Forum Archive Index - October 2000

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

>
>
>Wrightson's report was one that also grabbed my attention, 
>but I was quite disappointed to see the emphasis on 
>"providing customer solutions" - which expression was 
>peppered through the Chief Executive's report - but 
>virtually no specifics as to how shareholder value was 
>going to be restored and when the long-suffering owners 
>could expect to receive a decent  return on their  
>investment.
>
>
Veritas!   How dare you criticize WRI for not disclosing how 
they are going to improve their performance.  You know that is 
commercially sensitive information! ;-)

On more detailed reading of WRI's Statement of Cash Flows, and note 
16, I am wondering if WRIs 'improved result' has involved some 
mirror work.

I note that the cash flows from continuing operations has gone *down* 
by 10% since last year, despite sales being up 20%!

How could this happen?  

If you look under note 16 in the Annual Report:

'Reconcilliation of Surplus (Loss) After taxation with Net cash Flow 
from Operating Activities' 

then, you can see that inventories have increased by $8.7million.  
We'll allow them that.  You can't sell goods if you haven't got them 
to sell, although I would have thought that perhaps some more 'just 
in time' computer inventory management improvements might keep stock 
requirements low.

I also note that accounts receivables from customers have gone up by 
$14.3million (previous year down by $10.59million), and WRI have paid 
out $8.4million more to their wholesale suppliers in 2000 vs $3.75 
million more in 1999.

I further note that the provision for doubtful debts has gone down by 
$795,000 (after having increased by $1.419 million in 1999).

So what do all these figures mean, and why have I mentioned them? 
 
Having more stock on the shelves, paying your wholesalers for more  
stock before it is sold and reducing your doubtful debtors are all 
actions to take on the *promise* of better future profits and cash 
flows.   This is not the same as *actual* operational profits and 
cash flows having improved.  In other words I think the 
current results have a certain amount of 'hype' built into them.

Now, as an exercise, let's reverse these key assumptions and see what 
happens.  

Bad debts keep being incurred as per last year (cash flow 
decreases by 1.419--0.795=$2.214million) and farmers buy their extra 
stuff from other suppliers, not Wrightsons, (accounts receivable 
decrease by 14.282+10.591=$24.873million), so correspondingly when 
Wrightson's realizes they are not selling as much as planned, the 
amount that must be paid to wholesalers also decreases to 
(8.418-3.752=$4.647million).

The net effect of those three factors is a decrease of cash flow (by 
24.873+2.214-4.647) which comes to a loss of cash flow of 
$22.44million per year.  

In other words, WRIs 7.5million dollar profit from last year is 
actually a 7.5-22.94= a $14.94million dollar *loss* if the WRI 
directors future predictions are 100% wrong.

This is an extreme counter-example.   I don't think Wrightson's 
management is that poor in their predictions.  But it does show that 
Wrightsons has a certain vulnerability if it doesn't get its stock 
and debtor levels right.  I would argue that Wrightson's management 
don't have the runs on the board yet, to make me confident about 
holding WRI shares long term.
>
> 
>It is staggering how a company of such relatively
>small size is employing so many people on salaries of excess of
>$100,000. I'm afraid that too many N.Z. companies seem to see
>themselves as existing primarily to fill the pockets of management
>and directors. I would sooner see less glossy pictures and more
> emphasis on maximising shareholder wealth.
>
>
You are obviously just jealous Veritas! ;-)
 
I count 60 people on $NZ100,000+ salary packages on total 
company revenue of $NZ600million in the WRI annual report.

If you compare that with Ridley Corporation an Australian 
agricultural product retailer with sales of $A986.5million they have 
only 28 staff in that $A100,000+ pay band.

If Wrightson's reduced the number of high paid staff to more 
realistic numbers, the net profit of the company, and return to 
shareholders would go up by over 40%!

The rot carries through to Board level where 8 directors are deemed 
necessary for Wrightsons, where Ridley only needs 6.  

And it seems that in the case of one of the new directors (Maurice 
Loomes) the small shareholders do not get a vote, or any say, on his 
appointment.  Now I know that, in reality, the voting 
in of new directors becomes a 'fait accompli', as small 
shareholders are always block outvoted by larger ones.   Maybe the 
Wrightson directors have just recognised this and dispensed with the 
voting process entirely?     

On a 'turnover' to 'senior management fees' ratio, it looks like 
Wrightson's management only expect to have to work half as hard as at 
least one comparable company overseas.   I can't shake the impression 
that WRI is not a company run for the shareholders and I don't think 
"she'll be Wright-son" is good enough. SNOOPY

disclosure: Wrightson's shareholder, maybe for not much longer :-(







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