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.

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

Good morning, Mark and Vanessa, and congratulations on the result.

Thank you.

I've got a couple of questions. First one, you mentioned some benefits from additional backward integration throughput. Just keen to hear a bit more detail on how much was due to Titan Ag versus Pastoral Ag and how you think penetration of your generic sales pools in those two categories is going?

Yeah, good question. So predominantly it's through Titan Ag and Apparent, so the crop protection brand that's within the air business. So I think last year when we kind of washed it all out between the two brands, Titaneg and Air, and Apparent, there was around 25% of the addressable generic market. And for this first half, I think it's fair to say, Vanessa, it's at the 30%, 35%. Correct, Mark. Yeah, yeah. So 30%, 35%. Largely, it's coming out of there because we've had both the market growth with the volume of product, a minor impact of products coming off patent, but most of it's come from there. In terms of pastoral ag, the veterinary, the animal health products through AIR have taken an increase. Vanessa might be able to help me on the proportion, but as you're aware, we kicked that off in full this year. So if you go out into the branch network now, you will see pastoral ag products in the majority of our branches having replaced off-patent animal health products as well.

Got it. And on the pastoral ag side, as I understand, you had about 20 parasiticides in that portfolio. How have you seen uptake there and also penetration of that sales pool similar to what you gave for Titan Ag?

Yeah, I think the broad, if I go to broad numbers, I think the target area there may have been as small as 20 million.

20 million, yeah.

Yeah, so 20 million target area, and we're addressing that. But I guess the fundamental difference is that for the titan egg margin increase, it's in the 10% to 15%, whereas the animal health products, it's the 20% to 30%. So I think by full year, on the numbers certainly that you've run, I think we'd probably be close to aligning to that, all things being equal. And then the third area that we haven't budgeted for, but we're actually getting some traction in, is the general merchandise area.

OK, great. And just one more on the flagged commodity price increases in the outlook. I assume this relates to the crop protection and fertilizer side of things. Can you maybe elaborate on what kind of pricing techniques we'll see to offset these increased input costs? And do you think these costs could be entirely passed on to customers given the strong demand environment at the moment?

Yeah, I think that's generally what happens, but there's a lag. So the trick for a well-managed business, and I guess over many years I've learned the hard way with glyphosate and with urea and tropherol and et cetera, is to ensure as the increasing cost profile is there that you're actually passing on the costs. Interestingly, in fertiliser we've seen it in a number of examples, particularly in the east, where we've been able to commit to volume or tonnage but not price and the price is provided to us at a later date because of the increasing price claim with suppliers not wanting to get caught. For us, the one to watch is Glyphosate, big volume and increasing claim and being sure At the end, when the price starts to go down, we're not caught with high-priced stock. But largely, it does slide through to the market.

Okay, that's great. Thanks, that's all from me.

Yeah, thank you.

Your next question comes from Michael Peach with Goldman Sachs. Please go ahead.

Hi, Mark and Vanessa. Just a first question on the wholesale side of the business. Just trying to get a sense of seasonality there, Mark. Now we've seen a first half result from that business and you mentioned the extra synergies. What should we expect for the second half? What's the normal seasonality of this business versus your others?

Yeah, I think it generally aligns. What we're seeing with AIR is that under Eleanor's ownership, they're able to expand and pick up more wholesale customers. We're looking at new warehouse distribution facilities in central Queensland, in Tasmania. We've got the second year of Western Australia. I think what we're seeing is a very strong growth base. In fact, you can see that in the numbers. There has been a very strong growth phase and it's interesting because when we talk around the AIR board and what's happening, it's largely under Elders' ownership and the governance and the capital availability that we're able to grow at a faster rate with greater confidence. So I would expect that AIR put out an internal target for the whole business. of getting the business to a revenue of a billion dollars over a five-year period and they're running hard on that. In terms of aligning with the Elder's Upward Plan, that fits very comfortably within the graph that we're targeting. But a lot of it's, you know, they're picking up new wholesales, they're picking up new geographies, expanding. There's ongoing fallout in that area from CRT. There are a couple of competitive challenges with start-ups for wholesale businesses that are also trying to... provide an anchor with fallout from rural co-wholesale business and landmark wholesale business, but there hasn't been great traction at this point yet, because it's not a matter of saying it and it happens. You need distribution centres, you need a sophisticated logistics system as AIR has.

Yeah, I guess just to follow up on that, we've got a lot of history on your other segments, but wholesale, is that Should that be a bigger contribution in the first half or second or just to sort of get a broad sense of that?

