Elders Limited (ELD) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Elders Limited HY '24 Results Retail Investor Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Mark Allison, Managing Director and CEO.

Thank you very much, and welcome, everyone, to the Retail Briefing. So following feedback last year with our retail briefing, we've taken a few points on board. And we've decided to do this year as a fireside chat with Sarah asking questions of Paul and myself to begin with, and then we'll open up the session for questions from the audience. So thank you once again for coming along and look forward to a good session, and I'll hand over to Sarah.

Good evening, everyone. Welcome and also welcome to Mark and Paul. Okay, I'll start. Mark, Elders recorded a reduction in lost time injuries in the first half of FY '24. Can you provide an overview of safety initiatives this year and why safety is so important in Elders?

Yes, certainly. So I think the journey for Elders on safety, on a refreshed focus probably goes back to the first Eight Point Plan. And in the first Eight Point Plan at that stage, so that would have been almost 10 years ago, we had 34 lost time injuries in the business. And we were determined to reset that and make sure that everyone at Elders went home in a safe and sound manner. So we put a bunch of initiatives in place. And I think the journey has been a long and solid journey. The -- on the process all the way through to the first half this year of 1 lost time injury, but it does come up in all of our staff surveys as the most important thing at Elders is safety. And I think going back to the original Eight Point Plan, one of the key premises of the safety focus, apart from obviously caring for all of our people was that a safe business is always a well-run business and a profitable business. So our feeling is that it's win-win-win around the -- all of the spectrum of stakeholders, with our people coming home safely, with the team being committed to each other, with our shareholders and suppliers and customers also getting the benefit. So it's a really important journey, and I think well and truly embedded. One of the nuances of the safety culture and particularly with our strategy around bolt-on acquisitions, is that when new businesses join Elders, we do have to go through that process of kind of reaffirming the safety culture, the really basic important reasons of wanting to look after your teammates, wanting to look after your customers and making sure that everyone gets home at night safely.

Thank you, Mark. Paul, the first half presented some challenges for Australian agriculture. Can you describe these challenges and how conditions improved throughout the second quarter, especially livestock prices?

Yes, certainly, Sarah. And I might talk to Slide 16 of the Investor Presentation for this one. But certainly, I'd describe it as 2 very distinct quarters comprising the first half. This slide, I think, tells the story quite well. But as we started the first quarter, we had a forecast of very hot and dry conditions associated with the El Nio climate driver. And what that did was delay the summer cropping region in dry land areas and it also put significant downward pressure on livestock prices. So a couple of other slides in the pack that speak to that. And what that did was put downward pressure on client sentiment as well. And so we saw certainly a significant pressure in terms of animal health sales and certainly downward pressure on the agency services in there. The chart out to the right provides a non-financial indicator of pressure from Q1 to Q2. And so you can see the pressure generally across all products in Q1. What happened in December, we saw widespread rainfall down the East Coast and through much of Southern Australia as well. That precipitated a turnaround in livestock prices in the second quarter and the sentiment, more broadly. And you can see all but retail turned around in the second quarter. Retail was a little different in terms of basing the substantially lower crop protection and fertilizer prices against prior corresponding period. So whilst the summer crop turned out okay, the retail business continued to suffer headwinds through the second quarter. But in general terms, a very, very soft quarter in Q1 and a pleasing recovery in Q2.

Thank you. Mark, FY '24 has been a busy year for acquisitions. Can you provide an overview of activity this year and where the focus has been from a product perspective?

Yes. So I think a really good question because the way we've run Elders from the beginning of the Eight Point Plan period has been around having a portfolio of different products and services and having a nice balance, which gives us that diversification at that level and ensuring that we keep the balance on track. The approach we've taken to bolt-on acquisitions is that we have a fairly standard template to preserve our return on capital for our shareholders. And the template is that we pay 3x to 5x EBITDA of the business. And it may go above that, if it's a bigger EBIT, if it's $6 million, $7 million, $8 million, $9 million, $10 million EBIT. But we stick in that range. So we -- just at a high level, get the return on capital that we need. We have normalized working capital, 50% payment on completion, 25-year 1, 25-year 2. So we're able to keep the vendors in the business. And then at the end of that, we take decisions on whether we rebrand the business or whether we leave it as it is. So we call it light touch, but we're actually quite involved from a safety values and financial transparency viewpoint. And clearly, we're providing capital. An interesting stat around that is that something close to 90% of our vendors stay at Elders after the earnout period. So clearly, they feel that the culture and the flow of the business fits them as well. In terms of this year, we completed -- at half year, we completed 10 acquisitions. And given that we bought AIRR and Titan a few years ago, which balanced the portfolio more towards a rural products portfolio, we've been targeting real estate and agency businesses. So we're -- livestock agency businesses. And when you see some of the acquisitions we've announced with Charles Stewart and with the -- some of the Emms Mooney acquisitions and the Knight Frank acquisition, where it's either real estate or a blend of real estate and agency services. So we do pay a very strict attention to the businesses we buy. We do multiple assessments, probably reject maybe 70% of those that come to us. And then there might be only 10% at the end that we actually complete. So it's a very disciplined, financially driven process, but critically, there has to be a cultural and values fit.

