Wrightson - Allan Freeth

By Jenny Ruth

Thursday 6th November 2003

Rural services company Wrightson reported a 13% drop in net profit to $18.5 million for the year ended June, but the company says the previous year was "exceptionally buoyant" and that this year's result was dragged down by shrinking commodity prices, the higher New Zealand dollar and volatile weather conditions.

Nevertheless, the company says its underlying performance was strong and reflects its moves to reduce its exposure to both currency and commodity price cycles towards more sustainable earnings.

SC: What sort of allowance in terms of business planning and risk management does Wrightson make for unforeseen natural crises and risk factors for agricultural business such as an outbreak of foot and mouth disease?

Managing director Allan Freeth: The first issue is we have a series of insurance policies in place, one obviously around business disruption. There are a number of other insurance policies to mitigate that type of crisis. We have very comprehensive insurance and disaster contingency planning in place, covering both livestock and financial matters. With a foot and mouth outbreak, we would see a huge number of organisations not wanting to pay anyone else. We've been testing that with MAF (Ministry of Agriculture and Forestry) lately. With no debt on the balance sheet, our risk is reasonably low anyway. We had a scare about one-and-a-half or two years ago - (MAF has about two or three scares a month, but very few of those come to the public's notice and very few come to our notice - in Te Kuiti where our contingency plan was instigated. - It was a false alarm.

SC: What sort of impact on business would a complete ban on GE crops have on Wrightson's future prospects?

AF: That's quite a hard question. How long is a piece of string. The short-term impact would be minimal. The long-term impact is one we've been reasonably vocal on. There would be a wider industry impact - that is, the loss of scientific knowledge out of this country, which is a real issue, and the ability to compete, particularly in other markets where GE is pretty much universally adopted at the farmer level - I'm thinking the US, South America and, to a limited extent, Australia. Over a five to 10 year period, our ability to compete against other countries and other companies which develop solutions to high levels of pesticide, salinity and drought tolerance - that's when the impact would be felt by a company like Wrightson, particularly in the seeds area.

SC: What would be the impact if GE is widely adopted and then later discredited?

AF: That's one that's exercised our minds quite considerably. We consider it a reasonably low probability, given the ERMA regime and given the generally high quality science that's involved. Wrightson intends to manage it so we will have both non-GE and GE products. Whether they're sold in New Zealand is another thing.

SC: There's nothing to stop your non-GE science activities from continuing or from continuing GE work in laboratories is there?

AF: That's right, but the biotechnology community, like any business community, depends on ongoing investment. People make an investment based on the fact that they expect to see a return. In our company's case, the potential that the GE moratorium wasn't going to be lifted was a significant factor in considering whether we would continue to invest. Our company wouldn't have invested money into Genesis (it bought a 15.4% stake in March) or into the continued development of grasses. Genesis is heavily involved in a series of collaborations to do with genetically modified trees that have less lignum in the wood - Arbogen (a Genesis partnership) has genetically modified tress growing in South America. Whether they will ever bring it out of the laboratory and commercialise it is another issue.

SC: Will Wrightson risk over-diversifying into other areas, or will its core business focus remain?

AF: Our core business will always be agriculture. The issue is what are the businesses around that that we can build both shareholder value and meet farmer's agricultural needs. Will we ever be a city-based merchandiser, no we won't. Will we buy transport companies, no we won't. Our core focus will be on our core areas of competence.

