Elders Limited

Thank you very much. Welcome to all to the Elders' annual result presentation for the FY20 year. Thank you for joining Richard Davie and myself for the session today. From an Elder's viewpoint, FY20 is the final year of our second eight-point plan. The Elders' philosophy since the first H1 plan was put together has been to control what we can control and not to dwell on what we can't control and that has been critical for the year that we've just seen. The philosophy is also to have a capital and cost structure to allow us to make good returns in bad years and make great returns in good years. Last year is an example of good returns in bad years where we were close to meeting the record profit in a period of 100 year drought. This year's result is an example of great returns in good years where we've seen the drought break and moved to an average season and we've been able to deliver a very strong position. We use our multiple diversifications by products, service, geography, crop segment, commercial model and channel to market and our financial discipline to deliver consistent and high returns for our stakeholders. In summary, we control what we can control. Now just to recap, the first 8.1 plan was put together in FY14 where we got 40 of our senior managers together. We got rid of all consultants and externals from the business and we just focused on running the business properly. This was completed in FY17. The commitment was to a $60 million EBIT over the 20% return on capital and the first payment of dividends for 10 years. And this was from a position of a loss of some half a billion dollars in the previous year. and not paying dividends for 10 years. So at the end of the first APLON plan all safety and financial metrics were exceeded. Now the second APLON plan is put together following discussions with over 40 of our shareholders with a view to establishing what's an acceptable outcome from a financial viewpoint and also from a social economic community viewpoint. And we developed the second APLON plan based on this feedback. and we targeted 5% to 10% growth in EBIT through the agricultural cycles at above 20% return on capital. Now, the numbers that Richard and I present today show that all safety and financial metrics were also exceeded in the second eight-point plan. Through the second eight-point plan, we've experienced exceptional periods of floods, droughts and bushfires across various geographies and markets, and finally COVID-19 across our nation and the world. As such, the performance of Elders with its clear and consistent strategy, multiple diversifications, high financial discipline, hard-working and committed team and enduring customer anchor as the most trusted brand in Australian agriculture has been outstanding. The result is strong in safety, strong in sustainability, strong in profit, strong in return on capital, strong in cash, conversion and strong in strategic delivery of the Eighth One Plan. So the approach that we'll go to today, if we just go to the agenda, is that I'll provide an overview of the results. Richard will go to the detail of our financial performance and then I'll provide an update on the focus for the third AECON plan and our outlook. So going to the first item of COVID-19 impacts, and I guess the headline there is that there's no material impacts so far. So as we run through all of the areas of supply chains, there was a mild disruption in live export into Indonesia and Vietnam, which are the dominant markets. The wool market has been impacted as we're aware with price and volume and real estate across particularly metropolitan franchise business had an impact and then finally the China fine food business had a clear impact post-Chinese New Year where our target market is high-end restaurants and hotels but the materiality of this in terms of business is limited. We proactively put together a COVID-19 management committee based on our China experience and so had many of the items in place as we managed our way through this. And I think as we've gone through the early issues, we worked closely with our agricultural industry cohort in order to establish agriculture as an essential industry, which allowed us to continue on and to provide service to farmers rural communities and more importantly the agricultural industries to run through the year. We did this without any government support, so we had JobKeeper et cetera. We didn't access any of this support and we also maintained our workforce so there were no forced terminations, redundancies or any employees left over on the basis of COVID-19. So again, we did what we talked about a lot in controlling what we could control and with a positive outcome. When we look at the key highlights for the year, you can see from a safety viewpoint, two lost time entries versus nine in the previous year with a target of zero. And this is from the FY13, pre-FY13 period of 34 lost time entries in the business. So great progress and certainly my experience of running a safe organisation is that it does, you do tend to run down, then come back a little bit, run down. I guess the key point is the behaviour and the attitude of our people which is overwhelmingly committed to contributing to a safe environment. When we look at the financial performance, an underlying EBIT of $190.4 million, up some 62% on the previous year. Very strong operating cash flow. A return on capital at 20.2%. If we take the air acquisition out, we knew that the air acquisition would impact our return on capital and so we've shown both ways. And then post there, 18.7% return on capital. And a return on capital over the three-year period got the life of the second eight-month plan of above 20%. So quite solid. The leverage ratio is an interesting one because... Many of you will recall that we made the commitment of a pathway back to our sweet spot with leverage, the 1.5 to 2, post the air acquisition. We believe we've taken a couple of years to do that and we've been able to get it to 1.6 in the first year of that acquisition. And then obviously a strong growth in earnings per share for the business. Strategically the second eight point plan has been delivered above the five to ten per cent growth, so outside the top of the