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.

Thank you. If you'd like to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you'd like to cancel your request, please press star 2. If you are on a speakerphone, please pick up the handset to ask your question. Your first question comes from David Pobucky from Macquarie Group. Please go ahead.

Morning, Mark and Paul. Thanks for taking my questions today. Just in terms of the first one around the guidance, it looks like you're assuming a more normal first half, second half, even skewed this year, which is more consistent with FY20 and 21. What are the key swing factors for the remainder of the year that could get you to the top end of guidance and conversely, or conversely, the bottom end there?

Yeah, thanks David. I'll take that one. So I'll say firstly, just to set the scene here, so FY22, H2, we had $100 million of EBIT. So $107 million of EBIT takes us to the midpoint of that range. The assumptions there are for continued outperformance year on year from the retail business. a trend that we see in the first half already, but obviously premised on a strong winter crop. We see that effectively offsetting continued underperformance from livestock agency, albeit at a less delta than the first half. So we do see some stabilisation in livestock prices, but also a potential for a volume offset. And what we have seen in recent weeks in the US, for example, is an increase in the import prices for beef, up about 20% off its lows. We've seen that come through to the mutton market in Australia already. It's significantly off its lows. We're starting to see what we think is some stabilisation of livestock. We see those two, retail and livestock, offsetting each other by and large. Then we get positive contributions from our wholesale business. We see a cessation of the margin pressure, particularly from herbicides that we saw in the first half from declining cropping book prices. We see a stabilization in real estate. gross margin, financial services, continuation of theme, and then we see lower network incentives internally and also a slight contribution from lower SG&A with a focus on cost. So I think that's a good summary.

Thanks, Paul. Appreciate that. And just one last one for me. It looks like branch network EBIT was down 16%. first last year, but wholesale was down 38. What were the key drivers of that wholesale performance?

Yeah, so it's really the other side of rising crop input prices in FY22. They came off in the first half and at an inconvenient time from a procurement perspective. And so what we saw was margin pressure. We expect that to be transitory in the business that once that inventory is flushed through, Those margins should improve.

Yeah, I think, David, it's worth highlighting that the biggest proportion of that decline in wholesale was not in the member business. It was with a few small customers who were predominantly generic customers who were actually wholesaling themselves. So in terms of the core member business, the impact was significantly less. So this is just to call a spade a spade around very, very competitive glyphosate pricing.

Thank you. Appreciate it.

Thank you. Your next question comes from Philip Pepe from Shore and Partners. Please go ahead.

Hi, guys. Thanks for taking the question. Just appreciate you can control what you control. In terms of the M&A part of your strategy, the second half of the 5% to 10% growth, with some of the soft commodity prices deteriorating further and the market still being, call it 15% independence, Have you had more inquiries in terms of businesses coming to you to be sold and what's happening to their price expectations? Have they adjusted downwards in conjunction with or similar to sector models?

Yeah, it's a good observation. So what we did have was a bunch of agency and mostly cattle agency based businesses who had previously declined discussions, wanting to re-initiate discussions. In terms of the pricing, the multiples are still around the same, we're targeting the that we have over a number of years. So with our earn out position, the absolute price will reduce based on EBIT because the final, the second year EBIT washout or earn out washout is the multiple times the second year EBIT minus the original payments. So pricing will come down in line with earnings if there's an earnings impact. But yes, we have had greater interest.

And second question, if I can. It's in the printed materials, but you didn't talk about it. Very specific commentary regarding management update according to an announcement in July. Any more color on what the type of the announcement might be? Is there a short list of candidates? Is there a final contender? Did you get my resume? What's any more detail on the July announcement? One note is a joke.

Yeah, yeah, yeah, I know, but you normally don't send an acceptance letter with a resume, Phil. So the Chairman Ian Wilton will speak to that and is happy to update you as required on that. As you know, Ian and the Board are running the process and have initiated the process last year, so he will give you an update on that as required.

