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.

Thank you. At this time, if you'd like to ask a question, please press star then one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star then two. If you're on a speakerphone, please pick up the handset to ask your question. Our first question comes from Philippe Pepe of Blue Ocean Equities. Please go ahead.

Hi, guys. Well done on a great result in some pretty tough conditions. Lots of variability in the last five months. A couple of quick questions if I can. There's been a few varying press reports on sort of what are called the late winter season rain or lack of rain. I thought you mentioned earlier that lack of rainfall meant that some crop protection sales weren't as strong. Some parts of the country obviously are reporting too much rain where winter crops have been negatively impacted. So if you can clarify, was the late winter conditions a net positive or a net negative for elders? And then the second question, just on the next eight-point plan, the 5% to 10% random growth, presumably at the EBIT level and then at the MPAT level, whatever EBIT growth is, MPAT should be slightly higher. Could you just clarify that that's at the EBIT level and MPAT will be potentially a little more? Thanks.

Yeah, Phil, so is that an EBIT and earnings per share level is the commitment. In terms of the question on season, it's fair to say that our start to FY21, which picks up your area of question, has been solid. So I think with the dry or wet finish to a season it can cut both ways. So the dry finishing areas, there was concern that there may be interference in harvesting and there was also a concern there may be pinch grain. I guess the yin and yang of this is that broadly it's been okay so we haven't seen any material impact. And where there was additional rainfall towards the end of the season, this drives particularly fungicide activity or fungal activity in broadleaf winter crops like chickpeas, which is a positive. And the delay, talking through the northwest, there was one or two properties that I'm aware of that had delays. In the west, it's been fine. But I don't think there's any material impact. Richard, do you want to add to that?

Yeah, sure. So the comment I said, Phil, when I was sort of speaking through, so you might recall the half, we had a very, very strong start to the season. Obviously there was a lot of hectares sort of planted. So we saw really strong February and March sales because the season broke quite early. That sort of continued on until about sort of mid, really mid-July when I think things started to slow down and those post-emergents, you know, I think the expectations were a little bit high given some of the seasonal outlook, but we didn't sort of see that post-emergence pick up. And I think, once again, the rain sort of came about October again, so that you really hadn't quite... Not so much low rainfall, but below. I think you look across Australia and there was really winter rain was below average, I think, across most of Australia, really, after mid-July to August. So that was where sort of that post-emergence sort of demand wasn't as strong as we otherwise would have thought it would have.

Very good. Thank you.

Thanks, Phil.

Thank you. Our next question is from Michael Peat of Goldman Sachs. Please go ahead.

Hi, Mark and Richard. The first question, just on the backward integration, could you just give us a sense of, I think you've quoted a number about $20 million gross margin for Titan, but is there a revenue number you could give us a feel for and maybe just where you are on a scale of 1 to 10 in sort of getting that completed?

Okay, well I'll do the easy part. I'll give the scale of 1 to 10 because I can just make that up and Richard can talk to the details. My sense is we're maybe 35% along the pathway. I think there are a lot of other opportunities and we're growing as we go through this. It's a fluid process. We're growing and products are coming off patent as well during the next three years. So I think we've got a little way to go. And it's one of the most exciting parts of the next three years, Michael, is that so much of what we're doing in this uplift is actually within our control. And the role of our business improvement area in particular with our state GMs in rolling this out with AIR and Titan is great. So it's not actually market-related. Richard, do you want to put some detail around Michael's question, first part of the question?

Yep, sure. So in terms of where we're sort of at at the moment, so Titan sales I think this year sort of lifted from about $70 million up to about $130 million. So we saw really good, as I said, increase in that back-end integration sort of strategy. And that was actually across the board. From WA, which is one of the largest asset components before, there was a really nice take-up across southern Australia, and obviously with the seasons changing around, we did see that lift again in the eastern states. That's where that's sitting in terms of overall sales.

Great. Just on the vet animal health side, those synergies, they're the synergies, a fair chunk of them are captured in the air numbers, I imagine, but Could you give us a sense of how far through you are on that animal health backward integration piece?

