Elders Limited (ELD) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Elders Limited HY '24 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 to the Elders half year results presentation for financial year '24. Thank you for joining Paul and myself for the session today. From an Elders' viewpoint, this is the first half of our Fourth Eight Point Plan, first year of our Fourth Eight Point Plan. The Elders philosophy, since the First Eight Point Plan in 2014, has been to control what we can control and not to dwell on what we can't control; to have a cost and capital structure to allow us to make good returns in bad years and make great returns in good years. The FY '24 full year guidance is an example of acceptable returns in the difficult market and cost conditions and particularly in quarter 1, and we will go to the detail of that through the presentation. We use our multiple diversifications by product, service, geography, crop segment, commercial model and channel to market and our financial discipline to deliver consistent and high returns for our stakeholders. In summary, we aim to control what we can control. Over the first 6 months of the Fourth Eight Point Plan, we experienced an exceptionally difficult first quarter with improving market conditions across Eastern Australia from the start of this calendar year or our second quarter. Our view in November last year was that the average conditions in FY '23 were declining in the first quarter of FY '24 across Rural Products and Agency Services, and are now returning to an average outlook for the remainder of FY '24. In this context, the performance of Elders is a clear and consistent strategy, multiple diversifications, high financial discipline, committed team, enduring customer anchor as the most trusted brand in Australian ag culture is very solid. The result is strong in safety, sustainability and cash flow, and we reaffirm our full year underlying EBIT guidance of between $120 million to $140 million for FY '24. Our commitment is to provide 5% to 10% growth in EBIT and earnings per share and a minimum of 15% return on capital in a sustainable manner through a safe and inclusive workplace. The outlook remains consistent with our 5% to 10% growth through the cycles and commitment -- with this commitment with our annual growth for the last 5 years, approaching 20% on these metrics. Our approach today is that I'll provide an overview of the results, Paul will go to the detail of our financial performance, and I'll then provide an update of our outlook and growth and the transformation initiatives as we deliver our Fourth Eight Point Plan over the next 2.5 years. So moving firstly to the Slide 5. We have a look at the resilience of the business through seasonal volatility. And you can see from First Eight Point Plan all the way through to our current Eight Point Plan, the multiple environmental factors just reaffirming our belief -- our focus on return through the cycles. In the strategy session of the presentation, I'll also talk to our view on being able to achieve these targets by the end of the Fourth Eight Point Plan in FY '26. But you can see growth in the first 3 Eight Point Plans above the EPS, EBIT and ROC targets. And also, the Fourth Eight Point Plan, as we mentioned at the end of last year, are cut from the same cloth as the previous Eight Point Plans with the portfolio approach ROC-focused, multiple diversifications and operating in the same market with largely the same executive team. Going through to the next slide on the people and customer highlights. From a safety viewpoint, 1 lost time injury versus 3 at the same time last year, a reduction in our total reportable injury frequency rate. So continuing improvement on the safety front. The Net Promoter Score at -- maintaining a very high level at 47. Women in the workforce of 37%, 21% women in senior positions, and this is from 4% at the beginning of the Eight Point Plan process. And also taking into account that largely with our bolt-on acquisitions, we diluted our women in management position because there tends to be a disproportionate percentage of men in those senior positions with our bolt-on acquisitions. And then employee engagement, still of the high-performing level and additional sites that have come on board in the last 6 months. Going to the next slide, safety and well-being. And from a lost time injury viewpoint, as I mentioned, down to 1 for the first half, and that's against the annual number of 34 at this time of the Eight Point Plan process and are continuing good trend on the total recordable injury frequency. I think I highlighted last half the -- with a strong improvement through the wholesale business. So moving to the next slide on sustainability performance. And we talked previously about the targets we had set a couple of years ago. We've made great progress around our waste management, ethical sourcing platform, the Big Bag Recovery program that we're partnering in and also the target of solar and LED transition. So we're comfortable that we're moving along nicely on the sustainability front. Moving to the next slide. And the next slide, many of these measures, we foreshadowed with our trading update a few weeks ago with a decline in EBIT for the first -- for the first half against last year. And we also had a bit of feedback around understanding the difference in impacts of Q1 and Q2. And when Paul comes to that slide, we've broken it out in a way that allows you to see the significant downside of Q1. Return on capital down. And it's the first time in 10 years, actually, that we've dropped below our target, the 15% target. And our belief is that when we normalize Q1 and with the initiatives in place that we'll be approaching, we'll be at or above the 15% target as we run out to the end of this calendar year and for the first half of FY '25. Looking at cash conversion, very strong. And again, Paul can talk to that. And our leverage comment that we did make in the trading update, our target is between 1.5x and 2x, sitting at 2.6x at this point. But with a belief that for Q1 FY '25, this will come back into line, if not before. So with that, I'll hand to Paul, and he'll run through the details on the financial metrics.

