FY23 to continue into FY24, but we are well placed to pursue opportunities."

The interesting thing is, one of these commentaries came from the top brass at PGG Wrightson. The other, from the top brass at Elders. I don't think anything significant happened in agricultural sector regionally between these two reports coming out. So we are ostensibly talking about the same market in both outlooks. But one report has a rather more downbeat outlook on the near term than the other. Which company issued which outlook report? Can you guess?

SNOOPY