Elders Limited

Thank you very much and welcome to all for the Elders half year results presentation for financial year 24. Thank you for joining Paul and myself for the session today. From an Elders viewpoint, this is the first half of our fourth eight point plan. first year of our fourth APON plan. The ELTS philosophy since the first APON plan in 2014 has been to control what we can 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 make great returns in good years. The FY24 year, full year guidance is an example of acceptable returns in difficult market and cost conditions and particularly in quarter one and we will go to the detail of that through the presentation. 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 six months of our fourth eight-point plan, we experienced an exceptionally difficult first quarter with improving market conditions across eastern Australia from the start of this calendar year or our second quarter. Our view in November last year was that the average conditions in FY23 were declining in the first quarter of FY24 across rural products and agency services and are now returning to an average outlook for the remainder of FY24. In this context, the performance of Elders with its clear and consistent strategy, multiple diversifications, high financial discipline, committed team, and enduring customer anchor as the most trusted brand in Australian agriculture is very solid. The result is strong in safety, sustainability, and cash flow, and we reaffirm our full-year underlying EBIT guidance of between $120 to $140 million for FY24. Our commitment is to provide 5% to 10% growth in EBIT and earnings per share and a minimum of 15% return on capital in a sustainable manner through a safe and inclusive workplace. The average remains consistent with our 5% to 10% growth through the cycles and this commitment with our annual growth for the last five years approaching 20% on these metrics. Our approach today is that I'll provide an overview of the results. Paul will go to the detail of our financial performance I'll then provide an update about outlook and growth and the transformation initiatives as we deliver our fourth 8.1 plan over the next two and a half years. So moving firstly to the slide on five, we have a look at the resilience of the business through seasonal volatility. And you can see from the first eight-point plan all the way through to our current eight-point plan, the multiple environmental factors just reaffirming our focus on return through the cycles. In the strategy session of the presentation, I'll also talk to our view on being able to achieve these targets by the end of the fourth eight-point plan. in FY26, but you can see growth in the first three eight-point plans above the EPS, EBIT and ROC targets. And also the fourth eight-point plan, as we mentioned at the end of last year, cut from the same cloth as the previous eight-point plans with portfolio approach, ROC focus, multiple diversifications and operating in the same market with largely the same executive team. Going through to the next slide on the people and customer highlights, from a safety viewpoint, one lost-time injury versus three at the same time last year. A reduction in our total recordable injury frequency rate, so continuing improvement on the safety front. The net promoter score at maintaining a very high level at 47. women in the workforce at 37%, 21% women in senior positions, and this is from a 4% at the beginning of the outcome and plan process, and also taking into account that largely with our bolt-on acquisitions, we dilute our women in management position because there tends to be a disproportionate percentage of men in those senior positions with our bolt-on acquisitions. And then... employee engagement still at the high performing level and additional sites that have come on board in the last six months. Going to the next slide, safety and well-being, and from a lifetime entry viewpoint, as I mentioned, down to one for the first half, and that's against the annual number of 34 at the start of the outbound plan process, and a continuing good trend on the total recordable injury frequency. I think I highlighted last half with a strong improvement through the wholesale business. So moving to the next slide on sustainability performance, and we talked previously about the targets we had set a couple of years ago. We've made great progress around our waste management, ethical sourcing platform, the Big Bang Recovery Program that we're partnering in, and also the targeted solar and LED transition. So we're comfortable that we're moving along nicely on the sustainability front. Moving to the next slide, and the next slide, many of these measures we foreshadowed with our trading update of a few weeks ago with the decline in EBIT for the first half against last year. And we'd also had a bit of feedback around understanding the difference impacts of Q1 and Q2. And when Paul comes to that slide, we've broken it out in a way that allows you to see the significant downside of Q1. return on capital down, and it's the first time in 10 years actually that we've dropped below our target, the 15% target, and our belief is that when we normalise Q1 and with the initiatives in place that we'll be approaching, we'll be at or above the 15% target as we run out to the end of this calendar year and for the first half of FY25. Looking at cash conversion, very strong. And again, Paul can talk to that. And our leverage comment that we did make in the trading update, our targets are between 1.5 and 2, sitting at 2.6 at this point, but with a belief that for Q1 and FY25, this will come back into line, if not perform. So with that, I'll hand to Paul, and he'll run to the details of the financial metrics.

