Elders Limited

Thank you very much and welcome to everybody for the Elders Half Year Results presentation for FY22. And I'm joined here by Tanya Foster who will be assisting for the larger part of the presentation. From an elders view, this is the first half of our third eight point plan. The elders philosophy since the first eight point plan has been to control what we control and not to dwell on what we can't control. To have a capital cost structure to allow us to make good returns in bad years and to make great returns in good years. As you can see by the high key results that we're reviewing today, this is an example of great 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 shareholders. In summary, we aim to control what we can control. Over the first 18 months of our current Aikman Plan, the third Aikman Plan, we've experienced strong market conditions across most production enterprises and geographies, although this is coincided with the tail end of COVID impacts, supply chain disruptions and geopolitical uncertainty. We have also had positive livestock prices, winter crop and summer conditions over more recent times. In this context, 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 remains quite solid. So the results are strong in safety, sustainability, profit, strong in the return on capital, and strong in strategic delivery. I would point out however, as we look through the presentation, that the favourable market conditions account for 42% of the considerable upside from this time last year. And I think that's the key consideration when we look at these results. and also the key consideration when we look at the second half and when we also look at the next two to three years outlook in agriculture. So 58% of the upside has come from our organic growth with the multiple initiatives in line with the APON plan and also from the bolt-on acquisition strategy which has us filling geographical gaps throughout the regional rural Australia in key farming areas. So our commitment to provide 5-10% growth in EBIT and earnings per share at a minimum of 15% return on capital in a sustainable manner through our safe and inclusive workplace remains intact. The results today are a continuation of our over-delivery of this commitment with much achieved and much, much more to come. Importantly, we've also upgraded our outlook to 30-40% up on last year and we see a very positive mid-term outlook and commit to the 5-10% growth through the agricultural cycles in addition to this. So the approach for today is that I will provide an overview of the results, Tanya will go into the detail of our financial performance, and then I'll provide an update on the focus and progress of our third APLIN plan and the outlook. So if we go to the agenda slide, just a note on the agenda slide, there are three slides in the appendix that may be helpful for people, participants in this call. One is the business model, a refresh of that, the profit sensitivity calculations and also the capital management framework that Tanya alluded to when we get to that part of the presentation. So moving to the business update and firstly considering all of our key stakeholders from a people viewpoint with improving safety and we've seen that move from 33 lost time injuries at the beginning of the first affluent plan to one at the half year, strong and highly engaged You can see with the high engagement levels. At a customer level, most trusted brand, very high customer satisfaction as indicated by the Net Promoter Score. From a community viewpoint, our continuing 183 year commitment to regional and rural DNA and our customer base and the commitments we make there, and from a shareholder viewpoint, strong financial performance while delivering the other aspects of our APON plan. So moving to the next slide, I'll just highlight a few of the key areas where we have EBIT growing by 8% on the same time last year, very strong growth and we'll go into detail of that. Return on capital with our reset target a couple of years ago of 15% from 20, we're sitting at 27.8%. So very strong return on capital. From a leverage ratio viewpoint, 1.2. So we've seen this strengthening over the last couple of years. In fact, our pathway back from the acquisition of air to what we thought was an acceptable leverage ratio, we've exceeded that pathway back. And then looking at cash conversion, as we do see leading into the end of our first half, which coincides with the overlap in the pre-plant and winter cropping season, we do see a build-up of capital within the business. and then we'll go through the other factors that have driven that strengthening this year, but with the view that towards the end of the financial year, at the end of September, we remain committed to our 90% conversion target, and we'll go to the details of that shortly. So, looking at safety, health and wellbeing, and this slide emphasises my earlier point from a safety viewpoint, 10% reduction in the total recordable injury frequency, strong performance around our lost time injuries over many years, and a business that has safety is the number one priority when we run our internal staff surveys. From a sustainability viewpoint, again, good progress. So you'll recall that we set our climate targets last year with 100% renewable electricity across our business in Australia by 2025, 50% reduction in scope one and scope two emissions intensity, and our net zero scope one and scope two submissions by 2050. So our progress is very strong. And I think from our viewpoint, we feel comfortable that the focus and the priority across this area, across our business has strengthened significantly and will continue to deliver in an authentic way. So with that, I'd like to hand over to Tanya and she'll go to the detail of the key drivers in the business.

