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.