range and as I say with the metrics being met at multiple levels. The air integration and the year one synergies realisation have been positive. So our sense was that the midpoint of the synergies for the two year period was around eight million, we thought with ten months of air in year one and 12 months year two that it would be split $3 million, $5 million, but we've exceeded that number and we'll talk about that a little bit later on. And then in terms of our strategic coverage, the strategic gap analysis, filling those gaps, That's also been very, very positive. And then finally and a critical point is the third eight point plan which is a little different from the first two but has allowed us to really focus in and be a lot more sophisticated around the strategic enablers and the strategic priorities. So moving to the next slide, delivery against our FY20 priorities. And on this slide on safety and operational performance, I've made comment in the highlights about the key issues there, but I did want to focus on key relationships. And I guess point three there on the most trusted agribusiness brand. So Roy Morgan did some research this year that showed unprompted that Elders is the most trusted brand in this space and we're very, very proud of that in our 181st year and we're also very proud that we're able to live up to that very, very high standard within the business. This actually acts in many ways. It acts in attracting people to the business, keeping people within the business, attracting clients and also sets a standard and a bar for all of us to live up to. In terms of the progress in diversity plans, over the first two eight form plans we've gone from 4% of women in management positions to 15% so it's been wonderful progress and in the last 12 months it's also been great progress from 13% to 15%. So we have very high expectations of taking that up to 25% and I guess Given that all of these appointments have been of highly capable women who have been appointed on merit, it's wonderful that culturally this is increasingly an ingrained part of our culture. In terms of the sustainability function, another area that we're particularly proud of, again we established a sustainability function October 1st last year and the sustainability report was released today and it's a wonderful summary of the outstanding work that Elda has done across the communities and across all of our stakeholders. And also now with the strong measurements we've set our targets for the next three years. So I would ask you all to have a close look at the sustainability report because it really does highlight some of the wonderful work in regional rural Australia and with agriculture. So moving to efficiency and growth, as I mentioned the integration of of AIR has been very positive and the AIR team are part of the Elders family in every way that you could imagine. The Titan backward integration has also been very positive and the decision to acquire Titan a couple of years ago with the view that we would be able to significantly enhance the Titan ag brand and the pastoral ag brand throughout Elders. has moved along ahead of expectations. And I think finally, when we look down at the bottom point there, in terms of growing our footprint, the bolt-on acquisition pipeline has been enacted. We were, with the outbreak of COVID, we did increase or implement a $50 million additional footprint facility and we also slowed our bulk on acquisition activity but as we've gone through the year we've been able to maintain the rate given that we're able to manage it to a reasonable level. Okay, so with that I'll hand over to Richard for the financial performance slides and he'll take us through the detail.

Yeah, thanks Mark. So just on slide seven now, so looking now to the key financial performance items for the year. In addition to the material benefit related to the wholesale product acquisition this financial year, the business delivered a strong performance across most of our key metrics. Headwinds for the year included a summer crop which was down 66% on the prior year, a weak wool market which Mark already mentioned and a significant investment in a new branch incentive program. In terms of tailwinds we experienced, livestock prices continued to remain high with an increased winter crop also particularly on the east coast. Although it should be noted a lack of winter rain in late July and August meant low demand for post-emergent inputs. Sales revenue was up 29% to $2.1 billion and this was mainly in our rural products area with wholesale making up 50% of that increase. Underlying EBIT improved by $45.7 million to $199.4 which will be covered in more detail shortly both by product and geography. Underline profit after tax finished at $109 million, while statutory profit for the year was $124.2 million. The difference mainly relates to the continued recognition of an off-balance sheet tax asset, which has been progressively brought on as the business has grown. Net debt at balance date finished at $134.1 million, up nearly $40 million on last year. As already mentioned, operating cash flow for the year was an inflow of $110.5 million, which is a significant improvement on the last couple of years. Underlying return on capital of 18.7 is a really strong number when you consider the material impact on the group the wholesale acquisition has had, which was known at the time of purchase. If you look at the performance over the past three years, being the second eight-point plan period, this has averaged out to 20.3%, which is above a 20% target. Underlying earnings per share improved by 18.2 cents, or 35%, and leverage calculated on average debt for the year fell to 1.6 times. Moving on to slide eight. Performance by product. So now looking at our performance by product at a gross margin level, and this was up 25% year on year as highlighted in that grey box in that slide. Key drivers included the wholesale inclusion in our portfolio and positive gains across all the other products and services through a mixture of acquisition, organic and market benefits, which you can see sort of at the top of that slide, which was sort of outlined, and costs were up by 15%. Retail increased by 18% despite a slow start to the year with