Thanks Mark and welcome everybody. I'll commence on slide 11 of the pack, which summarizes Elders first half achievements, notwithstanding challenging seasonal conditions, especially in the first quarter, as Mark alluded to. Elders gave a trading update on April 8th, noting a forecast underlying EBIT range for FY24 of between 120 and 140 million, supported by a return to average seasonal conditions in the second half. I note that the second half EBIT assumption is within the range established over the past three financial years. Elders has made good progress in executing its fourth eight-point plan in completing 10 acquisitions in the first half and the acquisition of Knight Frank Tasmania post-balance date. The first half results showed resilience notwithstanding difficult trading conditions, especially in the first quarter, which was characterized by deteriorating client sentiment following a material decline in livestock prices and forecast hot and dry conditions associated with the El Nino climate driver. Trading conditions and client sentiment improved after the first quarter with January, February and April all exceeding prior year comparison. Leverage and return on capital have been negatively impacted by the EBIT underperformance in the first half, but a forecast to improve in the second half and return to target by half-year FY25. I'll move now to slide 12, which displays Elders' five-year financial performance from FY20. Over this period, sales have increased from $900 million in FY20 to $1.342 billion in FY24, a five-year compound annual growth rate, or CAGR, of 10.5%. Growth margin has increased from 204 million in FY20 to 285 million in FY24, a five-year CAGR of 8.8%. Comparatively, costs have increased at a five-year CAGR of 13% and remain a focus for the second half. Underlying EBIT has decreased from 53 million in FY20 to 38 million in FY24, a five-year CAGR of negative 7.7%, materially impacted by below average trading conditions in the first half of FY24. Moving now to slide 13, which focuses on shareholder returns over the past five years. Over the period, underlying earnings per share decreased from 31.2 cents in FY20 to 11.9 cents in FY24, materially impacted by market conditions in the first half. Dividends per share increased from 9 cents in FY20 to 18 cents in FY24, a five-year CAGR of 18.9%. The dividend payout ratio is currently elevated above Elders Policy of 40 to 60% of underlying impact, but is considered maintainable given a high cash conversion forecast in FY24 and the improved trading outlook. Moving to slide 14, which contrasts FY24 against the prior corresponding period. Notwithstanding the challenging trading conditions, Elders has been able to deliver a resilient result for the first half. Looking at the comparison, Sales revenue decreased 315.5 million, down 19%. However, most of the negative impacts resulted from lower crop protection and import prices compared to prior period. Pleasingly, the volume of products sold increased compared to prior period, indicative of positive organic growth in the business. We will explore this further in the presentation. Gross margin decreased 20.4 million to 285.4 million, down 7% year on year, negatively impacted by the low average trading conditions, but mitigated by recent acquisitions and new business. Gross margin percent increased 2.8% with good progress toward our FY24 backward integration target of 60% of the addressable market for off-patent chemicals. Gradual improvement in gross margin percent is encouraging given the negative impact experienced through FY23. Costs increased $24 million to $247 million, mostly due to acquisitions and new business, such as Elders Wall. When adjusted for acquisitions and new business, costs have risen only 1.8%, well below inflation. Underlying EBIT decreased to $38.4 million, materially impacted by the trading conditions, as discussed. Operating cash flow was positive 48.7 million with cash conversions supported by improved working capital efficiency from management initiatives and also lower crop protection prices compared to prior period. An interim dividend of 18 cents per share has been declared, reduced from 23 cents. Financial ratios are expected to revert to target by the first half of FY25, assuming average trading conditions. Moving to slide 15 now, which displays Elders product diversification. Overall, gross margin decreased by 20.4 million to 285.4 million. Lower ag chem and fertiliser prices compared to prior period had a material impact on retail products gross margin. Lower livestock prices compared to prior period reduced agency services gross margin and had flow-on effects to retail products due to reduced client sentiment, which negatively impacted animal health and other retail, especially in the first quarter. Pleasingly, outside of these impacts, several product categories demonstrated growth in the first half. Wholesale products increased 2.6 million to 35.3 million, plus 8%, with a very strong second quarter result. Real estate services gross margin increased 6.5 million or 22.5% with property management and residential and broadacre sales all showing significant growth supported by recent acquisitions. Financial services gross margin increased by 0.6 million to 27.1 million with continued growth from elders insurance. Over now to slide 16 where we further explore the impact of price volatility on the first half and how conditions change materially from the first quarter to the second. The chart below left indicates that the drivers of underperformance in the first half were rural products, agency services and costs. Each of these will be further analysed in subsequent slides. The chart to the right provides an indicator to the scale of impact on the first quarter from the conditions that prevailed at that time, and subsequently the significance of the turnaround in the second quarter, following the cessation of El Nino and material increase in livestock prices. According to slide 17 now, we review recent price volatility for urea and glyphosate as proxies for crop protection and fertilizer. The charts below demonstrate the significant price volatility that has been experienced across crop protection