Elders Limited (ELD) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Elders Limited HY '22 results briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Mark Allison, CEO. Please go ahead.

Thank you very much, and welcome to everybody for the Elders half year results presentation for FY '22. And I'm joined here with Tania Foster, who will be assisting for the larger part of the presentation. From an Elders view, this is the first half of our third Eight Point Plan, the old philosophy since the first Eight Point Plan has been to control what we can control and not to dwell on what we can't control, to have capital cost structure to allow us to make good returns in bad years and to make great returns in good years. And as you can see by the half year results that we are reviewing today, this is an example of great returns in good market conditions. 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 shareholders. In summary, we aim to control what we can control. Over the first 18 months of our current Eight Point Plan, the third Eight Point Plan, we have experienced strong market conditions across most production enterprises and geographies. Although this is coincided with the tail end of COVID impacts, supply chain disruptions and geographical -- geopolitical uncertainty. We have also had positive livestock prices, winter crop and summer conditions over more recent times. In this context, the performance of Elders with its clear and consistent strategy, multiple diversifications, high financial discipline, hard work and committed team and enduring customer [ anchor ] as the most trusted brand in Australian agriculture remains quite solid. So the results are strong in safety, sustainability, profit strong return on capital and strong and strategic delivery. I would point out, however, as we look through the presentation that the favorable market conditions account for 42% of the considerable upside from this time last year. And I think that's the key consideration when we look at these results and also the key consideration when we look at the second half and when we also look at the next 2 to 3 years outlook in agriculture. So 58% of the upside has come from our organic growth with the multiple initiatives in line with the Eight Point Plan and also from the bolt-on acquisition strategy, which has us fill in geographical depth throughout regional rural Australia in key farming areas. So the -- our commitment to provide 5% to 10% growth in EBIT and earnings per share at a minimum of 15% return on capital in a sustainable member -- manner, insure safe and inclusive workplace remains intact. The results today are a continuation of our own delivery of this commitment with much achieved and much, much more to come. Importantly, we've also upgraded our outlook to 30% to 40% up on last year, and we see a very positive midterm outlook and commit to the 5% to 10% growth through the cycles for the year and cultural cycles in addition to this. So the approach for today is that I will provide an overview of the results. Tania will go into the detail of our financial performance, and then I'll provide an update on the focus and the progress of our third Eight Point Plan and the outlook. So if we go to the agenda slide, just a note on the agenda slide. There are 3 slides in the appendix that may be helpful for people who are participants in this call. One is the business model, a refresh of that. The profit sensibility -- sensitivity calculations and also the capital management framework that Tania will allude to when we get to that part of the presentation. So moving to the business update. And firstly, considering all of our key stakeholders, from a people viewpoint with improving safety, and we've seen that move from 33 lost time injuries at the beginning of the first Eight Point Plan to 1 at the half year, strong and highly engaged workforce, you can see the high engagement levels. At a customer level, most trusted brand, very high customer satisfaction as indicated by the Net Promoter Score. From a community viewpoint, our continuing 183-year commitment to regional rural DNA and our customer base and the commitments we make there. And from a shareholder viewpoint, strong financial performance, while delivering the other aspects of our Eight Point Plan. So moving to the next slide. I just highlight a few of the key areas where we have EBIT growing by 80% on this same time last year, very strong growth, and we'll go into detail of that. Our return on capital with our reset target a couple of years ago of 15% from '20. We're sitting at 27.8%. So very strong return on capital. From a leverage ratio viewpoint, we're at 1.2x. So we've seen this strengthening over the last couple of years. In fact, our pathway back from the acquisition of AIRR to what we thought was acceptable leverage ratio, we've exceeded the pathway back. And then looking at cash conversion, as we do see leading into the end of our first half, which coincides with the overlap in the preplant and winter cropping season. We do see a buildup of capital within the business, and Tania will go through the other factors that have driven that strengthening this year. But with a view that towards the end of the financial year at the end of September, we remain committed to our 90% conversion target, and we'll go to the details of that shortly. So looking at safety, health and well-being. And this slide emphasizes my earlier point. From a safety viewpoint, a 10% reduction in the total recordable injury frequency, strong performance around our lost time injuries over many years. And a business that has safety is the #1 priority when we run our internal staff surveys. From a sustainability viewpoint, again, good progress. You'll recall that we set our climate targets last year with 100% renewable electricity across our business in Australia by 2025. 50% reduction in Scope 1 Scope 2 emissions intensity, and our net zero Scope 1 Scope 2 emissions by 2050. So our progress is very strong and I think from our viewpoint, we feel comfortable that the focus and the priority across this area, across our business has strengthened significantly, and we'll continue to deliver in an authentic way. So with that, I'd like to hand over to Tania and she'll go into the detail of the key drivers in the business.