Thanks Mark. Okay, over to the financial table as you see in front of you. Firstly, I'd like to say really strong performance across our key metrics. Firstly, you see our sales revenue up 38%. We've had strong double digit growth across all of our products, particularly in rural products with a 47% increase. Partly driven by demand for crop inputs, partly inflation driven, but partly seasonal. Fertiliser is one of the increases up 142 million or 77% and our Ag Chem product lines up 115 million or 44%. I should also mention high land stock prices and certainly our acquisition of organic growth has contributed to the sales uplift. Secondly, our growth margin increased by 84.9 million, 35%. Again, consistent with our sales growth and we're holding our growth margin relatively flat with strong performance of a 1% increase in our rural products business. This is off the back of our own product or backward integration strategy. Costs you see are up 25.8 million or 15%. Pleasing to see our cost growth is less than our sales growth and our cost to earnings ratio falling to 59% from 69%. There's a couple of key reasons for our cost growth. We've made acquisitions in the half and we've also added 298 FTE to support our growth agenda. EBIT up 80% off the back of those sales and margin performance. Net profit up after tax is up 23 million or 34%. It's worth noting that this is the first year that we've included income tax expense in our underlying earnings. In the prior half, we excluded income tax expense because we were recognising tax losses. Return on capital, very happy with the 27.8% return. It exceeds the three-year average of 22%. Our net debt is increasing whilst our leverage ratio is decreasing. Net debt primarily up to support the high working capital we're carrying due to the high input prices and obviously wanting to secure supply for our customers. The only soft spot in our result is the negative operating cash flow. We flagged this at the end of 2021. They were expecting our cash conversion to be weak in the first half given the sterling outlook at that time and also the high price inflation and wanting to secure supply. I'll go through that in a bit more detail. Underlying earnings per share at $0.58 per share. is up 15 cents or 36%. And then finally a dividend per share. We're really pleased to announce a 28 cent per share dividend. It's up 40% on the first half 21 and up on the second half 21 as well. So a really good outcome there. Turning over now to over the last five years, we always think it's worth sharing the trajectory of our half and half in year on year performance. So what you see here is the CAGR across the last five years and it's worth noting that the first half has been our strongest year on record with positive CAGR across all metrics. This has been driven by both organic growth and some acquisitions and obviously the high demand for our product as well as price inflation. You can see EBIT growing a healthy 30% across each of the hubs. Our costs are increasing by 10%, so which is less than our revenue growth and as I mentioned earlier, our cost to earnings has fallen to 59%. Pleasing to see our earnings per share, a caper of 5%. You'll see a blip in FY19 and FY20, which is a result of the issuance for the air acquisition. Worth noting also that the earnings per share would be a lot higher if we didn't have the income tax in our results for the first time this half. So comparing life with life, that earnings per share would be at 81 cents per share. Moving on to our financial performance by product, as you can see, we've had a fantastic year across all of our products with the total impact up 23 million or 34%. So just running through from the top, you can see our retail products up 53 million, strong sales activity up 47%. Strong demand for fertiliser and crop protection chemicals. Price inflation, you know, the prices have never been high for a lot of those inputs. And a little bit of forward purchasing by our customers in the first half to secure supply. But certainly the widespread rainfall bodes well for the second half. And obviously our backward integration or own product strategy is continuing to deliver benefits. Our wholesale business is up 27% on sales delivering that 8.5 million increase really driven by improved seasonal conditions and we've opened one new air warehouse in the half. Agency services is up 8.2 million and really driven off the back of high livestock prices. You can see cattle prices are up 32%, sheep are up 9%, but partly offset by reduced volumes. Farmers are increasing cattle longer to maximise weight gain and you're also seeing some restocking activity. Real estate services again is up 9.1 million, a really strong result in real estate. Prices for farmland is not getting any cheaper and we've also sold high volumes of properties both in residential and farmland. We also had two acquisitions in the half that built out our geographic footprint. Financial services was up 2.8 million, really strong performance in our insurance business, not only higher price premiums but more customers. And also our livestock in transit warranty business which 43% of our customers are opting in and this is not surprising given the high value of livestock. Feed and Processing, which comprises of our Kalara feedlot and the Elders Fine Food businesses have had a great year, or a great half I should say, with strong demand from domestic and export customers and we're also seeing high residency, improved efficiencies and higher cattle exits. Costs, as I mentioned earlier, we've got more people, 298 more, 123 related to acquisitions, and the residual 175 related to organic growth, particularly in agronomists and rural product specialists. And finally, interest tax and non-controlling interest, you see that's up 36 million. As I mentioned earlier, this is primarily a result of including income tax expense for the first time this half in our underlying earnings. Turning now to the segmentation of our gross margin. This is always a question that we get asked a lot. How much of your upside is a result of market growth? What we're presenting here is quite a bit of detail in how we think about market organic and acquisition growth. So in the top left hand side you can see acquisition growth at 10.5 NIRN or 12% and this relates to the five businesses that we purchased in the half and the residual annualisation of the second half 21 purchases. In the middle section you see our organic growth. We're attributing 38 million of our gross margin uplift to organic growth. This represents 46%. And finally you can see the market component which represents 36 million or 42% of the uplift. Just getting into a little bit more detail around how we think about organic versus market, it's a bit more of an art than a science when you think about how the factors accumulated. When we think about rural products, we think about the growth in market share and in terms of what we see as the benefits as organic. In agency, we've observed also an increase in market share. Again, we perceive that as organic. In real estate, we think of the growth in the number of properties that were sold as organic growth. And in financial services, we consider the increase in our livestock insurance and livestock funding businesses as organic growth where it comes to the increase in the number of premiums written. And feed and processing, we consider this wholly organic because it's largely attributable to the active management of our supply chain, procurement, contract