Elders Limited

Thank you very much and welcome to all for the elders full year results presentation for the FY23 year. Thank you for joining Paul and myself for the session today. From an elders viewpoint, this is the final year of our third eight point plan. The elders philosophy since the first eight point plan in 2014 has been to control what we control and not to dwell on what we can't control. To have a cost and capital structure to allow us to make good returns in bad years and to make great returns in good years. The FY23 results are an example of acceptable returns in very difficult market and cost conditions. In fact, this result is the second highest result in the last 10 years for Elders. 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 eight-point plan, and more specifically in FY22, we experienced exceptionally strong and early market conditions across most production enterprises and geographies. We also had positive livestock prices, winter crop and summer crop conditions with unseasonable rainfall, all resulting in a record profit last year. Our view in November last year was that the exceptional FY22 results would normalise to average conditions in FY23. Although we expected a reduction in livestock prices, we did not foresee near 60% drops in cattle and sheep prices over a very short period of time. In this context, the performance of Elders with its clear and consistent strategy, multiple diversifications, high financial discipline, hardworking and committed team and enduring customer anchor as the most trusted brand in Australian agriculture, the result is very solid. As mentioned, our second highest profitability in 10 years. The result is strong in safety, sustainability, profit, return on capital and cash conversion, maintaining a strong balance sheet through a very difficult year and setting us up for the next eight point plan. Our commitment is to provide 5% to 10% growth in EBIT and earnings per share at a minimum of 15% return on capital in a sustainable manner through a safe and inclusive workplace. The results today are consistent with our 5% to 10% growth through the cycles commitment with the annual growth through the last five years with a CAGR approaching 25%. Our approach for the day is that I will provide an overview of the results. Paul will go through to the detail of our financial performance, and then I'll provide an update of our outlook and growth and transformation initiatives as we commence our fourth eight-point plan.

So with that, I'd like to move to the key investment drivers. You can see as we run through the key investment drivers in terms of EPS growth,

a commitment of 5% to 10% growth of EPS and EBIT through the cycles at above 15% return on capital. So over the three eight point plans, so the last nine years, EPS CAGR of 57% with ROC greater than 15% throughout the period and a dividend payout between 40 to 60%. And this year, as you'll see in the notes above that for the payments. When we look at the geographical product and channel diversification, I think we talk a lot about our diversified model, and this allows us to make money through the cycles, as we've mentioned. And when we go to the GM slide on page 20, the pool will go into detail. You will see the impact of the multiple diversifications at product and service, and then the following slide at geographical level. In terms of attractive market and company outlook, It's a very, very positive outlook for food and agri. We talked about the cycles and the impacts of various uncontrollables, but in reality, as we can see by the slides coming up, we've had strong and high-quality growth through the cycles. In terms of transformational initiative benefits, again, we'll talk to the detail, but we do have the two biggest projects around our systems modernisation projects. and our Rural Product Supply Chain Optimisation Project are looking to provide benefits towards the end of FY24 and into FY25. Significant pipeline of new opportunities. So this year we talked about, we reported in on nine acquisitions, bolt-on acquisitions. There are some 16 candidates in our pipeline. And as we've mentioned previously, a universe of 1800 rural service branches around Australia, 900 of which are independent. and therefore opportunities for us with our bulk and acquisition strategy. And at a market share of roughly across all of our products and services of around 20%, significant room for growth