Yeah. Oh, sorry, Richard, do you want to?

Yeah, I can cover this if you want. So most of the animal health margin-related benefits do, as I said, flow into the elders sort of side of it or the retail side of it when you look at sort of the splits. So, yeah, and in terms of that, probably this year what we saw was given the timing of the acquisition and Really, as people sort of set up their agreements for the year, we probably missed a lot of that sort of, I said, both going into this year in particular. So I would expect that to be probably one of the levers we've got coming into the F21 year when we start to see more of those synergies, which we did expect at the time of the acquisition, although we didn't sort of anticipate, I said, really sort of missing that window sort of this year.

Yeah, so Michael, just with that, just to put a little bit more flavour around as well, you may recall that we took the decision to actually have the pass-through egg products, which were the Titan veterinary products, actually run by AIR because they're specialists in that area. So we actually did a whole rebrand and a refocus, which was one of the things that changed our strategy. So Richard's right. I think you'll see it flowing out much more strongly in FY21.

Okay. And just finally, just on the branch networks between wholesale and retail, could you just give us a sense of how many you added or the final numbers for the year roughly on those, both your retail business and the wholesale?

Let me tell you that, Mark. Yeah. Sorry. Yeah, you go first.

Yeah. So this is sort of approximate numbers. So we're From the acquisition, there was about eight warehouses that we sort of brought on through the air network and approximately five sort of retail asset sites. And then carrying on through the year, there was another three asset acquisitions that sort of picked up during asset times of the year. So there's about three there.

Okay, thank you very much. Thanks, Michael.

Our next question is from James Ferrier of Walsons. Please go ahead.

Hi, guys. Thanks for your time today. First question perhaps for Richard, just can you give us a bit more detail around that branch network? expense there I would assume some of that eight point eight million dollars relates to the sort of more traditional STI LTI for the management team and then there's probably some more on top in relation to that branch incentive program yep sure so that's the eight point eight is just purely the new branch incentive so if you recall last year there was no incentives paid so year-on-year that's that's all of it and I would expect that just to grow

incrementally going sort of forward. So as mentioned, that's a new program that really we looked out into our competitors and other incentive programs and that one we sort of chose given the belief that really we thought that was going to actually drive the right performance and behaviour at sort of the front end sort of business. So that's probably, you'd really say, a one-off sort of cost this year bringing into the business to incentivise the branches to grow from the current levels and obviously it's based around use of capital and obviously growth on sort of stretch targets. So in terms of your other question, there's also another $5 million to $6 million in short-term incentives that's come through that corporate line.

Yeah, okay. So $5 million to $6 million increase year-on-year or absolute $5 million to $6 million?

Because there was no incentives last year. They're both increases above last year. So you've got the 8.8 plus the $5.5 million, $6 million of the corporate as well.

Okay, that's helpful. Maybe while you're at the mic, Richard, just looking in the accounts at the receivables and payables, there was, I think, a deferred livestock receivables, I should say. Can you just explain what that is?

Yep, sure. That's a new product that we've instigated So in the back half of the year, you'll obviously recall we have the Stockco distribution arrangement where we obviously distribute our products, but that mainly relates to loans or advances greater than $100,000. So these capture those $0,000 to $100,000 items that we've started to offer to our clients as another sort of product to help fund livestock.

Yeah, okay. And it's just reported separately to trade debtors for what reason?

I guess it's a specific asset product. I think under the accounting, it's not really a – because it's more in the lines of an advance. I think that under the standards, it requires you to separate that from your normal trade receivables because it can have varying periods between, I think, six to 12 months.

Okay, yeah, that's sort of extended terms, I see. And a similar question then, on the payable side, there was about $8 million of payables associated with supplier financing. Just the background to taking on a structure like that?

Yeah, you might recall certainly around last year in May when you certainly saw the impact of Titan coming through onto the balance sheet and cash flow in particular. I mentioned that point in time we were looking at different the structures or whatever the word to get back those supply terms. So really that program is just to bring those credit terms back related to Chinese factories when we're procuring that tech from all the formulated chemicals from China.