Thanks, Mark, and welcome, everybody. I'll commence on Slide 11 of the pack, which summarizes Elders first half achievements, notwithstanding challenging seasonal conditions, especially in the first quarter, as Mark alluded to. Elders gave a trading update on April 8, noting a forecast underlying EBIT range for FY '24 of between $120 million and $140 million, supported by a return to average seasonal conditions in the second half. I note that the second half EBIT assumption is within the range established over the past 3 financial years. Elders has made good progress in executing its Fourth Eight Point Plan and completing 10 acquisitions in the first half and the acquisition of Knight Frank Tasmania, post balance date. The first half results showed resilience, notwithstanding difficult trading conditions, especially in the first quarter, which was characterized by deteriorating client sentiment, following a material decline in livestock prices and forecast hot and dry conditions associated with the El Niño climate driver. Trading conditions and client sentiment improved after the first quarter with January, February and April, all exceeding prior year comparison. Leverage and return on capital have been negatively impacted by the EBIT underperformance in the first half, but a forecast to improve in the second half and return to target by half year FY '25. I'll move now to Slide 12, which displays Elders' 5-year financial performance from FY '20. Over this period, sales have increased from $900 million in FY '20 to $1.342 billion in FY '24, a 5-year compound annual growth rate or CAGR of 10.5%. Gross margin has increased from $204 million in FY '20 to $285 million in FY '24, a 5-year CAGR of 8.8%. Comparatively, costs have increased at a 5-year CAGR of 13% and remain a focus for the second half. Underlying EBIT has decreased from $53 million in FY '20 to $38 million in FY '24, a 5-year CAGR of negative 7.7%, materially impacted by the low average trading conditions in the first half of FY '24. Moving now to Slide 13, which focuses on shareholder returns over the past 5 years. Over the period, underlying earnings per share decreased from $0.312 in FY '20 to $0.119 in FY '24, materially impacted by market conditions in the first half. Dividends per share increased from $0.09 in FY '20 to $0.18 in FY '24, a 5-year CAGR of 18.9%. The dividend payout ratio is currently elevated above Elders policy of 40% to 60% of underlying NPAT, but is considered maintainable, given the high cash conversion forecast in FY '24 and the improved trading outlook. Moving to Slide 14, which contrasts FY '24 against the prior corresponding period. Notwithstanding the challenging trading conditions, Elders has been able to deliver a resilient result for the first half. Looking at the comparison, sales revenue decreased $315.5 million, down 19%. However, most of the negative impacts resulted from lower crop protection and input prices compared to prior period. Pleasingly, the volume of products sold increased compared to prior period, indicative of positive organic growth in the business. We will explore this further in the presentation. Gross margin decreased $20.4 million to $285.4 million, down 7% year-on-year, negatively impacted by the below average trading conditions, but mitigated by recent acquisitions and new business. Gross margin percent increased 2.8% with good progress towards our FY '24 backward integration target of 60% of the addressable market for off-patent chemicals. Gradual improvement in gross margin percent is encouraging, given the negative impact experienced through FY '23. Costs increased $24 million to $247 million, mostly due to acquisitions and new business such as Elders Wool. When adjusted for acquisitions and new business, costs have risen only 1.8%, well below inflation. Underlying EBIT decreased to $38.4 million, materially impacted by the trading conditions as discussed. Operating cash flow was positive $48.7 million with cash conversion supported by improved working capital efficiency from management initiatives and also lower crop protection prices, compared to prior period. An interim dividend of $0.18 per share has been declared, reduced from $0.23. Financial ratios are expected to revert to target by the first half of FY '25 assuming average trading conditions. Moving to Slide 15 now, which displays Elders product diversification. Overall, gross margin decreased by $20.4 million to $285.4 million. Lower ag chem and fertilizer prices compared to prior period had a material impact on retail products gross margin. Lower livestock prices compared to prior period, reduced Agency Services gross margin and had flow-on effects to retail products due to reduced client sentiment, which negatively impacted Animal Health and other retail, especially in the first quarter. Pleasingly, outside of these impacts, several product categories demonstrated growth in the first half. Wholesale products increased $2.6 million to $35.3 million, plus 8% with a very strong second quarter results. Real Estate Services gross margin increased $6.5 million or 22.5% with property management and residential and broadacre sales, all showing significant growth, supported by recent acquisitions. Financial Services gross margin increased by $0.6 million to $27.1 million with continued growth from Elders Insurance. Over now to Slide 16, where we further explore the impact of price volatility on the first half and how conditions changed materially from the first quarter to the second. The chart below left indicates that the drivers of underperformance in the first half were Rural Products, Agency Services and costs. Each of these will be further analyzed in subsequent slides. The chart to the right provides an indicator to the scale of NPAT on the first quarter from the conditions that prevailed at that time and subsequently the significance of the turnaround in the second quarter, following the cessation of El Niño and material increase in livestock prices. Turning to Slide 17 now. We review recent price volatility for urea and glyphosates as proxies for Crop Protection and Fertilizer. The charts below demonstrate the significant price volatility that has been experienced across Crop Protection and Fertilizer over the past 18 months, following a material increase in prices from geopolitical events in FY '22. Whilst prices were comparatively stable through the first half of FY '24, they remain significantly lower than the prior corresponding period. This delta had a material impact on retail product sales and gross margin in FY '24 compared to prior period. Pleasingly, some of this impact was offset by volume sales growth as well as further progress in Elders backward integration strategy, demonstrating resilience from Elders diversified business model. The following slide explores volume growth within the business. The chart top left demonstrates that the volume of products sold continued to grow in FY '24, notwithstanding challenging market conditions. The chart bottom left shows that this volume growth added approximately $100 million in sales, partially offsetting the impact of lower crop protection and fertilizer prices on the retail business. I'll now move to Slide 19 to take a closer look at shipping cattle prices in recent times. Charts demonstrate the statistical materiality of price movements in sheep and cattle markets over the past 18 months. Analysis of prices over a 10-year period indicate the volatility of this magnitude is historically unusual. The sudden reduction in livestock prices to levels well below the 10-year median had a material impact on Elders first half results through reduced Agency Services revenue but also reduced Rural Products sales in last up-related categories such as animal health and other categories of a discretionary nature. Pleasingly, livestock prices firmed in the second quarter and are now trading close to 10-year median prices across most livestock markets. This is improved sentiment across the industry. Slide 20. I'll now move to Slide 20 to take a closer look at our real estate business which has been a focus of business development in recent times. On May 1, Elders announced the acquisition of Knight Frank Tasmania, a welcomed addition to the real estate team within Elders. Elders Real