Elders Limited (ELD) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Elders Limited H1 '25 Results 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 to all of those on the call for the Elders half year results presentation for the FY '25 year. Thank you for joining Paul and myself for the session today. As an overview, the half year results today are very strong on a half year comparative basis with a 67% uplift in EBIT on the first half last year. As flagged in the FY '24 full year results in November last year, we anticipated the normalization of the very poor first quarter from last year. This has been achieved with a corresponding improvement in the FY '25 first half results from an EBIT ROC gearing viewpoint. We've also made good progress on our SysMod rollout with South Australian and Tasmanian branches rolled out with Queensland, Northern Territory branches being rolled out currently. It's planned for all states to have completed their branch rollouts by year-end, in line with the plan and within budget. In addition, Project Streamline has delivered our targeted cost reductions, and Project Streamline is also on track with our supply chain efficiencies benefits as shown in the numbers that we will review today. Over the first 6 months of FY '25, we have experienced good growth across our livestock and Wool agency services and real estate services and our feed and processing services and our financial services. Our Rural Products category has seen some market softness with very dry conditions in South Australia, Southern New South Wales and Western Victoria. However, the outlook looks quite promising with wetter-than-average conditions predicted for the second half of the winter crop and the year, and we're starting to see those rainfall patterns coming through Southern Australia now or at the moment. With this in mind, the performance of Elders with its clear and consistent strategy, multiple diversifications, high financial discipline and daring customer anchor as the most trusted brand in Australian agriculture, we have remained very, very resilient. The result is strong in safety, sustainability, EBIT and ROC from a first half performance viewpoint. Our Eight Point Plan commitment is to provide 5% to 10% growth in EBIT and earnings per share at a minimum of 15% return on capital in a sustainable manner through a safe and inclusive workplace. The outlook remains consistent with our 5% to 10% growth through the cycles through to the end of this Eight Point Plan in FY '26, albeit with a difficult year 1 of this 3-year strategy. Moving now to the Delta Agribusiness acquisition announced in November and the investment highlights and progress on this acquisition. At a high level, this acquisition is fully aligned with the Elders acquisition rationale that delivered Titan Ag, AIRR and many other bolt-on acquisitions to Elders. With pre-synergies EPS accretion, enhancement of our technical and ag tech expertise and offerings, a strengthening of our geographical diversification, particularly in New South Wales and Northwest Victoria, South Australia and Western Australia, building on our Crop Protection and Animal Health regular package portfolio to drive our backward integration strategy, providing an additional platform for retail segmentation, allowing greater customer centricity; and providing further coverage for our real estate and financial services offerings. We have continued to actively work with the ACCC team on the Delta-Elders combination. We expect to receive the filings from the ACCC this Thursday. This will provide helpful clarity and certainty for the next steps of this transaction. With the strengthening of our financial performance progression and the conclusion of many of our transformational projects, including SysMod; Elders Wool, the automated distribution center; Project Streamline, Project Streamline; and also the expansion of our mill feeding facility in processing area; and with all of these benefits beginning to flow and also with the impending Delta agribusiness findings at a positive market outlook, we are both confident and optimistic for the future of Elders. We are truly on the cusp of a very positive period for the business, our customers, our people and our shareholders. Our approach today is that I'll provide an overview of the results, and Paul will then go into the detail of our financial performance, and I will then provide an update on our outlook and growth and transformation initiatives as we deliver our fourth Eight Point Plan over the next 2 years. With that overview, we'll now commence with the FY '25 half year results presentation. So moving to the agenda slide, and we'll follow the common approach that we use. But I did want to highlight on the appendix on Item 5 there because we don't touch the appendix unless there are questions, but we pride ourselves in the high disclosure and transparency, and I would direct you to the appendix section to see the KPI trends for all products and services over the last 5 years at detailed diversification data, the transformational impact on ROC. And we will talk a little to this because the significant capital investment that we've made to transformation over the last few years has had a cost in terms of our ROC and also our EBIT. But now as we're breaking the back of that, we're coming to a period where we'll be able to reap the benefits of those multiple projects. It shows our business model in the appendix gross margin sensitivity analysis we normally include and also the discipline of our capital management framework. So moving then on to the key investment drivers. And the key investment drivers for Elders, as you see this EPS growth, and we'll see as we go to future slides, the trending on this, a very strong return through the cycles. The first 3 Eight Point Plans, the 20% plus in terms of ROC and also the growth rate through that period above 20% as well. The geographical diversification and product diversification, which helps us do well in bad situations as