Farmlands Annual Report 2022
CONTENTS
Farmlands Annual Report 2022
CONTENTS
Our first digital report. We’ve changed our approach to make our communication easier to understand and simple to follow.
This is us now. This is how you will see us show up. We want to be more accessible, find more ways to get your ideas and feedback, and be honest and upfront as we make changes to the co-operative. We are building Farmlands for the future. Just as our founders did 60 years ago, we’re going to be doing things differently, learning and improving as we go.
Farmlands celebrates its 60th Anniversary in 2022. We were founded by small groups of visionary farmers in Outram in Otago and Esk Valley in Hawkes Bay, who came together believing there was a better and fairer way to source essential farm supplies.
The reason we are here has not changed – Farmlands is here to deliver essential farm supplies and services and create additional value for New Zealand farmers.
To be here for our farmers, we must continually look at how we can do things better. We need to be relevant, now and into the future to help ensure New Zealand agriculture continues to be successful. As a sector, we have never faced so much rapid disruption as we do right now – from farm ownership structures, land use, technology adoption, water reforms, carbon emissions and changing consumer behaviour.
We are an input provider helping farmers produce the best products for our local and global markets. How we operate our business, particularly doing the basics well, has an impact on our farmers. This means we must have the right products, available at the right time, in the right place, at a reasonable price.
COVID has sped up the pace of change and like a lot of businesses, we’ve had to adapt to a new way of operating. Recently, we have been looking inwards to ensure our foundations are strong. Our Braveheart programme was an example of this. We are now looking up and out. Over the last 12 months we have had to lift our team’s level of comfort with Farmlands becoming a more adaptable and flexible culture and business place. Just as our customers are adapting to changing regulation requirements and consumer demands, Farmlands must also adapt to ensure we provide you the support you need.
It has been an exciting time for Farmlands. Tanya, our CEO joined us, and she brought a new approach, perspective, and energy to the business. With the new leadership team in place, we are now more certain than ever with what we are here to do.
Farmlands is in a much stronger place now. Being able to deliver our first shareholder distribution in four years is proof of that.
Our plan now is to continue the work already started, with a clear focus on enhancing our delivery of customer needs and doing the basics brilliantly. We are a high volume, low margin business so efficiency and cost management are key. We need to be mindful of our operating costs so we can deliver the right price outcome to you, combined with providing you with the best people, delivering you the best service.
To be a successful co-operative, we all need to work together, to win together. I’m asking you to believe in us and your co-operative by giving us your support.
In closing, thank you to my fellow Board members, to our Farmlands team and to all Farmlands customers for your ongoing support.
Ngā mihi nui
Rob Hewett, Chair
ROB HEWETT
Chair
My first year at Farmlands has been one of significant change for the business, with much of this change being focused on our team and the way we do things internally. We have been ensuring Farmlands is best set up to support our customers.
Farmlands was built on a history of being a rebel, disrupting, pushing against accepted ways of doing things. We have awesome Farmlanders in our business. This year we have reminded them of our history, given them permission to challenge the status quo, do things differently and take a few more risks.
We have, at times, also needed to make some tough calls, for us to continue to be at the heart of our rural communities and to be a sustainable business for the next 60 years and beyond. This approach means that we are starting to better meet customer needs. It has also meant that we have delivered a positive end of year return for our shareholders, a fact our team are very proud of.
We know we need to lift our game and do things differently. We need to provide all the value we can to our customers, shareholders, and our sector.
We can only do a better job by changing how we operate our business – through better processes, smarter systems, helping our team see where they can add the most value and by delivering a consistently good customer experience.
I want you to know that we are going to be open about how we run our business – we operate in a low margin environment, our costs of doing business must reflect that. We now have a plan to get us there.
We will keep seeking your feedback and input as we make decisions that are best for all customers and our team. We have made some of these changes already – including paying our team better, exiting our Choices Rewards programme and introducing a new delivery service.
Our role is to support New Zealand agriculture, our core farmer customers are at the heart of this and are where we will return the most value. We must not ignore the opportunity provided by the growing number of lifestyle customers. While their needs and scale are different, they contribute significantly to our overall scale and our buying power. We will serve both and do it well.
With the plan we have in place, our awesome team, our expertise, and a strong focus on the future, we will keep building on this year’s result.
Thanks for the welcome many of you have given me in my first year. I have really valued the on-land invites and visits, the words of wisdom, thoughts, and ideas. I have absolutely loved my first year with Farmlands and look forward to meeting many more of you over the coming year.
