Elders Limited (ELD) Earnings Call Transcript & Summary

Thank you for standing by. And welcome to the Elders Limited Half Year 2023 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Mark Allison, Managing Director and CEO. Please go ahead.

Thank you very much, and welcome to all for the Elders half year results presentation for our FY '23 year. Thank you for joining Paul and myself for the session today. Many of you have met Paul, he's highly experienced within Elders and is Group Treasurer and Acting CFO. From an Elders' viewpoint this is the third year of our third Eight Point Plan. The Elders philosophy since the first Eight Point Plan is to be to control what we can control and not to dwell on things we can't control, to have a capital cost base that allows us to make good returns in bad years and it also allows us to make great returns in good years as we saw last year. The FY '23 half year results and our full year guidance are example of acceptable returns in delayed market conditions to commence our FY '23 financial year. We use our multiple diversifications by product, service, geography, crop segment, commercial model and channel to market and our financial discipline to deliver consistent and high returns for our stakeholders. In summary, we aim to control what we can control. Over the first few years of our third Eight Point Plan or specifically last year, we had experienced exceptionally strong and early market conditions across most production enterprises and geographies. We have also had positive livestock prices, winter crop and summer crop conditions, although more recently, unseasonal rainfall at the beginning of this financial year. Our view in November last year, when we presented the full year results was that the exceptional FY '22 result would normalize to average in FY '23 and that the East Coast floods and delayed start to the FY '23 year will see a reversion to the more traditional first half, second half balance. In this context, the performance of Elders with its clear and consistent strategy, multiple diversifications, high financial discipline, hard-working committed team and enduring customer anchor as the most trusted brand in Australian agriculture as we had considered for the first half. The result is strong in safety and sustainability with profit, return on capital and cash in the system with the delayed season and returned to average outlook. Our commitment is to provide 5% to 10% growth in EBIT and earnings per share at a minimum of 15% return on capital in a sustainable manner through a safe and inclusive workplace. The results today are consistent with our 5% to 10% growth through the cycles commitment with the annual growth rate through the last 5 years at over 25%. The approach for today is that I will provide an overview of the results. Paul will go through the detail of our financial performance and then we'll provide an update of our outlook to growth initiatives for the rest of our third Eight Point Plan. So if we go to the agenda, we look at the executive overview, I'd like just to comment around the key investment drivers for Elders and also demonstrate the resilience of the business model over the last 10 years. Then we'll move into the financial results with Paul and I'll come back for the growth and transformation part and the market outlook component. So, going to the key investment drivers for Elders and we've obviously worked on this for many years. When we look at the key investment drivers, first, EPS growth, compelling shareholder -- total shareholder return and over a 10-year period, earnings per share CAGR of some 30% with a return on capital of over 15% and a payout ratio of between 40% and 60%. If you look at the diversification through geography and product diversification, but also in many other aspects of channel and service and commercial model. In terms of attractive market and company outlook, point number 3, we have a relatively minor share of a very, very large market and have had a growing market share trend over the last 8 years. I think the opportunity for significant ongoing growth, as you know, the targets from the NFF for pre-farm gate rate from what it was back then at $60 billion through to $100 billion by 2030 is on track and we're well and truly back on track. So, the market environment is very, very positive. When we talk about the outlook, you'll also see the outlook is positive. In terms of transformational initiatives, point number 4, we have a number of initiatives in place. But I think the most important is our systems modernization program, which we will talk to in detail. And this program sets Elders as a significantly strong multiproduct, multiservice growth platform across these key markets. We'll also talk to the rural products optimization project as we move through. Point 5, significant pipeline of new opportunities. As you see, our bolt-on strategy and our geographical diversification, our gap filling strategy for many