for the business. And then finally, on our robust balance sheet and supporting growth, We've often talked about our high financial discipline. You've seen us make commitments at the half year with regard to cash conversion, with regard to cost management and efficiency, and they have been delivered and exceeded as we come into the full year. Paul will talk to that detail later. It's worth noting that we've finished the year at 1.5 times leverage with our guiding range, sorry, 1.4 leverage with our guiding range 1.5 to 2 times. So moving to the next slide, and again, just to emphasise what's happened with the eight point plans over multiple El Ninos, La Ninas, geopolitical issues, and many pandemics, et cetera, over the period of the first three eight point plans. And you can see the slides or the headings down the bottom talking about the uncontrollables, the climatic events, and you can also see under each eight point plan, how we've performed against a commitment of five to 10% growth in EBIT and earnings per share, and above 15% return on capital. So the first eight point plan, 30 year, sorry, 735% growth from business from turnaround, ROC of 25.7%. Second eight point plan, as we ran through drought years, so significant drought years, we've had the EBIT growth CAGR of 22.8% and ROC of 20.9% through that period. And then the third eight point plan as we ran from drought into La Nina and then finished off with a shadow of El Nino predictions. As you can see the EBIT growth of 17% through the cycles, EPS 13.6 and ROC of 21.6%. So obviously highlighting highly residual resilient business model that we put in place through the eight point plan period the fourth eight point plan we'll talk about later is cut from the same cloth in the same market and with largely the same executive team to deliver if you look at the next slide from an operational viewpoint you've seen a reduction in both lost time injuries and total recordable injury frequency rate. It's great progress. We've held our very strong net promoter score at 48. We go across with holding at 43% women in the workforce, but importantly, up to 20% women in senior positions. A long way to go, but it's also a long pathway from our first state plan when we started with 4% of women in management positions. Our employee engagement remains above high performing through the corn ferry assessment mechanism at 77%. So very strong engagement and enablement. And then of course, right in the middle for the fourth year in a row, the number one most trusted agribusiness brand amongst farmers. So going to the next slide. And you can see the pathway in lost time injuries. In fact, when you go right back to the first eight point plan, there were 34 lost time injuries. And so we've seen great progress there. And then with total recordables, you also see a clear trend line. And it's worth noting that there's been great progress within the wholesale business and we continue to make strong progress. The next slide in our sustainability performance, We issued our first report a few years ago and have made good progress across a number of the climate targets we set where we launched our way in terms of progress and launched our sustainability framework, established Thomas Eldon Sustainable Agriculture, which does support the front end and many other clients in terms of innovation efforts in sustainability, joined the Big Bag Recovery Program, which is an equivalent program to Drummaster, and Drummaster over the years having recycled some 53 million containers. Our targeted solar and LED lighting upgrades and also the solar farm development at Collara Feedlot. So then taking to the financial highlights with the next slide, above the middle of the range that we gave in terms of underlying EBIT at $170.8 down on FY22, but as mentioned, the second highest in 10 years. 16% return on capital with a target of 15%. Weight average cost of capital is in the realm of 8%, so significant shareholder value driving performance. Cash conversion, we exceeded our commitment of 90% that we made after half a year, and we do have in policy, and that has been another great result. And as mentioned, leverage ratio at 1.4 times against our target of 1.5 to two times. So in summary, before I hand over to Paul, in a very difficult year, it's a solid outcome, second best profit in 10 years and high quality return on capital and cash generation. So with that, I'll hand over to Paul.