Ngā mihi nui
Tanya Houghton, Chief Executive
TANYA HOUGHTON
Chief Executive Officer
(34% increase)
(9% increase)
(15% increase)
(14% increase)
*Including our fuel business
Pay improvement particularly for frontline teams
The culture of Farmlands is special. It’s important to us. We want our team to come to work knowing they are protected, supported, developed, and cared for.
We recognise that how we pay our team, impacts rural families and rural communities. It is important that they feel valued, and we pay them well. One of the first initiatives for this year, was to re-introduce our staff discount programme. We then undertook a review of our pay rates – particularly those of our front-line team members. This work resulted in a significant lift in our base pay rates, combined with a review across all Farmlands roles.
We have introduced the Your Share programme offering eligible team members at Farmlands the ability to share in a portion of our profit when our objectives are met. Creating an alignment where team members now share in the success of our customers and our co-operative. Given our strong result this year, we took the opportunity to surprise and delight our team and kickstarted Your Share early sharing a portion of 2022 profit across our team. Our team members will receive an equal share of $0.95m in Your Share funds which is just one way we are thanking our team for a huge effort in supporting our customers through a challenging year.
Flexible working helps attract and retain the best team members. It is also very important from a diversity and inclusion perspective, as it allows us to attract candidates with different employment needs or stages in their working life. Our Support Office environments offer flexible work anywhere arrangements.
We have also made the move to a flexible rostering system in our store network. In a tight labour market this has allowed us to expand our pool of potential candidates and we have seen a significant increase in response to our recruitment campaigns. It also provides greater flexibility for team members and a better customer experience enabling us to extend our store opening hours into weekend trading in over half of our stores nationwide.
We always want to look after our team and our customers, ensuring they feel safe. We also want our teams to feel healthy and well, whether at work or not.
The third year of the pandemic has created new challenges in this area – particularly as we dealt with large-scale community transmission. We followed all Government protocols to keep our teams and customers safe – which meant adapting to never seen before conditions such as vaccine mandates and mask wearing. The number of team members available to work was challenging at times and placed pressure on our branches and support teams to operate effectively. We needed to be smart about where we focused effort as a business to ensure we could continue to support our customers. We want to acknowledge and thank our teams for their efforts throughout the COVID pandemic. We are very proud of how they responded to what was a very difficult time for many people.
We continued to deliver, review, and improve our Critical Health and Safe Risk Programme. We took a structured approach to reviewing risks and implementing change programmes as required. One significant example of this was identification (through near miss and incident reporting) of unacceptable risk levels in our delivery methods, where we relied on field staff and trailers in branch. This information has been used to support an end-to-end review of deliveries and plans to shift to using professional, expert freight services.
The next steps in embracing diversity and creating an inclusive culture at Farmlands, revolves around our new values: Be You, Minds Open and See It Through. We see these as helping us to shape what makes us Farmlands.
Our identity is also being shaped and challenged through our Te Ao Māori journey. Te Whenua Tāroa is Farmlands te reo name, translating to The Enduring Land. Te Whenua Tāroa is also the name of our waiata – which also helps focus our Board, our leaders and our Farmlands team on the mahi (work) we need to do for our customers and our communities.
We believe that if we can look at what we do and how we do it through Te Ao Māori, it will help us authentically build a culture within Farmlands that we can be proud of. We know that we are only starting our journey and that change will take time. We are passionate to learn, engage and grow, and will be respectful and authentic.
We have recruited Farmlands’ first Māori Cultural Advisor to guide us.
We know that to be a successful and sustainable co-operative well into the future, we must embrace our role as guardian of the whenua (land) of Aotearoa and support our customers to do the same. The principle of manaakitanga (showing respect, generosity, and care for others) is equally important as we look to support the communities we serve.
Our approach to sustainability is how we deliver on these concepts by considering sustainable business practices across environmental, social and governance (ESG) activities and outcomes. We are in the process of establishing a Board ESG Risk Committee, and we are building our ESG team within Farmlands. The next step will be focused on helping our teams become better at considering ESG outcomes in their projects and daily activities.
We consider sustainability (particularly environmental – carbon and waste) in all our initiatives and programmes of work. We need to make decisions that are good for both our business and our environment – such as the establishment of Fern Energy, building a more efficient fuel network or changing how we manage freight as an organisation.
