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.