Elders Limited

Thank you very much and welcome to all for the Elders Half Year Results presentation for our FY23 year. Thank you for joining Paul and myself for the session today. Many of you have met Paul. He's highly experienced within Elders and is Group Treasurer and Acting CFO. From an elders viewpoint this is the third year of our third eight point plan. The elders philosophy since the first eight point plan is to be to control what we can control and not to dwell on things we can't control. To have a capital cost base that allows us to make good returns in bad years and it also allows us to make great returns in good years as we saw last year. The FY23 half year results and our full year guidance are an example of acceptable returns in delayed market conditions to commence our FY23 financial year. We use our multiple diversifications by product, service, geography, crop segment, commercial model and channel to market and our financial discipline to deliver consistent and high returns for our stakeholders. In summary, we aim to control what we can control. Over the first two years of our third acorn plan, and more specifically last year, we have experienced exceptionally strong and early market conditions across most production enterprises and geographies. We've also had positive livestock prices, winter crop and summer crop conditions, although more recently, unseasonal rainfall. at the beginning of this financial year. Our view in November last year when we presented the full year results was that the exceptional FY22 results would normalise the average in FY23 and that the East Coast floods and delayed start to the FY23 year would see a reversion to the more traditional first half, second half balance. 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 as we had considered for the first half. The result is strong in safety and sustainability with profit, return on capital and cash consistent with the delayed season and return to our rich outlook. Our commitment is to provide 5-10% growth in EBIT and earnings per share and a minimum of 15% return on capital in a sustainable member through a safe and inclusive workplace. The results today are consistent with our 5-10% growth through the cycle's commitment with the annual growth rate through the last five years at over 25%. The approach for today is that I will provide an overview of the results, Paul will go to the detail of our financial performance and then we'll provide an update of our outlook and growth initiatives for the rest of our third eight point plan. So if we go to the agenda. We look at the executive overview. I'd like just to comment around the key investment drivers for Elders and also demonstrate the resilience of the business model over the last 10 years. Then we'll move into the financial results with Paul and I'll come back for the growth and transformation part and the market outlook component. So going to the key investment drivers for elders, and we've obviously worked on this for many years. When we look at the key investment drivers, first, EPS growth, compelling total shareholder return, and over a 10-year period, earnings per share CAGR of some 30%, with a return on capital of over 15%, and a payout ratio between 40% and 60%. You look at the diversification through geography and product diversification, but also in many other aspects of channel and service and commercial model. In terms of attractive market and company outlook, point number three, we have a relatively minor share of a very, very large market and have had a growing market share trend over the last eight years. I think the opportunity for significant on-ground growth, as we know the target from the NFF for pre-farm gate growth from what it was back then at $60 billion through to $100 billion by 2030 is on track and we're well and truly back on track. So the market environment is very, very positive. When we talk about the outlook, you'll also see the outlook is positive. In terms of transformational initiatives, point number four, we have a number of initiatives in place, but I think the most important is our systems modernization program, which we will talk to you in detail. This program sets Elders as a significantly strong multi-product, multi-service growth platform across these key markets. We'll also talk to the rural products optimisation project as we move through. Point five, significant pipeline of new opportunities. As you see, our bolt-on strategy and our geographical diversification, our gap filling strategy for many years has been very, very successful. We still have a very strong pipeline. And we also have a strong pipeline for greenfield entries. And finally, the robust balance sheet. Paul will talk to the detail of this as we go through the financial part of the presentation. Moving to the next slide, the resilience of the business model, and you can see from FY14 all the way through, regardless of market conditions, of events, floods, droughts, bushfires, etc. The diversification of the model and the resilience of the business model has allowed us to make continually strong growth through that period. When we look at the FY23 guidance that we've put out and largely due to the change of balance between half year and first half and second half back to our normalised balance, you can see that the midpoint of the guidance for FY23 Although 18% down on last year's record profit, it's 14% up on the previous record profit in FY21. And so if we look through that two-year period, we're at the midpoint of our commitment of 5% to 10% growth through the cycles. So moving on to the next slide, which is the highlights for the business, all the stakeholders are covered through this on our people front, good reduction in our total reportable injury frequency, and we've had a 10% reduction over the last five years. In terms of employee engagement, very strong. The average employee engagement across the benchmarks in Australia is 65%. The high end is 73% and we're sitting at 79%. Percentage of female