the impact of a very low summer crop. This turned around in March with a good seasonal break and improved winter crop, particularly on the East Coast. When you look at this growth a little closer, two-thirds was from increased sales activity with a balance for a margin improvement, mainly from our backward integration initiative. Wholesale, which should be noted, was only included for 10 1⁄2 months of the year, delivered a result above expectations, and I'll touch on the EBIT results of this major acquisition on the next slide. Value drivers were mixed in our agency services business, positive in livestock from a mixture of higher prices across both species, cattle and sheep, partly offset by both negative volumes and prices in the wool area. Real estate services continued its improvement after a strong start in the first half of the year, particularly in the broadacre part of the business, Residential performance was the feature of the second half with gains from acquisitions and this was despite actually listings being down 10% year on year. Financial services growth mainly came from the new livestock in transit products which has outperformed our expectations and prior years under old ownership. Branch incentive is our new program which commenced on the 1st of October and unlike previous models this is no longer discretionary and based on zone targets and directly aligned to individual branch performance. As noted already, costs were up by 15% on last year, with acquisition-related costs making up nearly $25 million of that increase, with the balance being investment in geographical footprint growth and variable incentives expenses this year. Moving on to slide nine. Now, looking at the result by geography, all zones were up when compared to last year. For the purpose of this slide, we haven't split out the new wholesale business by zones. Wholesale overall delivered an EBIT of $21.9 million for the two and a half months under Elders' ownership. Key drivers of this included increased sales across all segments and included the benefits of first-year synergies, which were captured both in our wholesale and retail products. One of the items to note, though, is this also includes an amortisation charge of $3 million related to identifiable intangibles. In the north, high cattle prices lifted the livestock results. Drought-breaking rains across eastern Australia happened in February and March, buoyed farmer confidence for the winter crop, offsetting the significant drop we saw in the summer crop already mentioned. Overall retail for the year was up by 15%. Across the other zones, we saw similar positive drivers, mainly improved livestock results from higher prices and volumes. Retail sales and margin improvement from continued growth in our backward integration strategy with real estate activity also higher. Southern Australia, which has the largest sheep business, did experience lower volumes, which was offset by the high price I've already mentioned. Corporate and other costs, as you go across the waterfall chart, increased with investment in new initiatives, including strategy, business improvement and sustainability, as Mark has already alluded to. Increasing corporate insurance costs and variable performance incentive accruals made up the balance this year. Moving on to slide 10, capital employed. As we've already mentioned, return on capital for the group finished at 18.7% for the year and 20.3% over the last three years, outperforming our 20% second eight-point plan target. The average over the past three years is particularly pleasing, given half of that period was in severe drought conditions. As highlighted in the graph above, the like-for-like business did improve to 20.2% for the year on the back of an improved return from our largest product, Acid Retail, through backward integration benefits and improved stock terms. with the livestock products also improving year on year, and these were the two big drivers of this improvement. Wholesale products returns finished at 40%, 16% when you exclude the $3 million amortisation charge. Average working capital levels increased by $113.8 million, with the new wholesale product making up over half of this increase. Retail products made up the majority of the balance, with high debtors in line with growth in sales activity. Increased feed and processing capital came mainly from higher cost of capital, particularly which occurred during the year. Other capital increased by $117 million, again, mainly from the wholesale acquisition, which made up 90% of that increase. Turning out of slide 11, cash flow, operating cash flow, cash conversion of 101% on underlying net profit after tax has rebounded from the underperformance of the past two years and includes approximately $45 million in additional retail working capital to support growth. The improvement in operating cash flow to $110.5 million is being achieved through profit growth and the delivery of a number of working capital initiatives throughout the year. Key drivers of the increase in assets and liabilities of $28.6 million, which you can see in that red sort of box, included increased real products working capital of $48 million, primarily from growth in debtors supporting higher sales volumes, growth in Titan inventory as part of the backward integration expansion, and this was offset by higher creditors. Lower agency working capital of $31 million came from reduced year-end receivables with improved debtor collections as well as higher payables in part due to timing. As I already mentioned, higher inventory and feed-in processing was mainly due to higher cattle prices and we did see some impact of some supply chain disruption from China in September. Turning now to slide 12, net debt. Debt levels at balance date and average have increased primarily due to the wholesale acquisition settled in November last year. and working capital supporting earnings growth. All of our key ratios have strengthened through a combination of improved earnings both organically and acquisition. We're also well placed within our banking covenants with significant headroom across our ratios and we also have approximately $260 million in undrawn facilities. Turning now to slide 13 and I'll hand back to Mark.

