PGG Wrightson posts steep 19% drop in first-half profit as farmers tighten spending

Wednesday 24th February 2016

PGG Wrightson posted a 19 percent drop in first-half profit as low dairy prices and fear of an El Nino drought contracted farmer spending at the rural services firm.

Profit fell to $16.1 million, or 2.1 cents a share, in the six months ended Dec. 31, from $19.7 million, or 2.6 cents, in the year earlier period, the Christchurch-based firm said in a statement. Revenue declined 4.8 percent to $623 million, while the cost of sales slid 6.9 percent to $462 million.

Farmers have tightened their wallets after milk processors like Fonterra Cooperative Group, the country's largest, cut their farmgate milk payouts below the cost of production as a global oversupply lasts longer than anticipated. Fears of an El Nino drought heading into summer also kept farmers cautious with their spending.

"Low dairy prices, and the perceived risk of drought from El Nino conditions led to more conservative spending from PGW's farming customers in New Zealand," said chief executive Mark Dewdney.

Wrightson said tough market conditions may mean its its full-year earnings will be pushed towards the lower end of its forecast range of $61 million to $67 million in operating earnings before interest, tax, depreciation and amortisation.

"While the sentiment in the dairy and sheep meat sector has deteriorated over the last three months, there is strong confidence in the horticulture-based sectors that will provide further opportunities for growth," Dewdney said.

Fears of widespread drought had receded following regular rainfall since the start of the year, although the company's livestock business will probably be hit by lower trading volumes in the second half of the year after fear of dry conditions prompted sheep farmers to process more of their animals in the first half, Dewdney said.

"Falling commodity prices have replaced El Nino at the top of the list of things attracting attention," he said. "Although commodity price movements have been mixed, the outlook for dairy prices in particular remains extremely challenging."

In the first half, profit at Wrightson's rural services unit slid 14 percent to $19.8 million as revenue declined 4.3 percent to $449.8 million.

Within the rural services unit, retail profit edged up 0.2 percent to $17.1 million even as revenue slipped 2.4 percent to $306.6 million as horticulture and its fruitfed businesses improved. However the livestock unit turned to a loss of $322,000 from a profit of $2.3 million in the year earlier period as revenue dropped 27 percent to $30.3 million due to a lack of live cattle exports. Domestically, higher cattle and sheep tallies offset a decline in sheep prices and dairy volumes, it said.

In the company's other main unit, the seed and grain business which operates in New Zealand, Australia and South America, profit slumped 30 percent to $3.7 million as revenue dropped 8.8 percent to $167.5 million.

"Our South American business has experienced a challenging start to the year with some very wet weather and falling soybean prices reducing demand for seed and ag chemicals," Dewdney said. "This was however offset by another strong result from our New Zealand seed business."

Wrightson will pay a dividend of 1.75 cents per share on April 5, down from a payment of 2 cents in the year earlier period.

Its shares dropped 1.2 percent to 41 cents. The stock is rated a 'hold' according to the average of three analyst recommendations compiled by Reuters.

BusinessDesk.co.nz

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