Yeah, I'm just trying to think of the balance. Given that there's a chunk of it, you know, there's 120 members that are like coffee farmer sort of wholesale members and they wouldn't run seasonally at all. They're strong in New South Wales, so you'd expect through... They're strong through New South Wales... and Victoria, so you'd expect that to be strong. Maybe we come back to you on it and give you a more precise thought, but it doesn't jump out at me as a significantly different kind of balance, apart from the growth aspect.

And just on the synergies, you mentioned that it looks like you've got to be double what you thought initially for year two, so around $10 million in the second year. So what's actually driven that? Can you give us an idea of what the actual projects or where you've captured that extra money?

Yeah, it's across multiple areas, to be honest, and hand-in-hand with our business improvement area, whether it be the sourcing of the animal health products, whether it be general merchandise. The elders branch network is using... air warehouses and smaller delivery mechanisms significantly greater. We've got, there's a chunk that's been out of our trading terms because we've combined all our trading terms with the third party suppliers. So there are multiple areas. Vanessa, do you want to highlight some of those areas? See you've got that in front of you.

Yeah, yeah. The majority has been through elders and elders access to air buying power. So we're looking for over the two years about six mil to be contributed from that and also through higher air ag chem margins. That's another big contributor looking at 3.5 million over the two years.

So what we're seeing Mark was a continuation of the momentum from last year with the introduction of the branch network incentives and so with every branch having its profitability on a dashboard and all the metrics of its profitability and the significant impact of both Titan backward integrated products and AIR sourced products. So AIR are providing all the animal health products, products and also general merchandise. And so there are no barriers to the synergies that we targeted. In many examples where I've run companies previously, there's been an internal fight to deliver synergies because it means that if someone wins, someone loses. But in this case, in the Air Elders case, both win. And as you know, the key Air managers are significant shareholders in Elders as well.

And just a final question, just on return on capital overall for the group, obviously sitting nicely above 20% at the moment, which is well above your 15% sort of target minimum, I guess. Any reason why that shouldn't remain there, at least for the second half, given we've got working capital being released in the second half, analysation of some of these acquisitions? All the thoughts should stay around that level. Is that a fair comment?

Yes, we're predicting it to stay around the 20%.

Great. Thanks, Vanessa.

Yeah, exactly for the reasons you've mentioned.

Yeah.

That's all I've got. Thank you. Thank you.

Your next question comes from James Ferrier with Wilson. Please go ahead.

Hi, Mark and Vanessa. Thanks for your time this morning. Vanessa, can I ask you to recap a couple of comments you provided on slide 7 in relation to the increased cost I think you gave a little bit of an itemisation there. Could you just run through those again? I missed those, unfortunately.

Yeah, no worries.

You were on Netflix, James?

What's that, Mark?

Were you on Netflix?

Yeah, that's right. Yeah, I just got a bit distracted.

Yeah, no worries. So in relation to $16.5 million, so approximately 44% is from acquisitions, so around $7 million.

The costs, I think.

Yeah, that's right. Oh, sorry, okay. So $7 million from acquisition costs, mainly that's the one and a half months of air, contributing $3.2 million and YPA $1.2 million. And then the remainder was increased insurance costs of $1.6 million. system modernisation cost of $1.3 billion and then about $3 or so billion in relation to other strategic areas, so business improvement, retail academy, sustainability and customer solutions. We also have the corporate SIF that we've accrued for the first time this half year of around $2.8 billion.

Sorry, that was the corporate, then like STI, et cetera?

Yes, correct.

So James, you recall historically we haven't provided for that in the first half and we took a changed view this year and I suspect it'll be an ongoing position now with making those provisions in the first half as well.

Yes, okay. That's helpful. Thank you. Mark, second question. Perhaps a little bit more colour on the retail products contribution there. The fertiliser component was up 35%, gross margin up 35%. Volume or margin driven?

I think just to set a bit of a backdrop, well Vanessa gets the volume margin trade off. So the first year after drought, so this will be eastern Australia, the first year after a drought there's normally an accumulation of nutrients in the soil because they haven't been taken out. So the first year out is normally a low fertilised year which was last year, a low nutrient year and then the second year generally returns to normal or above average. I'm not sure if you've got the volumes there. My suspicion is it would be volume-based, James, but I'll confirm that with you.

Yeah, no, that does make sense.

And I guess similarly, the farm supplies component of that profile was up 20% year on year. Is that sort of skewed to crop inputs or was there a bigger contribution, relatively speaking, from... aspects like general merch and animal health.

Yeah, no, we would have been skewed to crop inputs. And we also had, through that period, we had fallow spraying occurring in areas through eastern Australia with that early rainfall.

Yeah, actually, it's an interesting point you make, Mark. March last year was an exceptionally strong month, and I'm just wondering how As you look back now, how Elders actually performed in March 21, just to sort of isolate a month and get a bit of a sense of that balance state cut-off, how Elders performed March 21 versus PCP?