workforce, also strong. And growth in people, and when Paul runs to the cost drivers, You'll see that we've made a significant investment in people this year that is to generate growth for 24, 25, 26. He will go to that point when we get to that section. From a customer viewpoint, for the last three years we've been the number one trusted agribusiness brand. Net promoter score has increased from previous 49 to 51, remembering that this is a very high number. Compare it, just one to compare with, to make the point, NAB at 1 and ourselves sitting at 51. And the additional locations through both fault on acquisition strategy and also from a greenfield strategy. From a community viewpoint, we continue to be significantly involved in all of our local communities and we've been able to do more and more as the business has become stronger. And from a shareholder viewpoint, there's 32.3 cents in underlying earnings per share. a dividend of 23 cents. That dividend of 23 cents is at the 71% dividend payout ratio. Our plan is to sit somewhere between 40 and 60 and at the end of the year, at the outlook or the guidance we've given, we'll see that sitting around towards the top end of that 60%. Moving to the next slide on our financial summary and a couple of points to highlight because we will go to this in deep detail. The sales result of a 9% increase at 1.7 inferring ongoing growth in market share and also showing the significant impact of that's occurred with our backward integration strategy providing margin and offsetting the margin squeezes caused through our input costs, reducing the cost of goods, reducing and there being significant pricing pressure in the market. We go next to underlying EBIT and I made a point earlier around the split of first half to second half and returning to a traditional 45-55 split with our guidance at 180 to 200. The final area, sorry, looking at the ROC at 16.9%, down from the above 20 numbers that you've seen of more recent times, but still 1.9% above our target at 15%. And then finally to cash conversion. At the half year, you'll all be familiar with the cash conversion numbers for half year, are always down with a target that we've reaffirmed and we will talk to later on at the 90% cash conversion by the end of the year. So moving to sustainability, just a couple of comments and we'll just go to the right hand side of the sustainability slide on our progress. Some great progress across our sustainability area. We've formed a dedicated strategy sustainability and innovation group headed up by Anna Benneth who's joined us from Australia Post. and we've provided additional resources as we drive a number of the initiatives that are outlined below there with our solar installations and development, our packaging waste policy launch and initiatives and also the independent on-site orders of all suppliers for the Titan supply chain through China and India. Moving to the next slide on safety, health and well-being and you see at this point two lost time injuries at half year and you will recall that over the period of the April plans we've gone from 34 lost time injuries down to two at the half year. So a very strong and enhanced safety culture and also the trend that I noted earlier on the total recordables. So with that I'll rejoin following the detailed financial review and I'll hand over to Paul now.

Thanks Mark. I'll commence on slide 11 of the pack which provides an overview of the industry themes that were prevalent in the first half. As Mark mentioned, the first half of FY23 was distinctly different to FY22, making year-on-year comparison difficult. The first half of FY22 was characterised by historically high livestock prices, high real estate turnover assisted by historically low interest rates and supply chain disruption which led to rising crop input prices which in turn brought forward sales to the first half. This created the historically unusual scenario where Elders FY22 earnings were weighted to the first half over the second. By comparison, the first half of FY23 saw declining sheep and cattle prices but little volume offset given the high availability of feed resulting from the wet spring and early summer months. Internationally, beef prices weighed on the domestic market following high cattle processing in the United States. The first quarter rainfall caused flooding in several summer crop areas and generally delayed the 2022 winter crop harvest across southern Australia, with harvesting continuing into January in many regions. This, along with generally declining input prices, has delayed FY23 winter crop sales compared to FY22. Consequently, it is expected that FY23 earnings will be weighted to the second half over the first, more in line with historic performance. International supply chain efficiency has improved significantly year on year, with delivery times and freight costs now close to pre-pandemic levels. This, coupled with the later client purchasing for the 2023 winter crop, has elevated inventory levels temporarily, impacting net debt and cash conversion. The complexity of the year on year comparison coupled with more favourable trading in recent months has underpinned the decision to provide full year guidance for underlying EBIT of between $180 and $200 million. Moving now to slide 12 we see trend analysis from FY19 which demonstrates the growth in the business over the past five years through the agricultural cycles. Over the five-year period, first half sales have increased from $733 million in FY19 to $1,657 million in FY23, a five-year CAGR of 22.6%. Underlying EBIT has increased from $34 million in FY19 to $83 million in FY23, a five-year CAGR of 24.9%. Costs have increased to $223 million at a five-year CAGR of 12.5%, but importantly, cost to earn decreased over the five years from 79% to 71%. Pending per share has increased at a five-year CAGR of 16%, adjusting to the impact of company tax expense from FY22. I'll now move to slide 13, which contrasts the first half of FY23 against the prior