Jenny Ruth: Tarred with the Wrightson brush

COMMENT

When Wrightson announced it was having difficulties in its rural supplies and livestock divisions, fellow farming services and supplies company Pyne Gould Guinness shares were also clobbered.

That's probably not surprising, given that Pyne's annual report last month showed operating earnings from its farm-supplies business dropped 46.9 per cent to $2.6 million in the year ended June, its lowest result since 1999. The previous year's result had also shown a decline from $5.9 million to $4.9 million.

The report said this outcome "marred" its overall net result, which was slightly ahead of last year at $12.7 million.

It noted that just an average performance from the farm-supplies business would have led to the bottom line being considerably ahead of last year's.

But it still fared better than Wrightson, whose rural supplies business contributed only $3.7 million in earnings before interest and tax to the latest result, down from $8.4 million the previous year and $8.7 million in 2001. Wrightson's net profit fell 12.7 per cent to $18.5 million in the year.

Wrightson has the bigger network with 77 stores nationwide, while all but one (in Hawkes Bay) of Pyne's 43 stores are in the South Island.

Pyne wasn't so hard on its livestock business, even though its earnings fell 34.4 per cent to $4.1 million. It noted that stock values were down for much of the year, leading to lower commissions, but said that was offset by market-share gains. "While down on last year, the overall contribution to group earnings was impressive," the report says.

Both Wrightson and Pyne are trying to reduce their exposure to commodity and exchange rate cycles.

As Pyne's report puts it: "The company has made steady progress in recent years to mitigate the impact on earnings that can be caused by volatility associated within individual sectors of the rural economy."

The report gives reasons its farm-supplies business is doing it tough, including lower dairy incomes, the rising New Zealand dollar and margins coming under pressure from competition from new entrants.

Pyne's chief executive, Hugh Martyn, who has only just taken on the job, said the new competition was largely coming from fertiliser company Ravensdown entering the market for animal-health products and selling directly to farmers.

He said the company was making changes both to staff and systems within the farm-supplies business, which is being run by chief financial officer Kevin Winders while a search is under way for someone to run the division.

Martyn said he didn't know why the previous farm supplies manager left the company, and chairman Bill Baylis didn't respond to a call.

Last year's annual report shows the manager then was Alex Shultz, who had previously managed Reid Farmers' trading division before that company was taken over by Pyne in 2001.

Possibly Shultz was sick of being taken over - he had previously worked for the Southland Farmers Co-op, which Reid took over in 1997.

Wrightson has also recently replaced its rural supplies manager, opting for a man with retailing experience rather than a farming background.

Martyn said Pyne would not necessarily take the same route. "Ideally, the first requirement is somebody with broad management skills. The icing on the cake would be someone with experience in the rural sector and in rural retail."

Retailing experience on its own wasn't necessarily relevant. "The farm-supplies business is different in many respects from mall or city-type retail so not all retail is directly applicable. An understanding of how the rural community works is just as important."

An appointment shouldn't be too far off. Martyn himself has some farming-related experience, having worked for Skellerup as a corporate lawyer and then moving to running that company's rural and dairy divisions after completing an MBA. But changes to the division meant "we're starting to see positive effects, but it's hard going".

As far as the livestock division is faring, Martyn won't be drawn further than to say "it has continued to perform satisfactorily".

As with Wrightson, one of Pyne's strongest divisions is its seeds business. From earnings of just $651,000 in 1999, its earnings jumped 53 per cent to $5.1 million in the latest year. That's a similar pattern to Wrightson, whose seeds division contribution to earnings before interest and tax rose from $1.4 million in 2001 to $10.6 million in 2002 and to $12 million this year.

Martyn said that performance reflected the quality of the company's research being proven by its results which ensured a high degree of acceptance of its products.

Interestingly, while Wrightson has put a lot of emphasis on the possible benefits of genetic modification, Pyne has so far ignored that avenue of research. Martyn said that didn't reflect an anti-GM attitude. "We've just not been interested."

The major area where Pyne's results shine compared with Wrightson's is its financial services division. Its ebit rose 13.5 per cent to $5.2 million in the latest year and has shown profit increases in each of the last five years.

Wrightson sold its finance business to Rabobank in February 1998, a move widely viewed as made under duress, although it did allow the company to retire debt and to ensure its survival.

It is now moving back into that field following the ending of sale restrictions that had prevented it from providing anything other than short-term finance until this month. It earned $1 million in ebit from finance in the latest year.

"We're firmly of the belief that [finance is] a necessary part of the package," Martyn said. "Certainly, it's an important revenue provider for us."

He rejected suggestions that he might have mistimed joining Pyne when the rural cycle was turning down and saw the job as "a huge opportunity".

The annual report hedged its bets about the outlook for the current year with talk about "challenges". Nevertheless, it said the year had started "encouragingly" and that "present indications are that the results for the 2003/04 year will give further evidence of the sustainability of the progress we have made over the last two years".

One leg up will come from its irrigation and pumping business acquired in February this year. It contributed only $160,000 to ebit in the current year, but the annual report says it expects it to make "a significantly higher contribution than a pro rata estimate based on the period to this year's balance date would indicate".