Thanks, Mike. Okay. Obviously, the financial table as you see in front of you. Firstly, I'd like to say really strong performance across our key metrics. Firstly, you see our sales revenue up 38%. We've had strong double-digit growth across all of our products, particularly in Rural Products with a 47% increase, partly driven by demand for crop inputs, partly inflation-driven but partly seasonal. Fertilizer is one of the increases up $142 million or 77% and our ag chem product lines up $115 million or 44%. I should also mention high land stock prices. And certainly, our acquisition organic growth has contributed to the sales uplift. Secondly, our gross margin increased by $84.9 million, 35%, again, consistent with our sales growth, and we're holding our gross margin relatively flat with strong performance of a 1% increase in our Rural Products business. This is off the back of our own product or backward integration strategy. Costs you see are up $25.8 million or 15%. Pleasing to see our cost growth is less than our sales growth and our cost to earnings ratio falling from -- to 59% from 69%. There's a couple of key reasons for our cost growth. We've made acquisitions in the half, and we've also added 298 FTE to support our growth agenda. EBITDA up 80% off the back of [ absolute ] sales and margin performance. Net profit after tax is up $23 million or 34%. It's worth noting that this is the first year that was included income tax expense in our underlying earnings in the prior half. We excluded income tax expense because we're recognizing tax losses. Return on capital, very happy with the 27.8% return. It exceeds the 3-year average of 22%. Our net debt is increasing. Whilst our leverage ratio is decreasing, net debt primarily up to support the higher working capital we're carrying due to the high input prices and obviously wanting to secure supply for our customers. The only soft spot in our result is the negative operating cash flow. We flagged it at the end of 2021, that we're expecting our cash conversion to be weak in the first half given the sterling outlook at that time and also the higher price inflation and wanting to secure supply. And I'll go through that in a bit more detail. Underlying earnings per share at $0.58 per share is up $0.15 or 36%. And then finally, dividend per share, we're really pleased to announce the $0.28 per share dividend. It's up 40% on the first half '21 and up on second half '21 as well. So a really good outcome there. Turning over now to over the last 5 years. We really think it's worth sharing the trajectory of our half-on-half and year-on-year performance. So what you see here is the CAGR across the last 5 years. And it's worth noting that the first half has been our strongest year on record with positive CAGR across all metrics. This has been driven by both organic growth and some acquisitions and obviously, the high demand for our product as well as price inflation. You can see EBIT growing a healthy 30% across each of the halves. Our costs are increasing by 10%, so we should lessen our revenue growth. And as I mentioned earlier, our cost to earnings has fallen to 59%. Pleasing to see our earnings per share, a CAGR of 5%. You'll see a slip in FY '19 and FY '20, which is a result of the issuance for the AIRR acquisition. Worth noting also that the earnings per share would be a lot higher if we didn't have the income tax in our results for the first time in half. So comparing like with like the earnings per share would be at $0.81 per share. Moving on to our financial performance by product. As you can see, we've had a fantastic year across all of our products with a total NPAT up $23 million or 34%. So just running through from the top, you can see our retail products up $53 million. Strong sales activity up 47%, strong demand for fertilizer and crop protection chemicals. Price inflation, the prices have never been higher for a lot of both inputs and a little bit of forward purchasing by our customers in the first half to secure supply. But certainly, the widespread rainfall bodes well for the second half. And obviously, our backward integration or own product strategy is continuing to deliver benefits. Our wholesale business is up 27% on sales, delivering that $8.5 million increase, really driven by improved seasonal conditions and we've opened 1 new AIRR warehouse in the half. Agency Services is up $8.2 million and really driven off the back of high livestock prices, as you can see, cattle prices are up 32%, sheep are up 9%, but partly offset by reduced volumes. People -- farmers they're increasing cattle longer to maximize weight gain and you're also seeing some restocking activity. Real Estate Services again up $9.1 million, a really strong result in real estate, prices for farmland is not getting any cheaper. And we've also sold higher volumes of properties, both in residential and farmland. We also had 2 acquisitions in the half that built out our geographic footprint. Financial Services was up $2.8 million, a really strong performance in our Insurance business, not only higher priced premiums, but more customers and also our livestock in transit warranty business, which 43% of our customers are opting in and this is not surprising given the higher sale of livestock. Feed and Processing, which comprises of our Killara feedlot and the Elders Fine Foods businesses have had a great year or a great half, I should say, with strong demand from domestic and export customers and we're also seeing high residency, improved efficiencies and higher cattle exits. Costs, as I mentioned earlier, we've got more people, 298 more, 123 related to acquisitions and the residual 175 related to organic growth, particularly in agronomists and rural product specialists. And finally our interest, tax and noncontrolling interests, you see that's up $36 million. As I mentioned earlier, this is primarily a result of including income tax expense for the first time this half in our underlying earnings. Turning now to the segmentation of our gross margin. Now this is always a question that we get asked a lot, how much of your upside is a result of market growth? So what we're presenting here is quite a bit of detail in how we think about market organic and acquisition growth. So on the top left-hand side, you can see acquisition growth at $10.5 million or 12%, and this relates to the 5 businesses that we purchased in the half and the residual annualization of the second half '21 purchases. In the middle section, you see our organic growth. We're attributing $38 million of our gross margin uplift to organic growth. This represents 46%. And finally, you can see the market component, which represents $36 million or 42% of the uplift. Just getting into a little bit more detail around how we think about organic versus market. It's a bit more of an art than a science. And when you think about how the factors are accumulated. When we think about Rural Products, we think about the growth in market share and in terms of what we see as the benefits as organic. In Agency, we've observed also an increase in market share. Again, we do see that as organic. In Real Estate, we think of the growth in the number of properties that were sold as organic growth. And in Financial Services, we consider the increase in our livestock in insurance and livestock funding businesses as organic growth where it comes to the increase in the number of premiums written -- and Feed and Processing, we consider this wholly organic because it's largely attributable to the active management of our supply chain, procurement, contract negotiation and the