Elders Limited (ELD) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Elders Limited FY '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 we might start the presentation on Slide 3. So, welcome to all for the Elders full year results presentation for the FY '22 year, and thank you for joining Paul and myself for this session today. Paul is well experienced with Elders, a number of you have met Paul previously and as Group Treasurer and acting CFO. From an Elders view, it's the second year of our third 8 Point Plan. The Elders philosophy since the first 8 Point Plan has been to control what we can control and not to dwell on what we can't control, to have our capital and cost structure to allow us to make good returns in bad years and make good returns in -- great returns in good years, and that's what we've experienced. The FY '22 results are 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 and stakeholders. In summary, we aim to control what we can control. Over the past 2 years of our third 8 Point Plan, we've experienced strong market conditions across most production enterprises and geographies. Although, this is coincided with the climate impacts, particularly on seasonal flooding, supply chain disruptions and geopolitical uncertainty. We have also had positive livestock prices with winter crop and summer crop conditions with more recent unseasonal rainfall. In this context, the performance of Elders with its clear and consistent strategy, multiple diversifications, high financial discipline, hard-working and committed team and enduring customer anchor as the most trusted brand in Australian agriculture, the result is quite outstanding. For us, the result is good in safety, strong and sustainability profit, strong in return on capital and strong in strategic delivery. Our commitment is to provide 5% to 10% growth in EBIT and earnings per share at a minimum of 15% return on capital in a sustainable manner through a safe and inclusive workplace. Over the last 5 years, we've had a 33% growth across that period at 26% return on capital, 26.2% that we finish up on this year. So, the results today are a continuation of our strong delivery to commitment as much achieved and much more to achieve into the future. On a final note of introduction, we've also announced that I'll retire from our role of Managing Director and CEO in 12 months from today. This will see the completion of the final year of the current 8 Point Plan, the completion of 3 highly successful 8 Point Plans and 10 years in the leadership of Elders as Chair and Executive Chair and as a CEO. From the view point of myself and the Board, the timing is right and this will allow for a leadership refresh and a smooth transition to Elders' next phase of growth. The focus of today, however, is our FY '22 annual results and the approach to today is that I'll provide an overview of the results. Paul will go through the detail of our financial performance. And then I'll then provide an update on our outlook and growth initiatives during the final year of our third 8 Point Plan. So, if we go to Slide 4, as I provide the overview, and the first slide really addresses all of our key stakeholders, starting with people. And you can see the TRIFR at 12.6%. And I think the critical point here is the 10% reduction over the last 5 years, although total recordable injuries. From an employee engagement viewpoint at 79%, just to put this in context because we've had a very, very strong engagement enablement over many years. But that 79% compares with the Australian norm of companies of 65% and the highest performing companies at 73%. So, a very strong position. When we look at our customers, the stakeholders pillar, you can see it's the most trusted brand, the #1 most trusted brand again for the third year in a row and Net Promoter Score of 49 and again, just to put some context. So, 49 compares with NAV of minus 1. It also compares with many banks prior to the hacking at 49 and -- sorry, 45, and then the company such as Woolworths at 49, equivalent to where Elders is. From a community view point, the community, regional rural communities are the core DNA of Elders and have been for 183 years. So, you can see very strong contribution through donations and sponsorship, 1,000-plus local community sports teams that have been sponsored and also supporting key initiatives like the Royal Flying Doctors and Beyond Blue within regional rural communities. And at a shareholder level, we've continued a very strong result. We'll go into the detail of this, but we're sitting with our growth rate at 33% over the last 5 years and finishing this year at 26.2% as a return on capital. Moving to the next slide on financial summary and just to highlight a couple of key points. You can see the underlying EBIT at $232 million, at the top end of the range that we communicated earlier in the year at 39% growth on the previous year. Return on capital at 26.2%. So, very strong in a difficult market in terms of price inflation and cost inflation. And the cash conversion, which, as a team, we think, is quite acceptable given the backdrop and scenario that are confronted with in the market at 75%. Our leverage at 1.2x. And as I mentioned, Paul, will break down each of those components in great detail. Looking at the next slide on safety, health and well-being. You can see the lost time injury is at 6 and it's quite interesting because when we look under the data, we've had a journey from the first 8 Point Plan where we had 33 lost time injuries and we got it down to 2. And just having a look at the data and what's happening, this year with 6 lost time injuries, 5 of those 6 lost time injuries have been contributed from acquisitions or bolt-on acquisitions, that's more or larger acquisitions. And so it's really something as a management team that we're looking very closely into in terms of the safety culture integration of our acquired businesses to ensure that the great work that we've done across the Elders network is also passed on and contributed in a similar way to the bolt-on acquisitions. I mentioned the total recordable injury frequency trend over the last 5 years and also much more proactive expenditure on safety initiatives throughout the business. Looking to the next slide on sustainability. And we published our principles and our climate targets over the last couple of years with our sustainability report. And you can see a change, we're making good progress across a number of areas. I would note on the net zero Scope 1 and 2 emissions where there's an increase. And this is really reflecting our additional people or acquisitions and additional fleet, et cetera, that's driving that. But in terms of the achievements across on the right-hand side, pretty much on track. We plan to ramp it up further in terms of our initiatives as we stated through the sustainability report, but I think the final point there with the 41,000-plus drums that have been being recycled. A great achievement and also from my viewpoint, being a signature to the original drumMUSTER agreement many years ago, very, very good to see those initiatives still giving great outcomes in terms of recycling of ag chemicals. So, I'd like now to pass on to Paul, and Paul will move on to Slide 9 to run through the financial results. Thanks, Paul.