Yeah, it's a good question because last year, you'll recall that I think it was early March, Newfoundland ran out of MCPA and had talked publicly about supply chain issues through China. And there was a bit of a COVID rush by that occurred in March for us last year. And so I think we were quite... We believed that this year we may be down in March because of that, because of the extraordinary... buy-in last year, but the result was actually at or above. So there's a seasonal impact. It'll be interesting on Thursday, the new thumbs result for Australia if they've seen the same.

Yeah, okay. That's helpful colour. WA, I think on that slide 8 where you show the geographic splits, there's a $5.1 million uplift in WA. And just thinking about the the relative sizes and sort of weightings of the elders network geographically for New South Wales to be up 3.7 and WA to be up 5.1 shows you how strong the knockdown spray season was over in WA am I reading it correctly in saying that?

Yeah, I think so. There's that component, but there's also... We brought on a significant agency business in WA as well, in Broome, and also a rural products outlet in Broome, and that would also be impacting. And you're also aware that there's significant sheep, there's over a million sheep have been kind of still flowing to eastern states from WA.

Of course. Yep, yep. OK, that makes sense. On the financial services business, you mentioned the on balance sheet livestock funding that sort of is sitting there side by side with your investment in StockCo. What's the balance sheet exposure now, the total liability that Elders has in relation to livestock funding on balance sheet?

Yeah, so I think the last time we spoke, James, we talked about a $5 million trial and then a $10 million trial. Vanessa's just getting the number in front of her. It'll be in that order, $10 or $15 million.

Yeah, okay. Do you have a sense of how large you'd want to grow that?

You know, we debate it on a regular basis in terms of how far we go with our balance sheet lending because obviously the implications for return on capital. But our thinking is that with a partnership with StockCo, they're dealing with the above business and that's going quite well. And we're really meeting a customer need and it doesn't need to be dominant. But it's an ongoing debate based on our mix of portfolio and returns.

Yeah, okay. Then last question from me. The systems modernisation program, if I understood you correctly, you're sort of still in that scoping part of the project, so you don't really want to commit to specifics around total cost and likely benefits. But I guess in some ways it's a little bit strange that you've got quite a specific plan in terms of the rollout and the expected staging of the costs You don't have a cost number that you can give to the market.

Yeah, and the reason that we talked about OPEX versus CAPEX and the phasing of those expenditures was that that's been consistent feedback that I've got from shareholders that even if we haven't got a signed-off business case, it would be helpful to provide that information. So that's the reason it's been provided, James. So it's basically responding to shareholders' interest. We haven't... The program hasn't... The business case hasn't gone to the executive committee and it hasn't gone to the board with benefits and costs at this point. And so, you know, it would just be a guess. But that's actually the driver behind making those comments.

Yeah, OK. Now, that's good. So can we assume that it's probably more likely in November in conjunction with the elders' full-year result announcement that you would be... likely in a position to give those additional details?

Yes, that's right.

Okay.

Thank you, Don. James, I think the sort of details we'd be giving would be implications for Outlook and the 8.1 plan, so it'll be that sort of level of information.

Yes, okay. Great. Thank you.

Your next question comes from Philip Pepe with Blue Ocean Equities. Please go ahead.

Excuse me. Hi, guys. Thanks for taking my question. Look, most of mine have been answered and I was watching Netflix as the other questions are going on. Just a bigger picture stuff, given a lot of those questions being asked. So in the last few years, I mean, you've talked about managing the business, you know, through the ag cycle average. You know, first time in a while now we're coming at the average from above the longer term, you know, whatever you want to look at, ROIC, commodity prices, et cetera. Is there anything you do differently in the next 12 months versus the previous seven years? And what's the thinking of your potential acquisition targets in terms of selling now to you at current multiples versus what might happen if volumes may revert in a couple of years' time?

Yeah, thanks, Phil. Yeah, it's a good question because I think through all of the AFON plans, somewhere we've had some sort of safety net, whether it be a cost lever, whether it be an ETI lever, whether it be a seasonal lever, and that that's been helpful to allow us to manage the droughts, floods, bushfires, et cetera, that we've had. I think just on your last question first, In terms of the bolt-on strategy that we apply, the template we're using for these bolt-ons is three to five times multiple of EBITs. the normalised working capital and an earn out period has an average three year EBIT as the starting point and then the final payment is around obviously the final EBIT and then reconciled. So we're quite protected against upturns and downturns in that context. So if it goes up they win, we win. If it goes down they lose and we don't win as much. So I'm not so concerned there. But I take your point on the other end. The systems modernisation program running through this is perfectly timed to ensure that we have the most efficient platform from a... from a core infrastructure and data infrastructure viewpoint that allows the efficiency should things change significantly. In terms of the balance of our business, having the wholesale and retail channels to market and having those markets diversified by townies and hobby farmers versus hardcore retailers pastoralists and hardcore cropping businesses is also helpful. So I think for us, what we need to watch is where the bolt-ons go, the geographies and the products, to ensure that we're not heavy and we're not overbuy in riskier areas.