negotiation, and the increased number of cattle exits. On the right-hand side, you can see what we consider market. So, rural products, all the uplift in the area planted, which is almost 11% year-on-year, and the price inflation associated with that uplift is considered market forces. Again, in agency, we consider the increased price and the downside in volume as market, and in real estate, the increase in the average property price market falls. In financial services, the increased price per policy, which is driven off the underlying value of that stock, we consider market. In closing, hopefully on this slide, hopefully that makes it quite clear how we think about market versus organic versus acquisition. So moving over to gross margin, you can see our gross margin increased across all of our product lines. And you can also see on this slide that agency services still represents our number one business, followed by AgChem. So interesting to note when you look at since 2018, the percentages of our businesses haven't really changed despite the sterling season we're having when it comes to crop protection. The only shift that's happened is the addition of the wholesale business, which has meant that we're reliant less on agency, which is a really positive story around our diversification. Starting on the left-hand side, you can see our ag chem business up 62% or 79 million. This is partly due to the higher prices. We're attributing about 40% to price and 60% is volume related. Fertilizer grew 100%. There's a lot of visits related to price. Around 80% of that increase is price, 20% is volume. Animal Health increased 22.4% to 16 in, also benefiting from the maturity of our own brand products in air. Other retail, this includes seed, general merchandise, fencing, retail and that increased 54%, a significant increase price and volume related. And our wholesale business ended 29% up on last year with strong sales growth in line with favourable seasonal conditions. Our agency business contributes 25% of our total result. Strong livestock stock prices are a key feature here. The equi finished up 32% on the first half, and the eastern lamb indicator is up 4% on first half, so certainly drove high commissions. Real estate, 10% of our gross margin at 33 million, up 37%. Interesting to note here that the median price of farmland is growing more than 20% on last year, particularly in Western Australia and Vic Reef. And finally, our financial services represents 7% of our business and increased 2.8 million to 23 million. Insurance and livestock in transit businesses were the key drivers here, representing almost 50%. And so our last week's feed and processing, really good results from our Kalara feedlot with the increased number of catalysis. across our geographies. So strong performance across all geographies and certainly the diversification we have reduces the risk. So our network has been working pretty hard. So in Western Australia, you can see there, they're up 24%, represent 20% of our business. Strong demand for fertilizer and chemical products. There's been pretty widespread rain in a lot of those cropping regions. And we've also acquired a new business, Esperance Rural Supplies, which joined us in the half. which has been a really strong contributor in the harvest. South Australia was up 51% and represents 16% of our business. This is strong performance across all of, not only livestock, but also rural products. Tasmania, smallest of our states, but still important to us, and pleasing to see that their result is off the back of the strength in cattle volume, so a winning share in Tasmania. Queensland and Northern Territory up 100%, so a really good performance in Queensland, which is partly due to our SunFam acquisition made in the second half of 21. The impact on floods has not really impacted our business, but it's obviously slowed down the movement of livestock with cattle volume down significantly. New South Wales continues to recover well from the presumed drought, up 100%, represents 18% of our business. And the widespread rain and soil moisture has meant that some of the cotton areas around Griffiths and Moree are having a standout year and are really contributing to that up-climb. But I should also mention the fact that the rest of the business is doing well, particularly livestock, and our Killarra feedlot is also in this segment. Big Riv across the board, really good performance, up 55%. It's our largest business representing 30%. Strong livestock sales due to cattle prices and real estate was really strong in this region as well. Turning now to costs. So our costs increased by 25 million or 15%. I'd just like to draw your attention to four areas. Our people costs are up 13 million, partly due to the organic growth in the network, up 129 FTE. This is a lot of investment in agronomists and real product specialists. And we also had some increase in our corporate services to support the ongoing growth across compliance, risk, systems modernisation and finance. Our acquisitions, there were five acquisitions in the half contributing an extra 73 FTE as well as the 50 that we did in the second half of 21 all contributing to cost up sign. We've got more vehicles, we're driving more, and fuel is costing us more, so that's added 1.2 million in costs. And our systems modernisation and IT costs have increased, which is in line with our expectations as the systems modernisation program continues. We're expecting to OPEX 4.5 million this year. So that's certainly flowing through, as well as investment in cyber and data. Capital performance, so our return on capital is increasing, 27.8% exceeds last year, exceeds our three year average and it also exceeds our hurdle rate of 15% in the eight point plan. You can see that our average working capital has increased 103 million and down the bottom is where you can start to see the investment that we've made in working capital over the last six months. We've got higher trade and other receivables up 190 million or 27% which is slightly less than our sales growth of 38%. Our inventory is at 198 million up or 50% and so this is almost offset by our trade and other payables which is up 183 million. So you can see that they normally would move in sync and they continue to do so. Moving to cash flow. At the end of the first half, we've got an operating cash outflow of 55 million, which is a conversion loss rate of 61%. We did flag this at the end of 21, and this is how it's played out. You can see that we're holding more trade than other receivables, which has increased 149 million. We're not seeing any degradation in our trade receivable balance. Our recoverability takes about 70 to 80 days and when you think about the second quarter of the half, then we are seeing our sales were particularly strong in March. So our Q2 sales were 200 million above the fourth quarter of 21. So 100 million above our first quarter. So when it takes 70 to 80 days to collect, then we're not expecting to see the inflow of that cash until this quarter three in 22. Secondly, our inventory grew 198 million. This is all ag chem and fertiliser. Fertiliser is all about price. We're not actually carrying that much extra in volume and our Ag Chem was just secure supplies given the challenging supply chain issues. So we're expecting to see a lot of that inventory out the door in the coming months. Trade and other payables increased, which is increasing our supply chain facility to fund our inventory. On the right-hand side, this is where you can see our cash conversion