Thanks Mark and welcome everybody today. I'll commence on slide 12 of the PAC. which displays Elders' five-year financial performance from FY19. Over this period, sales have increased from 1.626 billion in FY19 to 3.321 billion in FY23, a five-year compound annual growth rate, or CAGR, of 19.6%. Gross margin has increased from 352 million in FY19 to 619 million in FY23. at a CAGR of 15.1%. Comparatively, costs have increased at a five-year CAGR of 12.6%, reducing costs to earn from 79% in FY19 to 72% in FY23. Underlying EBIT has increased from $74 million in FY19 to $171 million in FY23 at a five-year CAGR of 23.4%. I'll move now to slide 13, which focuses on shareholder returns over that same period. Over the period, underlying earnings per share increased from 52.6 cents in FY19 to 87.6 cents in FY23 at a five-year CAGR of 13.6%, adjusting for the impact of company tax expense, which was only recognised from FY22. Dividends per share increased from 18 cents in FY19 to 46 cents in FY23. The dividend payout ratio, I note, is currently elevated above Elders policy of 40 to 60% of underlying NPAT, but is considered maintainable given high cash conversion in FY23, which is forecast to continue into FY24. Moving to slide 14 now, which contrasts FY23 against prior corresponding period. As noted in recent presentations, FY22 was characterised by historically high livestock prices, high real estate turnover and inflated crop protection fertiliser prices following supply chain disruption. These market forces supported elders' performance in FY22. By comparison, FY23 saw steeply declining sheep and cattle prices, which reduced livestock agency commission, along with declining fertiliser and crop protection prices, which placed downward pressure on rural pollux margins. Consequently, there are very material differences between the operating environment across the two financial periods. Notwithstanding these market impacts, Elders has been able to deliver its second highest result in the past 10 years, with a number of highlights evident. Looking at the comparison, sales revenue decreased 123.9 million, down 4%. However, most of the negative impacts from declining commodity and input prices was offset by growth in the volume of products sold. We will explore this further in the presentation. Gross margin decreased 33.7 million to 619 million, down 5% year on year, negatively impacted by lower sheep cattle. glyphosate and fertilizer prices. Gross margin percent decreased 0.3% due primarily to margin pressure from declining cropping foot prices, especially glyphosate and particularly in the second and third quarters. Pleasingly, the margin impact was softened by the increase in backward integration to 54% of the addressable market. Costs increased $27.6 million to $448.2 million due to acquisitions, new points of presence and support for transformational projects, including system modernisation and Elders Wall. Pleasingly, costs have been held flat from the second half of FY22, despite the inflationary backdrop. Underlying EBIT decreased to $170.8 million, with a five-year CAGR of 23.4%, exceeding Elders' target range of 5% to 10% through the agricultural cycles. Operating cash flow was positive $169.2 million with cash conversion of 163.1% above Elders' target of greater than 90%. The average cash conversion over FY22 and FY23 was 110%. A four-year dividend of 23 cents per share has been declared unchanged from the FY23 interim dividend. Over to slide 15 now. where the impact of market volatility is evident across several products. Elders agency business was negatively impacted by significant declines across sheep and cattle prices as producers adjusted forecasts of dry spring and summer conditions. These drivers will be further explored in subsequent slides. Falling cattle prices also negatively impacted elders feed and processing business, although mostly in the second and third quarters. Retail and wholesale products were impacted by declining crop protection prices in key actives, especially glyphosate, which compressed gross margin. The full impact of this market dynamic was mitigated by volume growth across several product categories and continued progress with Elders Backward Integration Strategy. Financial services performed well throughout the period with strong growth, particularly from Elders Insurance investment. Real estate showed pleasing resilience following a very strong result in FY22 and in the context of rising interest rates. I'll move now to slide 16 to review key performance trends. The four charts on the left demonstrate the material decline in sheep and cattle prices, and in the case of cattle, the absence of the volume uplift as would typically be expected. The four charts on the right demonstrate areas of continued growth in the business. as Elders continues to diversify by both geography and product. We'll further explore these areas of growth as we move through the pack. Moving on to the next slide, which takes a closer look at sheep and cattle prices over the past decade. The charts demonstrate the statistical materiality of price movements in sheep and cattle markets in FY23. Analysis of prices over a 10 year period indicate that volatility of this magnitude is historically unusual, and also the current pricing remains one to two standard deviations below 10 year median prices, unadjusted for inflation. This time last year, Elders forecast a softening in livestock prices for FY23, but not of the magnitude experienced. Turning to slide 18, we reviewed the market volatility over time for fertilizer and glyphosate. Market volatility had a significant impact on rural products gross margins, especially in the second and third quarters of FY23. The genesis of fertilizer price volatility