and fertilizer over the past 18 months, following a material increase in prices from geopolitical events in FY22. Whilst prices were comparatively stable through the first half of FY24, they remain significantly lower than the prior corresponding period. This delta had a material impact on retail product sales and gross margin in FY24 compared to prior period. Pleasingly, some of this impact was offset by volume sales growth as well as further progress in Elders' backward integration strategy, demonstrating resilience from Elders' diversified business model. The following slide explores volume growth within the business. The chart top left demonstrates that the volume of products sold continued to grow in FY24, notwithstanding challenging market conditions. The chart bottom left shows that this volume growth added approximately $100 million in sales, partially offsetting the impact of lower crop protection and fertilizer prices on the retail business. I'll now move to slide 19 to take a closer look at sheep and cattle prices in recent times. Charts demonstrate the statistical materiality of price movements in sheep and cattle markets over the past 18 months. Analysis of prices over a 10 year period indicate the volatility of this magnitude is historically unusual. The sudden reduction in livestock prices to levels well below the 10 year median had a material impact on Elders first half result through reduced agency services revenue, but also reduced rural product sales. in livestock related categories such as animal health and other categories of a discretionary nature. Pleasingly, livestock prices firmed in the second quarter and are now trading close to 10 year median prices across most livestock markets. This has improved sentiment across the industry. Slide 20, I'll now move to slide 20 to take a closer look at our real estate business, which has been a focus of business development in recent times. On May 1st, Elders announced the acquisition of Knight Frank Tasmania, a welcomed addition to the real estate team within Elders. Elders real estate business has grown at a CAGR of 21.3% with earnings contribution diversified across property management, residential and broad acre sales. Whilst Elders has grown significantly to become the fourth largest real estate company in its addressable market, it represents only 3.3% of transactions settled in that market. The chart below shows the regional locations of recent acquisitions, which are spread across the country, consistent with Elders' strategy of geographic diversification. Move now to slide 21 to further comment on geographic diversification. This slide shows geographic contribution to EBIT, excluding the wholesale business, as well as corporate overheads. In comparison to FY23, all states were negatively impacted by the tough first half trading conditions. Now turn to slide 22 to discuss costs, which have increased, but mostly due to growth-related initiatives, including acquisitions and new business. Overall, cost grew $24 million, up 11% year on year to support future growth as well as our transformational projects. In terms of key drivers, people contributed an additional $12.8 million, acquisition $7.3 million, transformational project $6 million and property $4.4 million. These cost increases were partially offset by a reduction of $8.6 million from operating and other expenses. Regarding people, Elders added 183 FTE, of which 155 joined Elders through acquisition and an additional 42 from the commencement of Elder's School in Ravenhall, Victoria. There was a net reduction of 14 FTE outside of these growth initiatives. The next slide separates costs relating to business growth, such as acquisitions and new business. The chart below shows that excluding growth-related uplift, costs have grown 3.9 million, or 1.8%, well below the rate of inflation. Consequently, 84% of the cost growth in the half resulted from initiatives to drive future EBIT growth, consistent with Elders' fourth eight-point plan. Elders continues to target a $10 million cost reduction in FY24, excluding costs from growth initiatives. to mitigate the impacts of inflation on the business. We'll move now to slide 24 to discuss capital allocation. Return on capital decreased from 16.9% to 11.4% compared to prior corresponding period and is below Elders' target rate of 15%. Return on capital is forecast to improve in the second half and return to above target by half year FY25. assuming a return to average seasonal conditions. Key drivers of the decline in FY24 include lower last-op prices, which are a key driver of return on capital in elders, and also the impact from lower EBIT, resulting from below-average trading conditions, especially in the first quarter. Pleasingly, working capital reduced by 180 million compared to prior period, benefiting from lower input prices and management initiatives. Over now to slide 25 in cash flow where we see an operating cash inflow of $48.7 million for the first half. The outlook for operating cash flow and cash conversion in FY24 remains favourable. With full year cash conversion expected to exceed Elders target of greater than 90% of underlying NPAT. Note also that the physical payment of company tax for Elders Limited is not expected to recommence until 2026, following the submission of the FY25 tax return, and just noting this is a year later than previously forecast. We'll now move to slide 26, where we see balance state net debt, excluding AASB 16, decreased by 68.4 million from 424.7 million to $356.3 million. Net debt benefited from a reduction in working capital in the first half, partially offset by investment in future growth, including acquisitions, new business, and transformation capex. Balanced state leverage, excluding AAFB 16, increased from 2.2 to 2.6 times and is above Elders' target range of 1.5 to 2 times. Leverage is forecast to return to within target by half-year FY25, assuming a return to average seasonal conditions. Importantly, elders' debt covenants maintain significant headroom. This concludes the financial section of the presentation. We'll now pass back to Mark to provide an update on our fourth eight-point plan and discuss the market outlook.