Thanks, Mark. I'll commence on Slide 9 of the pack, which displays trend analysis from FY '18, which is the first year of the second 8 Point Plan and demonstrates the momentum that currently exists within our business. Firstly, sales have increased to $3.45 billion in FY '22 at a 5-year compound annual growth rate or CAGR of 21%. Underlying EBIT has increased to $232 million at a 5-year CAGR of 32.6%. Costs have increased to $421 million at a 5-year CAGR of 10.7%, but importantly, cost to earn has decreased over the 5 years from 79% to 64%. Earnings per share was stable year-on-year due to the inclusion of company tax expense and underlying NPAT in FY '22. If we adjust for this impact, 5-year CAGR is 25%. The macro thematic for FY '22 provided more tailwinds than headwinds, vary planters for both summer and winter crops, similar to prior year, but above historic averages. Cattle prices were up year-on-year, although the financial benefit was partially offset by a decline in volumes due to restocking. Fertilizer and AgChem prices increased significantly in FY '22, but were successfully passed through the supply chain. I'll note the wet start to spring delayed some client activity in Q4, which resulted in Q4 EBIT in FY '22, declining $8 million year-on-year. In summary, conditions in FY '22 were favorable and the outlook remains so, but the year wasn't without its challenges. I'll now move to Slide 10, which contrasts FY '22 against prior corresponding period. Looking at the numbers, sales revenue increased $896 million, up 35% year-on-year with rural products contributing 91% of that growth. As a result, gross margin increased $123 million to $652.7 million, up 23% year-on-year. Gross margin percent decreased 1.9% due primarily to the increased ratio of low-margin fertilizer in the total sales mix as well as a slight reduction in agency and real estate commissions. Underlying EBIT increased $65.6 million, up 39% and following 38% growth in FY '21, both well above our target range of 5% to 10% growth through the cycles. Underlying NPAT increased $1.1 million to $152.2 million with company tax expense recognized as underlying from October 1, 2021, complicating the prior year comparison. Operating cash flow was $113.7 million with a cash conversion of 75.7%, which was down year-on-year due to the working capital investment required to fund growth. Approximately 53% of growth in FY '22 came from acquisitions and organic initiatives, both within Elders control with approximately 47% of growth coming from market drivers, as Mark will speak to later in the presentation. Moving now to Slide 11 to discuss gross margin drivers where pleasingly, all product categories increased their contribution in FY '22. So, FY '22 gross margin totaled $652.7 million, up 23% year-on-year. The top 4 product categories contributed 70% of total gross margin with all showing growth. Within the retail business, AgChem contributed $172.9 million, up 32.9%; Agency, $147 million, up 4% despite lower volumes due to restocking; Wholesale contributed $73.1 million, up 19.4%; and Real Estate, $66.1 million, up 21.5%. Product categories showing the most percentage growth include other retail, which grew 82.3%, assisted by the Sunfam acquisition and fertilizer, which grew 52.8% placing downward pressure on gross margin percent, given the comparatively low margins. Moving to Slide 12 now, which shows our geographic diversification, which is a key defense against regional variability. Slide 12 shows the geographic contributions to EBIT that excludes the wholesale business and also excludes corporate overheads. Pleasingly, all states grew double digits in FY '22 with exceptional growth achieved in Queensland and the NT, up 60% and assisted by the Sunfam acquisition. New South Wales is up 53.7% and South Australia up 37.4%. I'll move now to Slide 13 to discuss product categories, another pillar of Elders diversified business model. Growth was achieved across all product categories in FY '22 with 90% of growth coming from rural products and real estate. Within rural products, retail had an exceptional year, increasing gross margin by $87.7 million or 39%. Key drivers included the Titan backward integration, which added $15.1 million additional gross margin, AgChem increased $43 million and Fertilizer, an additional $20 million, both supported by an expanded selling network, acquisitions and favorable seasonal conditions. Wholesale products increased gross margin by $11.9 million or 19% from acquisition of the -- expansion of the AIRR network and favorable seasonal conditions. Real Estate services increased gross margin by $10.9 million or 21%, with key drivers, including broad-acre sales up 54% year-on-year and residential up 21%. Properties under management increased 20% year-on-year, supported by acquisitions. Agency financial services and feeding processing all contributed growth as well year-on-year. I'll move now to Slide 14 to discuss costs, which we're watching closely given our focus on cost and capital efficiency. Costs grew $57.7 million, up 15.9% to support business growth as well as efficiency projects such as sys mod and supply chain optimization. Pleasingly, cost to earn reduced from 69% to 64% year-on-year. In terms of key drivers, people contributed an additional $26.2 million in 2022, of which $1.5 million relates to increased performance incentive. Breaking this down, the Elders branch network added 118 FTE to service more clients. Corporate added 58 FTE to support business growth as well as our strategic efficiency projects. Acquisitions accounted for an additional $18.4 million in costs with 13 acquisitions completed in FY '22, having an additional 115 FTE. Other significant contributors include vehicles, fuel depreciation and also a significant investment in our side of defense capability. I'll move now to Slide 15 to discuss capital efficiency, which is at the center of Elders business model. Return on capital increased from 22.5% to 26.2% in FY '22, increasing the 3-year average to 22.2%, which is well above our hurdle rate of 15%. The key drivers include EBIT growth of 39% alongside a reduction in average working capital days. The reduction in average working capital days was supported by a focused procurement management, especially in Q3 and deferred debt as comprising a lower percentage of the total debtor book. I'll now move to Slide 16 and cash flow, where we see operating cash flow fell $28.5 million or 20% year-on-year, resulting in a reduction in cash conversion of 19%. The key driver of this outcome was the investment in working capital required to fund the 40% growth in retail products given the net 53 working capital days in this business, which required investment of approximately $125 million. The target cash conversion for FY '23 remains at greater than 90% of underlying NPAT. I'll now move to Slide 17, where we see net debt, balance date, increased $68 million to fund business growth, notwithstanding leverage fell from 1.4x to 1.2x, which remains below Elders target of 1.5x to 2x. Balance sheet strength combined with significant undrawn bank facilities and covenant headroom provides flexibility for Elders to pursue growth opportunities in FY '23 and beyond. Turning to Slide 18 now, I note the final dividend of $0.28 per share has been declared, taking total FY '22 dividend to $0.56, 30% franked and up 33% year-on-year. The dividend payout ratio has been increased to 58% from 43% in FY '21 and near the top of the policy range of 40% to 60% of underlying NPAT. Underlying EPS was $0.973 in FY '22 with prior year comparison, complicated by the inclusion of company tax expense and underlying NPAT as noted previously. EPS would have been $1.341, up 38.7% on a comparative basis to FY '21. On to Slide 19 now to provide an update on our deferred tax asset. As disclosed last year and noted throughout the presentation, Elders now recognizes all tax expense against all underlying earnings, notwithstanding deferred tax assets from historical tax losses are yet to be exhausted. The deferred tax asset balance decreased by $60 million in FY '22, leaving a carry forward balance of $50 million into FY '23. Held as forecasted all deferred tax assets will be fully utilized by FY '24. This concludes the financial section of the presentation. I'll now pass it back to Mark, who will discuss our growth aspirations as well as the market outlook.