at negative 61%, but pleasing to see our working capital to sales ratio reducing from 19% to 17%, and this compares really favourably with our peers. Our net cash outflow total was negative 35 million which is not indifferent to the first half of 21. There's two factors in there that you can see our investing cash flows for the acquisition of our five businesses increased to outflow of 46 million and our financing cash flows were positive given the additional supply chain finance. Net debt performance, so we've got improving ratios despite the increase in net debt. You can see in the top left we're up 120 million in debt and average debt is only up 18 million. The top right hand side you see leverage, interest cover and gearing ratios. We show both excluding and including AAFB16. For the bankers and analysts on the call, we know you don't have a love of AASB16, which is the least standard, so we tend to report those excluding AASB16. So you can see leverage is falling, our interest cover is up to 55 times, and our gearing ratio is falling to 37.9%. In the section below that you can see the same leverage interest cover and net worth as compared to our banking covenants. You can see we're well within our banking covenants and we have plenty of headroom on our borrowings with underlying facilities at year end, nearly 200 million. Dividends and capital management. So our earnings and dividends per share continue to grow, delivering value for our shareholders. Underlying EPS reported in the half was 58 cents per share, increase of 36%. If we were to make a like-with-like comparison, that would be 81 cents per share, excluding the tax allocations that I talked about earlier. As we mentioned earlier, 28 cents per shared dividend, up 8 cents or 40%, partly franked to 30%. We're probably not going to be in a taxpaying situation until sometime in 2024, so we'll be limited to the amount of franking that we can pay until then. Our payout ratio was at 48% and it's grown from 33% in 2018, but within the board endorsed dividend policy of 46% payout ratio. Our franking credit finished the year at 14 million, given some of the businesses required. Interesting to note that our dividend yields nearly doubled where we were in 2018, and our five-year TSR was at 33.4%. Just to give a little bit more detail around our business performance. Firstly, let's go to rural products. Our gross margin is improving year on year, partly attributed to our own products or backward integration strategy. You can see our sales is up 360 million or 43%. There's some really good numbers in here. Fertiliser was up 77% or 142 million. Our ag chem business was up 115 million or 44%. Animal Health was up 18% or 12 million and our other retail business was up 42 million or 28% and our wholesale products or air business was up 46 million or 27%. There's a whole mix of price and volume in those numbers but really stand out performance across the board. You can see on the right our growth margin exceeded our sales revenue growth and the growth margin percentage is up 1%. We improved margins across the board, particularly in Ag Chem relating to our own brand product in Titan and also Ag Pasture, Hunter, Independence Own and Apparent in our wholesale business. On the bottom left-hand side, you can see the success of that strategy. The blue section is showing our own brand increase in terms of share of our Ag Chem and animal health products, increasing from 25 to 29%. Third party has decreased slightly as a percentage, but you can see that it's also increased in terms of value of sales. We really value our third party suppliers, an important part of our business, so it's a really complimentary strategy. On the right hand side you can just see how our gross margin is comprised of chemical, wholesale and fertiliser. Those three products represent approximately 80% of our gross margin. Moving to agency services, agency services gross margin increased 11% to 82 million. It's our largest business. Cattle volumes are falling, but widespread rainfall has meant farmers are retaining cattle for longer, for weight gain. A bit of a mix of performance across the state, clearly a clean slam was down in volume. It's probably worth noting though, price per head has increased 32% on the first half and sheep volumes are also down at some 260k down. Again, the sheep price per head increased 9% half on half driving commission. More volumes were slightly back and then finally our Auctions Plus business which is the online trading platform we own 50% of nearly cracked a million in terms of volumes through that platform and was up 100,000 head or 30% since the first time. Real estate services, so the strong demand for farmland and residential properties doesn't show any sign of abating. Real estate contributed 33 million and grew 37% in the first half. Interesting to note, the median price of farmland increased 20% to 7,087 per hectare, with 30% increases in WA, Queensland and Victoria. So you can see our farmland sales have delivered a 34% CAGR and we're up 90% in the first half. The commission have been challenging for the big end of the market with some large property sales, but still a fantastic result. Our residential sales, you can see 24.7% CAGR over the last five years and 27% in the first half. Again, a really good result. Properties under management grew with the addition of a couple of acquisitions and you can see the increasing importance of properties under management in our gross margin on the bottom right hand side. So roughly equal contributions on farmland and residential sales. Financial services. We've contributed 23 million and the gross margin grew 13.7% in the half. You can see in the top left, not a lot happening in our rural bank loan and deposit book. They're sort of roughly flat for the half. There's plenty of cash around that all seems to be going into farmland. On the right hand side you see our StockCo book and our livestock funding balances. The increase that you've seen there is primarily related to the increased prices of stock and therefore the funding of those animals. You would have noticed the announcement back in March of the divestment of StockCo 30% share. This shouldn't have any impact on our forward EBIT when it comes to the distribution agreement that we'll continue to have with Heartland. But we're expecting in May when the deal is completed to book a 15 to 20 million profit on sale. Our livestock in transit in the bottom left hand side, you can see the ongoing growth of that product with 43% of our customers opting in and obviously valuing the high underlying product of cattle and sheep that are being insured. And finally our insurance products, the gross written premiums have increased significantly over the last five years and contributed to 50% of the upside. This is twofold, more premiums written and also higher priced premiums given the underlying value of the assets. And finally, our feed and processing business. You can see on the left-hand side the Kalara feedlot. Its performance has increased significantly in the half, contributed 8.7 million EBIT, was up 58%. Primarily a result of increased cattle exits. We've kept up the demand and managed the supply chain challenge as well through early procurement and our backgrounding operations. Elders Find Foods has had a challenging year with the rolling lockdowns in China and supply chain challenges. So it's sort of a marginal break even at the moment. So I'd like to hand back to Mark to talk a bit more about growing our business.