years have been very, very successful. We still have a very strong pipeline and we also have a strong pipeline for greenfield entries. And finally, the robust balance sheet. Paul will talk to the detail of this as we go through the financial part of the presentation. Moving to the next slide, the resilience of the business model. And you can see from FY '14 all the way through regardless of market conditions of advanced floods, droughts, bush fires, et cetera, La Ninas, El Ninos that we've -- the diversification of the model and the resilience of the business model has allowed us to make continually strong growth through that period. When we look at the FY '23 guidance that we've put out and largely due to the change of balance between half year and first half and second half back to our normalized balance, you can see that the midpoint of the guidance for FY '23, although 18% down on last year's record profit is 14% up on the previous record profit in FY '21. And so if we look through that 2-year period, we're at the midpoint of our commitment of 5% to 10% growth through the cycles. So, moving on to the next slide, which is the highlights for the business. All the stakeholders are covered through this. On our people front, good reduction in our total reportable injury frequency and we've had a 10% reduction over the last 5 years. In terms of employee engagement, very strong. The average employee engagement across the benchmarks in Australia is at 65%, highly -- at the high end at 73%, we're sitting at 79%. Percentage of female workforce also strong and growth in people and when Paul runs to the cost drivers, and you'll see that we've made a significant investment in people this year that is to generate growth for '24, '25, '26. He will go to that point when we get -- get to that session. From a customer viewpoint, for the last 3 years, we've been the #1 trusted agribusiness brand. Our Net Promoter Score has increased from previous 49 to 51, remembering that this is a very high number when you compare it to just -- one to compare with -- to make the point NAV at 1 and ourselves sitting at 51. And the additional locations through both bolt-on acquisition strategy and also from a greenfield strategy. From a community viewpoint, we continue to be significantly involved in all of our local communities and we've been able to do more and more as the businesses become stronger. And from a shareholder viewpoint, we're -- there's $0.323 in underlying earnings per share, a dividend of $0.23. That dividend of $0.23 is at the 71% dividend payout ratio. Our plan is to sit somewhere between 40% and 60%. And at the end of the year, the outlook or the guidance we've given, we'll see that's sitting around towards the top end of that 60%. So, moving to the next slide on our financial summary and a couple of points to highlight as we move -- go this -- to this in detail. The sales results of a 9% increase at $1.7 billion, inferring ongoing growth in market share, but also showing the significant impact that's occurred with our backward integration strategy, providing margin and offsetting the margin squeezes caused through our input costs, reducing the cost of goods reducing and there being a significant pricing pressure in the market. We go next to underlying EBIT and I made a point earlier around the slip of first half to second half and return to a traditional 45-55 split with our guidance at $180 million to $200 million. The final area, sorry, looking at the ROC at 16.9%. The -- down from the above [ 20% ] numbers that you've seen more recent times, but still 1.9% above our target at 15%. And then finally, to cash conversion, at the half year, you'll all be familiar with the cash conversion numbers for half year are always down with a target that we've reaffirmed and we will talk to you later on at 90% cash conversion by the end of the year. So, moving to sustainability, just a couple of comments, and we'll just go to the right-hand side of the sustainability slide and our progress. Some great progress across our sustainability area. We've formed a dedicated strategy, sustainability and innovation group, headed up by Anna Bennett who's joined us from Australian Post and we've provided additional resources as we drive a number of initiatives that are outlined below there with our solar installations and development, our packaging waste policy launch and initiatives and also the independent on-site orders of all suppliers for the tightened supply chain through China and India. Moving to the next slide on safety, health and well-being. And you see at this point, 2 lost time injuries at half year. And you will recall that over the period of the Eight Point Plan, we've gone from 34 lost time injuries down to 2 at the half year. So, a very strong and enhanced safety culture and also the trend that I noted earlier on the total recordables. So with that, I'll rejoin following the detailed financial review and I'll hand over to Paul now.