Okay, thanks, Paul. So we'll move to slide 28. And with the discussion on the eight point plan, we're going to focus specifically in on the transform component of it. But firstly, just to give an update on the innovate and grow before we move to those slides, from a business development viewpoint, for the half we had 21, financial models. So we've still got quite a strong pipeline of both acquisitions. 21 financial models, nine non-binding indicative offers, 11 due diligence and 10 acquisitions and then the nine franc after the close of the half with an annualized EBIT of 9.7 for the year. So our sense in terms of the innovate and grow The bolt-on acquisition component, which is a critical component, is intact. From a backward integration viewpoint, which is another part of the grow, we said we'd move from 54% of the addressable market, the off-pattern products, that we'd backward integrate to 60%. We fell behind that number in the first half due to the Q1 and the outlook forecasts, which had us buying third-party products. rather than our own branded product. Our assessment is by the end of this year, by the end of the full year, we'll be back at that 60% target for backward integration. And I think the final point I'd go to before we move to the detailed transform slides is around our ambition of 5% to 10% growth through the cycles at a minimum of 15% return on capital. So the question for us is, you know, in the last three eight-point plans, we've exceeded all of the metrics of that through-the-cycle target. And, you know, as we stand now, after six months of the fourth eight-point plan, what is our sense? Do we feel that we're going to be able to deliver the promise? But when we analyse that through to the rest of this eight-point plan, which takes us through to FY26, our sense is that we will be able to fit in that range of 5% to 10% growth through the cycles as we've targeted. And looking at how we do that, it's quite interesting because the retail and backward integration component takes or delivers some 37% of that in our view. Systems modernisation of the Streamline project, another 25% of that gap to hit the bottom end of the range. The bolt-on acquisitions, 17%. Agency and livestock reset, 11%. And then the wool and formulation projects, 10%. So from standing back on the commitment that we make to get 5% to 10% growth through the cycles, we see some 89% of the uplift required by the end of the 8.1 plan is actually in our control. So these are projects that we're running that are internally driven, and 11% is based on cycles, market conditions, and growth. So I think when we look at where we would fit in that range, our sense is given the normalisation of Q1 from this year, with the normalisation of Q1, we'll be to the top end of that range. And without the normalisation of Q1, we'd be at the bottom end of the range. So I think from a confidence in delivering our commitment, we're still on track. And as Paul pointed out with the Q1, Q2 impact, Our sense is that we methodically deliver the strategy as per the fourth APON plan and we're able to deliver the share of the commitments we've made. So moving to the next slide on slide 29, just focusing on Elders Wool. And I think we talked about this at the full year results. So this project is again on track. We now have the two sites up and we look forward to inviting everyone to an investor day at the Melbourne site on November 24th this year, because it's quite impressive to see the automated vehicles working and how the whole system works through that supply chain. But largely on track, there's 25 million capex we talked about at the end of last year, and with an 80% return on capital by FY25 that we talked about with capacity of 380,000 barrels. So I think from our viewpoint, what we have had and all highlighted in the cost and capital discussion, we've had a bunch of our internal projects come together from an operating cost and capex viewpoint with SysMod Streamline and the wall project at the same time. And that's reflected in the costs with the benefits coming towards the middle and end of the eight point plan. Looking at slides 30, Then when we look at systems modernization, we've talked about how we've broken it up into waves. How is each business case or each wave is approved by the board. We will disclose the numbers. So that's wave two is again on track with July state testing, South Australia. Wave three signed off as indicated on this slide. And also with assessment of the benefits that we talked about are also on track. We don't talk about streamline the raw products supply chain project here, but again, our sense is that's on track to the commitments that we made last November. Moving to Outlook, just a quick flick at page 31. The June AB Outlook estimates will come out shortly, I guess. But from our viewpoint, if we move to the next slide, our sense is that what we're seeing in the market is that from an East Coast viewpoint. Lastly, although the response in South Australia and Victoria where it's, where they're still waiting for acceptable winter crop rain. But for the rest of the East Coast, largely we predicted average, but in some areas it'll be above average. So the outlook through the cropping areas remains positive. It's also reflected in some of the comments Paul made earlier on livestock pricing and volumes. Across many of the inputs, we've noted although price and values volumes up with inferred market share gains, which fits with what we believe is happening as well. For Western Australia, later season, it's still dry in a number of areas, although over 50% of the crop has been dry seeded as we understand. And what this means is that there's low inputs pre, there might be some pre-emergent products and some fertilizer applied, but it does mean that when a rainfall event occurs, and it will occur, that we'd expect significant in-crop weed activity through the season, which are higher margin products than the pre-emergent and fallow products. So from our viewpoint, Things look average, slightly above average as we look at the east, and we maintain our belief that we'll hit in the range, the 120 to 140 range. So with that, I'll open up to questions, and please feel free to kick off.

