Wrightson Annual Review 2005

Wrightson

ANNUAL REVIEW 2005
(12 months to 30 June 2005)

OVERVIEW

The 2005 financial year was highlighted by a series of major strategic initiatives to simplify and grow the Wrightson business.

The earliest priority of the new Board and management team was to renew the company’s focus on the needs of clients and to make our business “easy to deal with.” This brought a number of changes to simplify administration and maximise decision-making by front-line staff.

There have also been significant changes to the business portfolio, with two key objectives – to simplify the business and establish a platform for growth. The largest initiative undertaken during the year was the merger with Williams & Kettle Limited following a takeover offer concluded in March 2005.

The comprehensive programme required to integrate the two companies began immediately after the acquisition and was substantially complete by the end of the year. It is a measure of the programme’s success that relationships with clients have not been disrupted. The merger is now having a positive impact on financial performance.

In the final quarter of the year, Wrightson entered into discussions with Pyne Gould Guinness Limited that led to a proposal to merge the two companies by way of a court approved scheme of arrangement. This was announced a few days after balance date.

These major initiatives were founded on Wrightson’s strong view that rationalisation is required amongst the many entities involved in rural services – to improve the industry’s economics and provide a better base to assist farmers to improve profitability and productivity. Further comments on this theme are made below.

OPERATING REVIEW

While much time was spent by the Board and management on strategic initiatives, Wrightson was still able to keep its focus on performance.

Net profit after tax (NPAT) was $20.5 million, compared with $10.3 million in the previous year. The 2005 result included a number of one-off or non-recurring items with a net positive impact of $4.0 million. These comprised gains on disposal of the Insurance, Potato and Forestry Services businesses, offset by items related to the Williams & Kettle acquisition, restructuring costs, discontinued operations and a loss on sale of the Genesis Research and Development Corporation shareholding. One-off items totaled negative $2.4 million in the previous year.

The New Zealand operations contributed NPAT of $16.9 million, compared with $7.7 million in the previous year. NPAT from the business in Australia was $3.0 million, compared with $2.1 million previously; and from South America $0.6 million, compared with $0.5 million.

Wrightson has declared a fully-imputed final dividend of 10.5 cents per share, to be paid on 15 September 2005. With the interim dividend of 3.5 cents per share, total dividend for the year is 14.0 cents per share. This compares to 11.5 cents per share for the previous year.

Operating conditions were generally comparable with those prevailing during the previous year, with continuing strength in commodity prices driven by strong demand for most agricultural products. This helped offset the high value of the New Zealand dollar.

International dairy product prices reached near-record levels. Overseas beef prices increased, partly due to the discovery of BSE in cattle in North America, and New Zealand was able to supply more beef to the Asian markets because of their ban on imports of North American beef.

Lamb production rose, and this is expected to continue in the short term due to ongoing productivity gains. United Kingdom lamb prices were at record levels because of reduced domestic supply and prohibitive above-quota tariffs on non-EU exporters. The average auction price for wool fell because of the exchange rate.

The deer industry continued to wait for improvement in both venison and velvet prices, which have been at low points for several years. In arable farming, cereal production was strong and prices were reasonable.

Climatic conditions had a mixed impact, with a difficult Spring for many farmers being balanced by good summer harvest conditions.

Operating revenue increased from $638 million to $692 million, including four months revenue from Williams and Kettle.

Earnings before interest and tax (EBIT) were $29.1 million, compared with $16.5 million in the June 2004 year. Most business units improved their financial performance, and there were particularly strong results from Livestock and Seeds. With the four months’ contribution from Williams & Kettle, the year-on-year comparison is not on a like-for-like basis.

Earnings from Rural Supplies were affected by a reduction in margin on fertiliser sales as intense competition affected prices. The Finance result reflected the investment in people, products and systems required to re-establish and grow the business.

Group earnings benefited from a range of initiatives to reduce overheads and improve efficiency in internal processes. These included the disestablishment of the Solutions business unit, the restructuring of the Consulting business, a reduction in corporate costs and improvements in central processing.