Yeah, okay, yep. Point of clarification to the income you're receiving from StockCo, does that get booked to agency or to financial services?

Financial services.

Yeah, okay. Now, your answer to Philip's question earlier just confused me a little bit just around the sort of the fact that sales slowed in effectively the fourth quarter of financial year 20. But on slide 11 of the PREZ, it talks about retail debtors increasing

partly because of higher fourth quarter sales can you just reconcile those two points sure it's a bit relative because if you look at last year you might recall obviously we just really in the deep depths of drought um so you know if you're comparing year on year uh we have obviously done better year on year but when you really the point is around the expectations from a good seasonal break obviously the break in sort of the drought the expectation was that those winter rains would have continued on, but obviously we didn't see that particularly in late July and August. So it's really around that demand we otherwise expected this year for post-emergence. But when you're comparing year on year, obviously given last year was in drought, we would have done, we did better.

Yeah, okay. That makes sense with the year on year. And finally, just the other acquisitions. I think it was $18 million spent last, I'm looking at the accounts, $18 million spent in FY20 on other acquisitions, $14 spent in FY19. Can you just give us a feel for the earnings contribution that's coming through from that outlook?

Yeah, I think for memory, it's about $4 million to $5 million, I think, when you're looking at that type of number. Yeah. You know, it's just got to be careful also when you're looking at those investing cash flows, if that's where you were looking at. we're obviously going to start to see some of those deferred considerations now coming through. For example, coming into F21, we're going to have quite a large payment for Titan, for example, because it's now three years since we have made that acquisition.

Yeah, no, it's fine. I was looking in the notes to the accounts rather than the cash flow. So that's sort of $4 million to $5 million in each of FY19 and FY20. Yes, yeah, that sounds about right. Yeah, so in a cumulative sense, you've got sort of close to $10 million of EBIT this year from acquisitions you've made at FY20 and FY19.

I'd have to go back and just have a look at that, but it depends on also how you look at the investment. So, for example, the livestock and transit acquisition. So we expected to make X and we've made Y sort of this year. So when we look at what's the acquisition-related earnings, we take what we expected and And then our performance or organic growth, we actually look at it as organic growth above that original business case. Oh, I see. Okay. Yeah, good one.

All right, that's great. Thanks for your time.

Thank you, James. Our next question is from David Pabucki of Macquarie. Please go ahead. Morning, Mark and Richard.

Congratulations on very strong results. Just firstly, just picking up on the backward integration piece, Can you provide a bit more colour around what you think the size of the prize is and what the margin upside could be?

I think what we've said is that from a pool of crop protection, if we're talking about crop protection to start with, from that pool that we meet some of our multinational suppliers are very, very important to us. They have generics as well as proprietary products. And so there will be a pool of the generic products that won't be accessible because we'll want to continue to support the multinational partners that we've supported for many years. In terms of the raw available generic product, we thought at the beginning of this process, a couple of years ago, there was around $250 million. We think that on average the upside of... of fact that integration is 10% to 15% margin. That varies product by product but these are just a broad realm of calculating it. If we think we're 35% of the way there, something like that, that gives you a sense of the next three years as we migrate products across to our own products. In animal health it's a smaller pool and we've only just started in the animal health or the veterinary product area but the margins as animal health approaches much more to the pharmaceuticals, human health side, margins tend to be higher and there could be 20-25% additional margin for every dollar that we bring across to our own products then.

That's great, thank you. And the second one is the past two summer crops were relatively poor. I mean, what's the impact from those years that you think you can call back during the upcoming summer crop?

Yeah, so Richard, do you want to run to that AB comparison that we did at the half year? Because we've updated that, so Richard can give you some good details around that.