SC: You said at the AGM that the core of the company's strategy is its people. Why are there so many of the senior management team departing the company? (Recent departures include chief financial officer Simon White, business services general manager Josie Swan and rural services general manager Crosby Spooner)

AF: Most of those people in senior management have been around for a long time. The nature of the business has changed. Simon and Josie's departures centred around the merging of the two roles. Josie's job was gone and Simon decided he didn't want the expanded role. General finance is a new position. We're very excited about bringing new people into the business. We're at a new stage of our development and we're well-placed to look ahead. We've brought in Philip Abraham (to head the rural supplies business, replacing Spooner) to bring some true retail experience into the company that's desperately needed. We want a much different focus to the role he (Spooner) held - he had much wider responsibilities. We've been quite upfront and honest about rural supplies' problems. There are two major reasons. The current economic and climatic environment isn't conducive to farmers spending large amounts of money on merchandise. Secondly, there are a whole series of management issues internally and what we regard as a lack of retail focus. He's (Abraham) been on board about four weeks and what he's already brought is observations about our business that are perhaps new to Wrightson - merchandising, return per square metre, the number of customers per square metre. For a company with its roots in the stock and station business, merchandising has been secondary. In supplier management, he brings a wealth of experience. We have high hopes around that business. (Abraham previously was retail and marketing general manager at the TAB and before that held various management roles within New Zealand Post, including heading its retail network.)

In reality, the change at the top level over a long period of time has been very minor. It's been a very stable team. Richard Wakelin (general manager of wool and livestock) is leaving for lifestyle reasons. He wants to go farming himself and to get out of the corporate world. We're very comfortable about that.

SC: Have you finished restructuring the company yet?

AF: It will never stop. No business will stop. Change is constantly happening, depending on the business. We've had a period of 12 to 18 months when we didn't change anything. Our solutions strategy requires flexibility. It's just a fact of the business environment. You don't want it to be disruptive to the business, but you also want to be flexible.
SC: The company's policy is to pay out from 60% up to a maximum of 80% of earnings in dividends. This year it paid out 84%. Is this just a blip? Are dividends sustainable at this level (equal to last year's payout)?

AF: The board gave very careful consideration to the level of dividends. The target range was set to handle a reasonably wide range of balance sheet structures with some debt, a much more optimum structure than we have at the moment. We're still looking at a return of capital or other acquisitions, but we've got plenty of capacity to invest without retaining earnings. What the board has signalled is a confidence in the ability of Wrightson to meet its target range and sustain the dividends it's been paying.

SC: How likely is a return on capital?

AF: We are looking at further investment rather than returning capital. The job of the board is to judge whether management can put forward (suitable) propositions. The board has to keep the full range of possibilities in mind.

SC: Analysts are suggesting the rural supplies part of your business is ripe for rationalisation, is that where you're looking to invest?

AF: That's certainly one very strong possibility, absolutely. The three big value-enhancing businesses in Wrightson for the future are seeds, merchandinsing rural supplies and finance. Our priority is for acquisition or strategic alliances or organic growth in those three businesses before other ones. There have been a number of comments about the need for rationalisation (of rural supplies). That's been pretty much on our minds.

SC: You've said your seed business in Uraguay is at last making a positive contribution, what was it?

AF: About $200,000 profit (compared with a $200,000 loss last year and a $1.2 million loss in 2001 when Uraguary was suffering both an economic crisis and a foot-and-mouth disease outbreak).

We're very positive about Uraguay and South America. I've just returned from there a couple of weeks ago. We're effectively about the only seed company left standing.

SC: What was the point of buying a 15.4% stake in Genesis Research & Development. While you have two board seats, that stake doesn't give you control and if you want Genesis to do research for you, you will still have to pay for it?

AF: One of the objectives Wrightson considers it has to have is a leadership position in key issues and in industry reform. Wrightson has publicly held the view that industry research and biotechnology research is in desperate need of rationalisation to provide value for companies like us. Government policy is difficult for commercial entities. There are a number of commercial entities trying to do similar things without much sense. We found our ability to influence those decisions were somewhat limited. We bought into Genesis to get more poker chips to play at the table when the rationalisation occurs, to gain a greater voice. Within two weeks of making that investment, I was contacted by every head of every research institute in New Zealand saying we should talk about what your (Wrightson's) intentions are. That game's still underway and it goes beyond delivering immediate shareholder value.

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