We are focused on reducing our greenhouse gas emissions by 30% by 2030. We also actively participated in broader national and industry sustainability conversations through:
Toitū undertakes Farmlands’ annual greenhouse gas emissions audit. Our latest audit (covering the period 1 July 2020 – 30 June 2021) was completed in November 2021. The result was a total carbon emissions reduction of 18% against our 2019 baseline. This is a further reduction compared to last year (12% against baseline) and means we are on target to achieve our 30% reduction by 2030 goal. We retained our Toitū carbon reduce certification.
In addition, we:
As a 100% New Zealand owned co-operative, we will always support New Zealand farmers and growers, while also considering how we have a greater positive impact on New Zealand agriculture. Without our farmers and growers being relevant and successful, then we don’t have a business, and ultimately New Zealand does not have a significant economy.
We know New Zealand agriculture is facing significant change – from environmental regulations, and rising interest and input costs. We are also seeing a significant land use change, including land being converted to forestry which impacts local communities. Farms continue to move to corporate ownership, and we are seeing growth in lifestyle blocks. Farmlands has a role to play in supporting our farmers through this period of change and disruption.
We are here for our farmers and growers to provide the vital inputs they need to be able to serve their customers, wherever they are in the world.
Over the last 12 months, we’ve talked to many of you about how Farmlands can serve you better. We know from these conversations that you need fair pricing, stock availability, easy ways to order and receive product and a higher focus on technical expertise. To look at how we can better meet these needs we are running a trial in our Canterbury province with a key group of our farmer and grower customers. In this area, you will see our technical field team show up a little differently than before. What we learn from this, we will adapt and look to apply to the rest of the country over the next year.
What we ask is for your ongoing support and belief in Farmlands, as a co-operative owned by you. Only by working together will we get this right and ensure that we maximise value returned to New Zealand agriculture in fair prices, rebates, shareholder returns and sector investment.
Our shareholder numbers have grown to almost 78,000 which is fantastic growth for our co-operative. We think about our shareholders in two main segments – farms and growers, and lifestyle property owners.
Lifestyle property owners have different needs to our farmers and growers. While not making a living off the land, they are passionate about living on the land and being connected to it. They are looking to Farmlands to support their life on the land with products and advice. We understand that lifestyle property owners bring additional scale that we can then leverage for the benefit of all our customers.
We also remain committed to our farmers and growers and lifting our support for them as we navigate these challenging times.
We are investing to better understand both our key customer segments through research and talking regularly with customers. We will find the right balance and have segment offerings and categories to meet the needs of farmers and growers and lifestyle property owners. This will play out in our retail network strategy over the coming years as we work to create models for our stores that suit specific communities and parts of New Zealand.
Understanding when you’re better off together than apart is another key to our success as a co-operative. If we know we can provide a better outcome to our customers by doing this, we will.
Establishing strong partnerships with likeminded companies is a strength of ours. We have over 1,100 suppliers of products into our stores and, ultimately, onto our customers’ land. Our Farmlands Card, backed by our network of almost 7,000 Card Partner locations, remains a unique point of difference and an important way that we provide value to our customers.
The challenge ahead of us is to reinvigorate our partnerships and find ways to make sure these deliver even more value. This means strengthening some partnerships and establishing new ones.
We have made a significant change to our fuel business by joining forces with Southfuels to establish Fern Energy. This new joint venture fuel business was established shortly after our 2022 balance date. It is aimed at providing better service and a more sustainable business during a time of significant industry change.
Fuel is critically important to customers and partnering with a dedicated fuel management team such as Southfuels, brings valuable expertise to the business. The increased scale provides opportunities for efficiencies (commercial and environmental) that benefit customers.
Through our retail network, we have 82 stores across Aotearoa and reach into even more communities through our technical field teams and the farms we serve. Over 1,000 Farmlands employees live in regional and rural New Zealand and are passionate about their communities and ensuring that Farmlands gives back.
This year we introduced a new programme to support these communities, Tag Your Charity, that supported shoppers in our stores to donate to a national charity or to a local charity selected by store staff. The national charity we supported was the I Am Hope Gumboot Friday Fund.
Last year, through Tag Your Charity, we raised $170,000 which was distributed to 80 charities nationwide. Tag Your Charity will be back in our stores in December 2022.
We also continue to support a range of other community causes and community initiatives, including:
We know we need to balance all the ways we provide value to our shareholders. First and foremost, we work to always provide competitive and fair product pricing to support all customers who shop with us.