Thank you. If you wish to ask a question via the phones, you will need to press the star key followed by the number one on your telephone keypad. If you wish to ask a question via the webcast, please type your question into the ask a question box. Your first question comes from William Park with Citi. Please go ahead.

Hi Mark and Paul. Thanks for the opportunity and thanks for your presentation. Just first question is around what you're seeing over the last month and a half across your business units. I mean, in the slides, you've talked about how the trading conditions are elevated in comparison to prior corresponding period. And just curious to know, curious to understand what if that momentum has carried through in May and also just in Prior to, I guess, you guys going into blackout, I understand there was a bit of a shortfall in your inventory levels to service. I guess the demand emerging out of Christmas and just wondering how you're thinking about inventory levels heading into second half as the demand levels progressively step up. Thank you.

Yeah, I think on your first question, and Paul might want to provide greater detail, we've been able to keep the momentum going, which is great. And, you know, obviously we've got multiple products and services, so it may be higher in one area than the other. But certainly I think April has shown the continued momentum. And, you know, it's expected as we come into – to a big winter crop. The winter crop across Australia, regardless of drought, flood or whatever, only varies by kind of plus or minus 10% in any particular area. So our sense is that the assumption of average and the continuing building of momentum makes a lot of sense. I think where, as I mentioned with Western Australia, where pre-emergent product, herbicide or fertiliser is not applied because of market conditions, it comes out because you need the night NPK to grow the grain. It means that there will be applications later on. So I think we've got that as a bit of a safety net as well. In terms of the imagery, I think you're referring to... Well, it was largely coming in the second quarter where we'd ordered to an El Nino forecast and we needed to source product from third parties, et cetera. But that's largely been, you know, with our demand planning, that's largely been offset. So, Paul, you may want to add something.

Yeah, I think that's right, Mark. The inventory shortage occurred early January in response to rainfall in December. And also, you might recall the DP world issues on the port played a factor there. But yeah, we're very comfortable with our inventory position as it stands today.

Thank you. And just the second one is around backward integration. You said you went backward in first half of 24. Are you suggesting we went back from 54% or? Are you saying it sort of landed between 54% to 60%, but it's sort of closer to 54% than it is to 60%?

Yeah, no, no, I didn't say we went backward. I said we didn't hit the target. So our plan for the year, last year was 54% of addressable market, and some key products have come off patent this year, so the addressable market's also changed, and the mix of products have changed with the dry conditions, etc., So what I said was at the end of the first half, and I'll pluck a number but it'll give you a sense, rather than running at 60% at that track rate, we're running at just below 30%. And that's fine because the largest part of the market is the second half. So our assessment is that we will still hit our 60%. So we'll make up for lost ground in the first half during the second half. So we'll be on track.

Thank you. And just one last one from me. Could you just give us a sense as to how you're thinking about your 12% stake in PGG Wrightson, given, you know, the issues there are pretty widely flagged?

Yeah, so it's unchanged, really. So we bought that stake a couple of years ago when the opportunity arose, and the opportunity was that Beijing Food and Agri had central government direction to divest. And so our sense was that although we had no short-term ambitions to move on PGW, we thought that it was prudent to take up the 12% and to sit on it until the time's right. With the dropping of our share price or the pressure on our share price, Last year, one of the critical metrics that we have for corporate activity is that it's a pre-synergy ZPS secretive, and we couldn't hit that target. So our sense is that we'll continue to be patient and to sit. In the meantime, the PGW has had... significant board issues that I think they've sorted out now with their major shareholder. But I think there's a bit of a shaking of confidence in the market for PGW. And there's also been difficult market conditions and lifestyle conditions in New Zealand. We've seen that pressure on their... They've done trading updates and downgrades and pressure on their share price. But from our viewpoint, we've got... You know, what we need to do and our focus... And I think everyone on the call knows that we're quite methodical in the way we attack these issues and financially driven. We need to deliver hopefully at the top of the guidance range of EBIT that we've provided. And we also need to deliver the wave two of our systems modernization project. settle down Elders Wool, now that we have that in place, and also deliver the outcomes from our streamline or the rural products project. So from our viewpoint, we don't need other distractions. And as we've said all along, we have no fast timeline on PGW.

Thank you. Thanks for taking my questions.

