Elders Limited (ELD) Earnings Call Transcript & Summary

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

Thank you very much, and welcome, everyone, to the retail investor fireside chat that we're conducting this afternoon. So with me here today is Paul Rossiter, our CFO; and we also have Sarah Post, who will be conducting an interview with us as a -- in the format of the fireside chat on a number of questions and common questions that have come up over the last 2 days of investor meetings and analyst meetings. So what we'll do, the process will be, we'll run through the questions, and then we'll open up to any questions from the floor at the end of the session. So Sarah, over to you.

Thank you, Mark. Mark, I'll start with this one. Elders gave FY '24 EBIT guidance on April 8 for between $120 million and $140 million and finished just below the midpoint at $128 million. Did the winter cropping season unfold as expected?

Yes. I think a good question. So at the half year, when we reported the half year results, we talked about the quite problematic first quarter -- the first half of the first half. And in that quarter, we -- where we -- on an average over the last few years, we've been delivering somewhere close to $32 million EBIT. We were close to breakeven due to a number of market difficulties that we outlined at the half year. Now we -- at that time, given that we are well behind, we decided the most appropriate approach was to give guidance, so that there was a much clearer understanding of what was in front of us. We thought in the second half that there'd be some recovery in livestock prices and in a couple of other areas of the business and that our rural products area will also strengthen, we have steady real estate and financial services. And largely, that's how it unfolded. So the range of $120 million to $140 million took into consideration that steady improvement. We did have a few bumps in the third quarter and that was largely in rural products, where there was some margin leakage with competitive pricing, but that recovery going back to where we thought in Q4. And as you've indicated, we ended up just below the midpoint of the range at $128 million. Just on the point and possibly we'll talk about it a little later. It did mean that the Q1 impact did have a downside impact on our leverage and also our return on capital.

Paul, on a similar theme, what second half factors reduced the result from the top end of guidance?

Yes. Excellent question, Sarah. So firstly, I'd say that the second half was the third biggest second half performance that Elders has ever had. So it was a really strong turnaround in the business. But certainly, it wasn't as good as it could have been. And as Mark pointed to, one of the factors was a very competitive marketplace, particularly in Western Australia and South Australia, who had a very dry late start to winter crop, and that resulted in some strong competitive pressure. And I'd say in terms of general conditions in winter crop in the second half, the East Coast was better than in the West and Southern Australia. And it's worth noting that SA and WA are 2 of our largest states. In FY '23, those 2 states combined delivered 41% of EBIT. In FY '24, that dropped to 33%. And that was the other part of that delta from $128 million to $140 million.

Okay. Mark, can you provide an update on current seasonal conditions and the outlook for FY '25 and how business performed in October?

Yes. Yes, sure. The -- I think part of our thesis with FY '25 is that the first quarter would return to average or normalize as it has been in previous years as opposed to the FY '24 first quarter. Indications 6 weeks in that our thinking was largely on track. So we're comfortable in that respect. I think also the outlook remains positive. We always assume a normal or average season. What we can see is -- and so we've taken that assumption across the rural products and livestock, in fact, all of our products and services. What we can see is being slightly different would be due to the higher planting chickpeas in Northwest New South Wales, this year. It's likely the dry land and cotton will be slightly down. But all in all, it's unfolding, and we're viewing it as an average season. And in an average season, Elders performs quite well.

Excellent. Paul, return on capital in FY '24 declined to 11.3%, well below Elders' hurdle rate of 15%. Can you speak to the key drivers of this result and the outlook for FY '25?

