Elders Limited

Thank you very much and welcome to everyone for today's FY20 half year presentation. So if the dream is to live in interesting times, we're all living the dream and I think the major difference between what's been happening in metropolitan Australia and cities around the world and what's been happening in regional rural Australia I think is clear as we go through the presentation. So we're reporting in the final year of the second eight-point plan today and we've got five months or so to run on that. Now just to recap, the core philosophies of the first two eight-point plans have been, since FY14, have been high financial discipline, Safety, EBIT and return on capital as the core metrics. Now clearly we have multiple other metrics and lead and lag indicators, but they're the three focal points for the business. A diversified business model, diversified by product and service, by commercial model. by market segment, by geography and now with last year's acquisition of AIR by channel with retail, wholesale and online channels. Now this provides a significant diversification which when coupled with a strong financial discipline around our cost and capital base allows us to make good money in bad seasons as we saw last year with the near record profitability through one of the worst droughts in eastern Australia in 100 years. And finally and very importantly in the core philosophies of the first two eight point plans is that in a very methodical low pulse rate way we look to fill the strategic gaps at a geographical and market segment level and we also look to access further margin pools particularly in our rural products area. by backward integration into key product portfolios as we have with the acquisition of Titan in the crop protection portfolio and the acquisition of AIR where we've been able to access additional margin pools in battery products and also significantly enhanced purchasing power across the total business in general merchandise products. So the context of today's results, half year results for FY20 are the prevailing drought conditions through eastern Australia as we ran into the first quarter of the year. Bushfires in eastern Australia across a lot of the coastal areas but significantly for through the Adelaide Hills and also Kangaroo Island. The emergence of COVID-19 in our Chinese supply chains through Chinese New Year with shutdowns in January and then drought breaking rainfall events in Eastern Australia as we ran through late January and February and then the lockdowns of COVID-19 in Australia for the last portion of March and the last part of the first half. And so with the implications and knock-on effects as we see with wool in particular, but in other areas as well, of the COVID-19 implications for the European economies, and other markets like the northern Asian economies where we export meat and grain with South Korea and Japan. So what I'd like to do now is to just run to the agenda. So I'm joined by our CFO Richard Davey and we'll first of all have a look at the highlights and delivering against our priorities and then Richard will go into a deep dive into the financial and then I'll come back and discuss the market outlook and strategic priorities as we go forward. So moving to the first slide, the highlights. We've split them into three significant areas. Firstly on safety which is a key priority to the business. One lost time injury which is similar to the same time last year. The lost time injury frequency at 2.2 but running down. We had a cluster of injuries, three injuries towards the end of last financial year so they won't wash out of our frequency until the same period this year. Clearly during the COVID-19 environment we've had a further enhanced and heightened focus around our people safety and our client and community safety throughout regional rural Australia and we proactively established a committee to focus on all of these aspects in March and we're very, very well placed as we work with the industry to have agriculture deemed an essential industry and to allow through multiple protocols, non-contact servicing of our clients throughout regional rural Australia as they're looking to take advantage of good seasonal rainfall. From a financial performance viewpoint our EBIT of 52.1 is up 53% on last year, significantly strengthened operating cash flow and we did have a lot of discussions around that. Richard will spend some time going through the ins and outs of that and I think our sense This year with a complete 12-month period our cash conversion will be back to the low 80% that we've talked about previously. Return on capital at 17.7% which is a pretty solid result as is the leverage given that we've given ourselves a two-year journey back to a higher return on capital and lower leverage after the acquisition of AIR. and an earnings per share of increase of 30% on the previous year. So pretty solid results in what has been a tough and mixed market environment. In terms of our strategy, we've established a business improvement area to our business October 1st last year. And we are seeing a delivery of significant business improvement initiatives, whether A lot of those, the majority will be seen in the second half of the year as we've established the function and started to get traction and engagement across the business but certainly from our viewpoint very, very positive, not so much reflected in the first half but looking for those results to come through in the second half. and then on an ongoing basis. The successful integration of AIR and Titan acquisitions, now it's early stages. The midpoint for synergies from AIR was around $8 million benefit over a two-year period. Given that we've owned AIR since November and not through the full period, we said that we believe that would be $3 million this year and $5 million next year. I think it's fair to say that we're on track and ahead of track with the air integration. With the Titan acquisition, similarly it's been performing very well and the original plan of accessing greater margin pools and converting generic products across the Titan brand to access that high pool has been quite successful this year. Again, we've got good traction, good engagement. All things being equal by the end of the financial year Titan will be at just above twice the EBIT it was when we bought the business and with significant benefits to the overall business. In terms of the business development activities and this includes the bulk on acquisitions to fill geographical gaps and segment gaps. We have slowed our pipeline. Our pipeline is very active and we believed that there would be significant opportunities with the nutrient acquisition of Ruralco. These have been present although we have purposely tightened our activity just to ensure that there weren't any blind spots with regard to COVID-19 impacts that we wouldn't be able to accommodate from a capital viewpoint. And finally the development of the third aqua plan is progressing well. I'll make some comments on it later on in the presentation. But certainly our thinking which is the shareholder feedback from three years ago of being able to deliver a 5% to 10% increase in EBIT through the agricultural cycles at a high, in this case a 20% ROC and for future most likely a 15% return on capital is acceptable. for our shareholders and provides a very robust and resilient business model for investors. So then looking at the priorities, delivery against the FY20 priorities after six months, on the safety performance I think the It's fair to say one lost time injury is one too many. This was a fall and a fractured forearm that occurred during the year when one of our One of our people was dodging a beast in a sale yard. One is one too many and we're working very, very hard on that. But it is worth reflecting where we came from in FY13 where there was in the order of 34 lifetime injuries in the business. So our desire is to get to zero and we're working hard on that. In terms of operational performance, as we run through underlying NPAT up 70%, underlying EBITDA up 55%, underlying EBIT up 53%, operating cash flow up 190%, leverage down and close to the target we had with the journey back from the acquisition of AIR, the commitment we made to our shareholders and investors. And then I think EPS earnings per share up 30% on the previous year. So pretty solid and done in a pretty safe low risk way as we continue to focus on a very methodical and high financial discipline approach to our business. In terms of key relationships, again been moving very strongly. I think on the first point On the first point, we have worked closely with industry proactively once we saw COVID-19 impacts in China and we were able to establish agriculture as an essential industry and from that point worked as an industry to ensure that we take advantage of of the conditions that were prevailing for Australian agriculture. I think very, very important as one of the industries that's not impacted significantly and very important core anchor for the Australian economy to be able to get back on its feet from an economic viewpoint. And with efficiency and growth, as I mentioned, with regard to the first point around air and integration pretty solid. The new products particularly the livestock and woolen transit delivery guarantee has been also performing very well and as I mentioned we've been able to basically be ahead of the plan across a number of the efficiency and growth areas. I'll talk to more detail around some of those issues as we go through the presentation, but I'd like now to hand over to Richard to go to the detail on financial performance. Thanks Richard.