Cash flow from operations was $17 million, compared with $9 million in the 2004 year. The increase was primarily a reflection of the rise in earnings and a positive movement in working capital.

Total assets increased from $255 million to $469 million following the acquisition of Williams and Kettle and growth in Finance Receivables. The increase was funded primarily through bank debt, which increased to $114 million at 30 June, and a bond issue in Wrightson Finance. With these initiatives in mind, new bank funding lines were established during the year and these are in excess of current requirements.

Shareholders’ Equity is strong at $151 million, up from $110 million last year, reflecting the improved profitability, the revaluation of land and buildings to market values and the issue of additional shares during the year.

Changes in the business portfolio included the establishment of a new insurance partnership with Aon New Zealand to improve the range of products and services offered to rural clients, and the restructuring of Wrightson’s approach to Research. Three major initiatives were taken in the Research area – the sale of the Genesis shareholding, the establishment of a new trans-Tasman partnership, and a substantial investment in a new venture fund focused on food and agriculture life sciences, with Nestlé and other investors.

The Potato business was sold during the year to two former principal employees. The Forestry Services business was sold to PF Olsen and Company Limited, New Zealand’s largest independent provider of forestry management and consulting services. The Solutions business unit was discontinued, and the Consulting unit absorbed into District operations.

The company further increased its focus on the industry-wide issue of recruitment and retention of talent. The 10 cadets taken on in the previous year were successfully introduced to the business through a programme mixing classroom and practical disciplines. A further 10 cadets are being recruited in the current year. An increased commitment and focus saw various parts of the business increase their provision of specialised in-house training.

Business unit performance

EBIT from Livestock and Wool increased from $5.2 million to $8.5 million.

The Livestock business performed strongly, with increases in tallies and prices. Average beef schedule prices were up 17 percent over the year, while those for sheep were up 12 percent.

The Livestock business saw the completion of the Rangiuru Liveweight Selling Centre – the final step in a project to upgrade nine saleyards around the country. Overall market share increased, with a 14 per cent rise in sheep and cattle numbers sold.

The strong New Zealand dollar affected wool prices negatively, producing flat results for this business. The late start to summer delayed the start of shearing, but bale intake was strong in the second half-year and was up by 1 percent year-on-year.

The New Zealand Wool Handlers joint venture established with Pyne Gould Guinness in 2004 performed well in its first full year of operations. NZWHL is looking to introduce new handling practices in the current year to increase efficiency.

The New Zealand Merino Company Limited, which is 35 percent owned by Wrightson, contributed $138,000 on an equity accounted basis, compared with $111,000 in the previous year. Wrightson supported the industry initiative to move the sale of New Zealand fine wool to auctions in Melbourne, which was completed in the first half of the year.

EBIT from the Seeds and Grain businesses increased from $11.9 million to $16.5 million.

Earnings from New Zealand Seeds were steady. The company’s proprietary ryegrass ExtremeTM, the world’s first commercially available ryegrass containing the novel endophyte AR6, built on its introduction to the market. Good sales of ExtremeTM were achieved, with the multiple agronomic benefits being recognised by farmers. The launch of the Pasture PartnersTM campaign provided a catalyst to raise farmer awareness of the economic and farm benefits of pasture renewal.

The Australian Seeds business lifted earnings despite a serious drought in the latter part of the year.

The business in Uruguay continued to build on earlier successes, with the introduction of summer crops during the first half of the year. Earnings were slightly higher than for the previous year.

The Grain business had a solid year, and produced a performance in line with expectations. The Potato business had slightly higher results during the period prior to its sale.

EBIT from the Rural Supplies business was $1.6 million – $0.1 million higher than for the previous year.

Reduced fertiliser margins from increased competition in that part of the business continued to affect earnings. The company has made a number of changes to improve performance, including decentralizing decision-making and accountability and increasing the focus on sales and inventory management. A pilot programme in the Otago region has supplemented these changes with an expansion in on-farm representation, along with a higher marketing profile through catalogues, fieldays and other promotions.