Absolutely. And certainly, return on capital is not where we'd like to see it. It's important to note as well that it dropped from 16% in FY '23. And the main drivers of that, firstly, is the first quarter impact, so that the lost EBIT from the first quarter of FY '24. And so that, that accounted for a 2.8% drop in return on capital. So adjusted for that return on capital would increase from 11.3% to 14.1%. The other things weighing on return on capital is our transformation projects. And the reason is because we spend the capital upfront before the benefits flow through. FY '24 is a very big year for transformation. We had spanned across systems modernization, Elders Wool and also the Killara feedlot. And none of those initiatives delivered us significant earnings in FY '24. The good news is Elders Wool. Elders Wool handling is now up and running and will deliver benefits in FY '25, as well the investment in the Killara feedlot, so the new feed mill out there. And so we will get some earnings flowing through in FY '25. SysMod, as with most IT implementations, has a big CapEx spend before you see benefits come through. We expect to see some in FY '25 that the majority of first full year of benefits will occur in FY '26.

Okay. Mark, FY '24 has been a busy year for bolt-on acquisitions. Can you provide an overview of activities here and contribution to EBIT?

Yes. It's been a bigger year than normal for us with bolt-on acquisitions. So we've reviewed many. We acquired 13 and the annualized EBIT of those acquisitions of cumulative annualized EBIT is $14 million. And so when we consider the impacts on FY '24 and the upside impacts on FY '25, about $8 million of that EBIT was reflected in '24. So roughly $6 million upside for FY '25 when we look at the financial contributors to the business. I think it's worth noting that with the poor first quarter of FY '24 and the balance sheet considerations and leverage considerations, we have taken the call to tighten our acquisition, both on acquisition spend through the next 12 months and with the view that we've basically overachieved our acquisitions in FY '24. And so we can tone it down a little in FY '25. But all in all, a very positive business development activity. And also, we had focused in on real estate and financial service bolt-on acquisitions to keep our portfolio balanced, given that we've had a strengthening of our rural products component of the portfolio.

Paul, leverage came in at 3.1x against Elders' target rate of 1.5 to 2x. What are the drivers of higher leverage? And what is the outlook for FY '25?

Yes. Thanks, Sarah. And firstly, I'll note that we're talking about accounting leverage here at 3.1x, whereas covenant leverage, which is imposed upon us by our financiers. There's ample headroom there. So we're currently at 1.3x, which is well underneath our cap of 2.5x. So we don't have a leverage problem from that perspective. But against our internally imposed measure certainly is higher than where we'd like it to be. Once again, one of the key drivers is the first quarter earnings dip in FY '24. And if we adjust leverage for that, it would reduce to 2.5x from 3.1x. So we see that normalizing in FY '25, as Mark suggested, and we're on track for that to occur. Outside of that, we saw a meaningful increase in net debt in FY '24. And there's a couple of reasons for that. Firstly, we had a big year for both acquisitions and transformation. As we've discussed and combined, they added $141 million to net debt. Offsetting that, we had a great result in terms of decreasing inventory. And when combined with an uplift in creditors, we released $115 million of capital, but that was fully offset by an increase in debtors. Debtors increased by $157 million in FY '24 due to a combination of factors, but mostly a later winter crop season, more demand for seasonal finance on the way through and to a far lesser extent, an uplifting debt arrears greater than 90 days. We have very sophisticated policy and procedures to manage debtors. We're not worried about the debtor position, approximately $120 million of debtors will fall due in the next 5 weeks or so. So if we measure the balance sheet at the end of December, it would look very different.

Mark, Elders was targeting backward integration of 60% of the addressable market. Sorry was targeting -- Elders was targeting backward integration of 60% of the addressable market. Was this achieved in FY '24?

Yes. Well, it's a good question. And I might just revisit the backward integration strategy. Then the thinking that we have with our backward integration strategy, largely in crop protection, but also in animal health and some specialty fertilizers is that in the Australian market, we have a large proportion of our crop protection products that are off-patent either at active ingredient level or at formulation level. And the -- our ability to source those products directly from their manufacturing sources largely in China and brand them with our own brand can add 10% to 15% margin that's within our control and flows through to the business. And so our position has been in the acquisition of Titan that we would expand our Titan brand. We chose a target of 70% at the time that we started the strategy a few years ago. We were sitting at around 20%. And the idea is that we would cap it at 70% of the off-patent products of our crop protection portfolio with the view that a number of proprietary chemistry suppliers also have generic components of their product range. And this would allow them to bundle proprietary products with generic products if we stopped the backward integration at -- we capped it at 70%. And so in order to preserve our supplier relationships, we've decided to do that over a 3- to 5-year period. Last year, we're at 50%. We targeted 60% this year. We had a slow start to the year with our first half and low volumes, so relatively low volumes. And given that the bulk of the crop protection market is a carrying over a winter crop and running into the second half of the year, we felt confident that we could transform that to 60% of our addressable off-patent market. And we got there on a volume basis, about 58% of the addressable market on a revenue basis. And with the view now that in FY '25, we take that to 65%. And of course, with this extra volume, extra profit flows through the business.