Thanks Mark. So we're just now on slide six. So turning now to the key financial performance items for the half year, as Mark's already mentioned, despite, I guess, dry conditions which continued into the first four months of this period, so the business finished really strongly with very good February and March results. Acquisitions were a key driver of that improvement with nearly $9 million coming from our new wholesale business, Air, which came on board in mid-November. Sales revenue increased by 26% to $925 million, with approximately a 50-50 split between acquisition and organic growth for that particular number. Underlying EBIT was up $18.1 million, as Mark already mentioned, to $52.1, and I'll cover that in a bit more detail shortly. Underlying profit after tax of $48 million was an increase of $9.8 million on the previous corresponding period. Net debt balance date was $202 million down on the PCP. People might know this is up on September, the levels we were in September with the settlement of the air transaction occurring in this period. Operating cash flow for the six months was an inflow of nearly $12 million, and that was an improvement of $25 million from the prior corresponding period. And that was a result of an increased earnings performance with increased debtors in our retail product, with sales that were nearly actually 100 million up in February and March on the PCP, so very strong performance feeding into our debtor book. Underlying return on capital, as Mark mentioned, is currently sitting at 17.7%, which is particularly, that's a good, but I'll go into that in a bit more detail in coming slides. Underlying earnings per share was up, it's at 7.2, so 31.5 cents, and as Mark already mentioned, Leverage decreased to 1.9 times, which is underneath the target that we sort of set ourselves of last year. And I'll run through other key ratios in the coming slides. One other point to note, for the purposes of this slide being presented, we have excluded the impact of the new leasing standard, which came into effect on the 1st of October. And this is to allow a more meaningful comparison with the PCP. But noting that the impact, which has been reflected in our statutory accounts, has been outlined in slides 18 to 19 of this presentation. So now moving on to slide seven. So looking at the performance now as a byproduct, the waterfall as a graph on top highlights the major movements for the six month with a focus on gross margin when compared to the previous prior corresponding period. The increase for the half was roughly split at this time as a 65-35 between acquisition and organic growth for this particular number at an EBIT or a profit level. Just focusing on acquisitions, this added $13 million to overall earnings for the period. As I mentioned, 8.6 of this related to the wholesale network purchase, which is made up of $17.4 million gross margin as shown in the graph, with $8.8 million in additional costs, shown as part of the $12.8 million increase in costs in the graph as well. A new livestock and transit product, which Mark mentioned already, which we purchased last year, added an additional nearly $4 million, which is included within that financial services item. Retail earnings recovered from a poor start, driven mainly from the reduced sales, with summer crop plantings down nearly 66%. However, recent rainfall improved soil moisture profiles has lifted the winter cropping confidence and saw, as I mentioned already, a strong sales finish to the half. Agency services gross margin improved, mainly in the livestock part of the business with high prices across both cattle and sheep being the main drivers, with volumes also up. Wool margins was back with both volumes and prices down for the half. Financial services margin was slightly up due to the acquisition already noted offset by lower banking margin in line with our new distribution agreement, which started in March last year with a corresponding reduction in costs. Other, that relates to the accrual of a new incentive program that we put in place, which commenced on the 1st of October. And unlike the previous model, this is no longer discretionary aligned to branch performance and achievement of stretch to targets, which is why it's coming through now in the results. Costs have increased by $12.8 million. with increased acquisition growth making up $9 million, that number which I already mentioned, and with geographical footprint growth and additional corporate investment initiatives, which Mark mentioned, with the business improvement area. And this was offset by reduced banking costs. Now, moving on to slide eight, looking at the business by geography. So now looking at the result by geography, the waterfall graph highlights the major movements, but this time, this is at an EBIT level. All zones except the north were up when compared to the previous corresponding period. As I said, continuing dry conditions was again a feature of the result in the north with the summer crop, which is a key part of the zone performance, significantly down. As I mentioned before, we did have to see improved results in February and March as conditions improved, particularly in the north, which was pleasing. The southern zones delivered an improved performance both in livestock and retail, with benefits flowing from our titan strategy, a key feature of those improvements. Costs were up from increased investment in frontline staff. Central Zone incorporating Tasmania delivered improved results across most products. Real estate and livestock were the standouts in this zone. Western Zone has had a very strong start, that's it, to the year, once again across most products, with retail sales the key driver of this increase. Corporate and other costs increased primarily due to investment in new corporate areas, namely strategy and business improvement functions. And there was a couple of unfavourable half-year statutory adjustments, in particular related to our long-service legal vision, which people might know from last year was a negative. Again, last year is the interest rate outlook that falls, and therefore the discount asset becomes negative. So moving on to slide nine. Return on capital. Return on capital calculated on a rolling 12-month basis finished at 17.7%. which is an excellent result considering the impact of below average seasonal conditions for a significant part of the last 12 months for which it's calculated, given we do it on a rolling 12-month basis. Whilst the impact of the poor summer crop and last year's winter crop has weighed on the retail product return, this has been offset by improved results or returns from both our agency and real estate areas. Average working capital levels when compared to the prior corresponding period were up by 85, nearly $86 million. 75% of that increase relates to acquisitions. particularly in our wholesale network and financial services, as mentioned already. The other 25% has supported asset business growth, mainly in retail and agency. Average other capital increased by $124 million, and that's from investment. So that's from the wholesale network and the livestock and transit product already mentioned. Turning now to slide 10, just looking at the cash flow. Operating cash flow for the half was an inflow of nearly $12 million. And this is before the lease impact I already mentioned. This is an improvement of $25 million compared to the PCP, which was an outflow of $13 million. Improved earnings for the half was offset by the normal build in retail working capital as we enter into the peak selling period for winter cropping. The main driver of this increase, which you'll see in the $45 million, was due to high debtors with, as I mentioned, very strong sales in February and March, which has fed into high debtors. Excellent cash flow result for our agency business was a feature, with lower working capital coming off higher balances last September. Feed-in processing delivered improved cash performance this half with increases in working capital related to higher cattle values at March, not numbers. Interest tax and dividends of $1.8 million comprised interest of $3.6 million. This was offset by dividends received from our insurance, about approximately $2 million from our insurance investment. With minimal taxpayers, we use our tax losses. CapEx of $5.7 million was up on prior year with spending on Chlorophylla, and this is about $2 million related to a silo asset replacement from the collapse we mentioned last year, which was covered by asset insurance. So that's a little bit elevated in this half than what we normally see. Turning now to slide 11, just touching briefly on debt. Debt levels at balance date and year-to-date average are reduced from the PCP. All of our key ratios have also improved through a combination of higher earnings, both organically and through the additional earnings from acquisition funded by equity, namely the air. We're well-placed within our banking covenants, which we've also taken the opportunity to outline there on those points off to the right-hand side, with significant headroom in all three as highlighted. We also have significant undraw facilities and are in a very good position as far as that's concerned. Turning now to slide 12, and I'll hand back them up.