Estate business has grown at a CAGR of 21.3% with the earnings contribution diversified across property management, residential and broadacre sales. Whilst Elders has grown significantly to become the fourth largest real estate company in this addressable market, it represents only 3.3% of transactions settled in that market. The chart below shows the regional locations of recent acquisitions, which are spread across the country, consistent with Elders strategy of geographic diversification. Moving now to Slide 21 to further comment on geographic diversification. This slide shows geographic contribution to EBIT, excluding the wholesale business as well as corporate overheads. In comparison to FY '23, all states were negatively impacted by the tough first half trading conditions. Now turning to Slide 22 to discuss costs, which have increased, but mostly due to growth-related initiatives, including acquisitions and new business. Overall, costs grew $24 million, up 11% year-on-year to support future growth as well as our transformational projects. In terms of key drivers, people contributed an additional $12.8 million; acquisitions $7.3 million; transformational projects, $6 million; and property, $4.4 million. These cost increases were partially offset by a reduction of $8.6 million from operating and other expenses. Regarding people, Elders added 183 FTE, of which 155 joined Elders through acquisition and an additional 42 from the commencement of Elders Wool in Ravenhall, Victoria. There was a net reduction of 14 FTE outside of these growth initiatives. Next slide separates costs relating to business growth, such as acquisitions and new business. Chart below shows that excluding growth-related uplift, costs have grown $3.9 million or 1.8%, well below the rate of inflation. Consequently, 84% of the cost growth in the half resulted from initiatives to drive future EBIT growth, consistent with Elders' Fourth Eight Point Plan. Elders continues to target a $10 million cost reduction in FY '24, excluding costs from growth initiatives to mitigate the impact of inflation on the business. I'll move now to Slide 24 to discuss capital allocation. Return on capital decreased from 16.9% to 11.4% compared to prior corresponding period and is below Elders target rate of 15%. Return on capital is forecast to improve in the second half and return to above target by half year FY '25, assuming a return to average seasonal conditions. Key drivers of the decline in FY '24 includes lower livestock prices, which are a key driver of return on capital in Elders and also the impact from lower EBIT, resulting from below average trading conditions, especially in the first quarter. Pleasingly, working capital reduced by $180 million compared to prior period, benefiting from lower input prices and management initiatives. Over now to Slide 25 in cash flow where we see an operating cash inflow of $48.7 million for the first half. The outlook for operating cash flow and cash conversion in FY '24 remains favorable with full year cash conversion expected to exceed Elders target of greater than 90% of underlying NPAT. And those also that the physical payment of company tax for Elders Limited is not expected to recommence until 2026, following the submission of the FY '25 tax return. And just noting this is a year later than previously forecast. I'll now move to Slide 26, where we see balance state net debt, excluding AASB 16, decreased by $68.4 million from $424.7 million to $356.3 million. Net debt benefited from a reduction in working capital in the first half, partially offset by investment in future growth, including acquisitions, new business and transformation CapEx. Balance debt leverage, excluding AASB 16, increased from 2.2x to 2.6x and is above Elders target range of 1.5x to 2x. Leverage is forecast to return to within target by half year FY '25, assuming a return to average seasonal conditions. Importantly, Elders debt covenants maintain significant headroom. This concludes the financial section of the presentation. I'll now pass back to Mark to provide an update on our Fourth Eight Point Plan and discuss the market outlook.

Okay. Thanks, Paul. So we'll move to Slide 28. And with the discussion on the Eight Point Plan, we're going to focus specifically on the transform component of it. But firstly, just to give an update on the Innovate & Grow before we move to those slides. From a business development viewpoint, for the half, we had 21 financial models. So we still got quite a strong pipeline of bolt-on acquisitions, 21 financial models, nonbinding indicative offers, 11 due diligence and 10 acquisitions, and then the Knight Frank after the close of the half, with an annualized EBIT of 9.7% for the year. So our sense, in terms of the Innovate & Grow, the bolt-on acquisition component, which is a critical component is intact. From a backward integration viewpoint, which is another part of the Grow, we said we've moved from 54% of the addressable market, the off-patent products that we'd back, would integrate to 60%. We fell behind that number in the first half due to the Q1 and the outlook forecast, which had us buying third-party products rather than our own branded product. Our assessment is, by the end of this year -- by the end of the full year, we'll be back at that 60% target for backward integration. And I think the final point I'd go to, before we move to the detailed transform slides, is around our ambition of 5% to 10% growth through the cycles at a minimum of 15% return on capital. So the question for us is, in the last 3 Eight Point Plans, we've exceeded all of the metrics of that through-the-cycle target. And as we stand now, after 6 months of the Fourth Eight Point Plan, what is our sense? Do we feel that we're going to be able to deliver the price? But when we analyze that through to the rest of this Eight Point Plan, which takes us through to FY '26, our sense is that we will be able to fit in that range of 5% to 10% growth through the cycles, as we've targeted. And looking at how we do that, it's quite interesting because the retail and backward integration of payment takes or delivers some 37% of that in our view. Systems modernization of the streamlined project, another 25% of that gap to hit the bottom end of the range. The bolt-on acquisitions, 17%; [indiscernible] livestock reset, 11% and then the Wool and Formulation projects, 10%. So from standing back on the commitment that we make to get 5% to 10% growth through the cycles, we see some 89% of the uplift required by the end of the Eight Point Plan is actually in our control. So these are projects that we're running that are internally driven, and 11% is based on cycles, market conditions and [indiscernible], livestock prices, et cetera. So I think when we look at where we would fit in that range, our sense is, given the normalization of Q1 from this year, with a normalization of Q1, we'll be to the top end of that range. And without the normalization of Q1, we'd be at the bottom end of the range. So I think from a confidence in delivering our commitment, we're still on track. And we, as Paul pointed out, with the Q1, Q2 NPAT, our sense is that we methodically delivered the strategy as per the Fourth Eight Point Plan, and we're able to deliver the shareholder commitments we've made. So moving to the next slide on Slide 29, just focusing on Elders Wool. And I think we talked about this at the full year results. So this project is, again, on track. We now have the 2 sites up. And we look forward to inviting everyone to an Investor Day at the Melbourne site on November 24, this year because it's quite impressive to see the automated vehicles working and how the whole system works through that supply chain. But lastly, we're on track. There's $25 million CapEx we talked about at the end of last year, and with an 18% return on capital by FY '25 that we talked about with capacity of 380,000 barrels. So I think from our viewpoint, what we have had and Paul highlighted in the cost and capital discussion, we've had a bunch of our internal projects come together from an operating cost and CapEx viewpoint with system on streamline and the all project at the same time, and that's reflected in the cost with the benefits coming towards the middle and end of the Eight Point Plan. Looking at Slide 30. Then when we look at systems modernization, we've talked about how we've broken it up into waves, how is each business case or each way is approved by the Board. We will disclose the numbers. So that's -- wave 2, is, again, on track with July state testing in South Australia. Wave 3 signed off, as indicated on this slide, and also with our assessment of the benefits that we've talked about are also on track. We don't talk about streamline, the rural product supply chain project here. But again, our sense is that's on track to the commitments that we made last November. Moving to outlook. Just a quick flick at Page 31. The June EBIT [indiscernible] estimates will come out shortly, I guess. But from our viewpoint, if we move to the next slide, our sense is that what we're seeing in the market is that from an East Coast viewpoint largely, although the response in South Australia and Victoria, where it's -- where they're still waiting for acceptable winter crop rain, but for the rest of the [ Eastern ], largely, we've predicted average, but in some areas, it will be above average. So the outlook through the cropping areas remains positive. It's also reflected in some of the comments Paul made earlier on livestock pricing and volumes. Across many of the inputs, we've noted, although price and values down, volumes up with inferred market share gains, which fits with what we believe, is happening as well. For Western Australia, later season is still driving a number of areas, although over 50% of the crop has been dry seeded as we understand. And this -- what this means is that there's low inputs pre -- there might be some pre-emergent products and some fertilizer applied. But it does mean that when the rainfall event occurs, and it will occur, that we'd expect significant in-crop weed activity through the season, which are higher-margin products than the pre-emergent and fellow products. So from our viewpoint, things look average, slightly above average as we look at the East, and we maintain our belief that we'll hit in the range $120 million to $140 million range. So with that, I will open up to questions. And please feel free to kick off.

[Operator Instructions] Your first question comes from William Park with Citi.

Just first question is around what you're seeing over the last 1.5 months across your business units. I mean in the slides, you've talked about how the trading conditions are elevated in comparison to prior corresponding period. And just curious to understand whether if that momentum has carried through in May. And also just in -- prior to, I guess, you guys going into blackout, I understand there was a bit of a shortfall in your inventory levels to service, [indiscernible] demand emerging out of Christmas. And just wondering how you're thinking about inventory levels heading into second half as the demand levels progressively step up?

Yes. I think on your first question, and Paul might want to provide greater detail. We've been able to keep the momentum going, which is great. And obviously, we've got multiple products and services. So it may be higher in one area than the other. But certainly, I think April has shown the continued momentum. The -- and it's as expected as we come into a big winter crop. The winter crop across Australia, regardless of drought, flood or whatever, only varies by kind of plus or minus 10% in any particular area. So our sense is that the assumption of average, and we continue to -- continuing building of momentum makes a lot of sense. I think we're -- as I mentioned with West Australia, we have pre-emergent product, herbicide or fertilizer is not applied because of market conditions. It comes out because you need the [indiscernible] NPK to grow the grain. It means that there will be applications later on. So I think we've got that. That's a bit of a safety net as well. In terms of the inventory, I think you're referring to well, it was largely coming in the second quarter where we had ordered to an El Niño forecast, and we needed to source products from third parties, et cetera. But that's largely been -- with our demand planning, that's largely been offset. So Paul, you may able to add some.

Yes. That's right, Mark. The inventory shortage occurred early January, in response to rainfall in December. And also, you might recall the DP World issues on the [indiscernible] played a factor there. But we're very comfortable with our inventory position as it stands today.

And just a second one is around backward integration. You said you went backward in first half of '24. Are you suggesting you went back from 54%? Or are you saying it sort of landed between 54% to 60%, but at sort of closer to 54% than it is to 60%?

Yes. No, no, I didn't say we got -- we went backward. I said we didn't hit the target. So our plans for the year, last year, it was 54% of addressable market, and some key products have come off patent this year. So the addressable market has also changed, and the mix of products have changed with the dry commissions, et cetera. So -- but what I said was at the end of the first half, and I'll talk a number, but it will give you a sense, rather than running at 60% at that track rate, we're running at just below 30%. And that's fine because the largest part of the market is the second half. So our assessment is that we will still hit our 60%. So we'll make up for lost ground in the first half, during the second half. So we'll be on track.

And just one last one for me. Could you just give us a sense as to how you're thinking about your 12% stake in PGG rights then, given the issues there are pretty widely flagged?

Yes. So it's unchanged really. So we bought that stake, a couple of years ago, when the opportunity arose and the opportunity was that [indiscernible] Food & Agri, you had central government direction to divest. And so our sense was that although we had no short-term ambitions to move on PGW, we thought that it was prudent to take up the 12% and to sit on it until the time is right. With the dropping of our share price or the pressure on the share price last year, one of the critical metrics that we have for our corporate activity is that it's pre-synergy EPS accretive. And we couldn't hit that target. So our sense is that we'll continue to be patient and to set. The -- in the meantime, the PGW has had significant Board issues. I think they've sorted that out now with a major shareholder. But I think there's a bit of a shaking of confidence in the market for PGW. And it's also been difficult market conditions and livestock conditions in New Zealand, seeing that pressure on their -- they've done trading updates and downgrades and pressure on the share price. But from our viewpoint, we've got -- what we need to do and our focus, and I think everyone on the call knows that we're quite methodical in the way we attack these issues and financially driven. We need to deliver, hopefully, at the top of the guidance range of EBIT that we've provided, and we also need to deliver the Wave 2 of our systems modernization project, settle down Elders Wool, now that we have that in place, and also deliver the outcomes from our streamline or the Rural Products project. So from our viewpoint, we've got -- we don't need other distractions. And as we've said all along, we have no fast time line on PGW.

Your next question comes from Evan Karatzas with UBS.

Just going through the Third Eight Point Plan. So I just want to get all the numbers -- correctly -- you talked about in terms of hitting that CAGR. So your 5% to 10% of the $171 million base last year. So it's, call it, $200 million to $230 million by FY '26. Can you just remind me of the buckets that you talked about? They're all the different percentages? Or is it a bit fast, I didn't catch those clearly?

Yes. So Evan, I'll do it very, very broadly, which is the way I articulated before. So from retail and backward integration, so retail growth backward integration, which is largely in our control, it's roughly around 37% of that gap. The -- when we look at the benefits from sys mod and streamline, those are the 2 of our supplies chain project and sys modernization project, that's -- the benefits come through, as you know, FY '25, FY '26, and that's around 25% of it. From bolt-on acquisitions, just with our new normal cycle, it's about 17%. For the Wool and Formulation projects, are around 10% as we grow into those with our greenfield in Western Australia on formulation, wool projects we've talked about, and also the -- also Eureka, the formulation acquisition in Victoria. And then the final 11% is around agency via livestock reset, which, as I say, it's not in our control, but we think is -- we think it will continue in line with market assessment. Now when we say 5% to 10%, and again, this is very broad, just to give everyone a feel. We're thinking if Q1 normalizes, as we believe it will, and I think Paul pointed, that was around $37 million as an average in that 5 years -- over 5 years, yes. So if that normalizes and then we'll be at the top end of the 10% or above it, and if we're completely wrong and it doesn't normalize, we'll be at the bottom towards the 5%. So I think the bio probability, we believe, it will normalize. So Paul, if you want to add anything to that?

Yes. I think the Q1 normalization, I'll make a couple of comments there. And just firstly note, these are management account numbers. Obviously, we don't audit Q1 versus Q2. But if you take that as an indicator, the 5-year average in Q1 contributed $37 million of EBIT. And whilst we haven't given specific numbers for Q1 FY '24, was significantly below that. So a normalization of Q1 will certainly go some way to bridging the gap.

Okay. So I mean, the range is sort of $30 million. So I assume it's somewhere around that number, taking from the low end to the top end. Okay. Just a follow-up on that. With the backwards integration, that's 37%. I mean it's a big chunk of it. I take your comments are sort of towards the end of the [indiscernible] backward integrated. Is there any other projects or I mean big chunk just maybe break that up a little bit more, that initial 37%?

Yes. So let's recap -- backward integration. So yes, I think the size of the pie is also changing because more bigger -- there are bigger products coming off patent as well. So there's that dynamic happening as well. That's in Crop Protection. In Animal Health, we're at a very low level of backward integration, as you're aware, and with our specialty fertilizers, so not the high analysis commodity stuff, especially fertilized, we're also at a relatively low level. So there are other buckets in those two.

Okay. I said some of the other products. Okay. Great. I'll pass it on.

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

Thanks for taking the questions. Most of might have been answered. I'll just throw one in on purchase and acquisitions, I suppose. What's -- you've touched on a few though, what's the current conditions done to the amount of businesses that have been put up for sale, of farmers battling putting more for sale -- or sorry, competitors battling putting more for sale? Are they holding off for better times?

Yes, that's a good question, Phil. The -- so our pipeline is quite dynamic, as I think everyone is aware. There are 15 targets in the pipeline now. As Paul mentioned, with the focus on real estate, we have [indiscernible] our focus to non-rural products businesses just to keep our portfolio balance that we have like a blend of different exposures, that's pretty similar to the investment portfolio. We've -- I think, particularly in real estate, we've gained significant momentum where people -- if you think of the major players like Knight Frank, we talked about in some of the [indiscernible] players and others, where they -- where they have a good experience or a great experience in terms of the acquisition approach, and I think everyone's aware that like 90% plus of our vendors stay with us after earn-out. So we do have a great experience. We get a lot of referrals from acquired businesses. And so we've seen that in Mainland Australia. And even from the Knight Frank acquisition now, we've had -- maybe there's 3 or 4 come to us, with their thoughts on what we can do next. So in those areas, we haven't seen a major change in flow in the Crop Protection or the Rural Products areas. I think some businesses, they're selling stress around capital. And so we're seeing a few [indiscernible]. But in the livestock agency ones, where I think the focus of your question was, it doesn't -- it hasn't really changed. During the good times, we had a lot of slow acquisitions in livestock because they were making so much money. So they slowed when the prices were high rather than become faster. And now we've got a lot. So we tend not to -- it doesn't tend to influence. And the earnout -- from our position, the earnout philosophy of the 3x to 5x with 50% completion -- 25-year -- '25 year too, means they've got 3 years basically to get the -- to continue to drive the growth of the business for the final earnout payment because it's the last payments, they multiplied by the earnings minus the first few payments. So we haven't really seen it. I -- and I think our focus on real estate is probably -- and other agencies has been helpful.

Your next question comes from James Ferrier with Wilsons Advisory.

Can I ask you, first of all, about the illustration on Slide 16 on the right-hand side there, where you're sort of showing that quarterly performance breakdown. Given how strong the recovery was in demand and how stronger trading conditions were through Jan, Feb, et cetera, why is the retail line still red in the second quarter?

That's a good observation, James. I'd say, in terms of retail, there's a couple of elements at play here. Firstly, summer crop was delayed from first quarter to second quarter. So that's part of the improvement that in terms of the headwinds for retail versus prior corresponding period, they were still in play, most notably the lower input prices period-on-period. And so they didn't mitigate, whilst client sentiment improved and activity improved, that was still -- there was still that base effect from the lower prices.

Okay. Yes. So volume is good, sort of seasonal condition is good, trading conditions, everything good, except that dynamic around lower input prices and the consequence of the margins relative to pcp. So as we move through the second half of FY '24, when does that particular issue become a nonissue, if that makes sense?

Yes, certainly, by Q4, I think it's already a nonissue because we can see in the presentation that gross margin percent is actually higher year-on-year. And so if you look at the declining price plan in FY '23, I was certainly biased to first half over second, but also there was margin pressure with that declining plan in FY '23 that's not evident today. So I think on balance, we've seen that the headwinds that's been with the retail business, that's declined.

Okay. Understood. Secondly, I wanted to ask you about working capital. So a really impressive position there at [indiscernible], really good cash conversion. Why was there such an increase in the trade and other payables against a decline in inventory? Often you see those 2 move in the same direction?

Yes, another excellent observation. I think it's more to do with prior corresponding period, James. So you'll recall in FY '23, we had elevated inventory ahead of the winter crop from primarily quickening the supply chains. So we just saw a product arrive 2 to 3 weeks earlier, but it was at the most volume this time of the year. So that obviously isn't a factor anymore. And so I think that describes a big chunk of that delta between inventory and debtors.

Okay. And last one I wanted to ask about was on the operating costs, and I appreciate your disclosures there. It's a very helpful, Slide 22, 23. What struck us, is the business did an exceptional job through sort of second half '22 -- first half '23, second half '23, keeping that operating cost base around sort of the mid $220 million level, all the while continuing to make acquisitions and invest in the business. And despite all that incremental activity, the cost base stayed reasonably flat. And as we move into this first half '24 result, again, there's still more growth activity taking place -- acquisitions, transformation, et cetera. But the cost base has stepped up meaningfully to $247 million. I'm just trying to work out what's different in this half versus the preceding 3 halves that might explain such a divergence on the cost base?

Yes. One factor, James, is staff incentives coming from FY '22 to FY '23. Given the drop down in EBIT, they will materially lower. So that's certainly a factor. And I think outside of that, it's just the volume of growth activity in FY '24 versus the previous years. We have made some medium-sized acquisitions in FY '24 and then obviously 11 acquisitions year-to-date, but also with Elders Wool, which is not insignificant in terms of the cost to the business. The other observation I've made is around the transformational projects piece. The majority of that is depreciation. And then that's obviously flowing from the CapEx in system change, primarily, starting to flow through the P&L.

Your next question comes from Ben Wade with Macquarie.

Just a couple of quick ones from me. Just on -- just looking at the cost slide, you see the increase in property and lease costs of $4.5 million or so. Do you mind just unpacking that a little more as well. What the drivers are there?

Absolutely, Ben. The material element to that is Elders Wool. So we've got 2 leases there, one that's new to the business in FY '24, which is the most significant one out in Ravenhall in Victoria. And you'll get a sense for why that is on the Investor Day in November. It's a substantial facility. Outside of that, it's typically a CPI, flowing through those lease agreements. So they all have that CPI uplift in it. I think as a corporate, we're fairly well placed in that regard, having regional, or by and large, regionally located leases, but it's still a significant growth factor.

Got it. And then maybe just building on James' question there around sort of working capital and cash flow. I think you sort of go back to 2018 to see a sort of a working capital release in the first half. So if you could just sort of talk us through what your expectations are for second half working capital and how that sort of ties into your $50 million working capital release for the full year as well with project streamline?