I understand. Thank you.

Thank you. Your next question comes from Piers Flanagan from Baron Joey. Please go ahead.

Morning Mark and Paul. Thanks for your time this morning. Just a couple from me, maybe just firstly on the cost base. You talked about adding headcount for growth in future years. Can you maybe just talk to sort of the headcount you've got at the moment? Are you still looking to add to that or is this the right size now for growth in say 25 and 26?

Yeah, thanks Piers. Look, I think in terms of FTE count, it's obviously very sensitive to acquisitions and new points of presence. So I think that will drive where it goes to from here. But in terms of FTE required for existing initiatives, I think we're at about the level that we need.

Sure. And then just on the higher inventory levels, I think you talked that they're starting to fall. Could you maybe just talk about how the second half trading has been and how the working capital levels currently look?

Yes, certainly. So we had a very strong March and April in terms of trading. So I would say that in terms of if we take the seven months to the end of April, March and April contributed more than 50% of that result and so as a consequence we've seen you know, inventory come down certainly from its peak. I've also had a fairly strong start to May as well. So I'd say in regards to inventory, it's a little higher than we would like for this time of year, but we are getting through it.

Sure. And then for the last one, I mean, over FY22, you had a slide in the presentation pack just talking about sort of the organic growth and then the market growth you saw. Can you maybe just talk to, I guess, sort of the first half of 23? I mean, you sort of had some good momentum within the backwards integration, but yeah, I guess sort of the growth within sort of the organic side and then maybe what the market impacted you.

Yeah, I think broadly, you may recall us talking in November around the market normalising this year and maybe taking out $26 million or something like that. And we would look at backward integration and bolder acquisitions to endeavour to offset that. to offset the shortfall from the market normalizing. I think it's fair to say with the six to eight week delay through September, October, November, et cetera, that the impact of market is more significant than we thought because we had anticipated with prices coming down if we go to livestock that there would be volume responses and obviously physically there couldn't be volume responses because cattle and sheep couldn't be transported. So I think the return to normalising or an average sort of season that we spoke about in November was pretty close to the mark, but we didn't foresee the delay in the season. Paul, you might want to add to that as well.

Yeah, I think that's a good summary, Mark. I think as well, in regards to acquisitions, we only had a $3 million contribution in the first half. So that's just where the acquisitions fall. But notwithstanding, the annualized benefit of acquisitions is much higher than that.

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

Thank you. Your next question comes from Evan Karatsis from UBS. Please go ahead.

Okay, thanks Mark and Paul. Just what cost to earn ratio should we expect for the second half, please?

Yeah, we would expect cost to earn to improve in the second half based on the assumption of slightly lower SG&A second half on second half and higher earnings.

Okay, all right, thanks for that. And then you called out the seven mil contribution from acquisitions in the first half. Does that include acquisitions you did last year as well, or is that strictly ones just completed through the first half?

Yeah, we only had three mil contribution half on half from acquisitions. The seven was annualised, yeah. Yeah, so seven mil is the acquisitions we've made in the first half at an annualised contribution.

Okay. Yep. Got it. Just making sure. Thanks. Cool.

Thank you. Once again, if you'd like to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from James Ferrier from Wilson's. Please go ahead.

Morning, Mark and Paul. Thanks for your time. Can I ask about the financial services result? Firstly, that really strong result, quite a significant uptick in gross written premiums there. Was there anything else driving that result? The livestock in transport, for example, maybe, or any seasonal finance?

Yeah, certainly the increase in gross written premiums was the major contributor there, but we did get slightly higher penetration in LIT and there was a small expansion on balance sheet lending, but not material.

OK, thanks, Paul. Secondly, on the working capital, I get the inventory and the seasonal timing there. We figured that the first half balance might have been a bit lower on the debtors, just giving you reference to the early purchase patterns in the PCP versus what we're seeing now with a more normal or maybe even slightly delayed purchasing pattern this season. And you couple that with lower prices for crop inputs, And livestock, we figured we might have seen a lower debt of balance year on year, but that wasn't the case.