Thanks, Mark. I'll commence on Slide 11 of the pack, which provides an overview of the industry themes that were prevalent in the first half. As Mark mentioned, the first half of FY '23 was distinctly different to FY '22, making year-on-year comparison difficult. The first half of FY '22 was characterized by historically high livestock prices, high real estate turnover assisted by historically low interest rates and supply chain disruption, which led to rising crop input prices, which in turn brought forward sales to the first half. This created the historically unusual scenario where Elders FY '22 earnings were weighted to the first half over the second. By comparison, the first half of FY '23 saw a declining shipment cattle prices but little volume offset given the high availability of feed resulting from the West spring and early summer months. Internationally, beef prices weighed on the domestic market following high cattle processing in the United States. The first quarter rainfall caused flooding in several summer crop areas and generally delayed the 2022 winter crop harvest across Southern Australia with harvesting continuing into January in many regions. This, along with generally declining input prices has delayed FY '23 winter crop sales compared to FY '22. Consequently, it is expected that FY '23 earnings will be weighted to the second half over the first, more in line with historic performance. International supply chain efficiency has improved significantly year-on-year with delivery times and freight costs now close to pre-pandemic levels. This, coupled with the later client purchasing for the 2023 winter crop has elevated inventory levels temporarily impacting net debt and cash conversion. The complexity of the year-on-year comparison coupled with more favorable trading in recent months has underpinned the decision to provide full year guidance for underlying EBIT of between 180 and $200 million. Moving now to Slide 12, we see trends analysis from FY '19, which demonstrates the growth in the business over the past 5 years through the agricultural cycles. Over the 5-year period, first half sales have increased from $733 million in FY '19 to $1,657 million in FY '23, a 5-year CAGR of 22.6%. Underlying EBIT has increased from $34 million in FY '19 to $83 million in FY '23, a 5-year CAGR of 24.9%. Costs have increased to $223 million at a 5-year CAGR of 12.5%, but importantly, cost to earn decreased over the 5 years from 79% to 71%. Earnings per share has increased at a 5-year CAGR of 16%, adjusting for the impact of company tax expense from FY '22. I'll now move to Slide 13, which contrasts the first half of FY '23 against the prior corresponding period. Once again, I emphasize the difficulty in this comparison given the first half of FY '22 was in most respects an outlier. Looking at the numbers, sales revenue increased $143 million, up 9% with rural products contributing most of this growth. This is an encouraging result given the seasonal conditions. Despite increased sales, gross margin decreased by $20.6 million to $305.8 million, down 6% year-on-year, negatively impacted by the lower sheep, cattle and fertilizer prices, a softer real estate market and increased cost to earn. Gross margin percent decreased 3%, due primarily to the reduction in livestock commissions and some temporary margin pressure from declining crop import prices, especially herbicides. Costs increased $29.4 million to $223 million half-on-half due to acquisitions, new points of presence and support for transformational projects, including systems modernization, supply chain optimization and Elders Wool Handling. Underlying EBIT decreased to $82.8 million with a 5-year CAGR of 25%, well above Elders' target range of 5% to 10% growth through the cycles. Operating cash flow was negative $86.9 million compared to negative $55.4 million in the corresponding period, impacted by the working capital build for the 2023 winter crop. Over now to Slide 14 to further explore performance at the product category level. In terms of highlights, retail products stands out with sales growth outweighing headwinds from declining fertilizer prices and the later winter crop activity year-on-year. Financial Services performed well throughout the period with strong growth, particularly from our insurance investment. Real Estate was noteworthy given the significant rise in interest rates over the past 12 months. Despite this impact, residential turnover was steady year-on-year and property management softened the impacts from lower broad acre turnover. Moving to Slide 15, which displays Elders product diversification, a key defense against market variability. Overall, gross margin decreased by $20.6 million from $326.4 million in FY '22 to $305.8 million in FY '23. Notwithstanding growth was achieved across a number of product categories. I'll note the following regarding key themes within the business, Agency Services gross margin decreased $18.2 million to $64 million, impacted by the lower prices in both cattle and sheep markets. There is perhaps cause for cautious optimism for some improvement in the second half with several livestock markets showing signs of recovery. Fertilizer gross margin decreased $5.9 million to $19.2 million due primarily to a significant decline in the price of urea. Pleasingly, across all retail product categories, gross margins increased by $4.8 million to $145.5 million with increases in AgChem, Animal Health and Other Retail more than offsetting the decline in Fertilizer. Wholesale Products decreased $5.1 million to $32.7 million, impacted by the flooding in Q1 as well as a temporary -- as well as temporary margin pressure from declining AgChem prices, especially herbicides. Real Estate Services gross margin decreased to $4.4 million with broad acre sales negatively impacted by rising interest rates and falling cattle prices. Moving to Slide 16, which displays Elders geographic diversification, the key defense against regional variability. This slide shows geographic contribution to EBIT, excluding the wholesale business as well as corporate overheads. In comparison to FY '22, all the states were negatively impacted by declining livestock prices and the later winter crop season. I note Victoria and Riverina was most impacted by the flooding in Q1. Moving now to Slide 17 to discuss costs, which we continue to manage closely given our focus on cost and capital efficiency. Cost grew $29.4 million, up 15% to support future business growth as well as our transformational projects. Cost to earn increased to 71% rolling 12 months, close to the average of FY '20 and FY '21 and well below FY '19. In terms of cost drivers, people contributed an additional $13.6 million, depreciation and amortization of $6.6 million and motor vehicles, $5.2 million. Breaking this down, the Elders branch network added 116 FTE to service more clients. Acquisitions added 57 FTE and there were 37 new graduates welcome to Elders. An additional 29 FTE were added to support the transformational projects, which are enablers for future growth. Moving to Slide 18 to discuss capital allocation, which is at the core of Elders business model. Return on capital decreased from 26.2% to 16.9% period-on-period, decreasing the 3-year average to 21.6%, which remains well above our hurdle rate of 15%. Key drivers include increased inventory in preparation for the winter crop, reduced EBIT compared to the corresponding period and a lower contribution from agency services, which generate comparatively higher return on capital. Over to Slide 19 and cash flow where we see an operating cash outflow of $86.9 million. Negative operating cash flow in the first half is not unusual for Elders given the working capital build required for the winter crop. I note that the working capital has trended lower post the March balance date as expected and Elders maintains its target cash conversion of greater than 90%. I'll now move to Slide 20, where we see average net debt, excluding AASB 16, increased by $47 million to fund acquisitions and working capital for the winter crop. Leverage, excluding AASB 16, increased from 0.7x to 1x but remained below Elders target range 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 now to Slide 21, I noted an interim dividend of $0.23 per share has been declared for the first half, franked at 30%. Underlying EPS was $0.323 for the first half. This concludes the financial section of the presentation. I'll now pass back to Mark who will discuss progress against the third Eight Point Plan, future growth aspirations as well as the market outlook.

