Elders Limited

Thank you very much and welcome to all for the Elders Half Year Results presentation for FY21. Thank you for joining Vanessa and myself for this session. So Vanessa is our Group Financial Controller and will stand in for our newly appointed CFO, Tanya Foster, until her commencement date of May 31st this year. I'd also like to take the opportunity to acknowledge our previous CFO, Richard Davey, who worked tirelessly over the major turnaround period and made a major contribution through this period with Elders. He'll be with Elders until the end of June this year. So this is the first six months of our third eight-point plan and as you are all aware, the philosophy that Elders has from the first eight-point plan has been to control what we can control and not to dwell too much on what we can't control. to have a cost and capital structure to allow us to make good returns in bad years and to make great returns in good years. This half result is an example of good returns in good market conditions. We use our multiple diversifications by product, service, geography, crop segment, commercial model and channel to market and our financial discipline to deliver consistent and high returns for our stakeholders over multiple years. The performance of Elder's Service's clear and consistent strategy in multiple diversifications, its high financial discipline and hard work and committed team, and enduring customer anchor as the most trusted brand in Australian agriculture has been outstanding for the first year, first half results. The result is strong in safety, sustainability, profit, strong in return on capital, back above the 20% number, strong in cash and strong in strategic delivery. The market conditions and commodity prices have been positive, as we're all aware, although it should be noted that the contribution of market conditions to the result is in the order of 35% of the upside, with bolt-on acquisitions contributing some 21% of the result and organic or self-help activities, things we can control, contributing some 44% of the growth. This is strongly aligned to the focus of our third 8.1 plan. So the approach for today is that I will provide an overview of the results, Vanessa will go to the detail of our financial performance and then I will provide an update on the focus areas of the third 8.1 plan and also the outlook. Just looking at the first slide on slide four in terms of the key highlights, strong outcomes across safety with two lost time injuries for the first six months and a significant improvement in a number of other areas as we've worked through them coming out of the COVID-19 period. In terms of financial performance, Solid uplift in EBIT of 40%. Acceptable and quite good cash flow, operating cash flow, given the circumstances and the build-up to the winter crop. Leverage down and, importantly, significant improvement in earnings per share. Elders will pay an interim dividend of 20 cents per share, 20% ranked. and this is compared to $0.09 at the same time last year. And also note that we didn't access any of the government supports such as JobKeeper throughout this period. From a strategic viewpoint, on track across a number of the strategic areas when we look at the 8.1 plan, I'll go to the detail of that, but largely on track or ahead of where we believe we would be at this stage. And then the key enabler for this 8.1 plan, for the third 8.1 plan, being systems modernisation program and we've completed the service design phase and also look on track as we roll that out throughout this eight point plan period. So moving to the next slide. And again, on track with our operational safety, our sustainability initiatives, good work there with the report released last year, our modern slavery statement, ethical contracting framework launched, action plan for full alignment with TCFD recommendations on track. and also the ongoing significant contribution that we look to make to regional and rural communities. Efficiency and growth also on track and with our core relationships across the spectrum of our business on track. So looking at the next slide, on slide 6, and just to highlight a few of the key financials before Vanessa goes to the detail, you can see the underlying EBIT at 73.8, some 40% up on last year. Underlying profit after tax at $67 million, 41% up on last year. Operating cash flow at $23.9 million. Underlying return on capital at 20.1%. You'll recall that we reset the ROC target for the third eight-point plan at 15%, and for the first half we're operating at the 20.1%. Strong growth in underlying earnings per share and a reduction of the leverage ratio. So with that, I'd like to hand over to Vanessa and she'll go to the detail as we show the strong growth across all products, all geographies, all services. Thanks, Vanessa.