Take a breath.

Absolutely.

So as you've just seen or heard from Tanya's comments and presentation, a very strong across the board first half for the Elders business and with market share gains as you see 58% of the growth. coming from Bolton acquisitions and organic growth, as Tanya explained. And with market share gains, when we look at the official data, market share gains on six of our seven key products and services, and on the other, we're flat at a strong position in the market. So I think quite positive. When we look to the future, we thought we'd reference the eight point plan to begin with on our ambitions of five to 10% growth of EBIT and EPS through the cycles at 15%. So with the good result that we're talking about for this year, we see that metric continuing. So 15, five to 10% growth on top of where we end this year. That's our target. And the ROC target that we have at 15%, it clearly will optimise and maximise the return on capital as we go through our cycles. In terms of the other ambition of leading sustainability outcomes, I've spoken a little bit about that and I think many of you would have read our sustainability reports and as mentioned, on track and in terms of most trusted Australian agribusiness brand, we still maintain that position and this will be a critical point as we embark in our battle for talent and labour and good people over the next few years. Going to our strategic priorities, and in the next slide I'll talk a little bit about the progress on those. We have made good progress against many of them, and then of course our enablers for the Systems Mod Program, attracting the best people in our financial discipline. So, looking at the progress on the third AFLON plan, so halfway through, and I think on the market share comments, you've already heard of the five acquisitions that have been put into place. We're performing very strongly with our pipeline and there's a dedicated slide shortly to talk about the AFLON pipeline and where they're coming from and also our approach there. In terms of expanding our own brand, Again, we've already spoken to that, but that's progressing quite strongly. We have taken a position this year, given the escalating cost of goods earlier in the year, so in the early new year, around February, on a couple of product areas. We opted to limit our own brand portfolio. in those areas where we thought the price would be dropping off significantly later in the season, and we'll be working with our partners, and we are now, in terms of product access and supply through those areas. Looking at our expanding and strengthening our products. with the new products coming through and also products coming through in other areas of the business. We've talked about the feed and processing and the great work that's been done, particularly in Kalara, in order to be able to continue to make good money and acceptable returns in a time of high cattle price and high grain and ration price. I mentioned our sustainability program, it's moving along quite nicely. Our tips and modernisation program, we've made a bunch of key decisions as we move into wave one of the program, and I'm largely on track with that. People and safety, I spoke about in the introduction to the presentation, and again, we've maintained very high engagement enablement. in comparison to all companies across Australia with the Corn Ferry indexes and we've also made further good progress on safety across a number of areas. And then in terms of cost and capital, I think Tanya did an excellent job in going right to the detail of our dynamics of cost and capital and as I think I've mentioned many times in the past, that running a business like Elders, you have to have high financial discipline. So where companies get in trouble in this space is where it's loose and for the last eight years we've tightened it and I'm very happy to say that Tenure is tightening it even further as you can see by some of the outcomes so that we meet our customer needs but also have high respect for the cost and capital of our shareholders. So if we go to the next slide, in terms of attracting and retaining the best people, and this is a challenge for everyone, so it's clearly not unique to others, and I guess making ourselves a company that people want to join is critical from a cultural viewpoint, from a positioning viewpoint, and you can see that strongly in the market response to others. Engagement enablement I've talked about, interesting slice on our diversity initiatives over many years, very, very strong representation through our non-exec directors, women in senior executive positions and we're making progress but nowhere near where we should be. absolutely know in the order we should be. From the first eight point plan, we're at 6% of women in leadership positions. Now we're at 17. So I'm face value three times. That's a great achievement, but we really need to be representative of the general population, and we're working very, very hard to get there. In terms of innovation and investing in innovation, I won't go into the detail of this slide so that we've got more time for outlook and questions, but we're investing heavily in our systems as you're aware of, our products and services and our other investments. And for us, I think being able to really hone in on innovation and tie that closely with the productivity of our clients and also the sustainability of our communities and businesses is the key agenda for us. We go to the next slide, which is our pipeline. And I'll just point out that for the first half, we saw the five acquisitions. That came from 31 financial models that we did in the first half in evaluating businesses. nine non-binding indicative offers currently there are 17 active candidates in our pipeline and it is quite a replenishing pipeline and so the I think the point of this slide is to show that in the independence area where a lot of our candidates come from so these are independent rural services businesses around Australia there's around 620 of those and of those There's a constant stream of founders who are now looking at a succession where their children may not be involved in the succession for many reasons and a lot of the reasons are that they've been successful, their kids have gone to unis and private schools and they've taken up other professions. and they don't want to run the family business. So this is where we get our pipeline of businesses from. Interestingly, a number of those have come out of corporates and given the size of the industry, a high proportion we know personally We've worked with them in previous lives, and that's actually where the pipeline comes from. And to the comment, the assessment that we may be running out of this pipeline, I think you can just see the numbers. The organic, some of the organic pipeline of people coming across would come from corporates in the nutrient, et cetera. But the independent areas where we get a lot of that. So if you look at this 620 and then you also look at the heir independence or members on top of the elders slide, that's also another universe for Bolton acquisitions. So these are heir members that we know very, very well that are in the same situation as the independence that I just mentioned. So our thinking is that the flow of bolt-on acquisitions where we buy at low multiples, we have a light touch management in the earn-out period, the majority of vendors, 95% plus stay in our business after the earn-out, this pipeline of growth will continue for a number of years going forward. So then if we go to market outlook, And I think, again, our belief or our forecasting runs off ABAIR and the ABAIR outlook is quite positive. I think in terms of how we see the business for 23, 24 and beyond that, but especially for 23 and 24, we see this mid-term as being very, very positive. the key drivers, whether it be from ag markets, whether it's all global commodities, remain very, very strong. And I think our sense, is that the market conditions will continue to be very strong for ag for 18 months to two years. But when we break that down, and we can break it down by sheep prices, livestock prices, some of the key drivers, or we break it down by winter crop or summer crop as big drivers, I think, first of all, the context. So this accounted for, the market staff accounted for 42% of our growth. So 58% of our growth came from non-market conditions or self-help, our aqua plant initiatives. In the 58% space, we, as I've just demonstrated with the bolt-on pipeline, it's very, very strong and as Tanya had mentioned with our backward integration and new products, it's also strong and not at a point where we're challenging relationships with the key partners while we're progressing. So I think our sense is that the outlook if we go to summer crop remains very strong and this doesn't directly rely on seasonal rainfall because these are irrigated crops and the dams and water availability looks strong for the next 18 months to a year, so the next couple of seasons after this season. Then we look at winter crop and key drivers and particularly with some additional free trade agreements that have been signed of late and the Indian agreement is the most recent but also the comprehensive agreement through South East Asian countries. In terms of the demand and the market access, in terms of the commodity price to drive that decision at a domestic level for Australia, particularly with black seaweed struggling and also North American drought conditions, our sense is those prices will continue to stimulate very, very strong activity. I won't go through all of them. I think we can take that in the question session, but I think the numbers, the outlook show that remains quite strong for that year to 18 months to two years. So then finally if I just, I'll jump to the next slide and just go to the closing so we can get to questions. So the clearly very strong financial performance. We've upgraded to 30% to 40% above last year. And on the soft spot that Tanya mentioned in the result, which is the cash conversion half year, we remain committed to our target of 90% cash conversion by the end of September. In terms of the supply chain challenges, the combination of supply chain challenges and a backward integration strategy and inflated COGS of some of the key inputs has seen the impact on inventory levels and values and I think it should be pretty clear to all that we have that very much as a high focus for myself, Tanya and the executive team. Continued focus on improving safety and our sustainability outcomes and in the second half we're looking at even further focusing those and we can report on those at the end of the year. In terms of growth for 2023, we remain quite optimistic for the reasons that we discussed, our bulk on acquisitions, The high likelihood that key markets, a number of the key markets will remain strong throughout that period and into the period after that. Expanding backward integration. The systems modernisation program will also start to deliver benefits, financial benefits and efficiency benefits through the business through 2023-2024 and I think the mid So with that, I'd like to turn to questions and happy to take any of your questions as we go through the session.