corresponding period. Once again, I emphasise the difficulty in this comparison, given the first half of FY22 was in most respects an outlier. Looking at the numbers, sales revenue increased $143 million, up 9%, with rural products contributing most of this growth. This is an encouraging result given the seasonal conditions. Despite increased sales, gross margin decreased by $20.6 million to $305.8 million, down 6% year on year, negatively impacted by lower sheep, cattle and fertiliser prices, a softer real estate market and increased cost to earn. Growth margin per cent decreased 3 per cent due primarily to the reduction in livestock emissions and some temporary margin pressure from declining crop import prices, especially herbicides. Costs increased $29.4 million to $223 million half on half due to acquisitions, new points of presence and support for transformational projects including systems modernisation, supply chain optimisation and elders wool handling. Underlying EBIT decreased to $82.8 million with a five-year CAGR of 25%, well above Elders' target range of 5% to 10% growth through the cycles. Operating cash flow was negative $86.9 million compared to negative $55.4 million in the corresponding period impacted by the working capital build for the 2023 winter crop. Over now to slide 14 to further explore performance at the product category level. In terms of highlights, retail product stands out with sales growth outweighing headwinds from declining fertiliser prices and a later winter crop activity year on year. Financial services perform well throughout the period with strong growth particularly from our insurance investment. Real estate was noteworthy given the significant rise in interest rates over the past 12 months. Despite this impact, residential turnover was steady year on year and property management softened the impact from lower broadacre turnover. Moving to slide 15 which displays Elders product diversification, a key defence against market variability. Overall, gross margin decreased by 20.6 million from 326.4 million in FY22 to 305.8 million in FY23. Notwithstanding, growth was achieved across a number of product categories. I note the following regarding key themes within the business. Agency services gross margin decreased 18.2 million to 64 million, impacted by lower prices in both cattle and sheep markets. There is perhaps cause for cautious optimism to some improvement in the second half, with several livestock markets showing signs of recovery. Fertiliser gross margin decreased $5.9 million to $19.2 million due primarily to a significant decline in the price of urea. Pleasingly across all retail product categories gross margin increased by $4.8 million to $145.5 million with increases in Ag Chem, Animal Health and other retail more than offsetting the decline in fertiliser. Wholesale products decreased $5.1 million to $32.7 million impacted by the flooding in Q1, as well as temporary margin pressure from declining Ag Chem prices, especially herbicides. Real estate services gross margin decreased $4.4 million with broadacre sales negatively impacted by rising interest rates and falling cattle prices. Moving to slide 16 which displays Elders geographic diversification, a key defence against regional variability. This slide shows geographic contribution to EBIT excluding the wholesale business as well as corporate overheads. In comparison to FY22, all states were negatively impacted by declining livestock prices and the later winter crop season. I note Victoria and Riverina was most impacted by the flooding in Q1. Moving now to slide 17 to discuss costs, which we continue to manage closely given our focus on cost and capital efficiency. Cost grew $29.4 million up 15% to support future business growth as well as our transformational projects. Cost at end increased to 71% rolling 12 months, close to the average of FY20 and FY21 and well below FY19. In terms of cost drivers, People contributed an additional $13.6 million, depreciation and amortisation $6.6 million and motor vehicles $5.2 million. Breaking this down, the Elders Branch Network added 116 FTE to service more clients. Acquisitions added 57 FTE and there were 37 new graduates. Welcome to Elders. An additional 29 FTE were added to support the transformational projects which are enablers for future growth. Moving to slide 18 to discuss capital allocation which is at the core of Elder's business model. Return on capital decreased from 26.2% to 16.9% period on period, decreasing the three year average to 21.6%, which remains well above our hurdle rate of 15%. Key drivers include increased inventory in preparation for the winter crop, reduced EBIT compared to the corresponding period and a lower contribution from agency services which generate comparatively higher return on capital. Over to slide 19 in cash flow where we see an operating cash outflow of 86.9 million. Negative operating cash flow in the third half is not unusual for Elders given the working capital build required for the winter crop. I note that the working capital has trended lower post the March balance date as expected and Elders maintains its target cash conversion of greater than 90%. We'll now move to slide 20 where we see average net debt, excluding AASB 16, increased by $47 million to fund acquisitions and working capital for the winter crop. Leverage, excluding AASB 16, increased from 0.7 to 1 times, but remains below Elders' target range of 1.5 to 2 times. Balance sheet strength, combined with significant undrawn bank facilities and covenant headroom, provides flexibility for elders to pursue growth opportunities in FY23 and beyond. Turning now to slide 21, I note an interim dividend of 23 cents per share has been declared for the first half, franked at 30%. Underlying EPS was 32.3 cents for the first half. This concludes the financial section of the presentation. I'll now pass back to Mark who will discuss progress against the Third A-Point Plan, future growth aspirations, as well as the market outlook.