The monthly rebates provided through the Farmlands Card and in-store purchases is the most significant and regular way we reward our shareholders for their support and loyalty. Our rebates help shareholders to reduce their input costs and manage their business cashflow. We delivered $94.3m in monthly rebates during the year – an increase of $5m compared to last year and an average of more than $1,200 per shareholder in total rebates. In addition, many shareholders also benefited from exclusive discounts through Card Partners.
We also know that it is important to pay an end-of-year profit distribution back to shareholders, and this is reflected in much of the feedback we received. An end-of year distribution demonstrates that we are a profitable cooperative and being profitable makes us strong.
Farmlands is paying an $11.9m (gross) profit distribution, which means $8.6m is being returned to shareholders after tax. This is the first time we have made a distribution since 2018. This distribution is notable as it has been achieved in another year disrupted by COVID and in one where we are making change, so it demonstrates the potential of Farmlands to generate sustainable, improved returns in the future.This distribution is being allocated to shareholders based on annual spend (between 1 July 2021 and 30 June 2022) across key product categories of rural supplies, bulk fuel, fertiliser, bulk nutrition and purchases on Farmlands Card. It will be provided as bonus shares or cash paid as a statement credit.
To receive a distribution this year, shareholders need to have purchased sufficient product to have generated a distribution of $200 or greater. This means approximately 11,000 farmer and grower shareholders will receive a distribution this year and ensures the $8.6m is being returned to support New Zealand agriculture.
Being profitable also allows us to reinvest in our business for future growth, to respond to a changing operating environment and market, to consider options to leverage our scale and to get better prices for our customers. It is important that we maintain enough capital to operate effectively through any year, that we provide a shareholder distribution and rebates throughout the year, and that we continue to invest in New Zealand agriculture whenever we can.
Our strong financial performance , which has supported us to pay a profit distribution, was built on a combination of good gross profit growth and tightly controlling operating expenses. For the group (including our fuel business) operating costs as a percentage of revenue improved by 1%. This was despite an operating environment where we faced significant inflationary pressure.
A like-for-like comparison with last year’s performance (with our fuel operation included) shows the total group revenue was $1.25b (an increase of 15%) and total turnover was above $3b for the first time. Our group net profit before tax and rebates was $17.1m (compared to $12.8m the previous year) and our group EBITDA (earnings before interest, tax, depreciation, and amortisation) was $51m (a 9% increase). The total number of Farmlands shareholders also grew by 2,443 to 77,843.
Our group performance for 2022 was made up of our ongoing operational performance and our fuel business (which is now part of the new joint venture company, Fern Energy), as outlined in the table below. A summary of our operational financial performance, as per our 2022 Financial Statements is also available below.
| Continuing operations 2022 |
Fuel operations 2022 |
Group result 2022 |
Group result 2021 |
|
| Reference | Income Statement | Note 23 | ||
| Turnover | $2,590.4m | $457.8m | $3,048.2m | $2,679.4m |
| Revenue | $787.8m | $457.8 | $1,245.6m | $1,082.9m |
| Operating EBITDA | $40.2m | $10.8m | $51.0m | $46.9m |
| Net profit before tax | $8.6m | $8.5m | $17.1m | $12.8m |
2022 was a growth year for Farmlands, which resulted in a strong performance despite the impacts of COVID restrictions and ongoing global supply chain challenges.
In July 2022, we agreed the sale of our fuel distribution business to a new entity with Farmlands owning 50% as a joint venture. As a result of the sale, our numbers now show our fuel business as an asset held for sale rather than as part of our ongoing operational business, requiring a restatement of our 2021 financial statements to accurately compare year-on-year performance. The operational financial position set out below, therefore, excludes our fuel business.
We delivered as increased net profit (before tax and rebates of 48.6m, up to 172% on last year’s $3.2m. Our EBITDA was $40.2m – an increase of $4.9m against last year’s $35.2m.
Revenue increased by 3.8% to $787.8m, driven by increased trading and with margins broadly in line with last year. Gross profit showed a 6.8% increase compared to the previous year or $10.8m year-on-year growth, with a slight increase in gross profit as a percentage of revenue from 20.8% to 21.4%. This was due to inflationary factors such as freight and storage.
Operating costs increased by $5.8m, largely driven by inflation and continued investment in our team. We focussed on driving operational efficiency and costs out of the business, despite the inflationary environment, via an organisation wide programme. This is reflected in our operational expenses remaining stable as a percentage of revenue and without this focus on cost management, we would have a greater increase in operating costs.