Okay. Thanks, Paul. And we'll move now to Slide 21. And I thought we'd kick off this section just by recapping the ambitions and the strategic priorities and enablers of the 8 Point Plan. So, we look at our ambition, we've mentioned, compelling shareholder returns 5% to 10% through the cycle at 15% plus. We've mentioned, the CAGR for EBIT is 33% over the last 5 years and we've finished -- we landed this year at 26.2% for return on capital. Industry-leading sustainability outcomes and we made great progress. But I really feel that we're at the point of stepping off and our sustainability work to the next level as we bring in a new executive general manager in the area and we also provided even greater focus with a dedicated Board committee around sustainability and safety. So, pretty exciting to continue on the great progress we've made. And the most trusted Agribusiness brand for 3 years in a row, we've held this position coming from a long way back in the early days. And it's a great inspiration to all of us that we're seen in that light and we want to maintain that position. When we look at these strategic priorities and we'll talk to it a little bit more detail around, firstly, winning market share across product services, geographies, and you can see the progress to this point on that, capturing more gross margin in rural products and we've been driving our backward integration strategy, as many of you are aware, both through the Elders retail business and the AIRR wholesale business with brand segmentation strategies across both businesses with backward integration, optimizing our feed and processing business, a great combination of investments, both in efficiency in Killara in particular and that provide efficiency for strong financial outcomes and also great sustainability outcomes with the investment in our pivot irrigation, the solar panels and the efficiency that we're adding into our milling process and the improvements across animal welfare with bedding and shading that have been put in place. So, some great work there and developing a sustainability program that's authentic and industry-leading. And I think this is a critical point for us. Authenticity again is core DNA. It has been for many years and getting real outcomes for the industry that also benefit Elders is critical for us. And enablers, system modernization that many of you again have been aware of our program of modernization that has been moving on quite nicely and we'll talk about that shortly, attracting, retaining and developing the best people and providing a safe and inclusive working environment, again, people enabler for us. And particularly when we look at accessing a broader labor pool through regional Australia with all the constraints on wave that we've seen across many industries. And then finally, the unflinching financial discipline and this really simple concept in agriculture that you diversify significantly across multiple aspects of new business as we've done and reset your costs and capital base to make good money in bad seasons and this has been reflected in the last 8 Point Plan years of performance and delivery. So, moving to Page 22, and I'll just pick a few of these to comment on rather than going line by line. In terms of winning market share, 13 acquisitions that we've seen through the business and we'll talk a little bit more around that in the universe of acquisitions later on. And also across -- that's largely across the retail business, but also some great initiatives across our wholesale business with the establishment of the distribution center in Westbury in Tasmania, which will continue to underpin both the Elders branch network in Tasmania and also the AIRR member, independent member network in Tasmania. We're also -- we've done some refurbs on some of the AIRR facilities, but also in [ New South Wales ] and Tamworth. And we're also putting a new facility in Wagga and or upgrade facility, and we're looking in Central Queensland in the same way. Going through the capturing more gross margin, again, the expansion of that pipeline, the 10 new Titan products launch. And remembering that the Titan, the active ingredients that go into Titan A crop protection products are also cut and paste across to the parent crop protection products that are done through the AIRR wholesale network. So, some good product development and the targets there are products that are coming off patent or formulations that are coming off pattern. And our first preference is always to make an arrangement with the original discoverer or producer of the crop protection product. If we're unable to do that, then we'll do it ourselves through our formulation technology and sourcing of active ingredients. Looking at the -- expanding our service offerings, the announcement from earlier in the year, the $25 million investment in automated wood handling, I'll talk to shortly, but great initiative and an investment in regional rural Australia and agriculture that's -- has not been made before. And clearly, again, talking about the DNA of Elders wool is core DNA. Going through other products in the product offerings with the financial service products and some good success around Livestock in Transit delivery warranty that we put in place a few years ago. Our feed and processing business, I've already spoken to a few of the great initiatives that the team have put together with the feed loss. And we've also taken the decision to close the Elders Fine Food business in China and that's currently in the process of being closed down. It was significantly hit with the Shanghai lockdowns, where it has a very strong base of food service restaurant and hotel business, so we took the decision early in the year to close that business. Sustainability program progress I've made comment on already, systems modernization, I'll talk to shortly, but we're really moving along now with going live with Workday in February and largely, we're on track across those areas of the business. People and safety, I've spoken quite a bit about that and also the cost and capital efficiency that we've talked to and Paul has also spoken to. So moving to Slide 23, and Slide 23 looks at the attracting and retaining the best people. And you can see a fleet -- a fleet or agronomist, I'm not sure. But 200 agronomists we've now got in the business and with very strong fee for service component of that, where we don't necessarily recommend a product, but we aren't paid for our -- the advice that we provide. So, that really underpins our innovation strategy, both at Thomas Elder Institute and Thomas Elder Consulting level. When we look at the engagement enablement and I mentioned right at the beginning of the presentation, the context is really important. Because you look at the numbers and say, well, flat, engagement around 76%, 78%, 79%. But then when you see in the context of the average Australian normal engagement being at 65% and the highest performing companies being at 73%, you can see the strength of the Elders culture. And while we've had such strong alignment to the 8 Point Plan implementation and the disciplines that we've put in place. And I think it's something to really reflect on when we look at post the third 8 Point Plan and how deeply embedded the financial disciplines, the business case approach, the process and systems that we put in place over the 3 8 Point Plans that are now deeply embedded and part of the culture of Elders as we get forward to our next growth