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

Hi, morning. Just going through the third eight-point plan. So I'm just trying to get all the numbers here correctly you talked about in terms of hitting that CAGR. So you're 5% to 10% off the 171 mil base last year. So it's 200 to 230 mil by FY26. Can you just remind me of the buckets that you talked about there, all the different percentages? This is a bit fast. I didn't catch those clearly. Yeah.

Yeah, so I'll do it very, very broadly, which is the way I articulated before. So from retail and backward integration, so retail growth backward integration, which is largely in our control, it's roughly around 37% of that gap. When we look at the benefits from SysMod and Streamline, those are the two with supply chain project and systems modernisation project, the benefits come through, as you know, FY25, FY26, And that's around 25% of it. From bolt-on acquisitions, just with our new normal cycle, it's about 17%. For the wool and formulation projects, around 10% as we grow into those with our greenfield in Western Australia on formulation, wool projects we've talked about, and also the... Also, Eureka, the formulation acquisition in Victoria. And then the final 11% is around agency livestock reset, which, as I say, is not in our control, but we think will continue in line with market assessment. Now, when we say 5% to 10%, and again, this is very broad just to give everyone a feel, We're thinking if Q1 normalises as we believe it will, and I think Paul pointed out it was around 37 million as an average in that five years. Over five years, yep. So if that normalises, then we'll be at the top end of the 10% or above it. And if we're completely wrong and it doesn't normalise, we'll be at the bottom, towards the 5%. So I think by all probability, we believe it will normalise.

So Paul, do you want to add anything to that? Yeah, I think the Q1 normalisation, I'll make a couple of comments there. And just firstly notice, you know, these are management account numbers. Obviously, we don't audit Q1 versus Q2. But, you know, if you take that as an indicator, the five-year average Q1 contributed $37 million of EBIT. And whilst we haven't given specific numbers for Q1, FY24... was significantly below that. So a normalisation of Q1 will certainly go some way to bridging the gap.

Okay, so I mean, the range is sort of 30 mils. So I assume it's somewhere around that number. Take you from the low end to the top end. Okay, so just to follow up on that, with the backwards integration, so that's 37%. I mean, that's a big, big chunk of it. I take your comments just sort of towards the end. of the Titan backwards integrate. Is there any other projects or, I mean, it's a big chunk, would you just maybe break that up a little bit more, that initial 37%?

Yeah, so that's retail growth and backward integration. So I think the size of the pie is also changing because there are bigger products coming off patent as well. So there's that dynamic happening as well. But that's in crop protection. In animal health, we're at a very low level of backward integration, as you're aware, and with our specialty fertilisers, so not the high analysis commodity stuff, but specially fertilised, we're also at a relatively low level. So there are other buckets in those two.

Okay, I said some of the other products. Okay, great. Thanks. I'll pass it on. Thanks, guys.

Thank you. Your next question comes from Philip Pepe with Shorin Partners. Please go ahead.

Hi, guys. Thanks for taking the question. Look, most of mine have been answered. I'll just throw one in on urges and acquisitions, I suppose. What's the current conditions done to the amount of businesses that have been put up for sale? Are farmers battling putting more for sale? Sorry, competitors battling putting more for sale? Are they holding off for better times?

Yeah, that's a good question, Bill. So our pipeline is quite dynamic, as I think everyone's aware. There are 15 targets in the pipeline now. As Paul mentioned with the focus on real estate, we have bent our focus to non-rural products businesses just to keep our portfolio balanced so that we have like a blend of different exposures similar to investment portfolio. I think particularly in real estate, we've gained significant momentum where people, if you think of the major players like Knight Frank we talked about and some of the Ray White players and others, where they have a good experience or a great experience in terms of the acquisition approach. And I think everyone's aware that like 90% plus of our vendors stay with us after earn out. So where they have a great experience, we get a lot of referrals from acquired businesses. And so we've seen that in, in mainland australia and even from the knight frank acquisition now we've had maybe there's three or four uh come to us uh with um with their thoughts on what we could do next so in those areas we haven't seen a major change in flow in the crop protection or the real price areas i think some businesses that they're feeling stress around capital and so we're seeing a few come to us but in the livestock agency ones where I think the focus of your question was it doesn't it hasn't really changed during the good times we have a lot of slow acquisitions in livestock because they were making so much money so they slowed when the prices were high rather than became faster and now we've We've got a lot. So we tend not to, it doesn't tend to influence. And the earn out from our position, the earn out philosophy of the three to five times with 50% completion, 25 year one, 25 year two, means that they've got three years basically to get the, to continue to drive the growth of the business for the final earn out payment. Because it's the last payments, the multiplied by the earnings minus the first two payments, So we haven't really seen it. And I think our focus on real estate is probably, and other agencies, has been helpful.

Excellent. Thank you.