Okay, thanks Richard. So on the air acquisition, As I mentioned in the introduction, it's been very, very positive for the first 10 months of being within the business. We've been able to exceed the synergies that we targeted. We're above the business case. As I mentioned, the midpoint for that was $8 million and we thought the split would be $3 million first year and $5 million second year. and we're above that. So it's highly likely that as you run out in the second full year of the air acquisition that we'll exceed the business case synergies that we presented last year to the market. I think the other point is that the integration has been positive from a people viewpoint. Clearly you have early teething issues but our light touch philosophy in running AIR as a standalone entity but with a bunch of linkages back through the business has been very, very positive and has given us a great outcome. It's been the platform for the expansion of our veterinary products under Pastoral Ag through Titan and also the expansion of crop protection products under the brand Apparent through the AIR network. I think the other point to note is that with Bayer being strong in New South Wales and that was one of our points of added diversification in the business case with the break of the dry conditions through New South Wales. We've been able to benefit in that through the AIR independent network. We haven't lost any of the AIR members and we've gained a number of CRT members and the old Landmark Wholesale members. So all in all it's really gone plan quite nicely and we've also been able to use the the digital capability through AIR to expand its own enterprises through touchscreen and also the elders networks. So when we look at the next slide, which is the market outlook, and we, as I think many of you know, we key off the ABAR numbers so that we're all speaking the same language. Clearly we've got different insights in different markets to ABAR, but we plan for an average season. The outlook as we go through all of these areas, and I won't go one by one, but the outlook is relatively positive for a number of reasons. But I think the The one cloud on the horizon has been the geopolitical tensions and market access. I think the announcement over the weekend of the Regional Comprehensive Economic Agreement, which was the replacement for the Trans-Pacific Partnership Agreement, this has now been resolved and this is a trading agreement that includes Asia. So there are 15 partners. But basically it's the Trans-Pacific Agreement minus the US and minus India. So from our viewpoint it's very, very positive for Australian agriculture. So it includes 15 countries, just broadly the ASEAN countries, North Asia countries in Japan and South Korea. China and it opens up or sets a very, very positive platform for the diversification that we've talked about Australian agriculture needing given the potential geopolitical issues on China. So I thought that was a very positive announcement and probably adds to the ABS assessments of the market outlook as well. Going to the next slide, the completion of the second eight-point plan and it's really basically putting in numbers the comments that both Richard and I have made through the presentation and that is the strategic focus of the first eight-point plan as many of you will remember was back to basics, pure play agricultural company, portfolio management, capital life, return on capital focus, et cetera, et cetera and the outcomes there. exceeded the expectations with a $70.4 million EBIT and 27% return on capital at the end of that period and the average return on capital at $26.3 million. Second acorn plan, we've got a little bit more sophisticated in our approach because we felt we had turned the business around and there was more opportunity to increase our risk appetite while maintaining our financial discipline. We said there'd be 5% to 10% growth through the cycles at 20% return on capital and again you can see the outcomes from a safety viewpoint, a profit viewpoint, return on capital viewpoint and cash generation viewpoint. And I think if the first safe home plan was survival and the second one was growth, during that period we were also able to get back on the horse in terms of both on acquisitions, in developing a financial template that gave a good financial outcome for all the shareholders and security around continuity of employment and performance of the businesses we're buying. Now the third Act On Plan is being launched today and we didn't pre-empt this to an extent of the half years. And in the first two there was a fair bit of consultation in developing but with this one we did a survey and many of you completed the survey of our stakeholders, investors clearly and basically just asked you what a good outcome would be as we continue to grow and develop Elders in a more sophisticated way. So the ambition that we've come up with based on those discussions was 5% to 10%, this is through the three year period, 5% to 10% growth in EBIT and earnings per share at 15% return on capital. So we dropped the benchmark given that our cost of capital is around the 7% or 8%. We want to be industry leading in our sustainability outcomes and I think when you do look at the sustainability report and see the platform we've set, we've set ourselves well for that, to be the most trusted agribusiness brand and again a very, very important aspect for us as the only listed Australian rural services company in the industry. In terms of our strategic priorities, focusing on winning market share across all product services and geographies. Capturing more gross margin in raw products and a large chunk of this is from our business improvement and our map and integration strategy. Strengthening and expanding our service offerings across a bunch of products and we're working to the detail of these. Optimising our feed and processing business in Collara and Elders Fine Foods. Collara has performed very well and it should be noted