Okay, thanks, Paul. So we'll move on to slide 23. And in the growth and transformation states, I think the first comment that I'd like to note is around the highly experienced and diversified team within Elders with an average tenure of 11 years. I should highlight, though, with the critical projects that we are conducting in the transformation states that we've, of those, the average tenure of 11 years, We also have three executives who have joined the business with specific skills in order to assist with those key projects. So firstly I note Viv DeRoss who joined a few years ago with Tesco and Ampol Experiences as CIO, a great addition to the team. We have Jeremy Cohen who's joined running our rural products supply chain, ZGM Rural Products. Again, deep experience with Mars Corporation and also Blackmores. And then finally, I mentioned Anna Bennett earlier, who's joined to head up our strategy innovation and sustainability area of the business. So a good balanced team and a significant Xcode line as we refer to them sitting under those individuals. Moving on to the progress against the third eight point plan, a number of the points have been covered but just to comment on the market share component with six acquisitions, 26 locations in the first half. and significant additional progress. I will go into more detail on these in later slides. Expanding of the brand portfolio to capture more margin with our backward integration initiatives. The elders wool handling project, the streamlined supply chain projects moving along quite nicely. And I think as we go through all of those points that the key components of the APON plans, the discipline, the methodical approach are all in place. Going to the next slide around the FY24 8 point plan and this 8 point plan we fine tuned some of the focus areas from our strategic priorities and our enablers but I would highlight item 6 which is the streamlined supply chain project and the systems modernisation project which will be setting a very significant growth platform through 24, 25, 26 and onward. Going to specific growth pillars of the business, and we've talked a lot about our multi-faceted strategy to drive growth through to FY26 and beyond. In terms of geographical expansion, our bolt-on strategy has continued with an active pipeline candidates right now. So far for the first half we've done 30 financial models, issued nine non-binding indicative offers, completed six acquisitions and with an annualized EBIT in the order of $7 million. So our plan as we talked about at the year end last year as we talked about our strategies to offset the return to average market conditions at FY23 was to hit somewhere between the 10 to 15 million annualized EBIT as we go forward. In terms of our backward integration, moving along quite nicely. In terms of measuring specific conversion percentages at the half year, it's quite difficult as Paul's indicated with stock in the branch network and with winter crop planning underway. But just to refresh everyone, we said of the addressable generic products within our portfolio, crop protection products, we would aim to replace 70% with our own brands, allowing us to have flexibility with our suppliers who have blended generic portfolios and proprietary portfolios. We started with about 25% three years ago and we got to 45% at the end of last year and this year our target is 55% of the addressable generic portfolio within Elders where we get a bump in margin of somewhere between 15% to 20% depending. So that's all going to plan at this stage. In terms of the transformational projects, we'll talk a little more about the supply chain optimisation project and this is really integrating a number of entities all the way through from our formulation through to our supply to procurement to our wholesale and then through to our retail network. Jeremy Cannon has been working on this project. We had Ellie Kay in last year to scope it up for us and we have some additional comments on it later, but clearly we're looking at both capital and EBIT benefits, capital reduction benefits and EBIT improvement benefits from this project. And then in terms of new channels to market and other transformational investments, we've taken the call to to buy and establish formulation facilities to give us much greater supply chain flexibility and this is on track as well. Going to the next slide in terms of the dual growth strategy through AIR and Elders and I think this slide is quite interesting from a point of presence viewpoint because we've indicated our channel to market diversification meaning we've got a retail channel as well as a wholesale channel allows us to get significant coverage and growth throughout Australia And in areas where an elders branch may not be the appropriate answer, there may be an air member. So the numbers indicate that in terms of the market, you've seen previous slides, about 1,800 rural service branches around Australia. 