Paul, post half year balance date, oldest purchase of the business that was known as Knight Frank Real Estate, Tasmania, can you speak to the scale of this business and the adjacent opportunities that it brings to Elders?

Yes. Certainly, Sarah. And I might just move to Slide 20 of the investor presentation and further to Mark's comments, more broadly around real estate. So as Mark suggested, real estate has been a focus of our business development team quite over recent years. And you can see that that's manifested in significant growth across the real estate business. You can see also the diversification between property management, broadacre and residential sales. And you can also see on this slide, the opportunity for future growth with Elders, notwithstanding being a substantial player in Australian real estate. We're still only 3.34% of the addressable market that we play in. In terms of Knight Frank, we can see some of the numbers there. It is a diversified business across property management, substantial property management business, 1,500 properties, but it's also got a substantial commercial and valuations business. Both of those, both commercial and valuation represent potential adjacent opportunities for Elders more broadly across the business. And from that context, it's a very exciting acquisition for Elders, and we certainly welcome the Knight Frank team to the oldest real estate team.

Mark, backward integration is another pillar of Elders' growth strategy for FY '24. Can you describe what the strategy is and provide an update on progress to date?

Yes, certainly. So the core basis of the backward integration strategy if we start with crop protection is that with products that we source ourselves and supply ourselves through our own brand, there's something like a 10% to 15% gross margin uplift. And the -- particularly with crop protection, the Australian crop protection market is largely a broadacre market with dry land winter crops and summer crops, but also some irrigated summer crops, and it's predominantly a herbicide market. The 85% of this chemistry is off patent. So it's largely a generic market. So what this means is that from an access viewpoint, with the acquisition of Titan Ag, a crop protection company, we were able to secure, I think it was over 160 regulatory packages for crop protection products, and we're able to do it ourselves. Our plan was to -- of the addressable market within Elders. So this is the amount of crop protection products that are off patent. There are generally 2 levels of patent, one at active ingredient level, at molecule level and one at formulation level. So given that both of those were out of patent, then we can copy them and sell Titan product throughout the business at a higher margin. The strategy is not to have 100% of our off-patent product with Titan labels. It's to get it to 70%. And our thinking in taking it to 70% is that this allows 30% of the volume that we have in off-patent products that we can use with third-party suppliers who are largely proprietary global suppliers with proprietary chemistry in order to maintain access to this specialized chemistry. So these are companies like ADAMA, Syngenta, Corteva, BASF, FMC, Bayer. So the strategy has been to do it over a number of years so that we don't -- so we're able to flag it to our suppliers without destroying their businesses overnight. We started at about 20% of our addressable market, backward-integrated, got to 54% last year, and our target this year is 60%, and we're on track to hit that 60%. Two other areas of backward integration are in our animal health products or the veterinary products. And we have regulatory packages for -- off-patent veterinary products that we acquired when we bought AIRR, the wholesale business. And it's the same deal where we -- in [indiscernible] products is an uplift of -- it could be 15% to 25% margin by having your own brand. And we're gradually rolling Pastoral Ag brand, which is the veterinary brand out through the Elders' network with that uplift. We've made 20% progress with veterinary products, so a way to go. And also without making it too complicated, we sell our crop protection products through Elders under the Titan Ag brand. We sell our crop protection products through AIRR and the Apparent brand. So it allows for -- any farmer in any town may get 2 quotes for a product and it may be Apparent from the AIRR member being quoted against Titan from Elders. So in either case, it allows us to gain the business. The third small area of backward integration is around specialty fertilizers. So fertigation type products that go through drip lines in orchards and glass houses, et cetera. And we're developing that. And there's also an uplift in margin with those.

Thank you, Mark. Paul, Elders is modernizing its business with investments in systems alongside growth initiatives, including acquisitions and new-build business such as Elders Wool. Can you speak to the impact this is having on costs in FY '24 and what Elders is doing to minimize pressure on costs?

Yes, certainly, Sarah. And I'll speak to Slide 23 of the investor presentation in regards to this question, so I'll put it this way, that FY '24 is very much a foundational year for our fourth Eight Point Plan. And we're investing to achieve the 5% to 10% growth through the cycles through this fourth Eight Point Plan. So it is a foundational year. You can see on this slide what we've done, noting that our cost has increased by $24 million half-on-half, which [indiscernible] 11%. But what we see on this slide is if we separate out the additional cost that relates to acquisitions, Elders' Wool or transformational projects, the majority of that number is depreciation. And then what we see is the base growth in our cost base is about $3.9 million or 1.8%. So well below the run rate for inflation. I think that's an important distinction when analyzing the cost base this year.

Mark, Project Streamline is aimed at improving procurement and supply chain efficiency. Can you provide an update on progress and when benefits are expected to be realized?