Yeah, so we have had increased sales, notwithstanding we're not seeing the benefit of that at the EBIT line because of the gross margin compression that we've experienced in the first half. So I think that answers the question in terms of debt of balance.

Okay, understood. And then lastly, maybe it's one for you again, Paul. The depreciation and amortization as well as the interest expense lines are both up quite a bit on PCP. Do you think doubling them is a decent starting point in respect of the FY23 expectations?

I'd say in regards to depreciation, I think that's a reasonable assumption, although I'd caveat that, but I haven't had a close look. In regards to interest expense, we'd expect net debt to decline through the second half, with working capital reducing.

So I'd expect...

Yeah, perhaps slightly less than a double.

Okay. That's helpful. Thanks for your time.

Thank you. Thank you. Your next question comes from Jonathan Snape from Bell Potter. Please go ahead. Yeah. Hey, guys.

Can you hear me okay? Yep. Great. Look, can I ask a couple of questions? Firstly, just on costs. Maybe this one is a bit like Evan's before, but in terms of the second half, can you just remind me, if you were doing $180 to $200 million EBIT, and being unwired in some of the incentive payments that you made last year, how material would that be in the second half?

Yeah, so in terms of the gateway driven incentives, they total $12 million in FY22. We also have network based incentives which are more of a commission type structure that they will be lower obviously on lower branch earnings. So it is significant.

Yeah, okay. And look, I'm just asking around the cash flow. Your cash conversion guidance greater than 90%. If I'm having a look at it, back of the envelope, you're probably looking at empaths somewhere around 110, 130, which is you're getting 90% is, you know, 100 to 120 million bucks in cash flow. And maybe this goes back to the working capital that James is alluding to, but if I went over the last two years, there's probably a $260 million investment in working capital, which I would have thought if livestock prices are down, ag chem prices are down, fertilizer prices are down, and even if only it's flat, you kind of have a working capital release that probably should have come in a normalised year. Kind of, I guess, what we're seeing in Graincorp and some of these other ones is it corrects down, there's a cash flow release. But it doesn't seem that you're kind of guiding to that. I guess I'm trying to understand Now, particularly last year, it was quite a material working capital investment. How some of that doesn't release if the levels or the value of our activity is down, you're on here.

So I think the other piece to the puzzle, Jono, is backward integration. And so there is a capital requirement for that. We do have supply chain finance that mitigates that impact. But particularly in this year, what we've had is accelerating supply chains. And so I would say that certainly at the half year snapshot, We've seen quite an impact from that as the goods arrived earlier. We do expect that to smooth out over time, but I think that's the missing piece of the puzzle there. As is typically the case, Our backward integration is weighted to the first half over the second, and so that's why we believe or are certainly confident in this working capital release coming through in the second half.

Okay. Can I just ask around the guidance, because obviously if I look at the major drivers of your business, it tends to be I guess the value of livestock turned off, which It was down in the first quarter, but accelerated down on face value by quite a material bit in the second quarter and probably exited much weaker. If I looked at fertiliser pricing, you know, as imagery would have sold through, landed pricing is really only now just showing some of the corrections that we would have seen in forward rates two months ago, but they accelerate down if I look forward. And if I'm looking at ag chem pricing, particularly actives, the last couple of months have come off again quite a lot. So I'm just trying to figure out how, you know, 50% declines in fertilizer pricing, double-digit declines in livestock pricing, and double-digit declines in actives and in ag chem pricing, how it doesn't have a more material headwind in the second half than it did in the first half when you're looking year on year. And I understand there's some volume shifts between the halves. But how material a headwind is it going to be? And does it then become more of a headwind in the first half of 24 when I'm comping first half of 23 because of that declining pattern?