we've done this year with the first half with wet conditions up north and dry conditions down south. Significant room for growth for the business as we have many of our products and services are very low market share. So there are multiple areas to grow from that viewpoint and also many geographies that we're not in at present. We have focused on the transformational initiatives, and these benefits are coming through FY '26 on an ongoing basis. And our estimate of the investment over the period in these transformational initiatives is in the area of $100 million of capital as we've reported and showed you in a transparent way as each of these business cases has been approved. Significant pipeline of new opportunities. And I think we are at a turning point in terms of our growth opportunities with a clarity uncertainty around the Delta Ag acquisition, our view is that we have big proportion of our ongoing growth opportunities through integration benefits, through backward integration benefits and through the efficiencies improvements from our major transformational projects as opposed to the component that we had of bolt-on acquisitions. Then we look at the robust balance sheet, and we talked about the normalization of Q1 from last year and the implications that would have on our balance sheet, and Paul can talk to that detail as we go through the presentation. So we move to the next slide. And you can see from the next slide, through the first 3 Eight Point Plans, very clearly, we way overachieved our objective from an ROC viewpoint and also from a growth viewpoint. At that time, we took the decision that this is the right time to invest heavily in our transformational projects. And you can see the -- we've outlined the transformational period that we're -- as we say, we broken the back of, and as I mentioned in that period, we've had Elders Wool, the automated wool facility that we put in place. And we've had SysMod, and we're through the half of that project. And we've had the feed mill improvements in Killara. We've also had our formulation facility in Western Australia, agri toll, that we've invested in and is now producing product; as well as the other internal projects like Streamline and Streamline. So significant activity, capital and expense through this period on ensuring that Elders is in a very strong position then to take advantage of the benefits. All of the benefits that we talked through were above the 15% return on capital. And our sense is that we've moved through those, we've taken the capital pain, which you can -- is a part of the trend on that slide. But we know that the benefits are coming through. So if we move to the next slide, in terms of our people and customer highlights, 3 lost time injuries this year, 8 in the first half. These were all livestock injuries. And we -- but we had -- for the whole of last year, we had 2. So we had 2 in the first half last year. So it's disappointing with our very, very high standards of zero harm to anyone ever. However, we have put in place further reinforcement of our safety culture, particularly in the area of livestock management. In terms of the total recordable history frequency rate, down. And both the lost time injury frequency and the total recordable injury frequency are significantly below industry benchmarks. So it's the -- I guess, the story here is that we're doing well and better than the majority of other players that we compare ourselves to, but any injury to anyone is unacceptable. So we have some work to do there. The Net Promoter Score has improved over the previous period. And then we go across to the other side with the women in senior positions at 23%. And that's good progress from the 4% of women in senior positions when we started the Eight Point Plan approach to running the business. We've got a long way to go. But it is very, very pleasing that we are making really good progress as we bring pathways for young female managers to come through in the business. In terms of employee engagement, again, in the top quartile out of all companies in Australia, in terms of the high performing, and we've done a little bit of work around the additional organic points of presence. Moving to the next slide. And you can see the trend line, and our total recordables on the right-hand side. And also on the left-hand side, the 3 lost time injuries for the first half. Moving to the next slide in terms of sustainability performance. And again, some really good progress here in a way as we like to see it as being a very authentic, practical and real way with the partnering that we're doing with Charles Stewart University with a number of initiatives. The partnering with SmartSat CRC in the Zero Net Emissions CRC, again, working very closely. The bagMUSTER initiative. And for us, it's all about ensuring that it's real and not virtue signaling. And we're quite comfortable on the left-hand side of the slide, you see the flight path for us to achieve our objectives there. And so finally, as an overview, moving to the financial analysis. And you can see the underlying EBIT, some 67% up on last year. And Paul will go through the detail, but that 67% up with what we say is a normalized Q1. If we go apples-for-apples, and as I say, we'll talk to this in more detail, there's $6 million of incentives that are in that $64 million number that weren't in last year's comparative number. So apples-for-apples, it's very much at or above the commitment that we talked about at the full year result, and the outlook remains quite positive given that this includes the flood conditions in Queensland, Northern Territory and also the drought conditions in South Australia. Going to the return on capital, that -- as you should expect, the responding impact on return on capital And Paul will go to the detail on a normalized return on capital, just to give you a sense of the transformational project impacts, and we'll also get the detail on cash conversion. So with that, Paul, I'll hand over to you to go to that detail.