increased number of cattle exits. On the right-hand side, you can see what we consider market. So Rural Products, all the uplift in the ABARES area planted, which is almost 11% year-on-year, and the price inflation is coshared, and with that uplift is considered market forces. Again, in Agency, we consider the increased price and the downside in volume as market. And in Real Estate, the increase in the average property price is market force. In Financial Services, the increased price per policy, which is driven off the underlying value of that stock we consider market. So in closing, hopefully on this slide, hopefully, that makes it quite clear how we think about market versus organic or acquisitions. So moving over to gross margin. You can see our gross margin increased across all of our product lines. And you can also see on this slide that Agency Services still represents our #1 business, followed by AgChem. So interesting to note when you look at since 2018, the percentages of our businesses haven't really changed despite the sterling season we're having when it comes to crop protection. So the only shift that happened is the addition of the wholesale business, which has meant that the agent were reliant less on Agency, which is a really positive story around our diversification. So starting on the left-hand side, you can see our AgChem business, up 62% or $79 million. This is partly due to the higher prices, we're attributing about 40% to price and 60% in volumes related. Fertilizer grew 100%. And there is a lot of pieces related to price. So around 80% of that increase is priced 20% is volume. Annual Health increased 22.4% to $16 million, also benefiting from the maturity of our own brand products in AIRR. Other retail, this includes seed, general merchandise, fencing retail, and that increased 54%, a significant increase on price and volume related. And our wholesale business ended 29% up on last year with strong sales growth in line with [ plan ] and seasonal conditions. Our agency business contributes 25% of our total result. Strong livestock prices were a key feature here. The EBIT finished up 30% on the first half. And Eastern land indicator was up 4% on first time, so certainly drove the high commissions. Real Estate 10% of our gross margin at $33 million, up 37%. Interesting to note here that the median price of farmland is growing more than 20% on last year, particularly in Western Australia and [ Vic Riv ]. And finally, our financial services represents 7% of our business and increased $2.8 million to $23 million, Insurance and Livestock in Transit businesses were the key drivers here, representing almost 50%. And for last week, season processing, really good results from our Killara feedlot with the increased number of cattle exits. Across our geographies, so strong performance across all geographies. And certainly, the diversification we have reduces the risk. So our network has been working pretty hard. So in Western Australia you can see there, they're up 24%, represents 20% of our business. Strong demand for fertilizer and chemical products. There's been pretty widespread rain in a lot of those cropping regions. And we've also acquired a new business, [ Wholesale Rural Suppliers ], which joined us in the half, which has been a really strong contributor in the half. South Australia was up 51% and represents 16% of our business. This is a strong performance across all of not only livestock but also Rural Products. Tasmania, the smallest of our states, but still important to us. And it's pleasing to see that their results is off the back of the strength in cattle volumes. So we're winning share in Tasmania. Queensland and Northern Territory up 100%. So a really good performance in Queensland, which is partly due to our [indiscernible] acquisition made in the second half of '21. The impact on the flood has not really impacted our business, but it's obviously slowed down the movement of livestock with cattle volumes down significantly. New South Wales continues to recover well from the predominant drought, up 100%, represents 18% of our business -- and the widespread rain and soil moisture has meant that some of the cotton areas around Griffith and Moree are having a standout year and are really contributing to that upside. But I should also mention the fact that the rest of the business is doing well, particularly livestock and our Killara feedlot is also [ making ] in segment. [ Vic Riv ] across the board, really good performance, up 55%. It's our largest business, representing 30%. Strong livestock sales, contribute to cattle prices and Real Estate, which really strong in this region as well. Turning now to costs. So our costs increased by $25 million or 15%. I'd just like to draw your attention to 4 areas. Our people costs are up $13 million, partly due to the organic growth in the network, up 129 FTE. This is a lot of investment in agronomists and rural product specialists. And we also had some increase in our corporate services to support the ongoing growth across compliance, risk, systems modernization and finance. Our acquisitions, there were 5 acquisitions in the half, contributing at extra 73 FTE as well as the [ 50 ] that we did in the second half of '21, all contributing to cost upside. Motor vehicles, we have got more vehicles. We're driving more and that fuel is costing us more. So that's added $1.2 million in costs. And our systems modernization and IT cost has increased, which is in line with our expectations as the systems modernization program continues. We're expecting to OpEx $4.5 million this year. So that's certainly flowing through as well as investment in cyber and data. Capital performance. So our return on capital is increasing 27.8%, exceeds last year, exceeds our 3-year average and also exceeds our hurdle rate of 15% in the Eight Point Plan. You can see that our average working capital has increased $103 million. And down at the bottom, is where you can start to see the investment that we've made in working capital over the last 6 months. We've got higher trade and other receivables, up $190 million or 27%, which is slightly less than our sales growth of 38%. Our inventory is at $198 million up or 50% and so this is almost offset by our trade and other payables, which is up $183 million. So you can see that they normally would move in sync and they continue to do so. Moving to cash flow. So at the end of the first half, we've got an operating cash outflow of $55 million, which is a conversion loss rate 61%. We did flag this at the end of '21, and this is how it's played out. So you can see that we're holding more trade and other receivables, which has increased $149 million. We're not seeing any degradation in our trade receivable balance. Our recoverability takes about 70 to 80 days. And when you think about the second quarter of the half, then we are seeing our sales were particularly strong in March. So our Q2 sales were $200 million above the fourth quarter of '21. There are $100 million above our third quarter. So when it takes 70 to 80 days to collect, then we're not expecting to see the inflow of that cash until quarter 3 in '22. Secondly, our inventory grew $198 million. This is all AgChem and fertilizer. Fertilizer is all about price. We're not actually carrying that much extra in volume -- and AgChem was just secured supplies given their challenging supply chain issues. So we're expecting to see a lot of that inventory out the door in the coming months. Trade and other payables increased, which is increasing our supply chain's ability to fund our inventory. On the right-hand side, this