Paul, systems modernization is a multiyear project aimed at transforming Elders' systems and processes. Can you provide an overview of progress to date and the benefits for Elders over time?

Absolutely. And firstly, just noting that SysMod, what is it? It's a 6-wave program to migrate Elders from an AS/400 green screen to Microsoft Dynamics. We started at wave 0. So we're currently working on the third wave, which is Wave 2 and covers the retail part of the business. This is the largest and most significant wave in the 6-wave program. It's also the wave where there is, in our view, the most benefits. The great news is that we went technical go-live yesterday on Wave 2, and we'll migrate the first branch over the next week. We intend to do 2 branches prior to Christmas before commencing the full rollout from February next year. So really exciting time for the projects. At the same time, in parallel, we are working on Wave 3, which covers the livestock business. That is a much smaller piece of work for the business and will be implemented in 2025, immediately following Wave 2. And so yes, really busy time for the projects, but really exciting time as well.

Mark, the acquisition of Delta Ag is a significant transaction for Elders. How does this align to Elders' growth strategy? And what does this mean for Elders?

Yes, it's very, very exciting and it aligns perfectly with our growth strategy. We -- as many of you are aware, what we've been over the last 10 years since the first Eight Point Plan, our bolt-on strategy has been to fill gaps in products, services, geographies, and the strategy with larger acquisitions is to like a Delta or an AIRR for that matter was to find a target that adds to our diversification because it's such a critical part of our business model to offset seasonal and commodity impacts into -- and also to find a target to bring specific IP and the -- with the financials being pre-synergies, EPS accretive. Now with the Delta acquisition, we've been talking with them for many years, 10 years or so. And we found a sweet spot for this acquisition. It brings geographical diversification there, particularly strong in New South Wales, Northwestern Victoria, parts of South Australia and particularly in the wholesale business in Western Australia. So they add significantly to the gaps that we've got with our current business. They also bring significantly in terms of their regulatory packages for animal health products and crop protection products and also the ag tech precision agriculture and technical expertise. So it's a really nice fit. The business is a good business, good people, and will add significantly to Elders going forward.

And Paul, how will Elders fund the acquisition of Delta?

Yes, good question. So it will be funded through a mixture of cash and scrip. So 60% cash and 40% Elders scrip, which means new Elders shares that will be issued to the current shareholders of Delta Ag. So the cash component will be funded through 2 means. So 160 -- sorry, $196 million equity raise. The institutional portion of which completed yesterday and was very well supported by shareholders. The second component of that will open on November 25. So I'd encourage all retail shareholders to have a look at that offer when it comes through. The other component of it is a new $110 million debt facility, which has been raised on a certain funds basis across Elders' existing financier. And pleasingly, under the same terms as our current multipurpose working capital facility. So all of that funding is in [ flash ] or raised or committed already. In addition to that, we're also raising an additional $50 million of equity for future growth opportunities, given the need to balance acquisitive growth and leverage over the next 6 to 12.

Mark, are you able to provide some indicators as to the size of Delta and where it operates and where -- what it brings to Elders, please?