period. When we look at enablement, again, you see 77%, 76%, 79%, 82%, and again, referencing in the context of the broader industry, Australian norm is at 67%, so Elders at 82% and the highest-performing companies in Australia at 73%. So again, a worthy note when you look post the third 8 Point Plan, the deep embedded this of the disciplines that we've driven through the 8 Point Plan across financial, social values, systems processes and how critical that is to Elders as we go through our next growth phase. When we look at the diversity numbers on gender, you can see the area, the bottom left pie, women in leadership positions. We have made great progress from 5% at the start of the 8 Point Plan up to 17%, we're close to 20%. But we've got a lot of work to do here. And I think everyone in the business knows that. The -- but one of the interesting insights is that we have actually been diluting our diversity numbers with our bolt-on acquisitions, which are largely male workforces and not having women in leadership roles in the businesses that we're buying. Having said that, we're still highly committed to improving this significantly in line with some of the other areas when we look at the slide in the pie. Okay. So, moving to Slide 24 and the growth opportunities. And quite a high level. I think everyone is aware of our strat and where we drive our bolt-ons backward integration, organic growth, et cetera. But just slicing it a different way. Firstly, in brand optimization. And yes, it's part of the diversification. But as it is, we've got retail brands with Elders, we've got product brands, we've got the service brands. And we use brand segmentation quite significantly within in the business, either to hang other products under the Elders brand, like an Arnott's approach where it's an umbrella brand or alternatively to have dedicated product brands like a Tim Tam brand under the Arnott's umbrella. So, we have Titan Ag, crop protection, parent, crop protection, pass-through ag, animal health independent and animal health, et cetera, and seed brands, et cetera, in order to drive greater share of wallet rather than trying to get dominant share under the Elders brand. The brand segmentation approach is a much more successful approach. In terms of branch optimization, we talked about the additional branches that we've added to the network. But I think, again, with our approach across all the business for many years, it's quite methodical and quite practical. To give a great example with Deloraine in Tasmania, it was a -- we did have a lot of customers coming to [ non-system ] coming from that area. So, then we put a very small pilot shed in Deloraine. It turned out to be very successful. We're able to increase our service levels. And now we're building a brand new state-of-the-art branch to service those clients. So, that's sort of step-by-step approach, making sure that we're client-centric, we give them what they want. And this has been the approach we've taken across Australia. So, the Tasmania example is just one example. Second, in our service offerings, I talked to in the last slide and driving our innovation and we've appointed a new EGM strategy, sustainability, and innovation. And our sense is that we're at a stage in regional world Australian agriculture, when we -- where can achieve sustainability and productivity and profitability outcomes all at the same time rather than having to go backwards from a commercial viewpoint but to go forward from a sustainability viewpoint. So, we're very excited with joining the business in January in that vein. And as I said, looking for a real step up now from great progress that we have made previously. So, the next slide, in 25 with looking at the question that's raised, are you running out of bolt-on acquisition opportunities? And do you still have gaps? And I think the answer is that there are many, many very large universe of opportunities. The right-hand side, you saw at the half year results, just identifying for the independents, whether they're an independent associated with the AIRR or with CFT or pure independents, our 2 other groups. There are many, many opportunities for bolt-on acquisitions. But I think it's worth noting this year that we -- of the bolt-on acquisition, we developed, 57 financial models on potential acquisitions. I guess we would have been approached by probably 80 or more. And we developed 57 financial model. We issued 27 non-binding indicative offers, which is the next part of the supply chain and acquisitions. We completed 13 acquisitions. EBIT for the year at $4.2 million and annualized at $8.5 million with 4 post-implementation reviews, just to ensure that we have the discipline of what went right and what went wrong. And I mentioned earlier, the safety integration component that we've identified with some of the bolt-on. So, our sense is that the universe is still large. There's still great opportunities and it allows us to make the right decisions for the right reasons because there are many options to choose from. When we look at Slide 26, just looking at the long term, what's happened with the acquisition growth as Titan backward integration and underlying -- the underlying business. I think just to take a little time, and I'm sure you'll get a chance to take a little time to look at this slide because it actually tells a really important story and confirms our philosophy of controlling what you can control. So, if you look at the base business over this period since FY '16 to FY '22, there has been growth. And it's been steady growth. And there's no doubt the base business would have ticked along. But the big uptick, in fact, the bolt-on acquisitions and the backward integration strategy by FY '22 is contributing 33% of the upside or of the total portfolio. So, I think it just reaffirms the -- what we said for many years, we control, we control, whether it goes up and down, rain falls, rain doesn't fall, commodity prices swing around. But the reality is that you can have consistent high-return growth in agricultural businesses by controlling what you can control. There's a slide later on in the presentation, the last slide actually, that shows that in a very clear manner by highlighting the environmental impacts and the constant growth of Elders through that period. Elders Wool Handling on 27 announced during the year. It's -- we're moving along nicely and this project, all the machineries arriving in February, the automation machinery. The sites are being put together now. I think the one issue on this is that apart from the upside and reinvestment in the wool industry, the issue -- one issue that we've been working through is the increase of building materials and that's reflected against the business case. But even having said that, our feeling is that we're largely on track. We're running an external project assurance assessment from now through to January next year, just to make sure that everything is completely under control, but it is a great initiative for Elders be part of in wool. On the systems modernization program, Page 26, you'll recall on the right-hand side that we broke the program up into multiple ways that run from FY '21 through to FY '25. And the idea here was that in line with controlling what we control, we didn't want to be locked into a runaway train and not be able to stop or think and reflect and assess. So, we're doing it very methodically, low pulse rate, wave by wave. We're doing the people