is where you can see our cash conversion at negative 61%. But pleasing to see our working capital to sales ratio is reducing from 19% to 17%. And this compares really favorably with our view. Our net cash outflow total with negative $35 million, which is not indifferent to the first half of '21. There's 2 factors in there that you can see, our investing cash flows for the acquisition of our 5 businesses, increased outflow of $46 million, and our financing cash flows were a positive given the additional supply chain finance. Net debt performance, so we've got improving ratio despite the increase in net debt. You can see on the top left, we're up $120 million in debt and average debt is only up $18 million. The top right-hand side, you see leverage, interest cover and gearing ratios. We show both and including AASB 16. So the bank is an analyst on the call. We know you don't have a love with AASB 16, which is the lease standard. So we tend to report those excluding AASB 16. So you can see leverage is falling. Our interest cover is up to 55x and our gearing ratio is falling to 37.9%. In these section below that, you can see the same leverage, interest cover and net worth compared to our banking covenants. You can see we're well within our banking covenants, and we have plenty of headroom on our borrowings with undrawn facilities at year-end, nearly $200 million. Dividends and capital management. So our earnings and dividends per share continue to grow, delivering value for our shareholders. Underlying EPS reported in the half was $0.58 per share, an increase of 36%. If we were to make a like-for-like comparison, that would be $0.81 per share excluding the tax allocations that I talked about earlier. As we mentioned earlier, $0.28 per share dividend, up $0.08 or 40%, partly franked to 30%, we're probably not going to be in a taxpaying situation until sometime in 2024. So we'll be limited to the amount of franking that we can pay until then. Our payout ratio was at 48%, and it's grown from 33% in 2018, but within the Board endorsed dividend policy of 40% to 60% payout ratio. Our franking and credit finished the year at $14 million, given some of the businesses we acquired. Interesting to note that our dividend yield is nearly double where we were in 2018 and our 5-year TSR was at 33.4%. Just to give a little bit more detail around our business performance. Firstly, let's go to Rural Products. Our gross margin is improving year-on-year, partly attributed to our own products or backward integration strategy. You can see our sales is up $360 million or 43%. There's some really good numbers in here. Fertilizer was up 77% or $142 million. Our AgChem business was up $115 million or 44%. Animal Health was up 18% or $12 million and our other retail business was up $42 million or 28%, and our wholesale product or AIRR business was up $46 million or 27%. There's a whole mix of price and volume in those numbers, really standout performance across the board. You can see on the right, our gross margin exceeded our sales revenue growth and the gross margin percentage is up 1%. We improved margins across the board, particularly in AgChem relating to our own brand product in Titan and also [ ag pasture hunter ], independently owned and apparent in our wholesale business. On the bottom left-hand side, you can see the success of that strategy, the blue section, it's showing our own brand increase in terms of share of our AgChem and animal health products, increasing from 25% to 29%. Third party has decreased slightly as a percentage, but you can see that it's also increased in terms of the value of sales. We really value our third-party suppliers as an important part of our business. So it's a really complementary strategy. On the right-hand side, you can just see how our gross margin is comprised of chemical, wholesale and fertilizers. Those 3 products represent approximately 80% of our gross margin. Moving to Agency Services. The Agency Services' gross margin increased 11% to $82 million. It's our largest business. Cattle volumes falling, but widespread rainfall has meant farmers are retaining cattle for longer, for weight gain. And a bit a mix of performance across the state is clearly Queensland was down in volume. It's probably worth noting though, price per head has increased 32% on the first half, and sheep volumes are also down at 260,000 down. And again, the sheep price per head increased 9% half-on-half, driving commissions. Wool volumes were slightly back. And then finally, our AuctionsPlus business, which is the online trading platform. We own 50% of, nearly cracked EMEA in terms of volume through that platform. And about 100,000 head or 30% since the first half. Real Estate Services, so the strong demand of farmland and residential properties doesn't show me a sign of abating. Real estate contributed $33 million and grew 37% in the first half. Interesting to note, the median price of farmland increased 20% to 7,087 per hectare with 30% increase within WA, Queensland and Victoria. So you can see our farmland sales have delivered a 34% CAGR and were up 90% in the first half. The commissions have been challenging for the [ peak ] end of the market with some large property sales, but still a fantastic result. Our residential sales, you can see, 24.7% CAGR over the last 5 years and 27% in the first half. Again, a really good result. Properties under management grew with the addition of a couple of acquisitions, and you can see the increase in importance of properties under management in our gross margin on the bottom right-hand side. So roughly equal contributions on farmland and residential sales. Financial Services. It contributed $23 million and the gross margin grew 13.7% in the half. You can see on the top left, not a lot happening in our Rural Bank loan and deposits book, they're sort of roughly flat for the half. There's plenty of cash around at all seems to be going into farmland. On the right-hand side, you see our StockCo book and our livestock funding balances. The increase that you're seeing there is primarily related to the increased price of the stock and therefore, the funding of those cattle. You would have noticed the announcement back in March of the divestment of StockCo 30% share. This shouldn't have any impact on our forward EBIT when it comes to the distribution agreement that we'll continue to have with Heartland. But we're expecting in May when that deal is completed to book a $15 million to $20 million profit on sale. Our Livestock in Transit in the bottom left-hand side, you can see the ongoing growth of that product with 43% of our customers opting in and obviously, valuing the high underlying product of cattle and sheep that are being insured. And finally, our insurance product, the gross written premiums have increased significantly over the last 5 years and contributed to 50% of the upside. This is twofold, more premiums written and also higher priced premiums given the underlying value of the assets. And finally, our Feed and Processing business, you can see on the left-hand side of the Killara feedlot. Its performance has increased significantly in the half, contributed $8.7 million EBIT, was up 58% primarily a result of increased cattle exits. We've kept up the demand and managed the supply chain challenges well through early procurement and our backgrounding operations. Elders Fine Foods has had a challenging year with the rolling lockdowns in China and supply chain challenges. So it's sort of a marginal breakeven at the moment. So I'll let hand back to Mark to talk a bit more about growing our business.

Take the breath.

Absolutely.

So as you've just seen or heard from Tania's comments and presentation, a very strong, across the board first half for the Elders business. And with the market share gains, as we see 58% of the growth coming from bolt-on acquisitions and organic growth, as Tania explained. And with market share gains -- when we look at the official data, market share gains on 6 of our 7 key products and services. And on the other, we are flat at a strong position in the market. So I think quite positive. When we look to the future, we thought we'd reference the Eight Point Plan to begin with on our ambitions of 5% to 10% growth of EBIT and EPS through the cycles at 15%. So with the good results that we are talking about for this year, we see that metric continuing. So 15%, 5% to 10% growth on top of where we end this year. That's our target. And the ROC target that we have at 15%, it clearly will optimize and maximize the return on capital as we go through the -- as we go through our cycles. In terms of the other ambition of leading sustainability outcomes, spoken a little bit about that, and I think many of you would have read sustained building reports and as mentioned, on track. And in terms of the most trusted Australian agribusiness brand where we still maintain that position. And this will be a critical point as we embark in our battle for talent and labor and good people over the next few years. Going to our strategic priorities. And in the next slide, I'll talk a little bit about the progress on those, which you can -- we have made good progress against many of them. And then, of course, it enables for the System Smart program, attracting the best people in our financial discipline. So looking at the progress on the third Eight Point Plan halfway through. And I think on the market share comments, you already heard of the or heard of the 5 acquisitions that have been put into place. We performed very strongly with our pipeline, and there's a dedicated slide shortly to talk about the bolt-on pipeline and where they're coming from and also our approach there. In terms of expanding our own brand portfolio, again, we've already spoken to that. But that's progressing quite strongly. We have taken a position this year given the escalating cost of goods earlier in the year. So at the -- in the early new year, around February, on a couple of product areas, we opted to limit our own brand purchases in those areas where we thought the price would be dropping off significantly later in the season and we'll be working with our partners, and we are now in terms of product access and supply through those areas. Looking at our [ feed and processing ] products, with the new products coming through and also our products coming through in the other areas of the business. And we've talked about the Feed and Processing and the great work that's been done, particularly in Killara in order to be able to continue to make good money and acceptable returns in a time of high cattle prices and high grain and ration products. I mentioned our sustainability program that's moving along quite nicely. [indiscernible] investment program. We've made a bunch of key decisions as we move into, wave 1 of the program and are largely on track with that. People and safety, I spoke about in the introduction to the presentation. And again, we've maintained a very high engagement environment in comparison to all companies across Australia with the [ contrary ] indexes. And we also made further good progress on safety across a number of areas. And then in terms of cost and capital, I think the Tania did an excellent job in going right to the detail of our dominant cost and capital. And as I think I've mentioned many times in the past, that running a business like Elders, you have to have high financial discipline. So where companies get in trouble in this space is where it's loose. And for the last 8 years, we've tightened it and I'm very happy to say that Tania is tightening it even further, as you can see by some of the outcomes, so that we meet our customer needs. But also have high respect for the cost and capital of our shareholders. So if we go to the next slide, in terms of attracting and retaining the best people, and this is a challenge for everyone. So clearly not unique to Elders. And I guess, making ourselves a company that people want to join is critical from a cultural viewpoint, from a positioning viewpoint. And you can see that strongly in the market response to others. Engagement and enablement I've talked about. The interesting slides on our diversity initiatives over many years, very, very strong representation through our nonexec directors and women in executive -- to the senior executive positions. And we're making progress but nowhere here where we should be, absolutely no way near we should be. From the first Eight Point Plan, we're 6% of our women in leadership positions. They were at 17%. So I'm [ fairly certain ] 3x. That's a great achievement, but we really need to be representative of the general population, and we're working very, very hard to get there. In terms of innovation and investing in innovation, I won't go to the detail on this slide, so we've got more time for outlook and questions. But we're investing heavily in our systems. As you're aware, we just on our products and services and our other investments. And for us, the -- I think being able to really hone in on innovation and tie that closely with the productivity of our clients and also the sustainability of our communities and businesses is the key agenda for us. If we go to the next slide, which is our pipeline. And I'll just point out that for the first half, we saw the 5 acquisitions that came from 31 financial models that we did in the first half in evaluating businesses, 9 nonbinding indicative offers. Currently, there are 17 active candidates in our pipeline. And it is quite a replenishing pipeline. And so the -- I think the point of this slide is to show you that in the independent area where a lot of our candidates come from. So these are independent rural services businesses around Australia. There's over or around 620 of those. And of those, there's a constant stream of founders who are now looking at a succession where the children may not be involved in a succession for many reasons. And a lot of the reasons are that they've been successful -- the kids have gone to [ unis ] and private schools, and they're taking up other professions and they don't want to run the family business. So this is where we get our pipeline of businesses from. Interestingly, a number of those have come out of corporates and, given the size of the industry, a high proportion we know personally. We've worked with them in previous lives, and that's actually where the pipeline comes from. And to the comment or the assessment that we may be running out of this pipeline, I think you can just see the numbers. The organic -- some of the organic pipeline of people coming across would come from corporates in the Nutrien, et cetera. But the independent area is where we get a lot of that. So if you look at the 620 and then we'll settle for the AIRR independents or members on top of the Elders slide, that's also another universe for bolt-on acquisitions. So these are AIRR members that we know very, very well that are in the same situation as the independents that I just mentioned. So our thinking is that the flow of bolt-on acquisitions where we buy at low multiples. We have a light touch management in the earn-out period. The vendors, the majority of vendors, 95% plus stay in our business after the earnout. This pipeline of growth will continue for a number of years going forward. So then if we go to market outlook. And I think the -- again, the -- our belief for our core customers runs off ABARES and the ABARES outlooks are quite positive. I think in terms of how we see the business, for '23, '24 and beyond that. But especially for '23 and '24, we see this midterm as being very, very positive. The key drivers, whether it be from ag markets, whether it's A-L-L- or global commodities remain very, very strong. And I think our sense is that the market conditions will continue to be very strong for 18 months to 2 years. But when we break that down, and we can break it down by [ sheep ] price, livestock prices, some of the key drivers, or we can break it down by winter crop or summer crop as big drivers. I think, first of all, for context, so this accounted for the market stuff, accounted for 42% of our growth. So 58% of our growth came from non-market conditions or self-help, our Eight Point Plan initiatives. In the $0.58 space, we sort of just demonstrated with the bolt-on pipeline, it's very, very strong. And as Tania mentioned with the backward integration and new products, it's also strong and not at a point where we're challenging relationships with the key partners while we're progressing. So I think our sense is that the outlook, we go to summer crop, remains very strong and this doesn't directly to rely on seasonal rainfall because these are irrigated crops and the dams and water availability looks strong for the next 18 months, 2 years. So the next couple of seasons after this season. Then we look at winter crop and the key drivers and particularly with some additional free trade agreements that have been signed of late. And the Indian agreement is the most recent, but also the comprehensive agreements with Southeast Asian countries, et cetera. In terms of the demand and the market access, that's in terms of the commodity price to drive that decision at the domestic level for Australia, particularly with Black Sea wheat struggling and also North American drought conditions. Our sense is those prices will continue to stimulate very, very strong activity. I won't go through all of them, but I think we can take that in the question session. But I think the numbers, the outlook show that remains quite strong for that new term of 18 months to 2 years. So then finally, I'll just -- I'll jump the next slide and just go to the close and so we get to questions. So the -- clearly, very strong financial performance. We've upgraded to 30% to 40% above last year. And on the soft spot that Tania mentioned in the result, which is the cash conversion half year, we remain committed to our target of 90% cash conversion by the end of September. In terms of the supply chain challenges, we've -- in the combination of supply chain challenges and our backward integration strategy, and inflated COGS of some of the key inputs has seen the impact on inventory levels and values. And I think it should be pretty clear to all that have that very much as a high focus for myself, Tania and the executive team. Continued focus on improving safety and our sustainability outcomes. And in the second half, we're looking at even further focusing those and we can report on those in the -- at the end of the year. In terms of growth for 2023, we remain quite optimistic for the reasons that we've discussed, our bolt-on acquisitions, the high likelihood that key markets, a number of the key markets will remain strong throughout that period and into the period after that, expanding backward integration. The systems modernization program will also start to deliver benefits, financial benefits and efficiency benefits through the business through '23, '24. And I think the midterm market and ag commodity outlook remains quite positive. So with that, I'd like to turn to questions and happy to take any of your questions as we go through the session.

[Operator Instructions] Your first question comes from Richard Barwick from CLSA.

Mark and Allison (sic) [ Tania ], great result and yes, amazing outlook as well. A couple of questions from me. System modernization benefits. Is that something that you're able to put some numbers around? And how do we think about that in the materiality and the timing?

Sure. It's Tania here. We've got a -- we've got 5 waves of system modernization in Wave 1, which is the ERP new vision, fixed assets, new HR module, it's $14.5 million in CapEx and about $4.5 million in OpEx. We applied the same lens to our projects as we do with the Eight Point Plan, so ideally wanting to return north of 15% on that investment. And so with each of the waves, there's different cost efficiencies that will be associated with the first wave, customer efficiencies, productivity improvement. And then when you get out to outer waves, which is digitization and online portals, then you get a much greater benefit from customer experience. So we're probably not in a position that we want to share transparently. The benefits of each wave at the moment, but you can be assured that we're applying our 15% return hurdle.

Yes. And I think as an insight, where the benefits are occurring in our branch network, so the front end of the business. We have -- many of our branches have 0.5 or 0.8 of a person working on adding staff and the rest of they're doing something, they're customer-facing. So our sense there is that those additional or that freed up capacity from the key front-end people will actually be converted into customer-facing activity and will drive revenue benefits as opposed to cost benefits. I think -- our thinking is that across regional rural Australia, it's very, very difficult to get good people who've had a business that are very strong in customer and systems understanding. And so that's our preference in those areas.

Okay. That's helpful. Makes sense. And the other one for me is just thinking about the wet weather, I mean I know from experience up where I live near Toowoomba, the planting has been basically delayed as a result of the wet weather. I'm just trying to think about the ramifications of that, how that might wash through. Do you see any risks that literally we're getting so much rainfall that the crop -- winter crops won't go in or the opportunity for the window of planning will be missed? And I guess, knock-on effect might be that you'd be stuck with some of the fertilizer and won't be selling through.

Yes. I think it's a good question because it's been obviously different across different geographies. A lot of the winter crops are already in and happening and certainly the early stuff. So if we target Anzac Day because of the good soil moisture, a lot of crop just went in prior to or at Anzac Day. We also had many examples of our planting dry in the anticipation that they would be wetter than average conditions. I think the issue, particularly in your part of the world, when you go north, because you have options of summer crop and winter crop, it's kind of like -- and particularly with grain prices, putting in a later winter crop and having a yield reduction is probably -- it isn't as a material downside as it used to be because the high [ competitive ] prices. I think the issue won't be a planting issue. I think the issue for us will be the rainfall during the crop and late in the crop and bundle activity and post-emergent wheat activity in the crops through the rainfall. And then hopefully, there won't be an issue with downgrades with the rain during the preharvest period.

Your next question comes from Paul Jensz from PAC Partners.

Just main question at the start is just on the strategic side. You might have seen that Incitec Pivot spinning itself into 2 groups or intending to. It's been coming for a while. Can you maybe take us through what Elders did in looking at that fertilizer group and where you might be positioned now, if possible?

Yes. I think good question, Paul. So I think back then, when it was first when you go forward. All right. You can [indiscernible]

I can hear you fine.

Yes. Okay. Sorry, when we considered that, I think it was 3 years ago when IPL were originally talking about spinning off the fertilizers. Our greatest interest was in the blending facilities, particularly through the Silicon Coast where we saw there would be a great advantage. We're relatively weak through that period through tropical helical and sugarcane. And we felt that, that would be a great platform for us to build the rest of our business around it. We weren't particularly interested in the heavy manufacturing assets or that adapt us in particular or any other heavy manufacturing assets. It doesn't fit our ROC philosophy at all. So our sense is that with the part of the business, might have been an interest, but obviously it needs to fit our metrics. But the whole of the fertilizer business, it's not of interest. The ROC implications in average seasons. I mean through the cycles now, it's fantastic and to no surprise at all with the timing of the timing right now. So -- but we wouldn't have a lot of interest in heavy manufacturing. Blending facilities, possibly.

And maybe a question for Tania. As we go through a return to normal season tenure. Have you got, I suppose, targets within your team as to how you might, I suppose, recover back to a similar sort of EBIT by, say, 2024, with the systems improvements and those sort of things, please?

We obviously referenced the Eight Point Plan and our capital management framework when we're setting targets for the future. So we continue to aspire to achieve 5% to 10% EBIT growth through the cycle.

And so Paul, just to be clear. So our sense is that this isn't as good as it gets at all. And our thinking is that our commitment to 5% to 10% growth at above 15% remains unchanged. We've -- I think Tania -- our first discussions around this to the management team were in April or...

March.

Or March this year in terms of offsetting a return to average season for winter crop. Summer crop, I made comment earlier, in terms of cattle prices with the restocking continuing strongly. But we're really looking at offsetting the downsides of a winter crop going to an average winter crop if it actually does, given the commodity price profile looking forward.

All right. It's just the big number there of 52% or 42%, just would the people coming from a spaceship having a look at that, they would suggest that, that's -- that's a big one to jump over. But you do have, obviously, leverage and a lot of things to pull. So sort of...