Yeah, and I think I'll just back over what we sort of mentioned, certainly at the sort of the half-year presentation. So at that point in time, we believed the impact of the below acid summer crop, which is down 66% year-on-year, which is, once again, last year was down on average. We really thought of that putting time and nothing sort of changed. That cost us about $5 million to $6 million in sort of EBITs. If you look forward into this year, obviously it'll be a combination of where we're strong at and what happens with the irrigated cottons and even the dry land that goes in. But I guess the expectations, if conditions continue to obviously stay strong and improve, you would expect to get most of that back this year just because of what even ABEZ and what we're hearing on the ground, as Mark alluded to at the moment. But I think one thing that's a little bit unknown at the moment is how much dry land sort of cotton will go in and I guess sorghum at the point in time when people get their crops off.

Thanks, Richard. And just one last one. If you wouldn't mind just providing a bit more colour on that system modernisation project, what's the timeframe, the cost and the expected benefits there?

Yeah, sure, Dave. So as Mark sort of mentioned, at the moment we're really going through, as I said, scoping slash service design. expect to finish that around about February, March next year. So really at the half-year results, we'll have a much better clarity around what our expectations in terms of cost and timeline. But I think, as I said, we did some really back-of-the-hand type of estimates a while back, but it really just depends on what system you go with. Because I know From what I understand, if you pick a mid-tier asset system, it can be X, but if you actually go to an SAP or an Oracle, you may as well add, as I said, 25% to 50% on those costings. But broadly, the expectation will be Once we get into implementation, which will be the back half of next year, you're probably talking at least two years on from that. And then so the cost will be, once again, probably more comfortable to firm them up sort of the half year next year. Great, thank you very much.

That's it for me.

Thank you.

Thank you. Our next question is from Piers Flanagan of CLSA. Please go ahead.

Morning, Mark and Richard. Thanks for your time this morning. Just a couple of quick ones for me. Firstly, just on the new eight-point plan, I guess looking at that 5% to 10% growth through the cycle, I mean, how we should think about that sort of organic versus inorganic and maybe just referencing, I guess, sort of slide 17 with some of those opportunities there by state.

Yeah, I think, as I mentioned, for the third eight-point plan, there is a lot of self-help involved in this with our backward integration and our business improvement initiatives. So I think although we're continuing to run our bolt-on acquisition strategy, filling the strategic gaps, the self-help component is quite sizable. So, Richard, do you want to put some meat around that? I like the fact that it's much more reliant on what we're doing ourselves and I also like the fact that we're not forced to buy at multiples outside our three to five times for these bolt-ons because we've actually got a lot of controllables we're controlling. Sorry, Richard.

Yeah, thanks, Mark. So as Mark sort of mentioned there, really as we sort of look at certainly the first a couple of years of that eight-point plan will really be focused around, you'd say mostly around that organic sort of growth and really making sure we start to nail those benefits coming out of the air asset acquisition and obviously continuing the great progress we've made through the Titan asset back integration sort of strategy. So, yeah, that's where the focus has been. There's some other areas that Mark sort of mentioned that we're certainly focusing around as well. In terms of, you know, just broadly though, and probably from what I can see, really we expect a lot of that sort of growth at the moment to sort of come around that sort of rural products. I said product with, you know, I said other growth really, you know, maybe some other growth coming out of financial services and the like. But really when you look at sort of where the drivers and the metrics are sitting and certainly around livestock, you know, definitely at the moment, you know, as prices are quite high, the expectation will be, and I think you can also read that through, whether it's MLA and sort of ABA's expectation over the next sort of period that those prices will come off a little as the restocking actually happens and as things settle down a little bit as well. But hopefully at a point in time, we do see those volumes sort of offset that, which is probably no different to where we were back in F17 when we were having the same conversation in terms of where prices were and therefore where volumes were as well. So... And the offset to that is we really could see also wool at a point in time, wool as it starts to turn around, which has been one of those sort of negative drivers or those headwinds we've seen, particularly in the last sort of couple of years.

Sure. And then just on the air synergies you talked about exceeding expectations at the moment, is that both timing and, I guess, the value, the midpoint of that $8 million you'd called out?

Yeah, in both aspects.