Okay. Thanks, Paul. So, we'll move on to Slide 23. And in the growth and transformation stakes, I think the first comment that I'd like to note is around the highly experienced and diversified team within Elders with an average tenure of 11 years. I should highlight though, with sort of the critical projects that we are conducting in the transformation space that we've -- of those -- the average tenure of 11 years, we also have 3 executives who have joined the business with specific skills in order to assist with those key projects. So firstly, I note Viv Da Ros, who joined a few years ago from -- with Tesco and Ampol, experience as CIO, a great addition to the team. We have Jeremy Cowan, who's joined running our Rural Products supply chain as EGM Rural Products, again, great experience with Mars Corporation and also Blackmores. And then finally, I mentioned Anna Bennett earlier, who's joined to head up our strategy innovation and sustainability area of the business. So, a good balance team and then a significant Exco Lite as we refer to them sitting under those individuals. Moving on to the progress against the third Eight Point Plan. A number of the points have been covered, but just to comment on the market share component with the 6 acquisitions, 26 locations in the first half and significant additional progress. I will go into more detail on these in later slides, expanding of the brand portfolio to capture more margin with our backward integration initiatives, the Elders Wool handling project, the streamlining supply -- rural products supply chain project moving along quite nicely. And I think as we go through all of those points, the key components of the Eight Point Plan, the discipline, the methodical approach are all in place. Going to the next slide around the FY '24 Eight Point Plan. And this Eight Point Plan, we fine-tuned some of the focus areas from our strategic priorities and our enablers. But I would highlight Item 6, which is the streamline supply chain project and the systems modernization project, which as I said, will be setting a very significant growth platform through '24, '25, '26 and onwards. Going to specific growth pillars of the business and we've talked a lot about our multifaceted strategy to drive growth through to FY '26 and beyond. The -- in terms of geographical expansion, our bolt-on strategy has continued with an active pipeline of 12 project candidates right now. So far for the first half, we've done 30 financial models, issued 9 non-binding indicative offers, completed 6 acquisitions and with an annualized EBIT in the order of $7 million. So our plan, as we talked about at the year-end last year, as we talked about our strategies to offset the return to average market conditions in FY '23 was to hit somewhere between the $10 million to $15 million annualized EBIT as we go forward. In terms of our backward integration, moving along quite nicely. In terms of measuring specific conversion percentages at the half year, it's quite difficult as Paul has indicated, with the stock in the branch network and with winter crop planning underway. But just to refresh everyone, we said of the addressable generic products within our portfolio, crop protection products, we would aim to replace 70% with our own brands, allowing us to have flexibility with our suppliers who have blended generic portfolios and proprietary portfolios. We started at about 25%, 3 years ago. We got to 45% at the end of last year. And this year, our target is 55% of the addressable generic portfolio within Elders where we get a bump in margin of somewhere between 15% to 20% depending on the products. So, that's all going to plan at this stage. In terms of the transformational projects, we'll talk a little more about the supply chain optimization project and the -- and this is really integrating a number of entities all the way through from our formulation through to our supplier to procurement to our wholesale and then through to our retail network. And Jeremy Cowan has been working on this project. We had [ Ellie Kay ] last year to stop it up for us and we have some additional comments on it later, but clearly, we're looking at both capital and EBIT benefits, capital reduction benefits and EBIT improvement benefits from this project. And then in terms of new channels to market and other transformational investments, we've taken the call to establish formulation -- by an established formulation facilities to give us much greater supply chain flexibility and this is on track as well. Going to the next slide in terms of the dual growth strategy through AIRR and Elders. And I think this slide is quite interesting from a Points of Presence viewpoint because we've indicated our channel to market diversification, meaning we've got retail channel as well as the wholesale channel allows us to get significant coverage and growth throughout Australia and in areas where an Elders branch may not be the perfect answer, there may be an AIRR member. So, the numbers indicate that the -- in terms of the market and you've seen in previous slides about 1,800 rural service branches around Australia. 