foundation, internal financial and people foundation. So, we started wave 0. We're now at wave 1 with Workday coming into place in February. We've narrowed the cost estimates from plus or minus 20% to plus or minus 10% and still on track, exactly where we were at the beginning and we've also allocated the split, the broad split of CapEx versus OpEx in the project and Paul can talk in detail to this if anyone would like to on the question session, but it's rough that it's 60/40 CapEx/OpEx. And I think Paul also mentioned earlier, we have been spending not surprisingly, even though our systems are older systems, we have been spending quite a bit of time on our cybersecurity with data security and privacy project, cloud application infrastructure security project and a cyber resilience project. I guess one of the interesting points from us and we've had simulated cyber sessions where someone takes over the system and basically what we're seeing unfold in the newspapers. We've had those simulations internally. And oddly, our old systems and non-integrated systems across a few areas of business actually do provide a little protection time at the moment because it's not all fully integrated. Having said that, we take it very, very seriously, and we've made significant investment to ensure that we have that resilience and security, particularly around privacy that we need. So, moving on to the market outlook. And from a market outlook viewpoint Slide 30. And this is the update of the half year slide on a split of where the upside of gross margin comes from. Now, so the -- we've used the same assumptions and allocations as we did in the half year, so we've got consistency in terms of acquisitions, organic growth to market. But as Paul will very quickly pulled out, this is more art and assumption than hardcore numbers. But it really does take the picture, you can see the allocations on the right-hand side and the basis of it and we're happy to discuss and debate that. But at half year, we were sitting at 42% of our upside coming out of the market and 58% out of acquisitions in organic growth. And by the full year, it's up to 47%, which is I don't think is too surprising. But really as we did hold back backward integration due to a desire not to be caught with higher price on stock. And so we did limit the backward integration once we got to May. And so -- and also in the market to continue to tick along. I think the question in terms of outlook that comes from this is what does this mean for the FY '23 year. Have we peaked, is it as good as it gets. And I think our sense is that we -- the [ ag plan ] talks about 5% to 10% through the cycles, growth through the cycles. So, we had greater than 15% return on capital. So, we hold to that assessment. Clearly, to match last year, it will be a massive challenge for the business, but we really are targeting, getting -- maintaining our position of 5% to 10% through the cycles. When we look at that particular slide on Slide 30, if you gauge the market part, which is the $46 million of rural product gross margin, when we look at that, and it's really the nuance that is not fully understood. It's $20 million of that $46 million is summer crop. It's moved from a below average to an average summer crop in that year. And so holding the average is -- means that we don't lose the $20 million. Having said that, until the excessive rainfall, the summer crop will quite be way above average. So, we'll see how it will washes that part in terms of replanning of cotton and the window is still planting, so on the winter crop, the winter crop, the 26th component there, it's from average to above average. And so that's really -- when we look at it, controlling what we can control, that's the gap that we're looking to fill as we go for the next 12 months. With that, just very simplistically and we can take questions on it very simplistically, the bolt-ons are in the order of $10 million annualized, backward integration in the order of $8 million and organic growth that we've been having is in the order of $8 million. What we can control and what we can do does theoretically give us the opportunity to fill the gaps, the seasonal gaps, if indeed, the winter crop for next year goes back to average. And we've got the [ ABN ] number from September, which says that it's it won't quite get back to average, but that's up to debate and we'll see the new ABN numbers out in December. So going to the next slide, market outlook. I think just to note, the indicators there, I mean, everyone has access. But I think importantly, on the next slide is the implications from our viewpoint. And you can see the impact on wet weather. Probably worth spending a little bit of time around that because wet weather impact at this time of the year can damage winter crop, which we've seen in areas of New South Wales and Victoria. The implications of downgraded winter crop don't hit Elders this year. They hit Elders the following year from a cash flow viewpoint for the farmers. But having said that, because of the -- our producers have had reasonable seasons in the last couple of years. The thinking is that it may not be a significant impact on cash availability, particularly if commodity prices remain high. The implications for summer crop is that we've had washout of planted [ Silvan ] crops, early kind of Silvan crops cotton. And the impact on that will depend on how we go La Nina does start to move away and we go back to dry conditions. In which case, they will be planting, replacement planting, given all the dams are full and all the [ profiles ] are full. And there's like there will be absolutely a lot of very ready fellow pads around the East Coast. And so I think the implications, difficult to determine. Our question and when we apply it to livestock as well, our question is, has it moved? It has been slower as we've gone through the first -- the August-September-October period with the wet conditions in the East. Has it just moved, has it gone? Or will it actually be bigger and stronger, given that they winter, the summer profiles are very full for winter crop next year and then there'll be [indiscernible] everywhere. So, I think as we go through all the others, the -- I guess the key point to us is around the financial discipline as we see what happens with the market impact of the wet conditions. So, the final slide then before we go to questions. If you look at the historical performance versus weather and world events, as from the first 8 Point Plan. And you can see all the way through and even with multiple issues occurring, this diversification strategy, multiple diversification strategy, a return on capital portfolio management strategy and high financial discipline even in the worst dry in 100 years in the East, we were still flat or slightly up at -- on growth. And then for the FY '20, FY '21, FY '22 period, now we're looking to set numbers today with 39% growth, and that seems just incredible, and it's a credit to the Elders people in what they've been able to do. But then you look back last year, it was actually 38% growth on the previous year and the year before was 64% growth on the previous year. And so this -- in terms of it rains and we have a good season, the slide actually emphasizes very significantly that the 5% to 10% growth, we've been hitting at CAGR of 33%, and the 15% ROC target at 26.2% and controlling what we can control. So with that, I think we'll go to question time and open up to questions.

