Annual Report 2020

Overall, the format and content of the annual report has improved with some additional information disclosed, including remuneration of the board and executives. However, there is still some basic information missing like the WATS Ltd financial statements (their joint venture) and an analysis by sector.

Financial results were a bit of a train-smash with profit before tax dropping from $8.3 million to just $0.1 million. This report covers the period up to 31 March 2020, which means COVID wasn’t the cause of the drop in profits. Revenues grew somewhat, but expenses have grown more sharply. This naturally draws attention to the former CEO’s salary, which we now know was over $500,000!

Some of the commentary in the report appears to be twisting the results, so it’s good that the AGM’s are scheduled for next week. We’ll take our chance to ask some questions. Come along to a meeting if you can, they’re on Monday and Tuesday evenings, details are here.

How did The Trusts go in 2019/2020?

Sales revenues: Operating revenues increased by 3.4%, with the CEO commenting that retail revenues grew 3.9%. The CEO stated that this result was “most pleasing”. For context, the growth in spending at liquor stores across NZ for the same period was 7.2%*. With West Auckland’s population growing faster than the NZ average, this is actually a fairly disappointing result for The Trusts.

With retail growing faster than the overall trading business, hospitality’s growth rate was lower than 3.4%. The exact rate isn’t disclosed but from back-calculations it appears hospitality revenues didn’t grow at all. Venues were closed for the last ten days of the year, which won’t have helped, but it remains a really disappointing result given that 2019/20 was the first year that Mr Illingsworth was operated for the full year.

* Stats NZ electronic card transaction data for 2018/19 versus 2019/20

Expenses: The Presidents make comment that “We note that the operating expenses were unusually high this year, primarily due to the repairs and maintenance that were required for our properties”. But inspection of the reports doesn’t bear that out. ‘Building expenses’ actually decreased by $1.5 million and more specifically, repairs and maintenance expenses barely changed at all (they increased just $0.06 million).

Head office (“shared services”) costs have been growing rapidly over the last few years. In 2016/17, these costs amounted to $3.8 million, and they have grown to $5.9 million in 2019/20. That’s a compound annual growth rate of 15%.

Because we don’t have visibility of the WATS Ltd financials, we can’t look further into what has driven those cost increases. Part of it is likely to be their increased marketing efforts in response to our group, including their blitz in the lead-up to last year’s elections.

Another contributing factor has been the CEO’s salary. This has grown rapidly from a relatively reasonable salary of $265,000 in 2012/13, after which the former CEO negotiated an annual increase of about 10% every year through to his departure during 2019/20. This left him with what was surely the highest salary for a licensing trust employee ever (by a big margin too) – receiving over $500,000 for his time with The Trusts before departing in December 2019. To put that in context, the CEO’s for the Invercargill Licensing Trust and the Masterton Community Trust were paid a little over $300,000 each (in 2018/19). Let’s hope that the new CEO, who has come from Masterton, has signed on for a more reasonable salary than his predecessor was receiving.

Reported profits: Reported profits fell dramatically from the previous year, with profit before tax falling from $8.3 million to just $0.1 million. Profit after tax doesn’t look as bad, but that’s mostly due to changes in depreciation rules implemented in response to COVID-19. As a result of those changes, The Trusts had a $4.3 million boost to their tax line that helped cushion the blow to their profit after tax, which fell from $7.3 million last year to $4.4 million.

Assets and equity: The report celebrates an increase in assets of 24%, and an equity increase of 6.8%. But assets and equity were affected by tax and accounting changes, specifically to depreciation and how leases are treated. The result was recognition of ‘right of use assets’ of $9.4 million and a ‘deferred tax asset’ of $2.7 million. The two licensing trusts also increased the amount they owe to WATS by ~$6.6 million, which serves to boost their cash balance by that same amount. If you take away the impact of those three factors, there was actually a decrease in asset value of 0.2% and an increase in equity of just 1.4% (i.e. less than inflation) so not really something to celebrate after all.

Giving back: The audited accounts show ‘community support’ of $3m, and at the front of the report are a list of sponsorships with a total value of $248,900. The report mentions $3.2 million of community support several times, which is presumably these two figures added together. This amount is a little less than the $3.5 million The Trusts promoted but it’s pretty close. Interestingly, last year’s report touted that $300,000 was given in sponsorships, but this year $248,900 of sponsorships has been lauded as a 27% increase. Something is a bit awry there.

New auditor: Kerry Price (from Grant Thornton) has signed off the accounts this year on behalf of the Auditor-General, taking over from Alec Flood (also of Grant Thornton). Alec had been the auditor for The Trusts for several years but as reported in the NBR in 2017, Alec had been “censured and ordered not to undertake an audit of a listed company, a bank, insurer or deposit taker for two years” due to a complaint of “negligence in a professional capacity”. It seems that order didn’t extend to licensing trusts, and it’s reassuring to now see a different name signing off the accounts.

So, definitely some progress with transparency, but otherwise not a great year for The Trusts. There should be some very interesting questions at the AGMs.