emanated from the Russian invasion of Ukraine, which resulted in increased natural gas prices in FY22, which subsequently subsided in FY23. Global prices for glyphosate and other crop protection products increased in FY22 due to limited supply from China out of the Beijing and Winter Olympics. Prices across several key products subsequently declined in FY23, placing downward pressure on gross margin percent across the industry. The charts demonstrate that the scale of price volatility over FY22 and FY23 is historically unusual. Pleasingly, much of this impact was offset by volume sales growth, as well as further progress in elders' backward integration. demonstrating the resilience in Elders business. Moving on to the next slide, we further explore the negative impact of sales from declining product prices and the extent of offsets and continued volume growth within the business. The charts below demonstrate that declining fertiliser and crop protection prices would have had a much more significant impact on rural products, sales and gross margin had it not been for the continued growth in the volume of products sold. The chart bottom left shows the volume growth added 315 million to rural product sales or 11%. This was more than offset by the negative impact on sales from declining crop protection prices estimated at 340 million. Moving to slide 20 now, which displays Elders product diversification. Overall, gross margin decreased by 33.7 million from 652.7 million in FY22 to 619 million in FY23. Despite the significant market volatility, many products performed strongly in FY23. AgChem gross margin decreased 14.1 million to 158.8 million due to margin compression from key actives, but increased 28.4 million on FY21 with continued volume growth. Animal health growth margin increased 7.6 million to 47.3 million with continued growth from Elders private label products. Other retail growth margin increased 15.3 million to 54.5 million due to continued growth in seed and general farm supplies products. Wholesale products decreased 1.4 million to 71.7 million impacted by the flooding in Q1 declining glyphosate prices but increased 10.5 million on FY21 real estate services gross margin decreased 2.1 million with broad acre sales negatively impacted by rising interest rates and falling cattle prices but increased by 8.8 million from FY21 financial services gross margin increased by 9.3 million to 53.5 million with a strong result from elders insurance investments Moving to slide 21, which displays elders geographic diversification. 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 the market and price volatility previously discussed. It showed great evidence of resilience. Over to slide 22 to discuss costs, which we continue to manage closely. Costs grew $27.6 million, up 7% year on year, to support future business growth as well as our transformational projects. In terms of key drivers, people contributed an additional $11.8 million, acquisitions $9.6 million, motor vehicles $4.8 million, and property $3.2 million. Breaking this down, the Elders Branch Network added 65 FTE, of which 29 were graduates, and acquisitions added 94 FTE. Transformational projects added 25 FTE, mostly from Elders Wall Rockingham, which commenced operations in July. Costs were stable through FY23 at similar levels to the second half of FY22, notwithstanding the inflationary environment due to continued focus on discretionary spend, operational efficiency and supported also by reduced staff incentives. I note that Elders is targeting $10 million of cost reduction in FY24 to mitigate the impact of inflation on the cost base. Moving to slide 23 to discuss capital allocation. Return on capital decreased from 26.2% to 16% period on period, but remains above Elders' target hurdle rate of 15%. I note that three-year average return on capital is 21.6%. Key drivers of the decline in FY23 include product mix, most notably a lower contribution from agency services, which generates comparatively higher return on capital, elevated average working capital due to quickening supply chains in the first half of FY23, which increased average working capital, and reduced EBIT compared to the corresponding period due to market and price volatility, as discussed. We'll now move to slide 24 and cash flow, where we see operating cash inflow of $169.2 million. Cash conversion in FY23 was 163%, with an average over FY22 and FY23 of 110%. The outlook for operating cash flow and cash conversion in FY24 is favourable, with project streamlined forecast to release approximately $50 million in capital in FY24. I note also that the physical payment of company tax for Elders Limited is not expected to recommence until 2025. I'll now move to slide 25 where we see balance date net debt increase by $183 million. with 84.7 million of this increase coming from AASB 16, primarily due to new lease commitments for Elders Wool and a general increase in duration across the property lease portfolio. Net debt excluding AASB 16 increased by 98.3 million, driven by nine acquisitions as well as Elders' $38 million investment in PG Wrightson and capital expenditure on transformational projects. notably the $25 million investment in Elders Wall. Balanced state leverage excluding AASB 16 increased from 0.7 to 1.4 times, but remains below Elders target range of 1.5 to 2 times. Balance sheet strength combined with significant undrawn bank facilities in Covenant Headroom provides flexibility for Elders to pursue growth opportunities in FY24 and beyond. This concludes the financial section of the presentation. I'll now pass back to Mark, who will review the performance of our third eight-point plan, introduce our fourth eight-point plan, and discuss the market outlook.