A change to New Zealand and international accounting standards relating to the capitalisation of Software-as-a-Service (SaaS) resulted in the need to re-categorise the investment in our Enterprise Resource Planning (ERP) replacement (Braveheart) programme. This has had a significant impact on the presentation of our financial numbers and required a further prior year restatement. Full detail on this can be found in our full Financial Statements in note 2.3y on pages 12-14.
We generated strong cashflows from operating activities of $45.3m, and after investing and financing activities this is reflected in a $21.7m decrease in working capital borrowings and a core debt reduction of $3.0m from last year.
We are forecasting similar operational performance in the next two to three financial years as we continue to invest back into the business to set us up for the future growth and long-term improvements in EBITDA, net profit, and shareholder distributions.
This year’s full Financial Statements can be downloaded as a separate PDF.
Supporting each other is also about talking and listening to learn and shape the business, the products and services, and the value we deliver. We have introduced our new Over the Fence shareholder panel, made up of 600 volunteer shareholders. We will continue to ask this group about new business ideas and gain feedback on how we do things.
You can join the Over the Fence panel here.
We will also continue to measure our success by asking our customers how they feel about us. In 2022 we were still operating within a COVID pandemic environment and facing impacts, such as lockdowns and protocols, and global supply chain challenges. Through this time, we remained focused on delivering to our customers. This was highlighted by our ability to maintain a +58 Net Promoter Score.
A co-operative is a unique business model; one which is built on principles of trust, transparency, equality, and equity. A change in leadership brought new perspective and we took time to truly understand if this is how our business was operating. The answer was, in some instances “no”.
Our customers have clearly told us that they need to trust us. This means no hidden costs and providing fairness and value to all. Historically we have provided some services and add-ons that have only been used by a small portion of our customers.
Our Choices Rewards programme was one of these. It was clear that not all our customers were being rewarded by this programme and it was driving increasing cost into the business. For this reason, we have closed Choices, as this is in the long-term best interests of all our customers.
It is still important to us that we reward our customers’ loyalty. Our approach now is to do this by getting the basics right – product, price, and service. We are also using our Over the Fence panel to understand how we can build on this over the next 12 months.
Feedback from our customers and team also created a change for our delivery experience. Historically, approximately 10% of our customers have been utilising our free delivery service, meaning this service was subsidised by all customers. Adding to this was the increasing risk of injury to our team members who were delivering by trailer out to farms. Change had to be made and we will be doing this in two parts:
Stage 1: We have introduced a new part recovery delivery fee structure for customers who choose to have their orders delivered – whether they purchase online or in-store. We are being completely transparent around this delivery cost, there are no hidden charges or mark-ups. Our customers can now make more informed choices around how they receive their products.
Stage 2: All of our deliveries are now tracked, this visibility along with demand and increase in scale means we can now work harder with our transport providers to ensure you are getting a cost effective, efficient and sustainable delivery service.
2022 was focused on resetting our business strategy and laying many foundations for change. 2023 is about delivering on the commitments we have made, ensuring we achieve our operational excellence and improving on our customer experience and financial objectives. We have a clear and simple plan to achieve this.
We will focus on how we start to improve experience for our key customer groups – core farmer and lifestyle.
We will support our customers through price, dividends, and our investment in the sector from expertise to the development of industry talent.
We will grow our lifestyle offering through product and ranging – to drive even greater scale and better margins that we can reinvest.
Our number one priority is our supply chain transformation – what we buy, how we buy, how we store products and how we get them to our customers. Through this multi-year programme, we will realise tens of millions of dollars on an annual basis in increased revenue, reduced costs and more effective management of shareholder capital.
Opening our new store in Ashburton in November, our first new store in seven years, is an important step. It is our first test and learn location where we can design a future retail network that will meet our customers’ needs, see how they interact with it and consider what that means for future stores.
We are focused on increasing our team’s job satisfaction through focusing on their development, increasing efficiency, and removing wasted effort.
I will continue to be out and about talking to our team and you, our customers. I have learnt a lot from our customers this year and we will continue to do so.
Thank you for your ongoing support.
Ngā mihi nui
Tanya Houghton, Chief Executive
TANYA HOUGHTON
Chief Executive Officer
This report is written to reflect our new business strategy based on our purpose of being the go-to for everyone connected to our land. It has been written to be easy to understand for all: our team, our partners, and our customers. It will support us to:
