Elders Limited (ELD) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Elders Limited FY '23 Results Investor 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 full year results presentation for the FY '23 year. Thank you for joining Paul and myself for the session today. From an Elders' viewpoint, this is the final year of our third 8-point plan. The Elders philosophy since the first 8-point plan in 2014 has been to control what we control and not to dwell on what we can't control, to have a cost and capital structure to allow us to make good returns in bad years and to make great returns in good years. The FY '23 results are an example of acceptable returns in very difficult market and cost conditions. In fact, this result is the second highest result in the last 10 years for Elders. 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 2 years of our third 8-point plan and more specifically in FY '22, we experienced exceptionally strong and early market conditions across most production enterprises and geographies. We also had positive livestock prices, winter crop and summer crop conditions with unseasonal rainfall, all resulting in a record profit last year. Our view in November last year was that the exceptional FY '22 results would normalize to average conditions in FY '23. Although we expected a reduction in livestock prices, we did not foresee near 60% drops in cattle and sheep prices over a very short period of time. 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 ag culture, the result is very solid, as mentioned, our second highest profitability in 10 years. The result is strong in safety, sustainability, profit, return on capital and cash conversion, maintaining a strong balance sheet through a very difficult year and setting us up for the next 8-point plan. Our commitment is to provide 5% to 10% growth in EBIT and earnings per share at a minimum of 15% return on capital in is 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 for the last 5 years with a CAGR approaching 25%. Our approach for today is that I will provide an overview of the results, Paul will go through to the detail of our financial performance, and then I'll provide an update on our outlook and growth and transformation initiatives as we commence our fourth 8-point plan. So with that, I'd like to move to the key investment drivers. And you can see as we run through the key investment drivers, in terms of EPS growth, the commitment of 5% to 10% growth of EPS and EBIT through the cycles at above 15% return on capital. So over the 3 8-point plans, so the last 9 years, EPS CAGR of 57% and with ROC greater than 15% throughout the period and a dividend payout between 40% to 60%. And this year, as you see in the notes above that for the payments. When we look at the geographical product and channel diversification, I think we talk a lot about our diversified model, and this allows us to make money through the cycles, as we've mentioned. And when we go to Slide -- the GM slide on Page 20, that Paul will go into detail, you will see the impact of the multiple diversifications at product and service and then the following slide of geographical level. In terms of attractive market and company outlook, it's a very, very positive outlook for food and agri. We talk about the cycles and the impacts of various uncontrollables. But in reality, as we can see by the slides coming up, we've had strong and high-quality growth through the cycles. In terms of transformational initiative benefits, again, we'll talk to the detail, but we do have the 2 biggest projects around our systems modernization project and our real product supply chain and optimization project looking to provide benefits towards the end of FY '24 and into '25. Significant pipeline of new opportunities. So this year, we talked about -- we reported it on 9 acquisitions, bolt-on acquisitions. There are some 16 candidates in our pipeline. And as we've mentioned previously, a universe of 1,800 rural service branches around Australia, 900 of which are independent and therefore are opportunities for us for that bolt-on acquisition strategy. And at a market share of roughly across all of our products and services of around 20%, a significant room for growth for the business. And then finally, on a robust balance sheet and supporting growth. We've often talked about our high financial discipline. You've seen us make commitments at the half year with regard to cash conversion with regard to cost management and efficiency, and they have been delivered and exceeded as we come into the full year. Paul will talk to that detail later. It's worth noting that we've finished the year at 1.5x leverage with our guiding range -- sorry, 1.4x leverage with our guiding range, 1.5 to 2x. So moving to the next slide. And again, just to emphasize what's happened with the 8-point plans over multiple El Ninos, La Ninas, geopolitical issues and many pandemics, et cetera, over the period of the first 3 8-point plans. And you can see the slides or the headings down the bottom talking about the uncontrollables, the climatic events. And you can also see under each 8-point plan, how we've performed against a commitment of 5% to 10% growth in EBIT and earnings per share and above 15% return on capital. So the first 8-point plan, 735% growth from business from turnaround, ROC of 25.7%. Second 8-point plan as we ran through drought years, significant drought years, we've had the EBIT growth, so CAGR of 22.8% and ROC of 20.9% through that period. And then the third 8-point plan as we ran from drought into La Nina, and then finished off with a shadow of El Nino predictions. As you can see the EBITDA growth of 17% through the cycles, EPS, 13.6% and ROC of 21.6%. So obviously, highlighting highly residual resilient business model that we've put in place through the 8-point plan period. The fourth 8-point plan, we'll talk about later, is cut from the same cloth in the same market and with largely the same executive team to deliver. If you look at the next slide. From an operational viewpoint, you've seen a reduction in both lost time injuries and the total recordable injury frequency rate. It's great progress. We've held our very strong Net Promoter Score at 48. We got across with holding at 43% women in the workforce. But importantly, up to 20% women in senior positions, a long way to go, but it's also a long pathway from our first 8-point plan when we started with 4% of women in management positions. Our employee engagement remains above high performance through the Korn Ferry assessment mechanism at 77%. So very strong engagement and enablement. And then, of course, right in the middle for the fourth year in a row, the #1 most trusted agribusiness brand amongst farmers. So going to the next slide. And you can see the pathway in lost time injuries. In fact, when you go right back to the first 8-point plan, there were 34 lost time injuries. And so we've seen great progress there. And then with total recordables, you also see a clear trend line. And it's worth noting that there's been great progress within the wholesale business, and we continue to make strong progress. The next slide is our sustainability performance. We issued our first report a few years ago and have made good progress across a number of the climate targets we set, where we launched -- in terms of progress we launched our sustainability framework, established Thomas Elder Sustainable Agriculture, which does support the front end and many other clients in terms of innovation efforts in sustainability. Joined the Big Bag Recovery program, which is an equivalent program to drumMUSTER, and drumMUSTER over the years, having recycled some 53 million containers. Our targeted solar and the LED lighting upgrades and also the solar farm development at Killara Feedlot. So then taking to the financial highlights or the next slide. The -- above the middle of the range that we gave in terms of underlying EBIT of $170.8 million, down on FY '22, but as mentioned, the second highest in 10 years, 16% return on capital with a target of 15%. Weighted average cost of capital is in the realm of 8%, so significant shareholder value driving performance. Cash conversion that we exceeded our commitment of 90% that we made at the half year and we do have in policy, and that has been another great result. And as I mentioned, leverage ratio at 1.4x against our target of 1.5x to 2x. So in summary, before I hand over to Paul, in a very difficult year, it's a solid outcome, second best profit in 10 years and high-quality return on capital and cash generation. So with that, I'll hand over to Paul.

Thanks, Mark, and welcome, everybody, today. I'll commence on Slide 12 of the pack, which displays Elders' 5-year financial performance from FY '19. Over this period, sales have increased from $1.626 billion in FY '19 to $3.321 billion in FY '23, a 5-year compound annual growth rate or CAGR of 19.6%. Gross margin has increased from $352 million in FY '19 to $619 million in FY '23 at a CAGR of 15.1%. Comparatively, costs have increased at a 5-year CAGR of 12.6%, reducing cost to earn from 79% in FY '19 to 72% in FY '23. Underlying EBIT has increased from $74 million in FY '19 to $171 million in FY '23 and a 5-year CAGR of 23.4%. I'll move now to Slide 13, which focuses on shareholder returns over that same period. Over the period, underlying earnings per share increased from $0.526 in FY '19 to $0.876 in FY '23 at a 5-year CAGR of 13.6% adjusting for the impact of company tax expense, which was only recognized from FY '22. Dividends per share increased from $0.18 in FY '19 to $0.46 in FY '23. The dividend payout ratio, I'll note, is currently elevated above Elders' policy of 40% to 60% of underlying NPAT, but is considered maintainable, given high cash conversion in FY '23, which is forecast to continue into FY '24. Moving to Slide 14 now, which contrasts FY '23 against prior corresponding period. As noted in recent presentations, FY '22 was characterized by historically high lifestyle prices, high real estate turnover and inflated crop protection and fertilizer prices following supply chain disruption. These market forces supported Elders' performance in FY '22. By comparison FY '23 saw steeply declining sheep and cattle prices, which reduced livestock agency commission, along with declining fertilizer and crop protection prices, which placed downward pressure on rural product margin. Consequently, there are very material differences between the operating environment across the 2 financial periods. Notwithstanding these market impacts, Elders has been able to deliver its second-highest result in the past 10 years with a number of highlights evident. Looking at the comparison, sales revenue decreased $123.9 million, down 4%. However, most of the negative impacts from decline in commodity and import prices was offset by growth in the volume of products sold. We will explore this further in the presentation. Gross margin decreased $33.7 million to $619 million, down 5% year-on-year, negatively impacted by lower sheep, cattle, glyphosate and fertilizer prices. Gross margin percent decreased 0.3% due primarily to margin pressure from declining cropping book prices, especially glyphosate and particularly in the second and third quarters. Pleasingly, the margin impact was softened by the increase in backward integration to 54% of the addressable market. Costs increased $27.6 million to $448.2 million due to acquisitions, new points of presence and support for transformational projects, including system modernization and Elders Wool. Pleasingly, costs have been held flat from the second half of FY '22 despite the inflationary backdrop. Underlying EBIT decreased to $170.8 million with a 5-year CAGR of 23.4%, exceeding Elders' target range of 5% to 10% through the agricultural cycles. Operating cash flow was positive $169.2 million with cash conversion of 163.1%, above Elders' target of greater than 90%. The average cash conversion over FY '22 and FY '23 was 110%. A full year dividend of $0.23 per share has been declared, unchanged from the FY '23 interim dividend. Over to Slide 15 now, where the impact of market volatility is evident across several products. Elders' agency business was negatively impacted by significant declines across sheep and cattle prices as producers adjusted forecasted dry, spring and summer conditions. These drivers will be further explored in subsequent slides. Falling cattle prices also negatively impacted Elders' feed and processing business, although mostly in the second and third quarters. Retail and wholesale products were impacted by declining crop protection prices in key actives, especially glyphosate, which compressed gross margin. The full impact of this market dynamic was mitigated by volume growth across several product categories and continued progress with Elders' backward integration strategy. Financial services performed well throughout the period with strong growth, particularly from Elders insurance investment. Real estate showed pleasing resilience following a very strong result in FY '22 and in the context of rising interest rates. I'll move now to Slide 16 to review key performance trends. The 4 charts on the left demonstrate the material decline in sheep and cattle prices and in the case of cattle, the absence of the volume uplift as would typically be expected. The 4 charts on the right demonstrate areas of continued growth in the business as our orders continues to diversify by both geography and products. We will further explore these areas of growth as we move through the [ pack ]. Moving on to the next slide, which takes a closer to look at sheep and cattle prices over the past decade. The charts demonstrate the statistical materiality of price movements in sheep and cattle markets in FY '23. Analysis of prices over a 10-year period indicate that volatility of this magnitude is historically unusual. And also, the current pricing remains 1 to 2 standard deviations below 10-year median prices unadjusted for inflation. This time last year, Elders' forecast was softening in livestock prices for FY '23, but not of the magnitude experienced. Turning to Slide 18, we review the market volatility over time for fertilizer and glyphosate. Market volatility had a significant impact on Rural Products gross margins. especially in the second and third quarters of FY '23. The genesis of fertilizer price volatility emanated from the Russian invasion of Ukraine, which resulted in increased natural gas prices in FY '22, which subsequently subsided in FY '23. Global prices for glyphosate and other crop protection products increased in FY '22 due to limited supply from China ahead of the Beijing Winter Olympics. Prices across several key products subsequently declined in FY '23, placing downward pressure on gross margin percent across the industry. The charts demonstrate that the scale of price volatility over FY '22 and FY '23 is historically unusual. Pleasingly, much of this impact was offset by volume sales growth as well as further progress in Elders' backward integration, demonstrating the resilience in Elders' business. Moving on to the next slide, we further explore the negative impact of sales from declining product prices and the extent of offsets from continued volume growth within the business. The charts below demonstrate that declining fertilizer and crop protection prices would have had a much more significant impact on Rural Products sales and gross margin had it not been for the continued growth in the volume of products sold. The chart at bottom left shows the volume growth added $315 million to rural product sales or 11%, but this was more than offset by the negative impacts on sales from declining crop protection prices estimated at $340 million. Moving to Slide 20 now, which displays Elders' product diversification. Overall, gross margin decreased by $33.7 million from $652.7 million in FY '22 to $619 million in FY '23. Despite the significant market volatility, many products performed strongly in FY '23. Agchem gross margin decreased $14.1 million to $158.8 million due to margin compression from key actives but increased $28.4 million on FY '21 with continued volume growth. Animal health gross margin increased $7.6 million to $47.3 million with continued growth from Elders' private label products. Other retail gross margin increased $15.3 million to $54.5 million due to continued growth in seed and general farm supplies products. Wholesale products decreased $1.4 million to $71.7 million, impacted by the flooding in Q1 and decline in glyphosate prices, but increased $10.5 million on FY '21. Real Estate Services gross margin decreased $2.1 million with broad-acre sales negatively impacted by rising interest rates and falling cattle prices, but increased by $8.8 million from FY '21. Financial Services gross margin increased by $9.3 million to $53.5 million with a strong result from Elders' insurance investment. Moving to Slide 21, which displays Elders' geographic diversification. This slide shows geographic contribution to EBIT, excluding the wholesale business as well as corporate overheads. In comparison to FY '22, wholesales were negatively impacted by the market and price volatility previously discussed, which showed great evidence of resilience. Over to Slide 22 to discuss costs, which we continue to manage closely. Costs grew $27.6 million, up 7% year-on-year to support future business growth as well as our transformational projects. In terms of key drivers, people contributed an additional $11.8 million; acquisitions, $9.6 million, motor vehicles, $4.8 million and property $3.2 million. Breaking this down, the Elders' branch network added 65 FTE, of which 29 were graduates and acquisitions added 94 FTE. Transformational projects added 25 FTE, mostly from Elders Wool Rockingham, which commenced operations in July. Costs were stable through FY '23 at similar levels to the second half of FY '22, notwithstanding the inflationary environment due to continued focus on discretionary spend, operational efficiency and supported also by reduced staff incentives. I note that Elders is targeting $10 million of cost reduction in FY '24 to mitigate the impact of inflation on the cost base. Moving to Slide 23 to discuss capital allocation. Return on capital decreased from 26.2% to 16% period-on-period, but remains above Elders' target hurdle rate of 15%. I note that 3-year average return on capital is 21.6%. Key drivers of the decline in FY '23 include product mix, most notably a lower contribution from agency services, which generates comparatively higher return on capital, elevated average working capital due to quickening supply chains in the first half of FY '23, which increased average working capital and reduced EBIT compared to the corresponding period due to market and price volatility as discussed. I'll now move to Slide 24 and cash flow, where we would see an operating cash inflow of $169.2 million. Cash conversion in FY '23 was 163% with an average over FY '22 and FY '23 of 110%. The outlook for operating cash flow and cash conversion in FY '24 is favorable with project streamlined forecast to release approximately $50 million in capital in FY '24. I note also that the physical payment of company tax for Elders Limited is not expected to recommence until 2025. I I'll now move to Slide 25, where we see balance date net debt increased by $183 million with $84.7 million of this increase coming from AASB 16, primarily due to new lease commitments for Elders Wool and a general increase in duration across the property lease portfolio. Net debt, excluding AASB 16, increased by $98.3 million, driven by 9 acquisitions as well as Elders' $38 million investment in PGG Wrightson and capital expenditure on transformational projects, notably the $25 million investment in Elders Wool. Balance date leverage, excluding AASB 16, increased from 0.7x to 1.4x, but remains 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 '24 and beyond. This concludes the financial section of the presentation. I'll now pass back to Mark, who will review the performance of our third 8-point plan, introduce our fourth 8-point plan and discuss the market outlook.

Okay. Thanks, Paul. And we'll just move to Slide 27, when we look at the first 3 8-point on plans. And I think the points have been made earlier in the presentation on the commitment of 5% to 10% growth through the cycles at 15% plus ROC for EBIT and earnings per share and the over delivery on those metrics over the first 3 8-point plans. The fourth 8-point plan, as mentioned, has a similar direction in terms of commitment to metrics through the cycle. And as mentioned earlier, is cut from the same cost in the same market and with largely the same executive management team and team across Australia delivering before the 8-point plan. So if we go to the next slide on Page 28. And the fourth -- when we look at the fourth 8-point plan, it's unchanged in terms of ambition, in terms of the compelling shareholder returns, industry-leading sustainability outcomes and most trusted agribusiness brand, unchanged in terms of the business units and also the values. What we have done for the fourth 8-point plan is to focus the 8 points into 3 key areas of run, transform and innovate and grow given we're at that stage in the development of Elders across Australia. So moving to the first component, which is our strategic priority of run. And I won't go to the details but happy to take any questions later on in terms of the deepening customer relationships, heading -- financial discipline heading and investing in our people heading. And these are the 3 core anchors of Elders over the last 10 years. As I say, I won't go into the detailed dot points, but happy to take any questions as we go through the question time. Going to the next slide in terms of transform. And this is a very strong focus area for us. And quite interestingly, the cost and capital that we've put into the transformational parts that will get returns towards the end of FY '24 and into '25, but were a cost and capital burden in FY '23 in the result. So if you look at the streamlining our supply chain, we flagged this at the half year. We now, with our acquisition strategy, have multiple points along the Rural Products supply chain from the formulation all the way through to retail and obviously, with supply procurement, wholesale, et cetera, in between. And so we thought that it was the time, particularly running parallel with the evolution of our new system, modernizing our systems, to target a streamlining of the supply chain. So we're looking over multiple years, a $10 million to $18 million EBIT benefit of $50 million to $80 million capital reduction benefit as per the original review that we did 18 months ago, and that's progressing quite well. When we look at systems modernization, and we've mentioned that we -- there are 7 waves, including the first one, which is 0, so 6 waves after that. Now we're in the second wave. We communicate and disclose to the market, the cost and capital involved in each wave as it's approved by the Board, but not ahead of time because it's -- we haven't had the business cases finalized, et cetera, et cetera, and they are not approved. But when you look at this year, this is the peak spend year in wave 2 and that's worth noting. We can go into greater detail of that with discussions later on. The benefits flow really kick off in FY '25, but a very, very important project for us with multiple benefits as we transform Elders with its multiple products and services to allow systems wise, the customer to be the center, which allows significantly greater areas to add value and to digitalize various services products and align our products and the share of wallet. The third project that's not there but we have talked about, we disclosed at the half year was Elders Wool, which is the automated wool handling facility, $25 million of CapEx, 18% return on capital by FY '25, flat in FY '24, although cost in FY '24. Our Perth facility was opened in July this year. Melbourne facility is planned to be opened in February next year and a capacity of some 380,000 barrels. So another great project for us to gain share and add further value to about clients and our shareholders. Moving to the next slide, which is the innovate and grow, and it's broken into 2 areas, one being the portfolio and the second being sustainability solutions. So we'll deal with the portfolio to start with. And I think, firstly, I'd comment that from a business development viewpoint with our bolt-on acquisitions, FY '23 has continued to be a strong 59 financial models developed, 20 nonbinding indicative offers, 11 detailed due diligence assessments, 9 acquisitions and $9.1 million annualized EBIT for the year. Adjusting for livestock price reduction, we're thinking that for FY '24, this is a $8 million to $10 million EBIT range of bolt-on acquisitions. Well, we currently have 16 in the pipeline. So very positive. And clearly, with the balance sheet to be able to continue to make these bolt-on acquisitions, where the EBIT multiple we're paying is converted into significant shareholder value against our multiples. So that's a very positive and ongoing initiative for the business. Then looking at backward integration, just broadly. So we targeted 55% of share of off-patent products to be tightened for a parent branded in FY '23. We got up to 54%, which is a great effort. And we're targeting now 60%. You may recall that we said we would go from, I think, back then, maybe 30%, we take it up to 70%, which leaves room for proprietary companies that have generic portfolios still to have bundled business with us. So that movement of 54% to 60% is in the realm of 5% to 10% EBIT for FY '24 as we go forward. Moving then to the second area of our strategic priorities, which is innovating and growing through sustainable solutions. And these are all 8-point plan key priority areas where we go from a health and safety, sustainable farming, employee attraction and retention, our management of climate change impacts and welfare focused corporate governance, community impact and investment and our waste management. So all being actively managed and expressed in detail in the sustainability report that you'll receive for this year's accounts. Moving to market outlook. And the Slide 34 has the September report. There's a December report due. And I think it's worth noting that we run on an average season [ build ] and at least that's how we run the business. And if there are clear indicators that there will be fundamental changes in prices, commodity prices, et cetera, that's factored in the way we look at the market. If you convert that the ABARES report, and I think in the update of that report, we may see some more positive commentary around the summer crop, around dryland summer crop, in particular, when the report comes out in December. But if you convert that to Page 35, which is our view on the impacts. And I think it's worth noting that it's something we -- as we say, across all the products and services, we say somewhere around 20% of the market. And so the market going up and down, particularly given the number of self-help initiatives, where we're in control, we're not relying on weather or commodity prices, but there is significant room for growth. So we're thinking across summer crop. Obviously, irrigated summer crop looked solid and there -- it looks like there with the heavy [indiscernible] through the summer cropping areas, rainfall coming through and that has come through has put some moisture in the profile, although it has been dry in some of the western areas. In terms of livestock price recovery, our thinking is that there's an 18- to 24-month recovery period in front of us. But having said that, again, when you go to the gross margin slides on Page 20 that Paul spoke to, you can see that the history of Elders being a livestock business, and particularly cattle business, is a long way from the reality where livestock now is, and particular cattle is something like 8% to 10% of our gross margin as we've developed a number of other areas with our portfolio management approach. So in terms of winter crop, we're saying average season. And we'll see what happens. There tends to be a -- Paul will talk to the weather maps as I still refuse to, but there is a theory that the El Nino impacts will dilute coming into autumn and as we run into winter crop. And as I mentioned, there is significant room to grow across many areas in the business. So with that, let's open it up for questions, and we can horn in on any of the issues that you may [ have ] interest.

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

Just 2 for me. It just sounds like from that outlook commentary, you are expecting, I guess, earnings growth in FY '24. Is that the way to sort of summarize those various comments there?

I think the way I'd put this, we're running our 5% to 10% through the cycles. And a cycle that has livestock prices going down, also has it going up. And our view is we control what we can control, we're targeting 5% to 10% through the cycles, and we actually see -- we're viewing the market in a relatively optimistic and positive way.

Okay. All right. Fair enough. And then just a second question for me. I'm just trying to understand the big difference between average working capital and the end balance date working capital. How come so much of that working capital unwind or reduction was skewed towards the end of the half? And maybe just ask it, I guess, fully directly, was any of that unwind driven by increases in receivable facilities or anything like that?

No, nothing like that, Evan. It was -- as discussed at the half, we had accelerating supply chains in the first half, which exaggerated our working capital position at the first half. Also, we had higher livestock prices. So net lifestyle working capital was elevated through the first half. All of those things, they take a while to come through. There's actually additional benefits still to come through from lower commodity and market prices in FY '24. The example I'd give there is in receivables where some of those are deferred from winter crop. So from February, March to December and January even, and it's about $125 million in deferred receivables which are at higher prices than what they would be today.

Okay. Great. So it's pretty clean working capital performance. Okay.

Your next question comes from Richard Barwick with CLSA.

Mark and Paul, first I want to clarify a couple of things in terms of some of the moving parts as we go into '24, particularly from acquisitions. So I just want to make sure I'm sort of -- if I've got everything right. So [ Charles, Stuart ], you talked about that would be $5 million in the first full year. And effectively, you've got the best part of the full year into FY '24. Eureka, you said $2 million. You would look from Emms Mooney that you talked about that being 4.3% for full year. So that's currently an incremental $2 million in FY '24. So it gets me to $9 million. And then I just wanted to double check on what you'd said, Mark, on the backward integration moving from 54% to 60%. Did you say that should equate to about an extra $5 million to $10 million of EBIT in FY '24? And are there any other moving parts that I've missed there?

Yes. No, no, you're spot on. It's roughly $5 million to $10 million. Obviously, it depends. If it's above average, it will be more the season because there will be a greater component of patent products being sold, but that's broadly our view. And on the bolt-on acquisitions, as you've rightly done very quickly, the cumulative of currently delivered bolt-on acquisitions is very close to the range. So we're obviously giving ourselves a lot of room to move there.

What do you mean very close to the range?

Well, the range I gave of $8 million to $10 million in terms of acquisitions annualized. If we did not move for the next 12 months, we're approaching the range. And clearly [indiscernible].

Got you. And is there anything else I've missed in other than obviously yet to be announced or yet to be delivered bolt-ons?

No, I don't think so. We've said the benefits of our streamlined project, the EBIT and capital benefits are over 2 years, although for that project, it's likely that they'd fall into this -- into FY '24 equally or more so than FY '25, where systems modernization the benefits largely come through -- start to flow through in '25.

Yes. Okay. All right. That's helpful. And then lastly, I just want to clarify with you. I mean you talked about currently 20% market share. But how do you reconcile that with Slide 31, where you talk about Elders 5.8% of the total farm input market or what would be roughly about 11% of the current addressable market?

Yes. So the total input market includes fuel and finance, where we're not -- where we're not players in fuel and the tiny players and finance. So that's the whole input market. And our percentage is not off that because we don't [indiscernible] in fuel and finance.