Thanks Richard. I think in terms of the market outlook I think it is a positive outlook. We'd expect to see ABARES update their assessment of the winter crop in the first week or so of June but it really does pitch to our earlier comments at the end of last year where our view was if there are successive positive rainfall events that is likely in eastern Australia, certainly behaviour through history, is that growers will plant from fence line to fence line and take advantage of the conditions in order to recoup the previous two or three years of minimal crop and minimal cash flow. I think one of the issues that comes out of that in the rural products area is that where land has been left fallow it has a lower requirement for fertiliser input so it's like a natural fallow that the drought has caused and so there may be some reductions and there has been some reductions in fertiliser application but as the crop progresses and given that we will have appropriate follow-up range through the season you'd expect a top-up of nutrition and also the use of post-emergent product and then depending as we run through the end of the season the fungal activity that also drives another application of crop protection product. So I think the outlook is positive from a domestic agricultural viewpoint and we've got the ongoing uncertainty in the global markets as we look at the implications. If we go to agency in particular for wool in the European demand of fine wool fabric out of China, that's obviously been a significant impact, as has North America. So we will see some of those knock-on effects, but I think from an elder's viewpoint, the essentials of the business are relatively positive. rainfall advanced driven feed which has driven restocking which has obviously put some impetus behind livestock prices. We still have strong markets for both lamb and for beef. Obviously the reduced Australian dollar has driven some of the grain activity but also with the strong winter crop we'll see strong grain position towards the end of the year. Outlook as we run through real estate, we think that there will be, clearly there's an impact on our franchise, metropolitan franchise real estate business. and as there is across all metropolitan areas. But as roughly a quarter of our real estate business and with real estate being roughly it's probably a little bit less now with the growth of our rural products area, maybe 8% or so of our total business, the materiality is not significant in the total scheme of things for the business. Moving through financial services and I think both Richard and I have already made comments on that. Particularly with the restocking occurring, the StockCo, our 30% investment in StockCo is moving, StockCo as a business is progressing very strongly as is Options Plus, the online livestock business where we're a 50% shareholder. So that's quite positive from a feed and processing viewpoint. The key business there is Collara which has been performing very well. The benefit Collara has had out of low priced cattle going into the business and particularly where we're backgrounding those cattle, that will diminish as we run out towards the end of this financial year as cattle prices increase. Although the flip side of it for Collara is that we're able to with water and with moisture in the soil We're able to grow more of our forage and grain on the farm which we're doing right now which drops the cost of our feedstocks into that equation. So I think the other issue around CLARA are the four processing facilities that are currently on hold from a Chinese export viewpoint and the customers of CLARA have been able to reallocate the abattoirs that they're using in order to minimise the impact and from Collara our sense is that that's relatively under control. With the Elders Find Food business which is smaller than one of the smallest branches in Australia, retail branches in Australia, just for completeness Elders Find Food went into shutdown in January around Chinese New Year as the whole of China went into shutdown. The biggest part of that business was for high end restaurants and hotels as I think many are aware. So during the shutdown period we refocused the business and opened up the channels of retail and online and that's now become a very important part of the business as China's recovered. The food service area is recovering slowly. but we're growing strongly in the online and retail part of that business. And finally on cost and capital, obviously as tight as tight as we always are and we'd like to recover as CPI increases but it's also worth noting in the order of a standard half a million of cost savings through a lockdown of your total business in terms of travel, entertainment, accommodation and all those on costs have been flowing through as well. So moving to the second eight point plan and really as we run out through to FY20 with the key areas as I mentioned this 5% to 10% growth of EBIT through the cycles. The 20% has been reset when we took the decision to buy air although at the half year we were at 17.7 which is pretty solid given that basis. Going to the next slide to get a bit more detail around the progress in the equine plan. That 5% to 10% growth has us in the 103 to 115 scale which is basically in line with most of the analysts' spread of assessments including the acquisition of AIR. I think at that 17.7% ROC with the wage leverage cost of capital around somewhere between seven and eight, something like that, you can see the significant shareholder value that's being gained through the second eight point plan. Going to the next slide and just a quick recap on where we've got to with the AIR acquisition and I'd have to say it has been overwhelmingly positive and I think for a bunch of Elders executives to walk into the room with 500 AIR members and management earlier in the year and be welcomed as we're all part of the same family. It was quite stunning and it has been reflected in the financial performance and the integration. If we run through what we actually acquired with AIR we acquired the wholesale channel so we acquired further diversification at a channel level which is very important to us. Included in that we acquired 100 branches in the produce hobby farm servicing