Wrightson bears glad tidings in rural sector

By David McEwen

Friday 18th October 2002

Pundits were quick to assume the rural sector was heading for lean times several months ago as dairy incomes fell and the New Zealand dollar strengthened.

But when you look at the earnings of a company like Wrightson which sells product and services to farmers there is no sign of rural hard times. In fact, business is booming.

Net profit improved 98% to $21.2 million for the year ended June 30, 2002, on operating revenue of $669.3 million.

"It reflects significant improvements in the performance of the Australian and Uruguayan operations, where we increased revenues and cut costs," managing director Allan Freeth and chairman John Palmer say in the annual report.

These improvements outstripped the New Zealand operations, which generated after-tax profit of $18.1 million, up 7%. Also significant was the profit growth on revenues that actually went backward, from $705 million to $665 million.

This reflects improved efficiencies within the business and a focus on higher margin activities a key strategy. The report stresses the company is moving from an essentially commodity-driven, transaction-based business to a "customer solutions business."

A few years ago Wrightson began to realise it had to develop a more reliable, recurring earnings stream, as commodity sales were far too cyclical. The answer is not just to sell the farmer something but also to give advice, offer solutions to farming problems and charge for it.

For example, it provides energy auditing facilities, helps create "elite pastures" and supplies wool and livestock supply and marketing solutions. It takes an entrepreneurial stance, in some cases taking fees that are tied to crop yields. Wrightson expects that by 2005, this solutions-based revenue will produce 30-40% of group revenue.

As well as a new business model, the group has adopted economic value added (EVA) measures to define its success. This concept recurs several times in the annual report and the directors clearly take it seriously.

The methodology emerged as a new way of measuring a company's performance and was introduced after everyone started realising net profit doesn't tell shareholders a heck of a lot about their business.

In particular, net profit doesn't show whether the company is creating wealth or destroying it, because share capital is regarded as a free source of funds. EVA proponents demand all capital is changed against profits at the rate of return an investor could get in a financial investment. The company can then see whether it is earning a return above the cost of all the capital employed.

A sprawling global conglomerate such as Wrightson can gain a lot from EVA, which would indicate its true productivity. A graph in the report shows it has created wealth in the past two years but this is dwarfed by shareholder wealth lost in previous years.

The Wrightson annual report has a rugged charm, as befits a rural services company. The picture of Messrs Freeth and Palmer says it all: two windswept directors in fleece-lined jackets, squinting into the sun. No pinstripe suits on these two, although there was no escaping the ties.

The report is clearly laid out, however, with a good global perspective as well as accounts of its various services, which range from insurance to seeds to rural supplies and advisory services.

Those expecting bad news for the rural sector to have been postponed to the current financial year will be disappointed by Messrs Freeth and Palmer's conclusions: "We have a positive outlook for New Zealand's rural sector for the next 12 months and, although we see a significant decline in incomes for dairy farmers, and to a lesser extent, sheep and beef farmers, the outlook is positive relative to average incomes during the 1990s."

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