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 2. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Richard Barwick from CLSA. Please go ahead.

Hi, Mark and Alison. Great result and amazing outlook as well. A couple of questions from me. System modernization benefits. Is that something you're able to put some numbers around? How do we think about that and the materiality and the timing?

Sure, it's Tanya here. We've got five ways of system modernisation. In wave one, which is the ERP, new ledger, new fixed assets, new HR module, it's 14.5 million in CAPEX and about 4.5 million in OPEX. We applied the same lens to our projects as we do with the eight-point plan, so ideally wanting to return north of 15%. on that investment and so with each of the waves there's different cost efficiencies that will be associated with the first wave, customer efficiencies, productivity improvement and then when you get out to the outer waves which is digitisation and online portals then you get a much greater benefit from customer experience. So we're probably not in a position that we want to share transparently the benefits of each wave at the moment, but you can be assured that we're applying our 15% return hurdle.

And I think as an insight, where the benefits are occurring in our branch network, so the front end of the business, many of our branches have 0.5 or 0.8 of a person working on admin stuff and the rest they're customer facing. So our sense there is that those additional or that freed up capacity from the key front end people will actually be converted into customer facing activity and will drive revenue benefits as opposed to cost benefits. I think our thinking is that across regional rural Australia it's very very difficult to get good people who know the business that are very strong in customer and systems understanding and so that's our preference in those areas.

Okay, that's helpful. Makes sense. Thank you. And the other one for me is just thinking about the wet weather. I mean, I know from experience up where I live, near Toowoomba, the planting has been basically delayed as a result of the wet weather. I'm just trying to think out the ramifications of that, how that might wash through. Do you see any risks that literally we're getting so much rainfall that the crops, winter crops won't go in or the opportunity for the window of planting will be missed? And I guess the knock-on effect might be that you'd be stuck with some of the fertilizer and won't be selling through.

Yeah, I think it's a good question because it's been obviously different across different geographies. A lot of the winter crops are already in and happening and certainly the early stuff. So if we target Anzac Day, because of the good soil moisture, a lot of crop just went in prior to or at Anzac Day. We also had many examples of planting dry in the anticipation that there would be wetter than average conditions. I think the issue, particularly in your part of the world, when you go north, because you have options of summer crop and winter crop, and particularly with grain prices, putting in a later winter crop and having a yield reduction probably isn't as a material downside as it used to be because of the high commodity prices. I think the issue won't be a planting issue. I think the issue for us will be the rainfall during the crop and later in the crop and fungal activity and post-immersion weed activity in the crops through the rainfall. And then hopefully there won't be an issue with downgrades with the rain during the pre-harvest period.

Okay. Right. That's helpful. Thanks, Mark. Thanks, Alison. Tanya, sorry.

Thank you. Your next question comes from Paul Jensen from PAC Partners. Please go ahead.

Mark, how are you? Excellent. And Tanya. Just the main question at the start is just on the strategic side. You might have seen that interdeck pivot splitting itself into two groups, or intending to. It's been coming for a while. Can you maybe take us through what... Elders did in looking at that fertilizer group and where you might be positioned now, if possible.

Yeah, I think good question Paul. So I think back then when it was first being. Alright, you can hear me.

I can hear you fine.

When we considered that, I think it was three years ago when IPL were originally talking about spinning off the fertilisers, our greatest interest was in the blending facilities, particularly through the sugarcane coast. where we saw there would be a great advantage, but we're relatively weak through that period, through tropical horticulture and sugarcane, and we felt that that would be a great platform for us to build the rest of our business around it. We weren't particularly interested in the heavy manufacturing assets of Dutchess in particular or any other heavy manufacturing assets. It doesn't fit our ROC philosophy at all. So our sense is that with Part of the business may be in an interest, but obviously it needs to fit out of our metrics. But the whole of the fertilised business is not of interest. The ROC implications in average seasons, I mean, through the cycles now, it's fantastic, and it's no surprise at all of the timing right now. But we wouldn't have a lot of interest in heavy manufacturing, blending facilities possibly.

Thank you. And maybe a question for Tania. As we go through a return to normal seasons, Tanya, have you got, I suppose, targets within your team as to how you might, I suppose, recover back to a similar sort of EBIT by, say, 2024 with the system's improvements and those sort of things? Please.

Look, we obviously referenced the eight-point plan in our capital management framework when we're setting targets for the future. So we continue to aspire to achieve 5% to 10% EBIT growth through the cycles.

So Paul, just to be clear, our sense is that this isn't as good as it gets at all and our thinking is that our commitment to 5-10% growth at above 15% remains unchanged. I think our first discussions around this with the management team were in March this year in terms of offsetting a return to average season for winter crop. I've made the comments earlier, in terms of cattle prices with the restocking continuing strongly, but we're really looking at offsetting the downsides of a winter crop going to an average winter crop, if it actually does, given the commodity price profile looking forward.

All right, it's just the big number there of 52 or 42%. Just would, for people coming from a spaceship, having a look at that, they would suggest that that's a big one to jump over. But you do have, obviously, leverage and a lot of things to pull.

So it's like... the outlook, the acquisitions and growing market share through organic growth. We've got our own product brand strategy continuing to invest in more and more products. And then we've got some operational efficiencies we're expecting to deliver over the next couple of years as well. So I feel that we're well positioned to continue to grow despite the headwinds that the market component represents.

And so that 42% does include going from below average summer crop to average summer crop?

Yep. Yep. That's good. And the final question is, with all, I suppose the competition knows what you're doing now with your 17 acquisitions and what you've done in the last 18 months to two years in this sort of picking up new people. So have you noticed that the competition has changed the way they've, I suppose, attracting people and attracting customers? stores and doing things to combat perhaps some of the low-hanging fruit that you've had in the last 18 months?