[Operator Instructions] Your first question comes from Philip Pepe from Shawn and Partners.

Mark and Paul, well done on a solid result despite the share price move. Just on the outlook, when you suggested FY '22 difficult to replicate, did you mean the growth of 39% growth? Or did you mean the actual $232 million EBIT? Like are you still aiming for 5% to 10% increase in the dollars this year?

Yes. So, I think the 39% growth may be difficult to replicate. But in terms of the number of $232 million, our sense is that we -- our plan is to continue to drive this 5% to 10% growth through the cycles and at greater than 15%. And so we look at that number, we look at what might not be there next year in terms of things we can't control, what the winter crop that I mentioned. And we say, okay, well, we've got a number of other issues we do control, like backward integration, organic growth and the bolt-on acquisitions. So, let's drive hard to try to match the number or beat the number and do our best. And that's how I'm thinking of it.

And secondly, I guess, a question on everyone's mind, I guess in terms of the timing of your resignation over time and clearly, conditions at peak, so we'll take that as a given. But in terms of -- in terms of succession planning, though, I mean, you came across from Wesfarmers that had a heavily return on capital focus and that drove down from the MD or through the company, and it seems to me like you've instilled that of Elders. With the -- in terms of what happens in 12 months' time, are there many internal candidates that could put their hand up for the job and how deep in the business is the 8 Point Plan understood? And how realistically, what are the material changes that may or may not occur in 12 months' time once you leave?

Yes. Thanks, Phil, and thanks for the good as it gets comment. I'll be expecting nothing less. So, I think this philosophy is deeply embedded because we got 2, 3 down, maybe 4 down in the organization, and it's across everything. And it's reflected in simple business cases, the business case approach for every decision as opposed to informal [ cavalier ] calls as it used to be many years ago in Elders. So, I think it's deeply embedded and it's a core part of the strategy. The -- I think by the half year, we should be in a position, so for the May half year results, I think it would be good. I mean, we can't guarantee it will depend on a few issues. But it would be nice to have a glimpse of the new strategy going forward. So, everyone can have comfort that the financial discipline and the core components of what we've been doing are captured. But I think the other point to note is with our systems modernization project, it actually puts us in a much greater position of enablement for technology and digital online activity and integration of all of our systems to further service our clients. And it actually -- it sets the strategy up probably for -- when you look at the 8 Point Plan, it's kind of an operational strategy. It's pretty [ one-on-one ] and about the revenue being higher than costs and running costs -- cost to earn reducing, et cetera. So, I think we have now had an opportunity to have a much more sophisticated and more strongly controlled strategy going forward with the systems modernization. In terms of internal, we've got a few internal, although we've -- Tom Russo just been appointed to the EGM of the network. And I think many of you know, Tom, has done a wonderful job in multiple roles and as recently in real estate. And so we've got really good continuity across our core part of the business. We have Peter Lourey, who's the Chief Operating Officer at AIRR. I think in terms of the thinking and the Board obviously runs the process for selection of a new CEO, and they're well maturely onto it. The idea is to have as broader number of candidates, internal external and to get the best person to take us to the next level.

Your next question comes from David Pobucky from Macquarie Group.

Mark and Paul, congratulations on a good FY '22. And Mark, congratulations on a very successful 10 years of the -- [ shipping ] Elders as well. Just first question, in terms of supply chains and inventory levels, can you talk to those 2? And how do you manage the risk of margin squeeze with commodity prices coming off to some extent?

Yes. Thanks, David. I'll fill that one. I think firstly, in terms of supply chain, we have had to procure a little earlier, particularly for winter crop through Titan Ag and that has put some pressure on working capital, particularly in the first half of the year, which you will have seen in operating cash flow. It's less pronounced as we move through the year. We did intervene in terms of inventory procurement in Q3 this year just to slow it down to basically rightsize it at that point in the year. So, we've managed it that way. We're looking forward. We do see some easing in both cost and pressure in supply chains, but it will follow a similar path in FY '23 to ensure that we have the goods that our clients need. The second part of the question in regards to passing on cost, what we have seen, if we look at where the cost has increased the most, we can see fertilizer in terms of pricing up about 80%. That is linked to the price of gas and therefore, to the situation in Ukraine. But on the other side of that, what we've seen in the sector is higher wheat and barley prices. So the industry, the supply chain has been able to absorb those costs, they're 2 sides of the same coin, if you like. So at this stage, we haven't seen pressure on margins. And I think as well, I'd say, in terms of balance sheet capacity for the sector, we've had 2 to 3 really good seasons. And you can see that in farm management deposits, which are now up around $6 billion and up 10% year-on-year. So, there's great capacity out there to absorb this.

And 1 more, if I may. A step-up in corporate costs in the year, do you expect a further increase in FY '23 off the back of continued investment in people and strategic initiatives, et cetera?

Yes, I think that there will be. We're just having a look at the cost base now. I confirm that cost and capital efficiency is close to the top of the list for us behind return on capital. But we do expect certainly there to be support costs as we implement sys mod and that will move around the business as various parts of that project get implemented.

Your next question comes from James Ferrier from Wilsons.

Could I, first of all, ask about seasonal finance? I think going back a year or so ago, you started introducing some of that funding on balance sheet as far as livestock is concerned. Can you just clarify where that's at now?

Yes. So, we've had a little bit of growth through livestock under $100,000. I think the average balance through the year was around $17 million. It did drop off towards the end of the year, but yes, fairly stable and consistent growth there.

And then with respect to crop inputs and the opportunity to offer extended terms there to customers and obviously, you're funding that on balance sheet. How does Elders manage that in terms of either at a store level or is it centralized credit? And how do the economics flow back to Elders as far as allocating that margin, the extra margin that you'd no doubt achieve in offering extended terms? Does that get booked back into retail products? Or is it into financial services or elsewhere? And then what size would that book be now at crop input seasonal finance book?

Yes. Good questions, James. Firstly, just in order. So, those extended terms are subject to a rigorous credit review process. So, that is centralized within the Adelaide head office. In terms of margin, that does get captured within cost of goods sold. So often, the funding charges is just blended into the sale of those products. Sometimes, it's levied separately as interest that either way it lands in the same place above the line. And what's the final question there?

Just the size of the book, Paul?

Yes. I can tell you that the size of the book is a proportion of the total debtor book has declined year-on-year. I don't have the actual size of the deferred book in front of me. But I would say it's well that we classify anything that is nonstandard terms as deferred. So, that can be relatively short-term extensions that are beyond 30 days in a month. So that, that number doesn't really provide much information in terms of the longer [ debtors ] elements out of that book.

Second question is around fertilizer. And I might be misreading this, but Slide 36 shows fertilizer volumes of about 1 million tonnes. And the same slide in last year's full year presentation showed about 980,000 or 978,000 tonnes, I think it was. So, am I right in saying that fertilizer volumes are up 2% year-on-year?

Yes, looks like.

And gross margin up 53% year-on-year from that 2% volume growth?

Yes. I'm not sure that's gross margin. But on a broader share issue, the fertilizer is one of the areas where we have increased market share, so particularly in Eastern Australia. The issue we had with fertilizer margins is because it's a dollar margin in the west with an increasing revenue. There was significant dilution of margin out of just the absolute calculation.

And that's sort of what I wanted to follow up on was, I'm just curious if you've seen what a couple of years since that structure on the West Coast change of that 1 million tonnes you're doing, what's the rough split between the East and West Coast?

I'd be guessing at it might be 20%. I mean I'd be guessing, probably 15% to 20%, it may not even be that high. Do you want a closer number?

Yes. No, that would be helpful, if you could.

Your next question comes from Piers Flanagan from Barrenjoey.

Just a couple for me, if I could. Maybe just firstly on the backward integration, obviously, sort of good penetration over this year. Can you just talk through some of the underlying categories where you're seeing sort of the growth between Animal Health and AgChem?

Yes. I think this year was a little different because I think I've mentioned that we actually slowed it because we didn't want to get caught with our own products, so we use third-party suppliers towards the end of the season with the cost -- with the price increases or cost increases. So, I think the way to think about it is the Animal Health is progressing, but it's not the most material part of it. So, just focused on crop protection. We started at of that total portfolio it's only the off-patent products, off-patent at an active ingredient level and off-patent at a formulation level. So, there's no surfactant patents or mixing patents or formulation patents. With that, we believe we can get to -- the end game is to get to 70% of that addressable portfolio that it is all off-patent. And the thinking there is that we wanted to leave 30% because the proprietary or the multinational suppliers have generic products as well as new technology, new proprietary products. And so we want to give ourselves room to be able to -- if we need to bundle some generics in order to get proprietaries that we still have room to do that. We started at 25% with the back of that addressable portfolio a few years ago, took to 35%. This year, we're looking to get to 50%, and I think we pulled it at 45% or 46% something like that. And with the idea that we'll continue to develop it for FY '23. And possibly, we may not get to 70% until the year after. But we're largely on track. We did hold it back this year though, so that we didn't get caught with the owned Titan product with high cost.

And then, Paul, just on your comment, and maybe I misheard this, but did you say sort of Q4 EBIT was down about $8 million year-on-year?