area which gave us access to a more stable and high margin component to that channel. We acquired a significant supply chain logistics capability through the eight warehouses that they run and we've actually fast tracked access and use of those warehouses for the Elders Branch Network in the areas of general merchandise and animal health products. And finally we acquired the regulatory packages for veterinary products, animal health products which allows us to access significantly greater margin pool for those products and to use those as the platform to strengthen our elders pastoral ag veterinary products that are now sold or that are being sold through the elders the elders branch network. So very, very positive. In terms of delivery of the acquisition synergies what we felt for this year would be around three and we're on track to deliver somewhere between three and five million synergies, increased margins across the elders group. You may recall in the acquisition one of our criteria for a positive corporate acquisition is around low integration risk and in this case it wasn't about closing branches, rationalising people, getting rid of layers of management. It was around accessing the capability of the eight warehouses and the combined purchasing power in combination with the additional margin pool through the Titan products for air and the air veterinary products for the Titan brand pastoral egg. So everything in our control and very, very positive and I think that's part of the reasons for the success to this point. Implementation of other initiatives, the member base has grown and I'll give you some numbers shortly on the organic growth components of the business, private label expansion in animal health and merchandise as we've mentioned with our backward integration and the TACA which is the hobby farm produce click and collect across member stores. light touch integration so Richard and I are on board on the chair there and basically not a lot else has changed in how it's run. So moving to the progress on the second eight point plan and obviously a busy slide but I really just want to focus on some key areas and we can pick up the other points of interest in one to one meetings or in questions now. The last point in organic is 3 to 5 million annualised earnings uplift and 10 to 20 million capital reductions from the business improvement pipeline. Now I indicated in my introduction that with the business improvement, the area of the business being established October 1st, we're now getting momentum, good engagement and we're comfortable around those sort of numbers as an annualised basis. I think in the organic side it's also worth noting that we've had quite a detailed plan with regard to potential fallout from the merger of Ruralco and Landmark and to this point It's worth noting in our analysis and we obviously have KPIs against many metrics in the fallout. So at this point 259 new customers have come from this. In terms of additional people there's 18 additional people have joined the business. These are quality revenue owners at the front end of the business and there have been eight additional wholesale members that have come from CRT and Landmark Wholesale that are now purchasing from AIR. So we're watching it quite closely and again our philosophy is that we would prefer to be approached by potential candidates rather than approached because once you chase someone you're obviously paying a premium and we need to be respectful and acknowledge the wonderful performance of our own people and not bring people from the outside at premium packages. Okay so on the final slide before we go to questions, the development of the third acorn plan and this is obviously the critical next step that takes us through to the end of FY23. Our sense is that and certainly feedback from multiple stakeholders and multiple shareholders is that the 5% to 10% through the cycles growth target is a reasonable and acceptable target, particularly given the last two Ackland plans we've delivered against that or we've exceeded that. We've also focused on the key priorities of winning market share across multiple business areas as you see with the strategic map or gap analysis. Real products gross margin improvement through the backward integration and supply chain efficiency that we've talked about. The expansion of additional offers with our financial services, Tom Selleck's consulting It continued to targeting with our feed and processing services which have been going quite well. And then finally in the strategic priorities our kind of focus on delivering an authentic industry leading sustainability program. which we commenced work on last year. We don't particularly want to tick boxes for the sake of it and have a glossy brochure. We want to be able to acknowledge the real and significantly important initiatives that we participate in and that we lead throughout rural regional Australia and for agriculture on behalf of the title industry. So there's absolutely no doubt in my mind as with our safety priorities. A safe business that doesn't hurt people is always, in my experience of running seven companies, is always a highly profitable business and a great business to work in and we have exactly the same view that an authentic sustainability program drives profitability for all parties and allows for a much, much better business for everyone to be associated with, invest in and work in. On the enablers, the three key enablers around OIT and data platforms that we have foreshadowed to the market and we're completing those assessments through to the end of this year with FY21 to be a critical year in implementing that systems modernisation program. retaining and attracting, developing the best people in a safe working environment and of course one of the cornerstones if not the cornerstone of Elders since FY14 is this very high financial discipline that drives all the decisions in the business. So with that, I'll just note Richard's earlier comments. The next couple of slides are the new lease accounting standards impacts on the business. We can comment on or question either one-to-one or in question time. But with that, I'd just like to close off the formal part and go into some questions. Thank you.

Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. The first question comes from Philip Pepe with Blue Ocean Equities. Please go ahead.

Hi, guys. Firstly, well done on a good first half result. In terms of current conditions, I mean, some of your customers have been hit by bushfires and then rain and issues with China. You've talked in the recent past about some of your customers planning from fence post to fence post, but how quickly does spending typically bounce back after a drought? Is it realistic to expect that back to normal so soon after some pretty difficult conditions, or will it more likely spread over the next couple of years?

I think through the drought hit areas in eastern Australia and given that there's sufficient financial capability and there are multiple sources of capital for cropping inputs available to where there's appropriate risk profiles, I think it bounces back very quickly. and that's been the history. I think in other areas like the dairy areas through Victoria and New South Wales, coastal dairy areas and also probably without more direct experience with Kangaroo Island there may be with bushfire impacts where infrastructure has been impacted it may take longer and particularly if I focus in on Kangaroo Island particularly where it's a remote and relatively isolated from a supply chain viewpoint the infrastructure rebuild may take longer, so it may be six to 12 months, as opposed to being able to get access to capital, put the planting inputs together, look after the crop, and then be able to generate significant cash flow in the November, December period.

Excellent. If I can sneak in a quick second one. This is the last few months of your current three-year plan. In terms of organic growth for the next three financial years, given that we're coming off a reasonably low base with the drought acquisitions aside, is 5% per annum organic in EBIT growth still a target or is that a bit low given the base is perhaps lower than what it would have been without the drought?

Yeah, I think the diminishing returns to scale issue is one that we consider strongly because we were coming from a very low base way back then in 14, 13, 14 as you know. I think from an investor viewpoint that that was the feedback. That has been the consistent feedback that if we can consist as an agricultural stock If we can consistently deliver between 5% to 10% growth and maintain a high and satisfactory return on capital, that combination for us has to be organic and bolt on acquisition. It has to be a combination so we don't compromise our return on capital profile. And it's doable, but it does require, with these sorts of businesses, it does require significant financial discipline in cost and capital management, both on acquisition template management. So we're comfortable in walking away from anything kind of higher than the five times multiple, et cetera, or a little higher than that if we're looking at a 15% return on capital. But I think it's durable. And it'll be a question that we'll be asking you know, the 100 or so people we talk to over the next few days on this. You know, is that acceptable? Is that a return that gives you confidence with an ag stock that we can get our 5% through the cycle?