No, I know. But still, if I restate it of -- just of the [ $34 million ] we'll end up closer to 11%, not 20%.

Yes. I'd say, Richard, that there's a real disparity there. So it's a percentage that we use internally, but there is within that number, certainly higher market share for something like sheep, but a much lower market share for real estate. So it is really just a rule of thumb.

Yes, it is. Yes.

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

And yes, well done on hitting your guidance. A lot of my questions have been answered. Perhaps any commentary on how year-to-date has begun. As you mentioned earlier, livestock prices continued to fall since September, but how is the first sort of 6 or 7 weeks performing for the company?

Yes. Thanks, Phil. I'll describe it this way. I'll start with livestock. And you are correct that prices have been a little softer. Volumes were very close to budget in October. Outside of that, yes, most other business units were in line with budget. We have seen some softness in retail sales but not of any sort of magnitude. But as Mark suggested, say, a slow start to the summer crop in dry land areas. But if you do look at the BoM in terms of -- the Bureau of Meteorology, in terms of outlook for the East Coast, it is somewhat improved from what it was previously with a 3-month outlook of median rainfall. So I think that is a theme that is one to watch.

Understood. And I guess, just following on from the earlier question as we stand at the moment, you've given medium-term guidance for EBIT that you are expecting EBIT to be up somewhat in FY '24, not backwards because of potential droughts or livestock prices, et cetera, given what we know today.

Yes. So we're not [ horning in ] on '24 because we can't. So we're sticking to our 5% to 10% streaming cycles. And the -- if we look at the areas that we control ourselves like backward integration, bolt-on acquisitions, all the efficiency projects, we're very confident that we'll be delivering those as committed. In terms of growth and timing of rainfall, et cetera, I mean we can't just [ punt ] and make up a view. But through the cycles, as we see El Nino fade away and we go back to another cycle over the next 3 years, we're confident that we can deliver that 5% to 10% and above 15% return on capital.

Your next question comes from James Ferrier with Wilsons Advisory.

Can I ask a question for Paul. Firstly, in your earlier comments, you referred to a target -- a cost out target for FY '24 of $10 million to, I guess, help combat some of the inflationary pressures you're seeing. Is that a part of the systems modernization cost out benefit? Or is that just a completely separate goal that you have for the business?

No, it's a completely separate goal focused on discretionary spend or spend that we can switch off easily without disrupting the transformation that's happening in the business.

Yes. Okay. And probably related -- in a related sense, the change or any potential change in STI type payments would be excluded from that, that it's more of a structural cost out you're looking for?

Yes, absolutely.

Okay. And perhaps, Paul, while you do have the floor. So a couple of comments you made about the cash flow for FY '24. And in particular, the capital release from the systems modernization program. Is it fair to say that you would be targeting that sort of normal 90% conversion operating -- or NPAT operating cash flow and then a $50 million to $80 million release on top of that?

I think that's reasonable, James, yes, absolutely. Yes, we expect -- if I was to guess, I'd say cash convert, there's no reason why FY '24 wouldn't be similar to FY '23.

Yes. And I think, James, it's worth noting that the major internal projects, we've ensured that we're not double counting benefits. And so the streamline benefit of capital reduction, et cetera, is separated out from the system-wide benefits, even though they're running parallel.

Yes. Yes. Got it. That makes sense. And Paul, so going back to one of your earlier remarks there, you said something about not expecting cash tax as in operating cash flow, cash tax payments until FY '25, but I think I might have misheard you there.

Yes, we still have deferred tax assets. So whilst we're recognizing company expense -- company tax expense for Elders Limited is offset against the deferred tax asset. And when the timing of when we commence physically paying tax relative limit is somewhat uncertain that there won't be material payments in FY '24.

Okay. Yes. That's helpful. And then last question for me. Slide 22, you're talking about cost drivers there. Property and lease costs increased by -- just over $3 million in the year. That includes the right-of-use assets and -- or the right-of-use depreciation. But the right-of-use depreciation year-on-year increased $10 million. So ex that other property and lease costs went backwards $7 million. Can you shed some light on why that would be the case?

Yes, I'll take that one offline. Yes, I need to go underneath that and look further into that, James.

Your next question comes from [ Dan Wade ] with Macquarie.