New renovated stores were opened in Waipukurau, Ashburton and Helensville, and another will be added in Huntly early in the current year.

The integration of the Wrightson and Williams & Kettle store networks proceeded successfully. Twenty-two Wrightson stores in the lower North Island were rebranded as Williams & Kettle. Seven of the 12 duplicated stores were amalgamated on single sites, and the remaining five will be completed in the first quarter of the current year.

Lower returns in the pipfruit industry affected the Fruitfed stores, with some flow-on effect on merchandise and machinery.

EBIT from Real Estate rose by $0.3 million to $2.6 million.

The real estate business benefited from its focus on high-value rural property capable of attracting interest from both international and New Zealand buyers. Market conditions were generally buoyant, with strong domestic demand. High priority was maintained on improving business support systems, and on attracting high-performing agents with customised training and systems.

Four new sites were added during the year – in Cromwell, Tekapo, Rangiora and Havelock North. The focus continues to be on rural and lifestyle properties. Market share was picked up in a number of key regions including the Waikato.

EBIT from Insurance was reduced by $0.3 million to $0.8 million, excluding the profit on sale of the insurance business.

Wrightson and Aon New Zealand established a joint venture to improve the range of insurance products and services available to rural New Zealand. The joint venture embarked on a development programme focused on transferring customers to the Aon operating system, creating a growth strategy, and establishing joint advertising and promotions.

EBIT from the Finance business increased by $0.2 million to $0.8 million.

The re-establishment of the Finance business continued, with emphasis on the recruitment of senior managers, product development and the upgrading of administrative systems.

Deposit-taking was established during the year, and a $45 million secured bond issue was completed. The loan book was increased from $17 million to about $60 million, with $20 million of the increase resulting from the Williams & Kettle merger. The company also established transaction banking and made initial preparations for the introduction of internet banking during the 2006 year.

Within the other businesses in the group:

Agri-feeds, the group’s animal feed supplements subsidiary, had steady earnings. Delayed spring growth conditions put pressure on volumes in the molasses market, but margins were steady across the business.

Agriculture New Zealand Training lifted its earnings slightly due to increased demand for training services and the success of initiatives undertaken with Telford Polytechnic and the Farmsafe consortia.

The Forestry business earned a loss prior to its sale.

PROPOSED MERGER WITH PYNE GOULD GUINNESS LIMITED

On 5 July 2005 Wrightson and South Island-based rural servicing group Pyne Gould Guinness announced their intention to merge to create PGG Wrightson Limited.

The objective behind the merger proposal is to establish a company that can deliver a new level of performance to farming clients, making a positive difference to the profitability and sustainability of their businesses. A strong national rural servicing business will be in a better position to achieve this than any of the businesses in what has been a highly fragmented industry.

The terms of the merger have been agreed unanimously by the Boards of Wrightson and PGG. A special meeting of shareholders – provisionally scheduled for early September – will be held to vote on the proposal. Shareholders will receive an Investment Statement and Prospectus providing detailed information on the proposal and on the business of the merged company.

OUTLOOK

Wrightson is well-positioned to improve performance in the current year, with benefits being realised from internal efficiency improvements, the refinement of the operating portfolio and the merger of Wrightson and Williams & Kettle.

Operating conditions for the coming year are difficult to predict. At this stage rural commodity prices remain generally strong, being helped by the recent decline in the value of the New Zealand dollar from its historical highs. Climatic conditions will always be a factor, but the spread of businesses and wide geographic presence of Wrightson reduces such risks. The generally favourable economic climate for farmers in recent years has meant on-farm investment has been substantial and productivity improvements are expected to continue.

If the merger of Wrightson and Pyne Gould Guinness is approved it will take most of the 2006 financial year to complete. Synergy gains would be offset by one-off costs in the current year, and would have a positive impact on earnings from the 2007 financial year.

ENDS

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