Excellent. Thank you.

Thank you. The next question comes from James Ferrier with Wilson's. Please go ahead.

Richard, well done on the results. Thanks for your time this morning. First question's about air. Just looking at the segment notes. Note 11 in the accounts. I think it was $8.5 million EBIT, $11.2 million EBITDA for four and a half months. If you just simplistically extrapolated that on a 12-month basis, the run rate's something close to $30 million per annum. I guess you've already alluded to the fact that the synergies are running a little bit ahead of your expectations, but that simple calculation I did there, is there something around the sort of first half, second half seasonality in the business that we should be mindful of? Or is it more reflective of the improvement in cropping conditions we've seen on the East Coast in the last couple of months?

Yeah, certainly. So you're talking, you know, in that result, what, four and a half months ultimately with that sort of result. So you can sort of, you know, extrapolate that out. In terms of, you know, it definitely had, you know, as I mentioned before, had a very good, as I said, I think February and March. As a number, so there was obviously some very good results there, but that was coming off some probably some poor results occurring there. But yeah, that sort of extrapolation, you know, I think it has a sort of necessarily the same pattern that we have. So I would expect it to have strong, April, May and June assuming conditions continue the way they are and then obviously after you get out of that peak period then to sort of fall away but noting that it does have a slightly different mix with regards to its sales with obviously the heavier mixing related to animal health rather than the ag chem that we have in the retail area of the channel.

Understood, that's helpful. Second question is about working capital just looking at the financial services business in particular, and not so much compared to PCP, but if I compare it to the 30 September balance, I think it was 19 million was the capital balance at the end of FY19, and you're now at 30. So it's increased $11 million, but you had an $8 million inflow from Stock Coast. So basically, it's an underlying increase of 19

million dollars so what's why are you having put more capital into that business and such a you know sizable amount of capital yep so you you were you looking at the march asset number compared because you might recall we didn't put a number of other asset loans into stock co and we also purchased the livestock in transit warranty product in the second half last year which As I said, increase that capital sort of base. And then, as you just mentioned, in this particular half, we've repatriated some of that $8 million back in stock co-advances. So that's generally how the capital's gone. There's a large increase in the second half last year with a reducing in the first half this year.

Yeah, so the $19 million figure I quoted was the balance at the end of FY19, which would have captured the livestock and wool in transit acquisition and then in this six months just finished to go from 19 to 30 even with the eight million dollar inflow from repayment from stock i'm wondering why there's an extra roughly 19 million dollars of capital needed in that business given livestock and wool was already in the original number back at september 30. yeah i'll have to have a look at that because that's not my understanding certainly

So, yeah, I'll have to take it offline and have a look at that number. I said definitely a big increase from, I said, in the second half last year and then a reduction, I said, into this year in financial services.

Just to finish, a couple of simple ones. You mentioned, Richard, the incentive program accrual. If I understand it correctly, previously you've just expensed incentives in the second half. So is this a change in accounting policy for you now?

It's a change in the actual program, the incentive program. So, you know, as I sort of mentioned, the last asset program was all discretionary based on the performance of the overall business and hitting, obviously, our stretch targets. The new incentive program that was put in place is asset set up to drive asset performance, certainly in particular in the front end of the business, and is centred around branch performance on stretch targets. So it's more of a mechanical calculation that gets accrued rather than discretionary. And that's just for the front line of the business, whereas the corporate and the asset part of that program is still discretionary based on asset hitting targets, the group target.

Yeah, understood that. And then finally, point of clarification to the notes in the accounts around the $2 million increase in bad debt provision. Mm-hmm. I'm assuming A, you've taken that above the line and B, just remind us sort of what you typically provision for on an annual basis, just so I can understand the relevance of that $2 million.

Yep, correct. So I think if you look back over the last five years in particular, we've probably been running around provision for doubtful debts anywhere between sort of $1 to $2 million. That's probably been the average. We increased the provisioning a little bit last half of last year, and that was particularly centred around northern New South Wales, where we increased it a little bit. So in line with that, the first half we provisioned approximately $3.5 million in provisioning just for the half. So that gives you a sense of the quantum.

Yeah, that's great. Thanks, Richard. Thanks for your time.

Thank you. The next question comes from Paul Jens with Pack Partners. Please go ahead.

First quick question for you, Richard, if I can. Just on the working capital build in the first half, I think there was a statement made of that working out in the second half. Can you work out, you know, go through that in a bit more detail? Because you've got around $58 million of extra working capital there from the wholesale and retail business. Can you give us comfort that it'll work out carefully and sensibly in the second half?