Very good. Thank you. Thanks, Phil.

Your next question comes from David Pobucky with Macquarie Group. Please go ahead.

Morning, Mark and Vanessa. Congratulations on the results. I just had a follow-up on one of the previous questions in terms of seasonality. Could you just clarify if you saw some pull forward in demand in the first half from the second half on the rural product side that would result in your first half, second half skew not being what you would typically see in an average year?

Yeah, thanks, Sam. So we did last year, and my point was that we didn't this year. What we've seen is a natural... There hasn't been any panicking buying. There's no... There hasn't been stockouts that have driven it, and there also hasn't been supply chain issues through China. Apart from the supply chain issues that everyone across all industries are feeling with container availability and the... the blocked courts and the sewers issue, et cetera, et cetera.

Thanks, Mark. That's clear. And second question, just on corporate costs. I think you've mentioned corporate costs to increase in the second half. Is that versus this first half or versus PCP? What's the expectation for the full year and for FY22, if you can provide that colour?

Yes, yes. So it'll be similar, similar to the first half, the costs. Thanks, Vanessa.

Thanks, Vanessa. Sorry, just one last question. In terms of the summer crop, how much of an earnings benefit did you receive from this summer crop versus virtually no summer crop in the PCP?

So what was the question? So how much summer crop uplift? That's the question? Is it how much summer crop uplift? Yeah, that's the question. Yeah, so $4.6 million was the uplift. from the prior year.

Great. Thank you very much. That's it for me.

Thanks Dan.

Thank you.

Your next question comes from Paul Jens with Pack Partners. Please go ahead.

Hello Mark, Vanessa. Just on the ag tech side, just a question around Thomas Elders and your weather zone and other things you've got there. Are you able to give us an idea as to the contribution from your online business now and where you might see that going in the next two to three years?

Yeah, it's not material in the scheme of things to this point. We've done a lot of work. In fact, we had Thomas Elder Institute and Thomas Elder Consulting, NCEM for that matter, in talking to us last week around the strategy. At this point, there's not, as with a lot of these areas, Paul, you'd be well aware, there's a lot of investment and hasn't been significant return apart from the Thomas Elder Consulting fee-for-service activity that occurs around Australia on a regular basis, and that's three or four million on average in a good year, which obviously is very high ROC. Our question, I know it's a question that you've also been contemplating, is where to go hard, where not to go hard. We've taken the decision to put the AgTech initiatives under our Chief Information Officer, under Viv, and with a great alignment there. And obviously we're doing work with Telstra and Microsoft and a bunch of others around trying to get greater alignment with our systems modernisation and the platforms we're developing for AgTech.

So then the following question then is just with, I suppose, real estate and finance giving about the same contribution around that sort of 8%, 9%. Can you see, I suppose, finance with this work that Viv and the team are doing sort of stepping up with your online business? Is that something where we could see that becoming a significant part of the business?

I think it's a dream. It's a dream. I mean, we, you know, the multiple financing options... that occur in agriculture through most of the commodities. Our sense is they must be able to be done much more efficiently, much more effectively. But historically, we haven't had our own base system platform to be able to advance them. So we're hopeful that we can move this. And we've decided to boycott supply chain financing for the moment and just leave that alone.

All right. Thanks, Mark. Thanks, Vanessa. Talk to you later in the week. Yeah. Thanks, Paul.

Thanks. Once again, if you wish to ask a question, please press star 1 on your telephone. Your next question comes from Jonathan Snape with Bell Potter Securities. Please go ahead.

Yeah. Hi. Can you hear me okay?

Yeah. How are you going, John?

Yeah. Good. Thanks, Mark. Just a quick one. On the tax, I just want to pick up on a comment before that was made about that. I think In your balance sheet, you've got $22 million unrecognised, which it sounds like you're going to bring the rest of that to account in the next half, which would suggest that you're going to start having a corporate tax expense through the P&L in 22 and 23, but you probably won't pay cash tax until what, about the first half of 24. Is that the right way to think about it?

Yes, that's exactly spot on.

Okay, thank you.

There's a danger telling him he's spot on. You see, Richard would never have done that.

I thought you let him have a farewell tour at least.

Okay, any other questions?

There are no further questions at this time. I'll now hand back to Mr. Allison for closing remarks.

Okay, well, thanks very much and look forward to talking with you individually or on small groups as you run through this week. And thank you for coming into the call.