Okay, thanks, Paul. And we'll just move to slide 27 when we look at the first three eight-point plans. And I think the The points have been made earlier in the presentation on the commitment of 5% to 10% growth through the cycles at 15% plus ROC for EBIT and earnings per share and the over delivery on those metrics over the first three eight point plans. The fourth eight point plan as mentioned has a similar similar direction in terms of commitment to metrics through the cycle. And as mentioned earlier, it's cut from the same cloth in the same market and with largely the same executive management team and team across Australia delivering the fourth eight point plan. So if we go to the next slide on page 28 and the fourth, when we look at the fourth eight point plan, it's unchanged in terms of ambition, in terms of the compelling shareholder returns industry-leading sustainability outcomes and most trusted agribusiness brand, unchanged in terms of the business units and also the values. What we have done for the fourth eight-point plan is to focus the eight points into three key areas of run, transform and innovate and grow, given we're at that stage in the development of elders across Australia. So moving to the first component, which is our strategic priority of run, And I won't go to the detail, but happy to take any questions later on in terms of the deepening customer relationships heading, financial discipline heading, and investing in our people heading. And these are the three core anchors of Elders over the last 10 years. As I say, I won't go to the detail dot points, but happy to take any questions as we go through the question time. Going to the next slide in terms of transform. And this is a very strong focus area for us. And quite, quite interestingly, that the cost and capital that we've put into the transformational parts that will get returns towards the end of FY24 and into 25, but were a cost and capital burden in FY23 in the result. So if we look at the streamlining our supply chain, we flagged this at the half year. We've now, with our acquisition strategy, have multiple points along the rural products supply chain from the formulation all the way through to retail and obviously with supply procurement, wholesale, et cetera, in between. And so we thought that it was a time particularly running parallel with the evolution of our new system, modernising our systems, to target a streamlining of this supply chain. So we're looking over multiple years a $10 to $18 million EBIT benefit, a $50 to $80 million capital reduction benefit, as per the original review that we did 18 months ago, and that's progressing quite well. When we look at systems modernisation, and we've mentioned that there are seven waves, including the first one, which is zero, so six waves after that. Now, we're in the second wave. We communicate and and disclosed to the market the cost and capital involved in each wave as it's approved by the board, but not ahead of time because we haven't had the business cases finalised, et cetera, et cetera, and they're not approved. But when you look at this year, this is the peak spend year in wave two. And that's worth noting. We can go into greater detail of that with discussions later on. The benefits flow really kick off in FY25. but a very, very important project for us with multiple benefits as we transform Elders with its multiple products and services to allow systems-wise the customer to be the centre, which allows significantly greater areas to add value and to digitalise various services, products and aligned products and the share of wallets. The third project that's not there, but we have talked about, we suppose that the half year was Elders Wool, which is the automated wool handling facility. 25 million of capex, 18% return on capital by FY25, flat in FY24, although a cost in FY24. Perth facility was opened in July. This year, Melbourne facilities closed. plan to be open in February next year and a capacity of some 380,000 bales. So another great project for us to gain share and add further value to both clients and our shareholders. Moving to the next slide, which is the innovate and grow, and it's broken into two areas, one being the portfolio and the second being sustainability solutions. So we'll deal with the portfolio to start with. And I think firstly, I'd comment that from a business development viewpoint with our bulk on acquisitions, FY23 has continued to be strong, 59 financial models developed, 20 non-binding indicative offers, 11 detailed due diligence assessments, nine acquisitions, and 9.1 million annualized EBIT for the year. Adjusting for livestock price reduction, we're thinking that for FY24, this is an 8 to 10 million EBIT range of bolt-on acquisitions. Well, we currently have 16 in the pipeline. So very positive and clearly with the balance sheet to be able to continue to make these bolt-on acquisitions where the EBIT multiple we're paying is converted into significant shareholder value against our multiples. So that's a very positive. and ongoing initiative for the business. Then looking at backward integration, just broadly, so we targeted 55% of share of off patent products to be Titan or Apparent branded in FY23. We got up to 54%, which is a great effort, and we're targeting now 60%. You may recall that we said we'd go from I think back then, maybe 30%, we take it up to 70%, which leaves room for proprietary companies that have generic portfolios still to have bundled business with us. So that movement of 54% to 60% is in the realm of 5% to 10% EBIT for FY24 as we go forward. Moving then to the second area of our strategic priorities, which is innovating and growing through sustainable solutions. And these are all eight point plan key priority areas where we go from health and safety, sustainable farming, employee attraction and retention, our management of climate change impacts, animal welfare focus, corporate governance, community impact and investment, and our waste management. all being actively managed and expressed in detail in the sustainability report that you'll receive with this year's council. Moving to market outlook, and the slide 34 has the ABS September report. There's a December report due, and I think it's worth noting that we run on an average season view, and that's how we run the business. And if there are clear indicators that there will be fundamental changes in prices, commodity prices, etc. That's factored in the way we look at the market. If you convert that, the ABH report, and I think in the update of that report, we may see some more positive commentary around the summer crop, around dryland summer crop. in particular, when the report comes out in December. But if you convert that to page 35, which is our view on the impact, and I think it's worth noting that at something, as we say across all the products and services, we say somewhere around 20% of the market. And so the market going up and down, particularly given the number of self-help initiatives where we're in control, we're not relying on weather or commodity prices. that there is significant room for growth. So we're thinking across summer crop, obviously irrigated summer crop looks solid and it looks like with the heavy clay soils through the summer cropping areas, rainfall coming through and that has come through has put some moisture in the profile, although it has been dry in some of the western areas. In terms of livestock price recovery, our thinking is that there's an 18 to 24 month period recovery period in front of us. But having said that, again, when you go to the gross margin slides on page 20 that Paul spoke to, you can see that the history of Elders being a livestock business and particularly cattle business is a long way from the reality where livestock now is, and particularly cattle, is something like 8 to 10% of our gross margin as we've developed a number of other areas with our portfolio management approach. So in terms of winter crop, we're saying average season and we'll see what happens. There tends to be a, Paul will talk to the weather maps as I still refuse to, but there is a theory that the El Nino impacts will dilute coming into autumn. And as we run into winter crop, and as I mentioned, there's significant room to grow across many areas in the business. So with that, let's open it up for questions. and we can hone in on any of the issues that you may see of interest.