Yep, sure. So I think the one point to note is with, I guess, the seasonal break we had, and probably coming off last year where we had a pretty poor break, we saw, as I said, sales up significantly in February and March, which has fed through to the debtors. So on a normal sort of debtor profile, and I think we average around about that 90 days, and I believe as it is probably a little bit better than that, the expectation would be that I would sort of collect those debtors into the second half of the year and therefore that would flow back into the cash flow. There's some other programs in there where we, as I said, back it off against supply terms, et cetera, but I expect a significant part of those debtors that built up particularly in February and March to be collected in the second half.

Thanks for that. And maybe yourself or Mark, just comment about, I suppose, the split first half, second half with, I suppose, the fast end of the first half.

The split of the group, the EBITDA of the group.

Yeah, it sort of moves around. If you looked at the last couple of years, it probably, once again, depends on the relative size of your summer crops and your winter crops and how well the livestock businesses in particular has been going. I think you probably note in the first half, we did see a pretty strong agency asset result, which probably meant that the first half was pretty strong in that product. But saying that, we obviously had a poor summer crop and then there was offset by a very strong end to it. You know, I think we're probably... What, last year, we've probably been running around 50-50, haven't we? But, you know, the expectation would be, and I think that's sort of captured in consensus, et cetera, that, you know, it might be around sort of that number as well with a stronger, as I said, winter cropping outlook. But I think, as Mark mentioned, there's probably some... some headwinds there as well, particularly around the real estate products and I guess Woolwich will take a little bit of that top off winter cropping, the improvement in winter, the expectation when winter crop.

Just the final comment, maybe more for Mark, is with the ABARE long-term outlooks and your summaries there and the relevance to elders, you know, coming off of what might be a reasonable 2020, there seems to be some fairly, I suppose, some tempered outlooks going forward, but you've still got a fairly positive neutral to positive arrow in your view of the world. Can you just match up those two statements?

Yeah, well, sure. Oh, sorry.

No, you keep going.

Yeah, sorry. So are you referring to that slide at the back of the fact of the appendices? Yeah. Yeah, so that's more of a longer, you'll notice on the footnote, that's more of a longer-term view from when ABARES sort of come out. I think they give their three-year, as I said, view of sort of ag. So, you know, that sort of takes out, I guess, your short-term volatility and even, I guess, your shorter-term sort of outlook. So that's more of the longer-term outlook by sort of sector.

Just commenting that even with, that sort of caveat of the long-term nature. There seems to be a bit of a positive bias for elders. So I'm just wondering if, I suppose, elders feel as though they're, I suppose, better positioned in a number of these markets versus the rest of the peers that you're with. That's all.

Yeah. Sorry.

Keep going, Richard.

No, off you go. Let's go, Mark.

Our thinking Paul is that we always look for average season, we plan for average season and I think our planning for average season has held us in good stead this year with the supply chain issues of crop protection product out of China where we had little or insignificant impact apart from the knock on effects of other suppliers running out. So regardless of the market growth, 10%, 5% or whatever, I mean, our market share across these areas is, you know, it may be up to 17% now, 1.7. So we don't have to go with the market. We're not a 100% market player. We don't have to go with the market and our view is that the approach we're taking, the methodical, highly disciplined approach we're taking to filling geographical and market segment gaps means that we're not reliant on the market going up or down. The diversification in our business model and the resilience in our business model allows us to comfortably grow and 50% acquisition, 50% organic through whatever cycle there is. But that's the position we've taken from day one. And it's part of the reason that the results are a positive result this year. It's not from anything we've done this year. It's what we started doing in the first eight-point plan. And you know my view. I don't look at weather maps or that sort of stuff anyway. But to me, it's a highly resilient, solid business model that allows us to grow at an acceptable rate with acceptable returns through the cycles in agriculture.

Thank you, Richard. Thank you, Matt.

Thank you. The next question comes from Jonathan Snape with Bell Potter Securities. Please go ahead.

Pardon me, Jonathan.

Yeah, sorry.

Can you hear me okay? Yep. Yep.

Look, just a couple of questions if I can. first of all, just around the summer crop. I mean, I think last year you quantified it and said it knocked you around five million bucks if you looked year on year. And obviously this year's crop was considerably worse than last year's. Do you have a sense of what the impact on both your business and air, given I think it's like 85% East Coast, was in that first half? I understand you probably didn't consolidate a lot of air's hit though. But do you have an idea of what the impact would have been?

Yep, sure. So from just the, I guess, the retail sort of side, we're not touching on there, it looked like sort of the impact sort of even just year on year, so this is not talking even an average given last year was back as well, was probably anywhere between $6 to $7 million down in that summer crop sort of, you know, which I'm talking that sort of first four months really. And that did include probably a little bit of the doubtful debt provision as well. And in terms of AIR, I think we did see them a little bit back, but not as far back as we expected, which is probably testament to their business model. And they seem to be able to rapidly adapt to market conditions, et cetera. So we didn't really see a lot of downside. but saying that we weren't necessarily looking at them sort of year on year. But I can recall when we were going through it, they were a little bit back, but not very far back at all.