900 or so of those are independent, so that's our Bolton acquisition pool. In our growth in these areas, we've been able to contribute significantly to the 5% to 7% growth through the cycles underpinned by the points of presence expansions. Moving to the next slide and you can see that with the points of presence growth at 3.6% over the last four years and we've still got sub 20% market share in a broad and general assessment of market share given our products and services. So there's significantly greater areas to grow and strengthen the business. When we look at the next slide in setting a seed up for growth through 24, 25, 26 and beyond, the rural product supply chain optimisation is significant. As I mentioned earlier, this will provide sales and operational planning ability throughout the whole of the business from formulation all the way through to selling to the end user farmer. At the moment, each entity has its own rudimentary sales and operational planning process. This will take out significant buffers and buffer stock between each of those entities. As mentioned, we see a significant capital reduction coming from this project as it rolls through. profit and loss side allow us to significantly focus our procurement and get greater efficiencies and so warehousing supply chain efficiencies across the whole of the network. So very exciting. The business case for Streamline as we call it internally will come to the board in June, July for benefits then to be flying out 24, 25, 26. Systems modernisation, we've talked about previously with the first wave largely completed and in full on time. Wave two, the business case, as we indicated, each wave will have its own business case with its own sign off. Wave 2 will also be coming to the board around that June July time as we look at coming to probably the big wave that allows us a single platform across the business. And then finally the Wool Supply Chain Optimisation Project, which is our automated warehouse in Victoria and Western Australia. which will be the first of their type in Australia and place us very, very strongly in the wool market. In terms of systems modernisation, as we say, the benefits will be coming through to FY26. Wave 1, the numbers are there and we can talk to them in question time if there are specific questions. But the wave two business case coming to the board in the next couple of months. Significant, in terms of the first project, wave one, work day, et cetera, the really great implementation. In fact, as I said, in full on time and a great job. But wave two is the big one that we're really focused on now. Retaining the best people, attracting the best people. I think the numbers there, and I've made comment about a very, very high engagement and enablement numbers over a number of years. So this remains very, very strong. In terms of women in leadership positions, from the first 8.1 plan until today, we've got 4% of women in leadership positions to 19%. As a perverse outcome, we do find that many of our bolt-on acquisitions actually take our women in management numbers down and so that's fine. We've got our targets and we've also got our desire to ensure that we have as diverse a workforce as possible and particularly in leadership. When we look at the tracking the best people, we'll also note, and Paul mentioned it, that we've put on 38 graduates and with the idea of investing significantly and early as you can see by the cost focus before the revenues delivered as we've mentioned earlier. So going on to the market outlook slide, and I think most players or people on the call would be across the market outlook, still relatively positive. In terms of rural products, the winter crop looks solid and we've seen the grain crop upgrade of late, although there's a delay effect on storage. of product in that case. But the outlook remains pretty positive in terms of our free trade agreements around the world. Market access is very, very strong. of the relationship in China also adds to the positive outlook for the market from our viewpoint. In terms of agency services, traditionally we get a volume response to price reduction, so the net impact is less. As Paul indicated in the first Q1 of this financial year, we had the double impact of price and volume reductions because of the the flooding conditions. Looking across all the other areas of the business, market outlook remains relatively positive and also clearly underpinning our guidance statement. The ABARES March numbers, again, you would have at your fingertips. So I'll go to the final slide around key investment drivers just to summarise. The very strong EPS growth that Elders has been able to deliver with its business model. The very, very strong geographical and product diversification components of the Elders business model allow us to be quite resilient and provide high returns through the cycles of profitability. The attractive market and company outlook. The transformational initiatives that are in place with both our rural product supply chain project and our systems modernisation project, which really do set that very solid platform for strong growth through the years ahead. Significant pipeline of new opportunities. I talked about our universe of potential acquisition candidates and also the robust balance sheet that supports growth at the high return levels. So with that, I think we'll go to questions and open up for questions.