Thanks, Mark. Favourable performance was achieved across most products through a mixture of acquisition, organic and market benefits. As highlighted in grey, performance by product area at a gross margin level was up approximately 18% on the prior comparative period. Retail products increased by 25%, benefiting from our strategic initiatives relating to optimised pricing and backward integration throughput. Favourable conditions produced a strong summer crop result. increasing our gross margin and winter crop remains to have a positive outlook. Wholesale products performed strongly in the first half and is up 68% due to increased sales predominantly from backward integration. High livestock prices have strengthened our agency services business. However, some adverse impacts have been seen within our feed and processing business as the Kalara feedlot has endured pricing pressures on their margin. Real estate margin has improved by 27% across most service offerings with earnings from residential being the feature which is up 70% on the prior comparative period. Financial services 10% uplift has mainly come from favourable earnings from equity-accounted investments as well as growth from our livestock in transit delivery warranty product and implementation of our new livestock funding product. Branch incentives, which is in its second year, has increased in line with EBIT growth in the business. Costs were up 11% or $16.5 million on last year. This is comprised of approximately 44% from acquisitions. The remainder relates to increased insurance costs of $1.6 million, system modernisation costs of $1.3 million and investment in strategic areas. For example, business improvement, retail academy, sustainability and customer solutions to neighbour few. We also recognise a corporate SIP provision of $2.75 million for the first time at half a year, due to strong first half performance and positive outlook for the second half. Moving on to slide eight. Now looking at the result by geography, all states are up compared to the prior comparative period. Key drivers of this include improved sales across segments, particularly in rural products. Wholesale products strong performance translated to an EBIT uplift of $6.7 million. A strong retail products result was a feature in New South Wales EBIT uplift with renewed summer cropping activity including drought affected areas producing higher sales. Backward integration initiatives were also a contributor. Queensland and Northern Territory performed favourable in all key product areas and included acquisition growth of $400,000. Confidence in Winter Crop Outlook was a key driver in Victoria and Riverina results, boosting retail product sales in chemical and fertiliser products. SA performed strongly on the prior comparative period, in part mostly due to retail products with uplifts in both sales and margins, and contributed also by the YC acquisition on the 1st of December 2020. Tasmania is slightly up on last year. Despite showing some gains in retail product margins, this was partially offset by lower livestock volumes. Like Queensland and Northern Territory, Western Australia outperformed the prior comparative period in all key areas. with improvement in retail, real estate and livestock. Corporate and other costs increased as a result of investment in new initiatives. Initial system modernisation costs, higher insurance costs and performance initiatives as previously mentioned. Moving on to slide nine. ROC for the group finished at 20.1% at the half and 18.5% over a three year average. ROC at the half is 1.2% up on financial year 20 and 2.1% above the prior comparative period. The key driver of this result pertains to improved earnings across rural products, more than offsetting increased acquisition and working capital. Average capital increased by $98.3 million to $483 million for the half. Rural products comprises around 74% of this increase, mostly due to increased retail product debtors, which is typical at this time of the year, as well as inventory build up to support quarter three sales and higher wholesale working capital associated with acquisitions and organic growth. High livestock prices have impacted average capital across both our agency services and feed and processing businesses, with prices driving an increase in livestock turnover, which in turn has lifted the average working capital. While Kalara Feedlot's working capital is largely driven by higher inventory due to both price and volume. Moving on to slide 10. Operating cash flow for the period was $23.9 million which equates to cash conversions of 35% on underlying net pack. This is a typical cash conversion rate for this time of the year and we expect to achieve our target of 80% by year end. Operating cash flow is comprised largely of EBITDA of 94.3 million, offset by movement in assets and liabilities of 62.2 million. Key drivers of movement include growth in rural products with increased debtors for both retail and wholesale and higher retail inventory to support quarter three sales and favourable creditors. timing of livestock receipts from large clients during March and higher cattle inventory at Killara. Investing and financing cash flow movements relate to the purchase and funding of the air acquisition in the first half last year. Turning now to slide 11. Debt levels at Ballast States have decreased partly due to the impact of AASB 16 leases. with lower debt due to payments more than offsetting new additions in the half. There is also lower investing cash flows as stated previously with the prior year including the air acquisition. Average debt is slightly up on the prior comparative period due to increases in our trade receivables facility in line with higher retail products debtors from sales growth. After removing the impact of AASB 16 leases, all our key ratios have improved on the prior comparative period, contributed largely by increased earnings. We are also well placed within our banking covenants, with significant headroom in all three as highlighted in the slide. We also have significant undrawn facilities. Turning now to slide 12. Elders will pay an interim dividend of 20 cents per share for the first half franked at 20%. The increase in the dividend from 13 cents to 20 cents more than offsets the post-tax impact of the reduction in franking percentage. Elders no longer have sufficient franking credits to pay fully franked dividends due to its significant carried forward tax losses that are likely to be fully exhausted around 2025. Consequently, elders will not be in a position to pay fully franked dividends until then. Current forecasts indicate that a partial franking rate of 20% is sustainable based on dividend forecasts from non-wholly owned interests. and the current number of ordinary shares on issue. Elders have carried forward tax losses of $141.9 million tax affected, $119.6 million on balance sheet and $22.3 million off balance sheet. It is anticipated that all losses will be on balance sheet by year end. Whilst Elders only pays a minimal amount of corporate taxes due to a significant amount of carry forward tax losses, it has contributed to the Australian economy with the payment of payroll tax, FBT and GST. I will now hand back over to Mark.