900 or so of those are independent. So, that's our bolt-on acquisition pool. And we've been -- in our growth in these areas, we've been able to contribute significantly to the 5% to 7% growth through the cycles, underpinned by the Points of Presence expansion. And moving to the next slide and you can see that Points of Presence growth at 3.6% over the last 4 years. And we've still got sub 20% market share in a broad and general assessment of market share given our products and services. So, there's significantly greater areas to grow and strengthen the business. When we look at the next slide and setting us up for growth through '24, '25, '26 and beyond, the rural products supply chain optimization is significant. So, as I mentioned earlier, this will provide sales and operational planning ability throughout the whole of the business, from formulation all the way through to selling to the end user of pharma. And at the moment, each entity has its own rudimentary sales and operational planning process, so this will take out significant buffers and buffer stock between each of those entities. So as mentioned, we see a significant capital reduction coming from this project as it rolls through. And it will also allow on the profit and loss side, allow us to significantly focus our procurement and get greater efficiencies and so warehousing, supply chain efficiencies across the whole of the network. So, very exciting. The business case for streamline, as we call it internally, will come to the Board in June-July for benefits then to be flowing out in '24, '25, '26. Systems modernization, we've talked about previously with the first wave largely completed and in full on time. Wave 2, the business case, as we indicated, each wave will have its own business case with its own sign-off. And Wave 2 will also be coming to the Board around that June-July time as we look at coming to probably the big wave that allows us to single platform across the business. And then finally, the wool supply chain optimization project, which is our automated warehouses in the Victoria and Western Australia, which will be the first of their type in Australia and place us very, very strongly in the wool market. So in terms of systems modernization, as we said, the benefits will be coming through to FY '26. Wave 1, the numbers are there and we can talk to that in question time if there are specific questions. But the Wave 2 business case coming to the Board in the next couple of months. It's a significant -- in terms of the first project Wave 1, Workday, et cetera, the really great implementation. In fact, as I said, full on time and a great job. But Wave 2 is the big one that we're really focused on now. In terms of the retaining the best people, attracting the best people. I think the numbers there and I may comment about a very, very high engagement and enablement numbers over a number of years. So, this remains very, very strong. In terms of women in leadership positions from the first Eight Point Plan until today, we've got 4% of women in leadership positions to 19%. As a preferred outcome, we do find that many of our bolt-on acquisitions actually take our women and management numbers down. And so that's fine. We've got our targets. And we've also got a desire to [ considerably ] we have is divest workforce as possible, particularly in leadership. When we look at the attracting the best people, we also note and Paul mentioned it, that we've put on 38 graduates and with the idea of investing significantly and early, as you can see by the cost focus before the revenue is delivered as we've mentioned earlier. So going on to the market outlook slide, and I think most players or people on the call would be across the market outlook, still relatively positive. In terms of Rural Products, the winter crop looks solid and we've seen the grain crop upgrading of life, where there's -- will effect on storage our product in that case. But the outlook remains pretty positive. In terms of our free trade agreements around the world, market access is very, very strong. Thawing of the relationship in China also adds to the positive outlook for the market from our viewpoint. In terms of Agency Services, traditionally, we get a volume response to price reduction. So, the net impact is less. As Paul indicated, in the first Q1 of this financial year, we had the double impact of price and volume reductions because of the flooding conditions. Looking across all the other areas of the business, market outlook remains relatively positive and also clearly underpinning our guidance statement. The ABARES March numbers, again, you would have at your fingertips. So, I'll go to the final slide around key investment drivers just to summarize the very strong EPS growth that Elders has been able to deliver. With its business model, the very, very strong geographical and product diversification components of the Elders business line will allow us to be quite resilient and provide high returns through the cycles profitability. The attractive market and company outlook, the transformational initiatives that are in place with both our Rural Products supply chain project and our system modernization project, which really do step at very solid platform for strong growth through the years ahead. Significant pipeline of new opportunities. I talked about the -- our universe of potential acquisition candidates and also the robust balance sheet that supports our growth at the high return levels. So with that, I think we'll go to questions and open up for questions.