Yeah, I think the competition's doing it pretty well. I think that one of the phenomenas we may be experiencing is that in really good times, for instance, we have less feedback and flack around poaching people today than we did in the drought times. So I think there might be a masking of that and it's not as significant because of good times. But in terms of the strategies of independence, nutrient and delta, if we just pick the three big bundles, it seems to me that they're doing a good job. and we're winning business on merit and winning acquisitions. There's probably one click point up in multiples because our sense was with Nutrien and Ruralco out of the competition for bolt-ons and Nutrien approaching their market share limits, that it may ease a little, but it hasn't because there are other players buying as well.

Thank you, Mark. Thank you, Tanya. Very much appreciate it.

Thank you. Your next question comes from Philip Pepper from Shaw and Partners. Please go ahead.

Hi, Mark. Hi, Tanya. Well done on a good result. Just on the current conditions and the working capability flags, with the first half, you thought there was perhaps some pre-purchasing by some of the farmers. Obviously, we've had a couple of months since the balance sheet was ruled off. What's demand been like since then? I mean, April rainfall was good. Are you seeing forward orders more pre-purchasing a particular fertilizer or are people holding off waiting to see how much show, how heavy the rain is?

I think there's been widespread rain across most of Australia except for the Southeastern and Western Victoria where it hasn't rained significantly yet. The inventory that we're carrying, we love Glyphosate as do our customers. It's probably the biggest, like our Ag Chem inventory is the biggest, but we're expecting that to be leaving our stores soon. And then fertilizers really, It's not really price-related. It's price-related, not volume, so we're not carrying a huge amount of extra fertiliser inventory. But we're already seeing our inventory balances, particularly for AgChem to start forming in the centre for March half.

Excellent. Thank you. My other question has been answered, so thanks and well done again. Thank you. Thank you.

Thank you. Your next question comes from David Pabucki from Macquarie Group. Please go ahead.

Good morning, Mark and Tanya. Congratulations on the really strong results and a good disclosure as well in the pack. The first question on the guidance was 20 to 30% and now 30 to 40% up on PCP. Can you provide a bit more colour around what you've seen since that initial guidance was set in mid-March, and I suppose the key drivers across the business to drive that upgrade, please?

Yeah, so I think what we've seen, and I think Tanya touched on a lot of it in answering Phil's question, we've seen continued strong performance. We had thought that there may have been 10, possibly 15% of pre-purchasing that occurred, but we're seeing high demand, very much in line with Tanya's We're seeing that across the same trends in terms of our agency business and the rural products business. Across real estate, again, we're seeing a continuation of that trend. I think in a lot of ways, it's what we thought. But because there have been a few market comments about pre-purchasing a product and therefore a slot for second half, we haven't been seeing that anywhere near the same extent at all. In fact, particularly running towards the middle of the summer cropping area, we had clients buying and using it on the same day. So we haven't seen that extent. In some areas, and Tim might add to the comments on what we've seen, but in some areas in southern Australia there's a bit more through southern Australian markets. But I guess it was the continuing trend that we've been seeing.

I think anecdotally we're seeing a bit of forward purchasing worrying about supply chains earlier, but then as the seasons played out that sort of pre-purchasing behaviour is playing out into increased demand despite what we've seen come through. We continue to be pleasantly surprised on the outside as the sales volumes continue this March.

Thanks a lot. I'll leave it there. Thank you.

Thank you. Your next question comes from Sophie Curran from Goldman Sachs. Please go ahead.

Hi, Mark and Tanya. Thanks for taking my question. Just one on the backwards integration strategy, and maybe if you can just provide an update on this. I saw it was up to sort of 29% of sales in the half. I mean, how much of this is sort of pricing versus volume uplift? And then how far through this program are you and how much further is there to go? And then maybe just one more on top of that is if you can touch on the investment in AgCrest and then just how you're thinking about this sort of longer term in terms of capturing more margin through that strategy.

Yeah, okay, thanks Sophie. So I think firstly the 29% is of the total universe, so it's not the addressable universe. So our targets that we talked to you previously about, where we talked about up to 70%, that's of the addressable universe, which means it's of exactly generic products, so we exactly have the same product. So the 29% is of our total crop protection. So they're two different comparisons. Just very broadly, where we've got to with our backward integration, I think we're sitting at 35% in that area this time last year, 35% of addressable market. We've taken it up to around 50%. And with the plan over a period of time to take it to 70%. So at 70% of the addressable market, it means if we think of a generic product like a 500 gram per litre triazine, that the base manufacturer of that or discoverer of the molecule before it went off patent, someone like a Syngenta or an Atoma, if they're still producing it, they still want to bundle it in with their proprietary products, we can accommodate their need and maintain that positive partnership. So that's why we stopped at 70%. We've got to 50 but I think for us this year we're being very, very pragmatic and we're trading off holding more owned product and taking the capital risk and the price reduction risk versus taking a margin reduction and for the last 20% of supply buying from a third party supplier. So that's the kind of trade-off we've made in a very pragmatic way because what we're trying to do is obviously ensure that we deliver our cash conversion, ensure that we don't overexpose ourselves with our product, which is what happens when you're back with Integrate. On the second question of ACREST, the way to think about our backward integration into formulation is not around the profit pool that's available. So if you look at the whole profit pool throughout the ACAM supply chain, if we take that as an example, the formulation component of it would account for, it might be 5% or 10%. So the driver is not around profit pool. optimisation, the driver is around the flexibility of, you know, backward immigration strategy. And what I mean by that is that rather than having to buy fully formulated products out of China and then put it on our first forecast, some in Queensland, some in New South Wales, some wherever, and in the product concentrations we want. So a product like Glyphosate has, you know, it has 360, 450, 180, 510, all these different formulations. So rather than making that decision three months before, if we have formulation facilities, we can make it at the time because we only need to put the adjuvant surfactants and active ingredients at the plant. And then with the Acrest example based out of Toowoomba, that gives us the ability and flexibility to be able to service a broad radius. So our sense is one north, one south, one west. And it just adds to that flexibility, but it's not so much a margin optimisation play. It's more around supply chain flexibility.

