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.