[Operator Instructions] Your first question comes from David Pobucky from Macquarie Group.

Just in terms of the first one around the guidance, it looks like you're assuming a more normal first half, second half EBIT this year, which is more consistent with FY '20 and '21. What are the key swing factors for the remainder of the year that could get you to the top end of guidance and conversely or conversely the bottom end there?

David, I'll take that one. So, I'd say firstly, just to set the same year. So, FY '22, H2, we had $100 million of EBIT. So, $107 million of EBIT takes us to the midpoint of that range. The assumptions there are for continued outperformance year-on-year from the retail business, a trend that we've seen in the first half already, but obviously premised on a strong winter crop. We see that effectively offsetting continued underperformance from livestock agency albeit at a less delta than the first half. So, we do see some stabilization in livestock prices but also a potential for a volume offset. And what we have seen in recent weeks in the U.S., for example, is an increase in the import prices for beef is up about 20% of the flow. We're seeing that come through to the mutton market in Australia already, what's significantly of the flow. So, we're starting to see what we think is some stabilization of livestock. So, we see those 2, retail and livestock offsetting each other by and large. And then we get positive contributions from our wholesale business. We see a cessation of the margin pressure, particularly from oversized that we saw in the first half from declining crop input prices. We see a stabilization in real estate gross margin, financial services is a continuation of theme and then we see lower network incentives internally and also a slight contribution from lower SG&A with a focus on cost. So, I think that's a clear summary.

And just one last one for me. It looks like branch network EBIT was down 16% versus last year, but the wholesale was down 38%. What were the key drivers of that wholesale performance?

So, it's really the other side of rising crop import prices in FY '22, they came off in the first half and at an inconvenient time from a procurement perspective. And so what we saw was margin pressure. We expect that to be transitory in the business that once that inventory is flushed through, those margins should improve.

Yes. I think, David, it's worth highlighting that the biggest proportion of that decline in wholesale was not in the member business, it was with a few small customers who are predominantly generic customers who are actually wholesaling themselves. So, in terms of the core member business, the impact was significantly less. So, this is -- just to call spade a spade, around very, very competitive [ list ] pricing.