Yes, Sure. Well, I think it's quite fascinating because in the most trusted brand stakes, Elders holds that position and has for a number of years now. But Delta is also up in that most trusted brand. So they're right around Australia. So there are 68 branch locations. In West Australia, there are 40 wholesale locations in addition, operating in all states of Australia. And as I mentioned, very helpful for us in states and areas that we're less representative. In terms of revenue, $835 million revenue, EBITDA of $53 million, and that converts to EBIT of $43 million. So quite a strong business, 450 people -- around 450 people. I think when we go to what they're bringing to the party in terms of IP and expertise, 92 ADAMA crop protection regulatory packages and 14 animal health regulatory packages, 80 consultants and agronomists and 5 precision ag specialists and importantly, there are 30% -- 38% minority in share owner of [indiscernible], which is a highly rated state-of-the-art tech platform. So they bring a lot to the party. But when we -- when I talk about the ADAMA packages or the regulatory packages, we should note the $12 million of synergies that we've identified between -- with Delta as we go forward as part of the post synergies, EPS double-digit accretion. Those synergies are largely in crop protection, some animal health, backward integration. So complemented with the regulatory packages that Elders have and then, again, with a slow burn in terms of moving from 20%, 25% backward integration now for Delta up to that 70% over a 2- to 3-year period. So I think quality business, quality people are well located and as I mentioned earlier, highly complementary to Elders.

Paul, what will Elders do with the proceeds from the equity raising if the transaction does not complete?

Certainly an outcome, firstly, that we don't expect to happen. But in the unlikely event that it did return to our capital management framework and consider alternative uses for some or all of that capital, but one likely scenario is that we'll be returning it to shareholders.

Mark, the Delta acquisition is subject to ACCC approval. What does this process involve? And how long do you think this will take?

Yes. So as we went through the process, I think when the Delta Founders and myself reached a view that there could be a sweet spot for us to come together. The first thing we did was to consider the ACCC position. They did work with their legal specialists in that area, and we did work with our competition lawyers as well. Came up with where we thought there may be some areas that could create some issues from an ACCC viewpoint. And we combined that view. In fact, once we felt comfortable that our potential exposure to ACCC-based divestments was an acceptable low level, then we proceeded with the exclusivity agreement and all the rest of the DD for the acquisition. With us announcing that result yesterday. The -- in terms of the process, we gave the ACCC heads-up last week of the announcement. Gerard, the CEO and Co-Founder of Delta and I will be talking with the commissioner next week. And we're quite confident that knowing that the the commissioner has experienced with the Ruralco landmark deal, and so in terms of the rural services ecosystem will be familiar with that ecosystem. The normal processes of the ACCC will take public submissions consultations and then obviously, a submission from us and then we'll make a call on that. And we're thinking it's probably a March, April outcome there. But having said that, we feel that the work that we've done has provided good guidance and comfort to us in terms of the firm decision they make. And we've also put some safety mechanisms in our agreement to ensure that we share any downside through divestments to a level and they have a threshold that we can act on should they be much greater requirements than we expected.

Okay. Mark, a final question. Given the scale of the transaction, have you committed to continuing your role as Delta transitions to the Elders Group?

Yes. Yes. So when -- when the Board asking to stay on last year, my thinking was that I would say, to the end of the full Eight Point Plan, which is the end of 2026. And that hasn't changed. And I'd indicated I saw that as a minimum. But with regard to Delta in terms of continuity and smooth transition last 2 years, on from the announcement. I think it's also worth noting that in the period since that announcement, we've -- the Chair and the directors have instigated the Board refresh that we have a number of directors coming on. And we've also instigated an internal succession planning process with 4 candidates internally and don't running that process. So I think when we get to that time point in time, we will have the internal candidates well developed and the Board well across pros and cons, and we'll be in a much stronger position for that transition. Okay. Well, thank you, Sarah, for facilitating that discussion with Paul and myself. I'd like that to open up to those on the line, any retail investors on the line who may have some questions.

[Operator Instructions] There are no questions at this time. I'll hand back to Mr. Allison for any closing remarks.

Okay. Well, thanks very much for attending the fireside chat today. I trust that the information that Sarah was able to extract from Paul and myself was helpful, and I look forward to speaking with you if there are further questions you'd like to ask directly. So thank you very much. We'll close the session.

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