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

Morning, Mark and Paul. Thanks very much for your time. I ask you first of all about the illustration on slide 16 on the right-hand side there. where you're sort of showing that quarterly performance breakdown. Given how strong the recovery was in demand and how strong the trading conditions were through Jan, Feb, et cetera, why is the retail line still red in the second quarter?

Yeah, it's a good observation, James. I'd say in terms of retail, There's a couple of elements at play here. Firstly, summer crop was delayed from first quarter to second quarter, so that's part of the improvement. In terms of the headwinds for retail versus prior corresponding periods, they were still in play, most notably the lower input prices, period on period. And so they didn't mitigate loss you know, client sentiment improved and activity improved, there was still that base effect from the lower prices.

Okay, yeah, so volume is good, sort of seasonal conditions good, trading conditions, everything good, except that dynamic around lower input prices and the consequence, the margins relative to PCP. So as we move through the second half of FY24? When does that particular issue become a non-issue, if that makes sense?

Yeah, certainly by Q4. I think it's already a non-issue because we can see in the presentation that gross margin percent is actually higher year on year. And so if you look at the declining price plane in FY23, We're certainly biased to first half over second, but also there was margin pressure with that declining plane in FY23 that's not evident today. So I think on balance, we've seen that headwind that's been with the retail business, that's declined.

Okay, understood. Secondly, I wanted to ask you about working capital. So it's a really impressive trend position there at balance date, really good cash conversion. Why was there such an increase in the trade and other payables against a decline in inventory? Often you see those two move in the same direction.

Yeah, another excellent observation. I think it's more to do with prior corresponding period, James. So you recall in FY23, we had elevated inventory of the winter crop from primarily quickening supply chains. So we just saw product arrive two to three weeks earlier, but it was at the most voluminous time of the year. So that obviously isn't a factor anymore. And so I think that describes a big chunk of that delta between inventory and debtors.

Okay, thank you. And last one I wanted to ask about was on the operating costs and appreciate your disclosures there. It's very helpful. Slide 22, 23. What struck us is the business did an exceptional job through sort of second half 22, first half 23, second half 23, keeping that operating cost base around sort of the mid $220 million level all the while continuing to make acquisitions and invest in the business. And despite all of that incremental activity, that cost base stayed reasonably flat. And as we move into this first half 24 result, again, there's still more growth activity taking place, acquisitions, transformation, et cetera. But the cost base has stepped up meaningfully to 247. I'm just trying to work out what's different in this half versus the preceding three halves that might explain such a divergence on the cost base.

Yeah, one factor, James, is staff incentives coming from FY22 to FY23. Given the drop down in EBIT, they were materially lower. So that's certainly a factor. And I think outside of that, it's just the volume of growth activity in FY24 versus the previous years. We have made some, you know, many-sized acquisitions in FY24 and obviously 11 acquisitions year-to-date, but also with Elders Wall, which is not insignificant in terms of the cost to the business. The other observation I've made is around, you know, the transformational projects piece. The majority of that is depreciation, and that's, you know, obviously flowing from, you know, the CAPEX, in system change, primarily if it's starting to flow through the P&L.

Yeah, understood. Thanks, Paul. That's helpful.

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

Hi, Mark and Paul. Thanks for taking the question. Just a couple of quick ones from me. Just on, just looking at that cost slide, see the increase in property and lease costs of four and a half mil or so. Do you mind just unpacking that a little more as well, what the drivers were there?

Yeah, absolutely, Ben. The material element to that is Elder's Wool. So we've got two leases there, one that's new to the business in FY24, which is the most significant one out in Ravenhall in Victoria. And you'll get a sense for why that is on the investor day. in November is a substantial facility. Outside of that, it's typically CPI flowing through those lease agreements, so they all have that CPI uplift in it. I think as a corporate, we're fairly well placed in that regard, having regional, or by and large, regionally located leases, but it's still a significant growth factor.

Got it. Thank you. And then maybe just building on James's question there around sort of working capital and cash. So I think you still have to go back to 2018 to see a sort of a working capital release in the first half. So if you could just sort of talk us through what your expectations are for second half working capital and how that sort of ties into your 50 million working capital release for the full year as well with Project Streamline.

Yeah. Good question.

We see continued working capital release in the business in the second half. There's a couple of internal initiatives that we've got still to flow through those numbers. And I'd say as well, in terms of average working capital, you can see that that's still elevated above prior year at this stage. I'd expect average working capital to continue to trend down And that is part of the reason for our confidence around the improvement in ROC in the second half, albeit we don't expect to fully get to above hurdle until we replace the first half of FY24 with FY25.

Thank you. That's all from me.

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

Yeah, hey guys, just a couple of questions. First of all, just on the costs in the wholesale business, they're up almost five million year on year. What was the driver there?