Yes. I think it just comes down to the outlook, the acquisitions and growing market share through organic growth. We've got our own product brand strategy, continuing to invest in more and more products. And then we've got some operational efficiencies we're expecting to deliver over the next couple of years as well. So I feel that we're well positioned to continue to grow despite the headwinds that the market component represents.

And Paul, that 42%, it does include going from below average summer crop to average summer crop.

Yes. That's good. And the final question is with all -- I suppose, the competition knows what you're doing now with your 17 acquisitions and what you've done in the last 18 months to 2 years in this sort of picking up new people. So have you noticed that the competition has changed the way they're, I suppose, attracting people and attracting our stores and doing things to combat perhaps some of the low-hanging fruit that you've had in the last 18 months?

Yes, I think the competition is doing it pretty well. I think that one of the phenomenons we may be experiencing is that in really good times. But for instance, we have less feedback and flack around poaching people today than we did in the drought times. So I think there might be a masking of that, it's not as significant because of good times. But the -- in terms of the strategies of independents, Nutrien and Delta, if we just pick the 3 big bundles. It seems to me that they're doing a good job, and we're winning business on merit and winning acquisitions. But there hasn't been -- there's probably 1 click point up in multiples, but the sense was it Nutrien and Ruralco out of the competition for bolt-ons and Nutrien approaching at their market share limits that it may ease a little, but it hasn't because there are other players going as well.

Your next question comes from Philip Pepe from Shaw and Partners.

Mark and Tania, well done on a good result. Just on the current conditions and the working capability, you flagged with the first half there was perhaps some repurchasing by some of the farmers. Obviously, we had a couple of months since the balance sheet was rolled off. What's demand been like since mid-April rainfall was good? Are you seeing forward orders, more people purchasing a particular fertilizer? Or are people holding off waiting to see how much showed, how heavy are the rains?

I think there's -- like there's been widespread rain across most of Australia, except for the Southeastern and Western Victoria, where it hasn't rained significantly yet. The inventory that we're carrying we -- [ we'll often ] say this to our customers. It's probably the biggest [ ag cannery ], but we're expecting that to be leaving our stores soon. And then fertilizer is really -- it's not really price related -- it's price related, not volume. So we're not carrying a huge amount of extra fertilizer inventory. But we're already seeing our inventory balances, particularly for AgChem to start falling in that since the March half.

Your next question comes from David Pobucky from Macquarie Group.

Mark and Tania, congratulations on the really strong results and a good disclosure as well in the pack. Just first question on the guidance. It was 20% to 30% and now 30% to 40% up on PCP. Can you provide a bit more color around what you've seen since that initial guidance was set in mid-March, and I suppose the key drivers across the business to drive that upgrade, please?

Yes, yes. So I think the -- what we've seen -- and I think Tania touched on a lot of it in answering Phil's question. We've seen continued strong performance. We had thought that there may have been 10%, possibly 15% of prepurchasing that occurred. But we're seeing high demand, been very much in line with Tania's -- just her previous answer. So -- and we're seeing that across the same trends in terms of our agency business and the Rural Products business. Across Real Estate, again, we're seeing a continuation of that trend. So I think in a lot of ways, it's what we thought may be occurring, but because the a few market comments about prepurchasing the product and therefore, a softer second half. We haven't been seeing that anywhere near the same extent at all. In fact, we've been particularly towards -- running towards the middle of the summer cropping area, there was -- we had clients buying and using it on the same day. So we haven't seen that in some areas, and Tania might add to the comments on what we've seen. There have been in some areas in Southern Australia, there's a bit more through Southern Australian markets. But I guess it was the continuing trend that we've been seeing.

I think anecdotally, we received on seeing a bit of forward purchasing on our supply chains earlier. But then as the seasons play out, that sort of prepurchasing behavior is playing out into increased demand despite what we've been seeing come through. But we continue to be pleasantly surprised on the upside of the sales volumes continuing in March.

Your next question comes from Sophie Carran from Goldman Sachs.

Just one on the backward integration strategy. And maybe if you can just provide an update on this? I saw it was up to sort of 29% of sales in the half. I mean how much of this is sort of pricing versus volume uplift? And then how far through this program are you? And how much further is there to go? And then maybe just one more on that is if you could touch on the investment in Agcrest and then just how you're thinking about this sort of longer term in terms of capturing more margin through that strategy?

Yes. Okay. Thanks, Sophie. So I think firstly, the 29% is of the total universe. So it's not the addressable universe. So our targets that we've talked to you previously about, when we talked about up to 70%, that's of the addressable universe, which means it's exactly generic products that we exactly have the same product. So the 29% is of our total crop protection. So there are 2 different comparisons. Just very broadly, where we've got to with the backward integration. With -- I think we're sitting at $35 in that area this time last year, 35% of addressable market, taking us up to around 50, and the -- with the plan over a period of time to take it to 70. So this -- at 70% of the addressable market, it means if we think of a generic product like a, I don't know, 500-gram per liter [ Trisine ] but the base manufacturer of that or discoverer of the molecule before it went off patent, someone like a Syngenta or an Anima, they -- if they're still producing it, they still want to bundle with them with their proprietary products. We can accommodate their need and maintain that positive partnership. So that's why we stopped at 70. We've got to 50. But I think for us this year, we're being very, very pragmatic, and we're trading off, holding more owned products and taking the capital risk and the price reduction risk versus taking a margin reduction and for the last 20% of supply buying from a third-party supplier. So that's the kind of trade-off we've made in a very pragmatic way because what we're trying to do is obviously ensure that we deliver our cash -- year-end cash conversion and ensure that we don't overexpose ourselves with own product, which is what happens when you're back to integrate. On the second question of Agcrest. The way to think about our or our back integration into formulation. It is not around the profit pill that's available. So if you look at the whole profit pool throughout the Agcrest supply chain, if we take that as an example, then the formulation component of it would account for -- it might be 5% or 10%. So the driver is not around profit pool optimization. The driver is around the flexibility of our backward integration strategy. And what I mean by that is that rather than having to buy fully formulated products out of China and then put it on our first forecast, some in Queens and some in New South Wales, some wherever, and in the products concentrations we want. So a product like [ glyphosate ] has 360, 450, 180, 5, 10 to all these different formulations. So rather than making that decision 3 months before, if we have formulation facilities, we can make it at the time because we only need to put the adjuvant surfactants and active ingredients at the plant. And then with the Agcrest example, based out of Toowoomba, that gives us the ability and flexibility to be able to service a broad radius. So our sense is 1 north, 1 south, 1 west. And it just adds to that flexibility, but it's not so much a margin optimization plan. It's more around supply chain flexibility.