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

Hi, guys. Just two from me. It just sounds like from that outlook commentary, you are expecting, I guess, earnings growth in FY24. Is that the way to sort of summarise those various comments there?

I think the way I put this, you know, we're running our 5% to 10% through the cycles. And, you know, a cycle that has livestock prices going down also has it going up. And our view is we control with control. We're targeting 5% to 10% through the cycles. And we actually see, we're viewing the market in a relatively optimistic and positive way.

Okay, all right, fair enough. And then just second question for me, I'm trying to understand the big difference between average working capital and the end balance state working capital. How come so much of that working capital online or reduction was skewed towards the end of the half? and maybe just ask it, I guess, fully directly, was any of that unwind driven by increases in receivable facilities or anything like that?

No, nothing like that, Evan. It was, as discussed at the half, we had accelerating supply chains in the first half, which exaggerated our working capital position at the first half. Also, we had higher livestock prices, so net livestock working capital was elevated through the first half. all of those things, they take a while to come through. There's actually additional benefits still to come through from lower commodity and market prices in FY24. The example I'd give there is in receivables where some of those are deferred from winter crops, so from February, March to December and January even, and it's about $125 million in deferred receivables, which are at higher prices than what they would be today.

Okay, great. So it's pretty clean working capital forms there. Okay, thanks. I'll pass it on.

Thank you. Your next question comes from Richard Barwick with CLSA. Please go ahead.

Okay, Mark and Paul. Just want to clarify a couple of things in terms of some of the moving parts as we go into 24, particularly from acquisitions. So just want to make sure I've got everything right. So Charles Stewart, you talked about that would be $5 million in the first full year, and effectively you've got the best part of a full year into FY24. Eureka said $2 million. You would look from EMS Mooney, you talked about that being $4.3 million for a full year, so that's crudely an incremental $2 million in FY24. So that gets me to $9 million. And then I just wanted to double check on what you'd said, Mark, on the the backward integration moving from 54 to 60%. Did you say that should equate to about an extra 5 to 10 million of EBIT in FY24? And are there any other moving parts that I've missed there?

Yeah, no, no, you're spot on. It's roughly 5 to 10. Obviously, it depends if it's above average, it'll be more of a season because there'll be a greater component of patent products being sold. But that's broadly our... our view and on the Bolton acquisitions, as you've rightly done very quickly, the cumulative of currently delivered Bolton acquisitions is very close to the range. So we're obviously giving ourselves a lot of room to move there.

What do you mean very close to the range?

Well, the range I gave of 8 to 10 million in terms of acquisitions annualised, if we do no more for the next 12 months, we're approaching the range. It clearly went, we've got an answer.

Gotcha. And is there anything else I've missed in that other than obviously yet to be announced, we get to be delivered bolt-ons?

No, I don't think so. We've said the benefits of our streamlined project, the EBIT and capital benefits are over two years. Although for that project, it's likely that they'd fall into FY24 equally or more so than FY25, whereas systems modernisation, the benefits largely come through, start to flow through in 25. Yeah.

Okay. All right. That's helpful. And then the last one, I just want to clarify with you. I mean, you talked about, yeah, crudely 20% market share. But how do you reconcile that with slide 31 where you talk about elders 5.8% of the total farm input market or what would be roughly about 11% of the current addressable market?

Yeah, so the total input market includes fuel and finance where we're not players in fuel and tiny players in finance. So that's the whole input market. And our percentage is not of that because we don't do fuel and finance.

No, I know. But still, if I restate it of just of the 34, we end up closer to 11%, not 20%.

Yeah, I'd say, Richard, that there's a real disparity there. So it's a percentage that we use internally, but there is within that number, certainly higher market share for something like sheep, but much lower market share for real estate. So it is really just a rule of thumb. Yeah, it is.

Yeah. Okay. All right. All right. Thanks, guys.