we normally have a a trade-off between higher cattle prices, profitability in our agency business and lower profitability in our Collara business. They generally run against each other but Collara has been managed to a level of great profitability and return on capital this year under that environment and also with the external impacts of our export markets tightening up, particularly China given the various issues and the COVID impacts. Elder's Fine Foods, on the other hand, not material to the whole business, but the story is consistent. We've had a number of months now of profitability in the Elder's Fine Foods business after it was significantly hit by the shutdowns in China's New Year in February. given that our channel was that top end channel. We've diversified our channels into retail and e-commerce and the business is performing quite strongly. As I say, not super material but is consistent with how we've run the whole business. And then they've developed a sustainability program that I've talked about earlier. On the sustainability front, when you look at where we've got there, and you'll no doubt have a chance to read the sustainability report, some of the highlights, over $1.51 million in donations and sponsorships throughout our stakeholder communities, over 350 local community sports teams and events sponsored, 78% decrease in lost time injuries. We've re-established our Safety 7 work health and safety system that's been launched. with 417 new hires, zero employees stood down during COVID-19 and something that's dear to my heart, being one of the originators of the Drummaster program back then, back a little while ago, 42,600 or over 42,500 agricultural chemical containers diverted from landfill and brought into recycling facilities practices and we've also taken up the TCFD which is the Taskforce on Climate Related Financial Reporting recommendations and targeting this reporting. It's also worth noting on the sustainability front that with the materiality assessment we did with Ernst & Young to identify the areas of focus, We've identified the community impact and investment, health and safety, employee attraction and retention, climate change, water availability, animal welfare, severe weather events, energy, waste management, corporate governance and innovation and technology areas to focus on. So again, a very exciting issue for us and also we're so well placed to be a leader in Australian agriculture. as one of the very few Australian-owned companies in this space. But what we tend to see with multinational companies in this space is that they tend to, and I've experienced it firsthand, they tend to have much more of a home-based focus on this and for all the international areas it's more of a box-ticking exercise, if I can say from direct personal experience. Okay, so moving to item 6 of our enablers on the 8.1 plan. The systems modernisation program, again we've been preparing ourselves for the right time to do this and many of you have been talking to Richard and myself over the last six years on when we press the button and we look at our systems. So we flagged in the half year that we would start to run this program. It's fully running now in terms of our service design period. and our change management components and the program management as such with decisions being made over the next 12 months. So when we talk on our 101 meetings we're happy to go into much more detail around this area but I think what gives me great comfort is being part of many of the discussions on this and throughout the whole business. These are very, very positive whether it's from branch land to head office to the product areas, the geographies. There's a very, very positive inclination towards this and I think that puts us in a position to have a successful project at the end of it. Item 7 in the 8-point plan in terms of our neighbours, attracting, retaining and developing our best people in a safe and inclusive environment. We've talked to the safety issues, the diversity issues, the most trusted brand issues. And I think it's very, very important for Elders at this stage of our development where we have a number of competitive people wanting to join Elders and to ensure that we keep the standards at the appropriate standards for the best people and don't disenfranchise our own people. And so that's been top of mind as we've gone through this period. And finally maintaining financial discipline and commitment to cost and capital management and I think you know that very clearly that Richard and my philosophy is that this is the core basis of running a successful agricultural company to consistent growth and that's in the April Plan we call it Unflinching Financial and Capital Management. On the strategic opportunities, still lots of opportunities. I think we may have got to 17% or 18% market share across the country as a general market share, obviously higher and lower in different areas. But massive opportunities to continue. We've got a pipeline of Bolton acquisitions. We've also got a bunch of more corporate acquisitions. But our very tight philosophies and templates means that a lot of them we look at, we know lots about, but whether we proceed or don't proceed really comes down to the numbers and the cultural fit. So just to close off then, to summarise the key highlights for the year, the reduction in lost time injuries, strong emphasis on safety and particularly through the COVID-19 period. It has been wonderful. Financial metrics are very strong and I guess our thinking was that the platform for these strong metrics was set with the first acorn plan and they'll remain to be a very solid platform for the third acorn plan. And from a strategic viewpoint, basically doing what we said we were going to do across the air integration, the tightened backward integration and the growth through both acquisitions. And now if we kick off after this week, we're fully focused on the third eight point plan. So with that, I'll open to questions.