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

Just I appreciate you can control what you control. In terms of M&A part of your strategy to sort of the second half of the 5% to 10% growth, with some of the soft commodity prices deteriorating further in the market still being, call it 15% independents. Have you had more inquiries in terms of businesses coming to you to be sold? And what's happening to their price expectations? Are they adjusted downwards in conjunction with or similar to sector offers.

Yes. Yes, so a good observation. So, what we did have was a bunch of agency and mostly cattle agency-based businesses who had previously declined discussions, wanting to initiate discussions. In terms of the pricing, but the multiples are still around the same. We're targeting the 3% to 5% that we have over a number of years. So, with our earnout position, the absolute price will reduce based on EBIT because the final -- the second year EBIT washout or earnout washout is the multiple times the second year EBIT minus the original payments. So, pricing will come down in order with in line with earnings if there's an earnings impact. But yes, we have had greater interest.

And second question, if I can. It's in the printed materials, but you didn't talk about it, perhaps you can't, but very specific commentary regarding management update or announcement in July. Any more color on what type of the announcement might be. Is there a short list of candidates? Is there a final contender? Did you get my resume? What's -- any more detail on the July announcement?

Yes, I know. But you normally don't send an acceptance letter with a regime Phil. So, the Chairman Ian Wilton will speak to that and is happy to update you as required on that. As you know, the -- Ian and the Board are running the process and have been initiated the process last year. So, he will give you an update on that as required.

Your next question comes from Piers Flanagan from Barrenjoey.

Just a couple for me. Maybe just firstly, on the cost base, and you talked about adding headcount for growth in future years. Can you maybe just talk to sort of the headcount you've got at the moment? Are you still looking to add to that? Or is this the right size now for growth in, say, '25 and '26?

Look, I think in terms of FTE counts, it's obviously very sensitive to acquisitions and new Points of Presence. So, I think that will drive where it goes to from here. But in terms of FTE requires for existing initiatives, I think we're at about the level that we need.

And then just on the higher inventory levels, I think you talked that they're starting to fall. Could you maybe just talk about how the second half trading has been and how the working capital levels currently look?

Yes, certainly. So, we had a very strong March and April in terms of trading. So, I would say that in terms of -- if we take the 7 months to the end of April, March and April contributed more than 50% of that result. And so as a consequence, we've seen inventory come down, it looks like certainly from its peak also had a fairly strong start to May as well. So, I'd say in regards to inventory, it's usual higher than we would like for this time of the year but we are getting through.

And then just the last one, I mean, FY '22, you had a slide in the presentation pack just talking about sort of the organic growth and in the market growth you saw. Can you maybe just talk to, I guess, sort of the first half '23? I mean you sort of had some good momentum within the backward integration, but I guess sort of the growth within sort of the organic side and then maybe what the market impacted you?

Yes. I think broadly, you may recall us talking in November around the market normalizing this year and maybe taking out $26 million or something like that. And we would look at backward integration and bolt-on acquisitions to endeavor to offset that to offset the shortfall from the market normalizing. I think it's fair to say with the 6- to 8-week delay through September, October, November, et cetera, that the impact of the market is more significant than we thought because we had anticipated when prices are coming down to get to livestock, there would be volume responses. And obviously, physically, there couldn't be volume responses to the cattle and sheep couldn't be transported. So, I think the -- it's the return to normalizing our average sort of season that we spoke about in November, was pretty close to the mark, but we didn't foresee the delay in the season. Paul, you might want to add to that as well.

Yes, I think that's a good summary, Mark. I think as well, in regards to acquisitions, we only had a $3 million contribution in the first half. So, that's just where the acquisition holds. But notwithstanding the annualized benefit of acquisitions is much higher than that.

Your next question comes from Evan Karatzas from UBS.

Just what cost to earn ratio should we expect for the second half, please?

We expect cost to earn to improve in the second half based on the assumption of slightly lower SG&A, second half on second half and higher earnings.

And then the -- you called out the $7 million contribution from acquisitions in the first half. Was that -- does that include acquisitions you did last year as well? Is that strictly one's just completed through the first half?

We only had $3 million contribution half-on-half from acquisitions.

The $7 million was annualized, yes.

Yes. So, $7 million is the acquisitions we've made in the first half at an annualized contribution.