Your next question comes from Jonathan Snape from Bell Potter.

Yes, Can you hear me okay?

Yes we can.

Quick question around the comments around the cost structure and the cost to serve in the outlook statement. I think you've said here it's going to be flat. I'm assuming is that year-on-year? I just wanted to try and figure it out because that kind of implies a fairly big uplift in the second half? Is there something in the way that you're accounting for the incentives in there?

There's a couple of things that are driving the growth in the second half. They'll be slightly increase in the provisions for incentives, there's some additional earn-out, and we've got a high -- on cost will be higher in the second half as well, particularly as depreciation comes online. We also have the annualized effective recent acquisitions that they annualize into the second half. So we're expecting cost increase there. We're also running quite a high number of vacancies. We might be being hopeful by hoping to fill those vacancies. But certainly, that will add to our costs in the second half.

Okay. And if I'm looking at the corporate overhead, so I didn't list that much during the half year-on-year, I guess only so even just over on million bucks or so. How have you accounted for the incentives? Because you know when you guys beat by this March, there's quite an incentive payout that comes through employees sort of benchmarked against those 5% to 10% [ nose work ] targets. So how would you anticipate that looking in the second half?

So we're accruing [ on the same to ] every half based on the performance in the half relative to the incentive scheme. We have 4 different components of the incentive scheme.

Okay. And look, can I just ask one question around the -- I think the waterfall you put in there on the bits that you're own doing and the market doing. I just wanted to kind of make sure I'm referencing some of the numbers that you quoted through earlier. I think you said 40% of the move in AgChem was purely price driven, and I think 80% of the fertilizer move was price driven, which if I'm doing the maths right, is about $22 million of EBIT or thereabout, which is a big proportion of that $26 million. And I think it says that B&W was up, I think, about $6 million. So it looks like they're the 3 bits that you probably lumped in there is market driven and everything else is kind of self-help. Is that kind of the right way to think about it?

Yes, that's essentially correct. That's right. So fertilizer price, AgChem price increased. Certainly, the other segments are mostly volume driven. So there's less price impact, except for the other retail, which is seen and fencing that obviously has [ to mean crisis ]. Does that clarify your question?

Yes. Yes, I was just trying to make sure what was in that 26% because it looks like those 3 bits alone gets you up to about that maybe a little bit more. So there's really no volume or market-driven volume that you kind of see in there?

Yes. The other thing, though, is the margin component of that. So it's in the organic, we claim the margin based on our own performance in managing that.

Okay. What -- so i.e., your stock in a rising market and get an uplift on that on it. Is that -- is that what you mean?

No, so it's actually...

So it's actually it's an integration margin, we have a huge gross margin on each product. So we've improved our percentage gross margin, which should be agnostic of volume increase -- does that make.

[Operator Instructions] Your next question comes from Evan Karatzas from UBS.

Congrats on really strong result. You touched a bit in your outlook in closing comments, but just interested to understand how you're mitigating that risk of, I guess, margin squeeze, to use your term as some of these, I guess, commodity prices roll over. Can you start to sell forward some volumes to mitigate that price risk? Just can to pass that out a bit. And then also, if you can also touch on just how long the typical inventory cycle is for the AgChem and Fert products as well, that would be super helpful?

Yes. I think firstly, on the mitigating the margin squeeze. So we've got multiple plans and actually formal work groups kind of managing this on a weekly basis. And we started this last year because sadly few of us around in 2008, 2009, when the last cycle occurred like this. So one of the -- I think one of the key observation is that it's not across all products, so we can factor on some products. And even though some products and those products we're focused on, a number of them we're now getting signs that the price reductions that we thought would occur and may be more rapid than we thought, that we're actually not occurring. So we're seeing a flattening of a lot of cost of goods. And so the grade concern is being cut with high-cost product in a falling market seems to have been soft a little bit, although it's a major issue that we're working on.

No, I think that's.

Yes, Your second question?

Just around the, I guess, the typical inventory cycle, how long it is for AgChem and Fert products?

Yes, yes.

So -- it varies by product. What I can say is that our age inventory is what we consider more than 6 months old, and another can be more than 12 months old, has fallen significantly half-on-half. So we are clearing aged stock. And certainly, what we have in stock at the moment, we're actively managing it to make sure that we haven't got oversupply and proactively sharing it between branches and regions where the freight costs are not prohibitive, to ensure that we're optimally placed to deliver to our customer. But it does vary. It depends on the product and then some products that we might have left over from the previous season will keep. But they're still good. You have the fine line at the moment between having too much and too middle road.

And it's absolutely not a straight line. So it's our biggest fish over the years. And we saw it a few years ago and it happened a little bit here is when markets go early, and we don't have all the products, and we've got to buy top-up product to meet an early market, and we saw this with [ Canavan ] in West Australia. But alternatively, where we sized up for a big season like chickpeas and then we have the rug pulled with India putting a $8 in tariff on straight chick peas and so [indiscernible]. So the -- that's the more likely problem that we've got to confront -- and then because they're one season products, we'll then stuck for at least a year. I think we're pretty close to closing off. One final question, maybe.

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

Yes. Thank you very much. Well, thanks, everyone, for joining the call, and I appreciate the questions and comments and look forward to catching up with you many of you in one-to-ones next week. So thank you very much.

That does conclude our conference for today. Thank you for participating. You may now disconnect.