Thanks, Vanessa. So just moving to the next slide, on slide 13, and this is the third eight-point plan that many of you would have already seen about four years last year. So our mission through to 2023 with the third eight-point plan is 5% to 10% growth in EBIT and earnings per share through the cycles at above 15% return on capital to have an industry-leading sustainability outcomes across our health, safety, community environment and governance and also to maintain the position as the most trusted brand in agriculture and regional rural Australia. It is worth noting that this is the third eight point plan. For the first eight point plan we took the business from 27 to 71 million EBIT at above 20% return on capital. The second April plan from 71 million to 119 million EBIT at an average through the period above 20% return on capital. And the plan of 5% to 10% growth, which we've exceeded in the last two three-year periods, it looks like it's on track if we're looking at the outlook and the initiatives. I think it's quite important because there is consideration that Elders is tapering off and we've turned around, consolidated and we've had the growth that we can deliver. But clearly as we look through all the initiatives and our plans, we've really reset the platform for significantly greater growth as we move through this period and through to the next five to ten years for the business. When we look at the strategic enablers in the third eight point plan from winning market share, capturing more gross margin, strengthening of our service offerings, optimising our feed and processing businesses and developing our sustainability program, details of the achievements in these will be shown on the next slide and I'm sure we'll go through many of those in detail with the question time. And then the enablers of the Third Acorn Plan, the systems modernisation program that we've started the investment and development of, attracting and retaining the best people and then maintaining the very strong financial discipline. So if we move to the next slide and just touch on a few of these areas. And as I say, a number of these will be fleshed out in much greater detail in questions where there's specific interest. But it is worth noting that through this period, if we look at winning market share, which is largely around our acquisition of bolt-on strategy, and capturing gross margin, which is largely around the self-help organic growth. Just to reiterate my initial comments, of this half-year result, 35% came from the market, 21% from the bolt-on aspects, and 44% from the self-help areas. So in terms of the control, what we control, can control, I think this philosophy has been run strongly as we look at the results. From a bolt-on viewpoint that you would have noted in the details, we've had six greenfield sites established through this period and also six bolt-ons through this period. Now these spread across multiple products and services and also multiple geographies. If I refer you to the slide in the appendix which shows the strategic gaps, by geography and by product and service, you can see that there are multiple further opportunities. When we look at the business development pipeline, currently there are 17 active candidates in the business development pipeline and obviously they all won't come to fruition, but from our viewpoint they are generally low multiple in the area of 500,000 EBIT to four or five million EBIT and we weigh heavily that the people in these businesses fit the culture, fit the values and fit the outlook that we have for the business. Just going to another area within the gross margin aspect, the synergies for air. You recall that the average position when we bought air was that over a two year period we'd extract 8 million of synergies and given that we part owned air for the first period we thought it would be split 3 million and 5 million over the two year period. For the first period the actual number was in the order of 5 million rather than 3 million and for the second period we're targeting 5 million and our sense is that we should be around double that. So the synergies from air and the ongoing momentum of air has continued very, very strongly under Alva's ownership. I think the final point I'd make around winning market share and capturing more gross margin, one of our sets of targets and KPIs, or the metrics that we measure from the... ..actually, we put in place the thinking prior to Nutrien buying Ruralco was to gain some of the pull-out, both as acquisitions, as people and as customers, Last year for the full year it was just under 500 customers from Nutrien that come across to Elders and it's quite interesting for the first, we'd always talked about waves of activity in terms of competitive activity. For the first six months of this year including acquisitions to be fair there's over 900 customers. have come across in the same period. Similarly there were four acquisitions from the Nutrien stable last year for the whole year and to this point we've had one but five others in play at the moment and last year 23 people, so these are revenue earning front end people, had come across and for the first six months about eight people had come across. So there's good progress on those