Yes, that's correct.

And some of the key drivers behind that?

So, key drivers were, I suppose, certainly livestock. So we -- availability of feed is very advantageous to putting on more weight. So, we saw a very different livestock season, that's continued to today with the unseasonal wet conditions. And I think in terms of the other key driver, so summer crop was a little earlier last year than this year, once again, due to the conditions.

And then just a final one just on M&A. And I think you said you looked at sort of close to 60% and approach by sort of over 80%, maybe just how you're seeing expectations sort of vendor multiple expectations out there in the market at the moment following a couple of good broader industry years?

Yes. So, you'll recall that we were targeting 3x to 5x multiple EBIT with the template that we use with the earnout split, et cetera, et cetera. But the -- what we're seeing is that there are a couple of larger ones we'll be looking at. And so far like $300,000 EBIT or $500,000 EBIT, you may be in that realm. But larger ones whether it's $5 million or $6 million or $7 million EBIT, we have seen the multiples move up, so 6, 6.5, et cetera. So probably not surprising, but we have seen that tension. And James, on your question around [ WAF ], my guesstimate what was within [indiscernible], I think about 250,000 tonnes. I think we're pretty close to the end because we've got a back-to-back coming up, sorry, back to the moderator.

Your next question comes from Richard Barwick from CLSA.

I've got a question. Just trying to sort of disentangle a little bit around some of your longer-term targets. You said that you're holding to the assessment of the 5% to 10% growth through the cycle. Where is your sort of definition here of through the cycle? I'm just trying to think -- I mean you're so far ahead of that target and yet you're sticking to that as a target. So, how do we even begin to think about that as -- whereas your baseline? Do we think about a 10% CAGR too? I was just trying to hope for a little bit of clarity.

Yes. So, I mean our -- the 5% to 10% through the cycles, you may recall was based on [indiscernible] we did of our key investors and funding, et cetera. And the thinking was for an ag company, if it's above 15% return on capital and through the cycles, we are growing at 5% to 10%, that's a good outcome. And so that's embedded in the 8 Point Plan and the way we think, and that's all we stuck to. In terms of saying, hey, it's going to be 1.2% up on last year or 5% down on last year, I mean that's for you guys and ladies to work out and to assess yourself. I mean, from our viewpoint, we're very focused on growth. And internally, as I indicated with the breakup of the gaps that we've identified on this last year's performance for next year from a seasonal viewpoint, we've got stuff -- we've got initiatives in place. where we control what we control and we'll do our best to continue to grow with that commitment to 5% to 10% through the cycles. So, I doubt, Richard, doesn't answer your question, but I guess that's why you're paid the big bucks.

If only, that was true. All right. Then I guess, another sort of point of clarification and Mark, I think you've said at some point that if the winter crop, so the FY '23 crop was sort of back to an average, you've got enough within your control to offset that. So, I understand that component of the narrative. But then you've got the other moving parties around the summer crop. So, is it fair to say that the movements in the summer crop sort of sit outside that commentary. So, winter back to -- if it's back to normal, you can sort of compensate for that. But if there's some negative moves around the summer crop and that would be an additional negative to consider?

Yes. I think that's right. I think it's -- and it's not just cropping, it's livestock. It's [ AgChem ], it's all the aspects that are outside of our control. But my comment on summer crop would be that it went from below average to average, and the outlook is above average. So, we're assuming average not above average. So, the question is that does the overly weight conditions sort of occurred in October and early November, does that change the outlook of summer -- of cotton in particular, from above average back to average, I'm not sure, we'll go with the ABN forecast. My gut feel is that it will still be very, very strong.

And then the last one for me is really around some of the -- your bolt-on acquisitions. And really, part of that is part of your branch optimization. Do you -- I guess there's 2 questions here. When you think about branch optimization, how do you balance up your corporate outlets with the wholesale members? I mean, you have -- do you hold back or you don't really factor in moving into the territory of some of your wholesale members if you see there's an opportunity for a corporate outlet? And I guess, part and parcel of that question is when you're thinking about your bolt-on acquisitions, do you have a preference for some of your wholesale members? Or would you actually have a preference for an unrelated outlet?

Yes. Well, when we're doing the business cases on wholesale members, we've got to back out the profit we already make from them. So, it makes the hurdle much higher for them. But the way to think about it is that we -- if we've got 3 members that are in the pipeline, the way through our business development committee, and this is the point of embedded systems and processes, what we do is to say, okay, is that particular member, is that better as a red branch or as a wholesale branch or in the wholesale network has its own -- AIRR has its own retail network as well. So, we actually decide and then when we buy it, it's converted into whatever we decide. So, the -- in terms of preference, yes, it's all around brand segmentation. So, in the town, if we've got 20% share, the general rule is that we can throw everything out of and we probably might get to 21% share. But if in that same time, we've got an AIRR member, we can get up to 30% share through getting the margin from wholesale into that member. And the customers got choice of 2 options or 3 options or 4 options. So, it's -- for rural services, it is 40 years later from my experience, it is the way to increase your share of wallet in any town is to have multiple segmentations. I think the final point, Richard, is the demographic of the AIRR members is quite a bit different to the demographic of -- sorry, the market demographic but because the Elders network is largely wheat sheep kind of sort of like big broad acre segmentation where they're smaller segmentation, smaller operators.

That is all the time we have for questions for today. I'll now hand back to Mr. Allison for closing remarks.

Okay. Well, thank you very much, and I look forward to -- Paul and I look forward to catching up with many of you over the next week and look forward to catching up to you then. Bye.

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