Next question comes from Philip Pepe with Shore and Partners. Please go ahead.

Hey, guys. Thanks for taking the question. And, yeah, well done on hitting your guidance. A lot of my questions have been answered. Perhaps... Any commentary on how year to date has begun? As you mentioned earlier, livestock prices continue to fall since September, but how is the first sort of six or seven weeks performing for the company?

Yeah, thanks. Thanks Phil. I'll describe it this way. I'll start with livestock and you are correct that prices have been a little softer. Volumes were very close to budget in October. Outside of that, most other business units were in line with budget. We have seen some softness in retail sales, but not of any sort of magnitude. But as Mark suggested, I'd say a slow start to the summer crop in dry land areas. But if you do look at the BOM in terms of the Bureau of Meteorology, In terms of outlook for the East Coast, it is somewhat improved from what it was previously with a three-month outlook of median rainfall. So I think that is a theme that is one to watch.

Understood. And I guess just following on from the early question as we stand at the moment, You've given medium-term guidance for EBIT, but you are expecting EBIT to be up somewhat in FY24, not backwards because of potential droughts or livestock prices, et cetera, given what we know today.

Yeah, so, Phil, we're not honing in on 24 because we can't. So we're sticking to our 5% through the cycle. And if we look at the areas that we control ourselves, like backward integration, Baldwin acquisitions, all the efficiency projects, we're very confident that we'll be delivering those as committed. In terms of growth and, you know, timing of rainfall, et cetera. I mean, we can't just punt and make up a view, but through the cycles, as we see El Nino fade away and we go back through another cycle over the next three years, we're confident that we can deliver that 5% to 10% at about 15% return on capital.

Excellent. Thank you. Well done.

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

Hi Mark and Paul, thanks for your time today. Can I ask a question for Paul? Firstly, in your earlier comments, you referred to a target, a cost out target for F424 of $10 million to, I guess, help combat some of the inflationary pressures you're seeing. Is that a part of the system's modernisation cost out benefit, or is that a just completely separate goal that you have for the business?

No, it's a completely separate goal, focused on discretionary spend or spend that we can switch off easily without disrupting the transformation that's happening in the business.

Yeah, okay. And probably in a related sense, the change or any potential change in STI-type payments would be excluded from that? That's more of a structural cost out you're looking for?

Yeah, absolutely.

OK, thanks. In practice, Paul, while you do have the floor, so a couple of comments you made about the cash flow for FY24, and in particular the capital release from the systems modernisation program, is it fair to say that you would be targeting that sort of normal 90% conversion operating cash or NPAT to operating cash flow and then a $50 million to $80 million release on top of that?

I think that's I think that's reasonable, James. Yeah, absolutely. Yeah, we expect if I was to guess, I'd say, you know, cash convert. There's no reason why FY24 wouldn't be similar to FY23.

Yeah, and I think, James, it's worth noting that the major internal projects, we've ensured that we're not double counting benefits. And so the streamlined benefit of capital reduction, et cetera, is separated out from the system-wide benefits, even though they're running parallel.

Yeah. Yep, got it. That makes sense. And Paul, also going back to one of your earlier remarks there, you said something about not expecting cash tax, as in operating cash flow, cash tax payments until FY25. I think I might have misheard you there.

Yeah, we still have deferred tax assets. So whilst we're recognising company expenses company tax expense for elders limiters, it's offset against the deferred tax asset. And, you know, the timing of when we commence physically paying tax for elders limiters is somewhat uncertain, but there won't be material payments in FY24. Okay.

Yeah, that's helpful. And the last question for me, slide 22, you're talking about cost drivers there. Property and lease costs increased by three, just over $3 million in the year. That includes the right of use assets and all the right of use depreciation. But the right of use depreciation year on year increased $10 million. So X that other property and lease costs went backwards, $7 million. Can you shed some light on why that would be the case?

Yeah, I'll take that one offline. Yeah, I need to get underneath that and look further into that, James.

Yep, OK. Thanks, Paul. Appreciate your time.

Thank you.

Your next question comes from Ben Wedd with Macquarie. Please go ahead.

Hi, Paul and Mark, thanks for taking the question. Just on the first question around CapEx, you said the systems modernization will be in the range of $26 million for FY24. So should we still think about CapEx as going up at a total level by $18 million or so, given the system modernization spending in 23?