Yeah, so they've got some additional warehouse costs there up in Brisbane and preparatory work for Rockhampton as well and down in Tassie. Yeah, so yeah, that's... that's primarily related to growth.

Okay. And look, I know if I can ask around the ag chem side, but in the first half, what would have been the year on year movement in the contribution from, from Titan? Like I imagine you didn't sell much, if anything coming through there, um, was it material?

Yeah, I think we'll, we'll,

We'll come back, take the opportunity to come back to you on that, John. I haven't looked at that number or have that turning in, but we'll take that offline.

Okay. And look, can I just check if I heard a number right? Mark, did you say that Knight Frank was a 9.7 million annualised EBIT contribution on the acquisition earlier, or did I make that number up?

Yeah. No, what I said was that the 10 acquisitions had an annualised EBIT contribution, of course,

So that's the 10 acquisitions that have already been done today. Does that include Knight Frank or not?

No, it occurred in the second half.

Okay. Should we just assume with that one that, you know, your normal four to five times multiple is applicable there or is that one a little more expensive given the scale of it?

Yeah. Yeah, well, as you know, if they're at the higher end of EBIT, they're at a higher multiple. So I assume that it's up the top end.

Okay. Okay, so if I'm looking at it, I mean, you should get some annualised benefits of these acquisitions that probably didn't have much the first half. You know, a bit in the second half and probably more so in 25. Knight Frank, you're going to get half of it, but then half of it next year. I think I saw you wool things like five in additional EBIT. the sysmod you know if you're spending 70 or 80 million on the first three stages you kind of hope you'd be getting your 15 return on that sort of stuff so that should be a 10 to 15 million drop and then it looks like the first quarter you know it's probably a 15 20 million hit in its own right um am i doing like maps on the run looking at your own income.

Yeah, I think first quarter, yeah, I think first quarter, as Paul indicated, the tenure average is 37 million.

Yeah, it was, yeah, well below that.

Yeah, okay, so it's a, you know, it doesn't look like that much at all, if anything, in the first quarter. All right, and look, just on average net debt in the second half, you know, given where you've come out and exited through the first half, You know, obviously if the season starts to move pretty quickly the way here, you'd imagine inventory is going to flow in and flow out fairly quickly as well. Would you anticipate that being down year on year at this stage?

Versus prior corresponding periods?

Yeah, because you carried a lot more inventory for a lot longer last year, if I remember correctly, than you probably thought.

Yeah, certainly working capital will be down. Obviously, net debt brings in, you know, acquisition spend and capex and dividends as well. So there's a few moving parts there, but yeah, we take that one offline as well.

Yep. All right. Great. Thank you.

Your next question comes from Belinda Moore with Morgans. Please go ahead.

Good morning, Mark and Paul. Look, Can I just check, was the first quarter sort of break even to slightly unprofitable? Second, if I look at the back of your account, is it correct you've paid as much as $50.7 million for Knight Frank? And then, yeah, are we applying about six times as Jono asked? And then just lastly, CapEx guidance. Thank you.

I think I'll do the difficult one. Yes to your first question, Belinda.

Paul? In terms of Knight Frank, Belinda, so there's an upfront portion to that acquisition and then some performance and earn out behind that. So, yeah, we haven't disclosed the detail of that arrangement. And your final question? Oh, CapEx. CapEx, yeah. So CapEx outlook, so we're at the peak of CapEx in Wave 2. We have obviously released Wave 3 CapEx at $10 to $13 million. So we're sort of at now the peak in CapEx spend in elders and certainly through the system transformation process.

Thank you. Your final question is a webcast question from Richard McDougall with Flinders Investment Partners. This reads, have your third-party purchase needs and crop protection now normalised? And what is the impact on margin if it has?

So the question was, how does it normalise?

Third-party supply normalised. Oh, yes. So our plan was to gradually move to 70% of... of off patent or address chemistry or what we call addressable market within Elders to our backward integrated Titan and parent products. So we've been doing that over a number of years in the discussion with our mainstream suppliers. And so what's happened is that obviously that's our plan. We've been transparent on it and we've progressed to do that. Where products come off patent now, we work closely with them in order to use their active ingredients in our home branded backward integrated products. And obviously there's a trade off on margin, but it certainly allows them to continue to grow with us. And I think from our viewpoint, We need many of the third parties who are also multinational proprietary discovery companies, and our decision to take it to 70% as the maximum was to allow us to still take generics from them while getting access to their proprietary chemistry.

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

Okay, well, thank you very much, and thank you all for coming on. Many of you we'll be talking with over the next week, so I look forward to catching up when I go to the meetings. Thanks very much.