That's great. Thanks, Mark.

Thank you.

Thank you. Your next question comes from Jonathan Snape from Bell Potter. Please go ahead.

Hi, Mark. Can you hear me OK? Yeah, good. How are you? Yeah, good, thanks. Quick question around the comments around the cost structure and the cost to serve in the outlook statement. I think you've said here it kind of is flat, and I'm assuming is that year on year? I just wanted to try and figure out, because that kind of implies a fairly big uplift in the second half. Is there something in the way that you're accounting for the incentives in there?

There's a couple of things that are driving the growth in the second half. There'll be a slightly increase in the provisions for incentives, there's some additional earn out and we've got a high, our SISMO costs will be higher in the second half as well, particularly if depreciation comes online. We also have the annualised, like the recent acquisitions that they annualised into the second half. So we're expecting cost increase there. We're also running quite a high number of vacancies. We might be being hopeful by hoping to fill those vacancies, but certainly that will add to our cost in the second half. Okay.

And if I'm looking at the corporate overheads, it didn't lift that much during the half year on year. I guess it's not even just over a hundred million bucks or so. How have you accounted for the incentives? Because usually when you've got beat by this March, there's quite an incentive payout that comes through the employees that are benchmarked against those 5% to 10% in those ROIC targets. So how would you anticipate that looking in the second half?

So we're accruing our incentives every half based on the performance in the half relative to the incentive scheme. We have four different components of the incentive scheme.

Okay. Well, can I just ask one question around the, I think the waterfall you put in there on the bits that are your own doing and the market doing. And I just wanted to kind of make sure I'm referencing some of the numbers that you quoted through earlier. I think you said 40% of the move in Ag Chem was purely price driven. And I think 80% of the fertiliser move was price driven, which if I'm doing the maths right is about 22 million bucks. of EBIT or thereabout, which is a big proportion of that 26. And I think it says in there that BMW is up, I think, about $6 million. So it looks like they're the three bits that you've probably lumped in there as market-driven and then everything else is kind of self-help. Is that kind of the right way to think about it?

Yeah, that's essentially correct. That's right. So, fertiliser price, Ag Chem price increase, certainly. The other segments are mostly volume driven, so there's less price impact, except for the other retail, which is seed and fencing. They've obviously had some increases. Does that clarify your question?

Yeah, yeah, yeah. I was just trying to make sure what was in that. because it looks like those three bits alone gets you up to about that maybe a little bit more. So there's really no volume or market-driven volume that you kind of see in there.

Yeah. The other thing, though, is that the margin component of that is in the organic. We claim the margin based on our own performance in managing that.

Okay. What components? So, i.e. your long stock in a rising market and get an uplift on it, is that what you mean?

No, the backward integration margin, yeah. Percentage growth margin on each product. So, we've improved our percentage growth margin, and it should be agnostic with volume increase. Does that make sense?

Yeah. All right. Good. Thank you.

No worries.

Thanks.

Thank you. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Evan from UBS. Please go ahead.

Yep, thanks. Congrats both on a really strong result. You touched on it a bit in your outlook and closing comments. We're just interested to understand How are you mitigating that risk of, I guess, margin squeeze? Use your term. If some of these, I guess, commodity prices roll over, can you start to sell forward some volumes to mitigate that price risk? Just keen to pass that out a bit. And then also, if you can also touch on just how long the typical inventory cycle is for the AgChem and for its products as well, that'd be super helpful.

Yeah, I think firstly on the mitigating the margin squeeze. So we've got multiple plans and actually formal working groups kind of managing this on a weekly basis. And we started this last year because sadly a few of us around were in 2008, 2009 when the last cycle occurred like this. But one of the, I think one of the One key observation is that it's not across all products. So we can focus on some products and even those products we're focused on, a number of them, we're now getting signs that the price reductions that we thought would occur and maybe more rapid. than we thought that were actually not occurring. So we've seen a flattening of a lot of cost of goods. And so the grave concern of being caught with high cost products in a falling market seems to have been softened a little bit, although it's a major issue that we're working on. Did you want to add something?

No, I think that's... Yeah, yeah, yeah.

Yeah, your second question?

Just around, I guess, the typical inventory cycle, how long it is for AgChem and first products.

Yeah, yeah.

So... It varies by product. What I can say is that our aged inventory is what we consider more than six months old, and then there's another category more than 12 months old. It's fallen significantly half on half, so we are clearing our aged stock. Certainly what we have in stock at the moment, we're actively managing it to make sure that we haven't got oversupply and proactively sharing it between branches and regions where the freight costs are not prohibited to ensure that we're optimally placed to deliver to our customers. It does vary. It depends on the product. Some products that we might have left over from the previous season, we'll keep. They're still good. It's a fine line at the moment between having too much and too little, right?

Yeah, for sure. And it's absolutely not a straight line. So our biggest issue is over the years, and we saw it a few years ago, and it's happening a little bit here, is when markets go early, and we don't have all the product and we've got to buy top-up property to meet an early market and we saw this with canola in Western Australia or alternatively where we size up for a big season like chickpeas and then we have the rug pull with India putting an 85% tariff on Australian chickpeas and so no one plants any so that's the more likely problem that we've got to confront. And then because they're one season products, we're then stuck for at least a year.

Yeah, yeah, yeah. No, no, clear answer. It sounds like you guys are right on top of it. So I appreciate your time.

Thank you. Okay, I think we're pretty close to closing off. One final question maybe?

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

Thank you very much. Thanks everyone for joining the call and I appreciate the questions and comments and look forward to catching up with many of you in one-to-ones over the next week. Thank you very much.