I think let's take those in turn. Say in regards to fertiliser, we see a continuation of what's happened in the first half effectively for that. We're not expecting that situation to change. Obviously the genesis of the increase in fertiliser last year was linked to the invasion of Ukraine. That is purely a market normalisation I would say. in gas as the commodity. I think that's a steady state. In regards to livestock, the curious thing with the first half is that particularly for cattle, we didn't see a volume offset to the price declines. We know that those numbers are there. The national herd has increased over recent years. The forecast is premised on a stabilisation of prices, but more of a volume offset in the second half. Notwithstanding, we still expect a drag year on year from livestock agency. So we're not expecting that to turn around completely, but to stabilise and be offset by outperformance in retail. In regards to Ag Chem, The message there is that there was an impact in the first half from the timing of the reduction in prices and so there was some margin compression there. We expect that to ease over time from here as the market adjusts to the lower pricing. So it's really the volatility in price movement rather than the levels that they're at that have the major impact.

Did you guys take any impairments above the line on your Ag-10 inventories? Because, you know, farmers, when they see things going down, if they're held back, they'll hold back longer if they think they're going to get it cheaper. So I'm just interested in what you did in your inventory positions, isn't it?

That behaviour, that buying behaviour was there. So there was a lot of holding off, which pumped a bunch of it over to second half.

Yeah, and I'd say with glyphosate, you know, a lot of that price decline, you know, started in late 2022. So we're some ways away from that now. But no, we didn't take a specific impairment.

Okay, great. Thank you.

Thank you. Once again, if you'd like to ask a question, please press star 1 on your telephone and wait for your name to be announced. Your next question comes from Jason Palmer from Taylor Collison. Please go ahead.

Yeah, thanks for your time, good morning. Just a question from me in respect to just the inventory position, and maybe you can talk to the amount of inventory, maybe in terms of percentage terms that you think you're long, more broadly across some of the categories.

Yeah, look I'd say we're comfortable with our inventory position. I wouldn't say we're maybe fractionally long to where we expect to be. We certainly were at the half, but where we sit today we're fairly comfortable with our inventory position, simply given the seasonal outlook for winter crop, which is very, very strong.

Okay, I've got a couple more just in respect to when you sort of spoke about April trading and May trading being pretty good for the business and selling through some of that working capital. How does that sort of play out relative to your outlook observations? Maybe you also have some comments around, you know, margins that you've actually, you're realizing in some of those ag chemicals as they're being sold through at a more close to the length market price.

Yeah, I'd say April and May trading has underpinned the forecast process, which is the bottom-up process, and supported the guidance that we gave.

Okay, just the last one's around cost and the business. I mean, you've had a lot of cost to the business in the first half, and some of it's acquisition related, some of it's growth related. How quickly can you turn that cost off if you need to? And the second part of that question is, I mean, you put the numbers for the first half 23 at the EBIT line in the La Nina column. So the reason I'm asking that question is I'm trying to kind of work out where this business is at relative to the cycle. Whether we should be considering these numbers now as normal seasonal conditions or whether there's an element of over-earning still in there because it's a good winter crop.

In terms of cost control, we've had a program in place for three months, four months around targeted cost reductions and predominantly discretionary expenditure for the remainder of this year. So that's been in place and we've got good traction across the business on that. The second part of the question I'm not sure we quite follow.

The second part of the question was, you put it in your column, the earnings for this year, implying that it's still above the normal seasonal conditions. I'm just trying to get your views on where we are relative to normal seasonal conditions in this business.

I don't think there was an intentional alignment. You all heard my view on weather maps. Our sense is that whether it's dry or wet, there's upsides and downsides. I'm just trying to find the slide, Jackson, but there wasn't an intentional alignment.

Okay. All right. I'll leave it there then. Thanks.

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

Yeah, well, thank you everyone for coming to the presentation. Many of you will see in one on one meetings or group meetings, but thank you very much and talk to you shortly.