fronts. In terms of the sustainability program, also good progress being made there. The next slide highlights some of the other issues. We won't move to that as yet. But good progress. And I think from an elder's viewpoint, We don't want to be box ticking in this area. We want to be authentic. We want to be real and we want to be practical. And we've got a massive platform of activity and initiatives to allow us to contribute significantly across major areas in the community, in health, in water availability, in animal welfare, in energy and waste management, in governance across regional rural Australia. And we'll highlight a few of those in the next slide. And then on the systems modernisation program, Viv DeRoss has been appointed as the new CIO, and he's making great progress. I think there's a very strong comfort level throughout the business in terms of our systems modernisation program, and it's rolling out as a five-year program, so it'll run across this eight-point plan period as an enabler and into the next. There has been some interest... around the phasing of the program and the costs. At this point we don't have a signed off program so we can't validate costs and benefits because the business case hasn't been completed and signed off at this stage. But it's worth noting that year two we're anticipating 15% of the spend, year three 36% of the spend And over the period of the program, the five-year period, we're thinking that 30% of the expenditure will be OPEX and 70% will be CAPEX. So until we have a sign-off program, I think they're the details that we can provide. But I can say that we feel very comfortable that we're on track with this program and see it as a significant platform for our ongoing growth. So moving to the next slide, in terms of sustainability, now the sustainability report was launched last year with the annual results. And again, good progress. I know we're in at least one ESG fund already and we've made good progress there. But if we just take it to the practical and say, well, what actually... If we look at community impact, we look at all of the work that we do around Australia with local communities, charities, the Royal Flying Doctors Service program that we're involved with and many, many other activities which are just part of being involved I guess, make up being the most trusted brand in regional rural Australia, having been around for 182 years. In terms of health and safety, with our Safety Week, our AgSafe partnerships, the multiple safety action teams, safety steering committees, et cetera, and also the Employee Assistance Programme, which offers counselling for both our people and our communities. Significant work there. On the climate change area, the carbon footprint analysis that we've done, climate change risks and opportunities assessments and the carbon farming advisory services we're providing, Just to start, you'll see we're moving more in that area. Water availability as well. If we look at the severe weather events that have occurred, whether it be in the east coast or north-western Australia, where we play a significant role, and largely very, very practical things like extending payment periods so that the last thing that people need to worry about... story last week from a guy up north in Western Australia where he had one of his producers come in saying hey the place has been blown away I don't know what bills I owe can you tell me because I don't want to be a late payer even though he was in crisis himself and The guy was brought to tears and we said we'll waive that and allow you to pay when you can pull this together. So this happens every day with people wearing pink shirts all around Australia. It has for a long, long time. Looking at the waste management area, the drum master program we support reusable CHEP pellets, the branch chemical drum collection program, cleansing and redistribution, and the organic waste management program that we have in place in Kalara, as well as on the energy front, the solar panels in branches, hybrid vehicles in our elders fleet, developing an organisational wide emissions reduction strategy. and setting our targets. So there's lots of detail around that, but I felt it was worth just highlighting a couple of the areas. That detail's in the sustainability report, and we're happy to talk to any investors who want to talk in detail around those initiatives. So if we move to the next slide on market outlook, and I think it's fair to say that most people are aware that agriculture and the outlook for agriculture... is quite strong. When we look through rural products, there's a lot of talk around winter crop and the Grand Cork presentation. I know Rob talked about Outlook and the public figures and the positive nature there. I think it's worth also noting that the strong environmental conditions and rainfall that occurred six weeks, eight weeks ago has also brought a lot of the irrigation country back up to a reasonable position and we would expect to have a very strong summer crop that flows out through late September, October, November through the east coast of Australia and particularly Davao North but also in the Murrumbidgee Irrigation Area. So that outlook remains positive. The agency services through livestock, sheep