Sure. Great. Thanks. That's all from me.

Yeah, thank you.

Thanks, Peter. Our next question is from Tony Mitchell of Ordmanet. Please go ahead.

Well done, Mark and Richard. I'd just like to ask you, Mark, you mentioned the new trade deal in Asia, which obviously includes China. Can you give us a detailed account of all the concerns that people have got about barley and cotton and all those things that the Chinese are threatening to implement? How does this agreement address those particular commodities?

I think the way to look at the agreement, Tony, is to look at non-China. So what it does for the ASEAN countries, which we're talking about, what, 800 million people, and China at 1.2, 1.4, depending on how it's quoted. I mean, what it does is actually provide a very solid and legitimate platform for our diversification strategies. On the Bali issue, now with Vietnam included under this, so we've got a formal, strong platform. So I see it more that way. And on the China front, as you and I have discussed many times, I actually feel quite optimistic about where we'll eventually get to with that relationship. But having said that, we control what we can control. We maintain our strong relationships, trading relationships with our ASEAN and Chinese partners and Northern Asia, because that's very, very important from our meat perspective. grain viewpoint and our producers control what they can control which is to produce a high quality ag commodity at a value price and the geopolitical stuff's the third part that's not in our control.

Alright and just one other question, the dividend payout ratio has fallen slightly this year, given you very strong results wouldn't you have thought the dividend payout ratio would have gone up?

Yeah, a good question and a very solid debate around the board table. I think from the board's viewpoints we've landed in the right spot, but it's certainly an open discussion, Tony.

Right. OK, thank you. Thank you. Our next question is from Jonathan Snape of Bell Potter Securities. Please go ahead.

Yeah, thanks, guys. Just a couple of questions, if I can. First of all, around air, look, I'm looking at the store numbers, and I think when you bought it, when it was in last year's number, I think it was somewhere around 340 stores. I think at the half, you said you'd added 10, and it looks like you closed at kind of 370, which would suggest the momentum in terms of members coming over accelerated in the second half. I'm just kind of interested in how you're seeing it at the moment. Has that momentum continued into the early stages of this year? And where do you think that store count could get? Because it's 10%, 15% higher than where it was when you initially did the numbers on this acquisition.

Yeah, I think we're seeing the various phases of the nutrient consolidation of Landmark and Ruralco, to be honest. So we've seen, and I think we've all had experiences where there's been mergers and acquisitions and it takes a little while, people take a little while, have a look-see before they make a call. And our thinking is that there has been a second wave and we suspect there'll be a third wave soon. of talented and quality members and people falling out of that position. We've just acquired one of the blue-chip CRC members in South Australia with multi-branch, high-quality business. and that will also prompt another bump in the momentum. So I think that's actually what's happening Jono and I think for us at a strategic level we need to determine if these are acquisition targets and elders branded companies or whether they're air member companies and that's what we're spending a lot of time working through in the geographies. Northern Rivers is a great example where we have a bunch of opportunities there. And they could be Ace Olsen branches because of the horticultural slant. They could be Elders branches or they could be Air Members, depending on how that rolls out. So that's more of where we're focused on in that area. But the momentum is definitely coming with us. We're looking at putting an air distribution facility, a warehouse in Launceston. And with that, that'll free up the capability to bring on more there in Tassie as well.

Now, those 20 that came on in the second half, I'm just kind of interested in terms of when the timing of that would have been, because if they weren't in that early stage of the third quarter, I assume they probably wouldn't have been that material in terms of the purchases in this year's result.

No, they wouldn't have been.