Can you just repeat the number there? Was that $18 million? Yeah, so we expect the, so the full capex for wave two is estimated at 40 to 45 million. Yeah, so I'm not sure where the 80 million comes from there. 18, sorry. And this is the peak wave. Yeah. I'd add as well that this is the most significant wave in this project. So certainly, you know, wave three and four will not be of any sort of magnitude similar to wave two.

Got it. Thank you. And then just on the Charles Stewart acquisition, which you sort of previously disclosed, you know, $5 million of earnings in the first 12 months, is that sort of assuming current levels of livestock prices and goldings, or are you assuming some recovery there?

No, so that range that I gave was adjusted for livestock prices for FY24.

Got it, thank you. And then just on the Calaris feedlot as well, if I can squeeze another one in there, you referenced higher grain costs and higher feed costs there as well as the low import costs for the cattle. What do you see the grain and feed costs doing in 24? We cannot really forecast that.

Yeah, so Kalara produces a lot of its own feed, so has some insulation to whatever the grain costs might be. They have blended rations. I think in terms of FY23, the major impact on that business was around declining livestock prices, which impacted the ultimate margin achieved on backgrounding cattle. But I think the outlook for Kalara is pretty favourable.

Yeah, it is. It is. And there's been, in terms of the producing our own forage in particular, we've invested in pivot irrigation systems that has made that more efficient as well. And as Paul says, with the reduction in cattle prices, the cogs, the margin has extended. And we've also expanded our grass-fed program with Coles and Woolworths.

Thanks, guys. That's all from me.

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

Jonathan Snape, your line is now live.

Please proceed with your question.

Sorry, I have myself on mute. Hey, guys, can I just ask a couple of questions on these system modernisation charges? I'm looking at your slide there. I think it was, what, 20-whatever. The component that's going to be capitalised, the component that's going to be expensed by the looks of it. Am I reading that right? That, you know, there's an aspect that's going to come through your P&L next year in your, I'm assuming, in your network charges? That 16 to 18 million type number?

Yeah, so in terms of capitalised costs, Jono, so you can work on sort of 60% capitalised, 40% non capitalised over the losses of the project. Then within that, in terms of the OPEX, there'll be a portion that will be underlying, so where it's recurring type expenditure and a portion that's non underlying. So we've put the 16 to 18 there in non underlying. The reality will be that some of those costs will fall that way, but the capitalised costs are typically costs associated with the system integrator. and elders, employees that are full-time on the project.

Okay, but what I'm trying to understand is the 16 to 18 that's going to flow through P&O, I'm assuming most of it next year, as a non-underlying charge, is there an aspect of OPEX in underlying that's going to be there in like 25 and 26 that I have to kind of be on top of? and then you're going to start depreciating all that capex, I assume over a five or six year period?

Yeah, the depreciation will be more like 10 years on that capex. Yes, there'll be a portion of underlying costs, so things like license fees, but ultimately there'll be a runoff of the previous system's license fees as well.

you know it's it's there's yeah there's a tale of runoff and new costs coming on board okay so if I went back and did that waterfall episode I think a few people have been trying to do I mean obviously you said your acquisitions are eight to ten um there's your costs out that you talked over ten um backward integration of five to ten um a few other things in there I think that added up to five or nine then there's going to be some additional costs in systems modernization that looking at year on year looks like it's anywhere from 13 to 15 million bucks is a you know maybe a one-off next year and then drops away in 25 and then there's the inflationary cost pressure so I think you're calling out are probably going to be about 10 as well as in the controllables that you guys have. Is that an accurate description of that aspect of it if you're trying to do a waterfall?

Yeah, I think close enough, yeah.

Yep, and then after that all I've got is like livestock's a headwind, summer crop's a headwind. Pricing in Ag Chem looks like it's probably turned from the worst and starting to go maybe the right way. And then, you know, rate of the rain gods in March.

Yeah. All right, great.

Thank you.

Yeah, thank you. We've got a hard close at 10.30 Adelaide. So maybe one more question.

Thank you. There are actually no further questions at this time. So I'll hand back to Mr. Ellison for closing. Thank you.

Okay. Well, thank you very much. Thank you. Thank you all for coming into the call and look forward to speaking with you in the one-to-one discussions. But the summary being really tough market conditions on multiple fronts and a result which is the second highest for elders over the last 10 years at a 16% EBIT and a very strong cash conversion. So we'll look forward to speaking with you all shortly. Thank you.