Just on the first question around CapEx. You've said the systems modernization will be sort of in the range of $26 million for FY '24. So should we still think about CapEx is going up at a total level by $18 million or so, given the systems modernization scheme in '23?

So can you just repeat the number there? Was that $80 million?

$18 million.

Yes. So we expect the -- so the full CapEx for Wave 2 is estimated at $40 million to $45 million. Yes. So I'm not sure where the $80 million comes from there.

$18 million, sorry.

Now this is the big wave.

Yes. I'd add as well that this is the most significant wave in this project. So certainly, waves 3 and 4 will not be of any sort of magnitude similar to wave 2.

Yes. Got it. And then just on the Charles Stewart acquisition, which you sort of previously disclosed, $5 million of earnings in the first 12 months. Is that sort of assuming current levels of livestock prices or -- and billings or are you assuming some recovery there?

No. So that range that I gave was adjusted for livestock prices for FY '24.

Got it. And then just on the Killara Feedlot as well, if I can squeeze another one in there. You've refenced higher grain costs and higher feed costs there as well as [indiscernible] What do you sort of see the grain and feed costs doing in '24 or we cannot really forecast that?

Yes. So Killara produces a lot of its own fees. So it has some insulation to whatever the grain costs might be. They have blended rations. I think in terms of FY '23, the major impact on that business was around declining live stock prices, which impacted the ultimate margin achieved on backgrounding cattle. But I think the outlook for Killara is pretty sizable.

Yes, it is. It is. And there's been -- in terms of producing our own forage in particular, we've invested in pivot irrigation systems that has made that more efficient as well. And as Paul says, with the reduction in cattle prices, the COGS and the margin has extended. And as -- and we've also expanded our grass feed program with Coles Woolworths.

[Operator Instructions] Your next question comes from Jonathan Snape with Bell Potter.

Can I just ask a couple of questions on these modernization charges. And I'm looking at your slide there, I think it was, what, 20, whatever. So the component that's going to be capitalized and components that's going to be expensed by the looks. But am I reading that right that there's an aspect that's going to come through your P&L next year in your -- I'm assuming in your network charges that $16 million to $18 million type number?

Yes. So in terms of capitalized costs, Jon, so you can work on sort of 60% capitalized, 40% noncapitalized over the losses of the project. Then within that, in terms of the OpEx, there would be a portion that will be underlying so -- where it's recurring type expenditure and a portion that's non-underlying. So we've put the $16 million to $18 there in non-underlying. The reality will be that some of those costs will fall that way. But the capitalized costs are typically costs associated with the system integrator and Elders' employees that are full time on the project.

Okay. But what I'm trying to understand is the $16 million to $18 million that's going to flow through the P&L, I am assuming most of it next year as non-underlying charges. Is there an aspect of OpEx in underlying that's going to be there in like '25 and '26 that I have to kind of be on top of? And then you're going to start depreciating all that CapEx I assume over a 5 or 6-year period.

Yes. The depreciation will be more like 10 years on that CapEx. Yes, there'll be a portion of underlying costs, so things like license fees, but ultimately, there'll be a runoff of the previous systems license fees as well. So it's -- there's a tail of runoffs and new costs coming on board.

Okay. So if I went back and did that waterfall, I think a few people have been trying to do, I mean, obviously, you said your acquisitions 8% to 10% as you cost out that you talked of 10 backward integration of 5% to 10%. There's a few other things in there I think that added up to [indiscernible], then there's going to be some additional costs in systems modernization that looking at it year-on-year, it looks like it's anywhere from $13 million to $15 million. Is it maybe a one-off next year and then drops away in '25. And then there's the inflationary cost pressures. So I think you're calling out probably going to be about [ $10 million ] as well as in the controllables that you guys have. Is that an accurate description of that aspect of it if you're trying to do a waterfall?

Yes, I think close enough, yes.

Yes. And then after that all I have got is livestock is a headwind, summer crops is headwind. Pricing in agchem looks like it's probably turned from the worst and starting to go maybe the right way and then the rain gods in March.

Yes.

We've got a hard close at 10:30 Adelaide. So maybe one more question.

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

Okay. Well, thank you very much. Thank you all for coming into the call and look forward to speaking with you in the one-to-one discussions. But the summary being really tough market conditions on multiple fronts and a result which is the second highest for Elders over the last 10 years at a 16% EBIT and a very strong cash conversion. So we'll look forward to speaking with you all shortly. Thank you.

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