Okay. And look, while you're mentioning air, do you have a sense of, I guess, what the pro forma first half number would have looked like this year relative to last year for air? And maybe an idea of what the split was for the business last year, first half, second half.

Yeah, no, I don't have that off the top of my head, as said, Jono. But certainly I know when we were, as I said, going through, and I probably have to refer back to the notes, would be that, yeah, I think Ayr did definitely improve, as I said, year on year, and especially given how strong February and March sort of results were. So they certainly performed better, as I said, year on year. And I think from that sort of, once again, splits, as I said, point of view, I'd have to go back and have a look to see what their sort of splits are, as said, you know, relative to, you know, whether it's 50-50 or 40-60 or whatever splits. But they've got a different profile as well.

Yeah. And look, just on the winter cropping outlook, obviously it's improved a lot. There's a lot of early rainfall. And it sounded like there was a fair bit of pre-purchasing that went on as people got concerned about access to stock. What do you think that the pull forward would have been from, say, the second half into the first half in terms of farmer purchasing patterns this year, given the break was so early?

Yeah, we certainly had a look at that, particularly when we saw really strong, as I said, March sales coming through. But we focused on particular products that we thought might have been, as I said, brought forward. And that really, at the end of the day, wasn't all that material from what we could actually see. you know, a couple of million dollars in sort of EBIT, you know, and that's just purely looking at particular products that we normally would see selling, you know, as I said, a bit one or two months sort of later. But, you know, there's no doubt the break or the sort of we did see that sort of, you know, and noting also last year was pretty awful, I think, March from memory as well, given that I think you had the dry conditions really, really bite hard.

Yeah, so John, I think just for rough figures for you to work through in your mind, our assessment in southern Australia, the two southern zones, it may have been topped out at 15% for March. So across the six months, it'll be quite small as a percentage.

Okay. And look, just on stock code, are you able to give us the size of the book in how that's looking? Because I imagine the earnings follow the book uplift.

Yep, sure, John. So that's certainly improved of recent sort of times. And, you know, without sort of giving away, I think it's sort of our portion has, I think, you know, as of now, up to about $7 or $80 million. So that has improved substantially, particularly in sort of the last sort of couple of months. And I guess we would expect that to, you know, increase as restocking improves as well.

Okay. All right. Correct. Just one last one on Titan. I just want to make sure I heard some of the comments right. I think when you originally bought that business, you kind of said about $7 million in Avid. And I think at the opening, Mark, you said you thought it would be double that. By the end of the year, all things being equal, yep. Yep. And how much in terms of the transition of the portfolio do you think you're now through in terms of taking your business over into that? And then do you have any kind of aspirations and what you can convert over from air? I think that that HRC business that kind of does a bit of it, but how much of their business do you think you can pull in?

Well, again, it's just plucking numbers, but if you want my intuition, it's... So after two years, we're ahead of where we thought we'd be, and, you know, maybe we've got the same amount to go again. Because, you know, there's a blend. It's a blend of growth in the market and also reallocating a generic portfolio to Titan and a parent product for Elders and Air, respectively. So there's still a bit to go.

Great. All right. Thanks, Wilco.

I think we're getting close to the end of the call. So I think Belinda, there might be one more with Belinda that we can take.

Thank you. The last question will come from Belinda Moore with Morgan Financial. Please go ahead.

Hi Mark and Richard and congratulations on a great result today. If I can just clarify, I think you talked about with the next eight-point plan that increased IT costs. So can we just talk about sort of what CAPEX spends will be associated with that please? And then secondly, I know the air synergies are second half weighted, but in the eight and a half today, what level of synergies please?

Do you want me to take that, Mark? You think? Yep, sure. So I think it's a little bit early in the program to have said they're only sort of indicative numbers, but I guess the expectation, depending on which product sort of you go to, can be quite substantial. But I think from a CapEx point of view, initial, you know, once again, numbers, which are pretty rough at the moment, sort of we would expect your CapEx to be anywhere between, you know, around that sort of 20 million, I think, over sort of three years. So not substantial, but more so, you know, given, I guess, the way, you know, as I said, the change that's occurred sort of recently in terms of licensing versus capex, you'd probably expect an increase in sort of running costs anywhere. I'd be expecting everything five, six million when you get a fully integrated, or I said fully, that might be in sort of two, three sort of years. So not massive numbers, but it also depends on what product you sort of pick because we know from that point of view, yeah, your SAPs and your oracles can be far more expensive and significantly more expensive depending on which product you go with. In terms of the other one, synergies that you asked around sort of there, I think from what I saw at the half, we're probably talking anywhere between $800 to sort of a million dollars in sort of synergies in sort of the first half.

Okay, thanks very much.

Thank you.

Thank you. That concludes the question and answer session. I'll now hand back to Mr. Allison for closing remarks.

Okay. Well, thank you, everyone, and many of you we'll be talking with over the next few days. So, again, a solid result with the solid business model and AECON plan that we've established over the last six years. So I look forward to talking to you, and all keep safe. Thank you.