No, you're right. OK. And, look, just on to your market share, I'm referencing the heads of cattle, sheep and fertiliser volumes in particular and having a look at those. It looked like you went up in cattle, up in sheep in a market that was probably off 5-10% in terms of turn off of head this year and if I had a look at fertiliser it looked like you're up somewhere around about 18% odd year on year when if I looked at CSPP and IPL they were more like 12 or 13 so I'm just interested is am I seeing that right that you think you're picking up between 300 and 500 odd basis points in market share in the last 12 months in those categories and kind of trying to get an idea of what's growing what's doing that

Yeah, well, I think category by category, we'll have the discussions on that. I think to give just a case study, we would have, in cattle, in livestock, Richard, so maybe I'm thinking northern Australia, if there's 60,000 head, there's central Queensland, in the New England area. I'm thinking of all of the fallout where we've gained, yeah, there may be 100,000, 120,000 head, which equates to movement in market share points, apart from what we're doing with our own business. So these are new... I think we've got the order from memory. It's just under or close to 500 new customers across Australia in the last 12 months. And there may be, I think it's 25 or 26 new people who are all customer-facing and holding market share that have come across and joined us. So I think that you're picking the trend that we're seeing. Alright, great. Thanks both.

Thank you. Our next question is from Linda Moore of Morgans. Please go ahead.

Hi Mark and Richard and congratulations on a great result today. Just a few questions. Richard, can you just remind me what the Titan Deferred Consideration is in 21? Also, great cash flow result today. How should we think about sort of cash flow conversion going forward? Can you also remind us of what tax losses on and off balance sheet you have left now? And then just lastly, how we should think about the sort of corporate costs in 21? Thank you.

I reckon you've only got a quota of two questions, Belinda, but I'll try to cover them all actually quickly. So just to go again, just on the Titan, so really that was just to basically a facility to... bring back credit to terms effectively that we lost when we consolidated sort of Titan into our portfolio. So really, as I said, as I mentioned before, that was about $9 million, that facility at the end of, as I said, September. It actually goes up and down based on the cycles of purchasing from, as I said, really China, which is where most of the purchasing is happening from Titan. So that next year, depending on where our purchasing patterns occur, could be high because we only started to bring on... supply is really midway through the year when we established that facility but really all it was meant to do was to bring those supply terms back on that we lost through when we consolidated. In terms of the cash convert, in terms of the off balance sheet, there's still about $42 million of that asset sitting off balance sheet. The rest is sitting on balance sheet as of the end of the year and I'd expect that to all be back, all be on balance sheet within the next couple of years and If we go to the next obvious question is what my current thinking around when we use up all those tax losses, it's probably now, I think, looking between five to six years, depending on what the trajectory of the earnings profile and where that comes from looks at. In terms of cash conversion, I think you would have noted that there's a little bit of timing. We got a benefit because of livestock this year, but we also were sitting on, as I said, really some uh high sort of debtors or inventory certainly in retail sort of products but i'm pretty yeah pretty happy with the way the cash conversion uh went this year and some of the initiatives we put through so yeah the expectation was we could have another strong cash flow uh into next year as well uh and in terms of corporate costs that was your last one wasn't it in terms of corporate costs really the big list in corporate costs this year were um really those uh those incentives certainly the short-term incentives you might recall we had sort of zero last year so once again that's discretionary so I always call that a variable cost. So depending on where, you know, obviously where our budget sort of sits next year and what our targets sit will depend on whether we have that accrual next year. And probably where I'm sort of seeing at the moment in terms of looking forward, a couple of things I'm seeing will mean the corporate costs will be up next year. Corporate insurance, which is the insurance over certainly the whole of the group. Obviously, everybody would be aware that The insurance market's quite hard and print's been going up. So I'm looking at probably another 1 million, 1.5 million increase in that cost into next year. And we'll start to see some costs coming through, particularly around that system modernisation, which you can't capitalise. Certainly in the first parts of the program, you're not able to capitalise a lot of that research and development sort of piece of it. So the expectation will be that potentially anywhere up to $4 million And just to note on that, we've incurred about nearly up to a million dollars this year in just setting up the program office and some initial, as I said, the cost associated with getting that program up and running.

Thanks, Belinda. Thank you.

Thank you. Mr. Ellison, there are no further questions at this time. Would you like to make some closing comments?

Yeah, thank you and thanks for all coming on to the call and look forward to speaking with you over the next few days as we run through the results. So we'll talk to you then. Thank you very much.