and cattle, a lot of debate around cattle prices. And as a simplistic North Queenslander, rather than all the modelling, I just look at all the grass that's available. The national herd is down significantly. We're still drawing significant northern cattle into Vietnam and Indonesia with live export. And there are a lot of... producers have sold cattle at very high prices and can't get back into the market. So in terms of supply, they're Brahman cattle as far south as Armidale and Glen Innes now, grey Brahman cattle. Good luck to the winter guys. And the sense to me is supply and demand says that this remains firm. Our internal position is always to be highly conservative and we see cattle prices softening and dropping off. However, it remains a significant safety net for the business. Real estate, a similar scenario where we had thought that the pipeline and demand may drop off late last year, but it's remained very, very strong as I think we're all aware. And the outlook looks strong. Interestingly, with the reduction in Chinese investment money coming into Australia through the ramped up FERB conditions, that Canadian money and other money and large family money is actually filling the gap and keeping the market quite buoyant. Financial services moving along nicely. We're ahead of system with the larger loans and fully on balance sheet, less than $100,000 loans. We've also had a very, very positive result, largely pitched at the restocker market that Stockco is also involved in. So this is outside of the Stockco frame. And feed and processing, I guess the one area of the business that has the downside, and this is the cost of diversification, where you have upside, you have downside. And Collara, through good seasonal conditions, has grown its own forage, its own forage sorghum and maize that's used in its rations. And that's offset the cost of increased cattle prices. in the order of 25%. So we haven't been able to fully offset the increase of feeder stock and that will be reflected in the, or is reflected in the results. The Chinese business, Elders Fine Foods, is immaterial and operates at breakeven every now and then but obviously it's never been material in the scheme of things at any rate. So the final comment I'd make around Outlook, and this may go to questions. Firstly, on the mouse clave that's got a lot of media coverage, Again, you'd be aware this is mostly in New South Wales. The government has allocated $50 million to fund eight grain treatment sites. There's also been fast tracking of the active ingredient registration for control through the APBMA, the regulatory body for the control of mice. And historically through mice plagues as it gets colder the mice are killed off and it stops and the next cycle occurs three or four years later. So in terms of impact on elders for this forum, minimal impact although we're doing what we can to support our clients in these areas. The second area that I'd like to put a particular focus on is around the geopolitical issues and implications for elders. I think everyone's, again, very aware of China, Australia, US issues. But in terms of implications for elders, it's quite minimal. The way our trade and access agreements are set up as Australian agriculture forges ahead to 100 billion target pre-farm gate, by 2030, we've always had an eye to diversifying markets. We've currently got the, I think it's the seventh or eighth round of the Indian Free Trade Agreement running through. Clearly there won't be beef in that agreement, but there is lamb and other commodities in that agreement. We have the EU agreement and the UK Free Trade Agreement also running parallel, which opens up further markets. And we also had last year in November, December, the Regional Comprehensive Partnership Agreement through ASEAN countries. So I think from an Australian agricultural viewpoint, there are other markets. Barley has shown that with the Vietnamese market. And I think it's also worth noting that our biggest competitors here for a lot of our commodities are kind of bearing down on our traditional markets at any rate. So Canada in particular and the US, but also the Chinese beef market was always being targeted by Brazil and Australia. and Argentina as they've been doing with the Indonesian market. So this is normal business as usual. And in terms of implications for Australian agriculture and for elders, our sense is that it's not material in the scheme of things as we move through these cycles. The other example is around wine. and I guess Treasury is the one that's been highlighted here. We work closely with Treasury Wine. They're a great partner and we've had a long relationship with them. And I guess it's the same boat as Australia, finding other markets, diversifying our business, as we should be. Lobsters in Western Australia are quite a unique example where the market was actually created by the Chinese and we were able to take advantage of it and as it's turned out, they've taken that market away. So I'll just finish on there for heading to questions. In the appendix you'll see the business model, our segmentations, our sensitivities, our points of presence, our strategic gaps and also a longer term outlook from ABAR to consider. But I think with that we'll go to questions.