Yes. Thanks, Mark, and welcome, everybody. I'll commence on Slide 12 of the pack, which summarizes Elders' first half with the first quarter playing out largely as forecast with a significant turnaround in our Agency Services business. Underlying EBIT, as Mark mentioned, $64.3 million, an increase of 67% compared to what was the challenging corresponding period in FY '24. And the improved result was supported by a strong turnaround in livestock prices and volumes as well as continued momentum in real estate from both acquisition and organic growth. These positive contributions were partially offset by a reduction in retail gross margin, most notably from South Australia and Western Victoria due to a dry start to the winter crop. Progress has been made in restoring return on capital and leverage to target with continued improvement of focus for the second half. I'll now move to Slide 13, which displays Elders' 5-year financial performance from FY '21. Over this period, sales have increased at a 5-year compound annual growth rate, or CAGR, of 6.5%, supported by acquisitions and organic growth. Gross margin has increased at a 5-year CAGR of 7.7%, with first half gross margin up $39.1 million compared to the prior corresponding period, or PCP. Comparatively, costs have increased at a 5-year CAGR of 11.6% but were reduced compared to PCP after excluding additional costs from acquisition and transformation. Underlying EBIT increased $26 million compared to PCP. Moving now to Slide 14, which focuses on shareholder returns over the past 5 years. As displayed, underlying earnings per share increased to $0.214 from $0.091 in the PCP, up $0.123, supported by the turnaround in livestock agency and a strong performance from real estate. The dividend of $0.18 per share has been announced, unchanged from the prior period and franked at 50%. I'd note that consistency in dividend payments remains a priority within Elders' capital management framework. The dividend payout ratio is currently elevated above Elders' target of 40% to 60% of underlying NPAT, but is forecast to return to within the target range in FY '26. Moving now to Slide 15, which contrasts FY '25 against PCP. In addition, this slide details the impact on key financial metrics from the capital currently held that will be applied to the completion of the Delta acquisition subject to ACCC approval. Elders has delivered a strong first half results with the following highlights evident. Sales revenue increased $71.3 million, up 5% despite dry conditions in some key cropping regions. Gross margin increased $39.1 million to $324.5 million, up 14% against PCP with growth achieved across most products. Return on capital increased from 11.4% to 12.7%, with additional uplift forecast once the benefits from systems modernization are realized. Net debt was negatively impacted by intra-week volatility from livestock net working capital over balance date. We'll discuss these key metrics further as we move through the pack. Moving to Slide 16, which displays Elders gross margin diversification, the key defense against seasonal variability. As noted, gross margin increased $39.1 million to $324.5 million. The key drivers of this result include agency gross margin increased $20.5 million or 36.7% following a strong recovery in lifestyle prices, increased livestock volumes and a full first half of Elders Wool operations. Loss of volumes have been driven by strong international demand for protein as well as some destocking in dryer regions, which may impact volumes in the second half. Should this occur, a price offset may follow, mitigating the impact on Elders agency services business. Real Estate Services gross margin increased $18.5 million or 52.3% with property management, residential and broad-acre sales all improved compared to PCP, supported by both acquisitions and organic growth. Wholesale Products increased $3 million or 8.9% due to higher sales and tight cost and margin management. Financial Services gross margin increased $2.7 million or 10%, supported by growth in the broker model through the acquisition of Riverland Lending Services and the addition of company-employed agri brokers, long-size improvement in the livestock in transit warranty products. An increase in on-balance sheet lending was also achieved. Collectively, the increase in gross margin across these products more than offset the reduced earnings from the exit of the Rural Bank exclusivity agreement in FY '24. Feed and Processing was another highlight with gross margin up $2.1 million or 23.6% due to productivity and efficiency benefits from the new feed mill commissioned in August 2024. Growth in the above products significantly outweighed the negative impact from retail products, which will be discussed further on the following slide. Moving to Slide 17, which further analyzes product performance in the first half. We hesitate to include weather maps in all these investor presentations, but in this instance, we feel they are the optimal way to demonstrate both the significance of the dry conditions, especially in South Australia and Western Victoria as well as the case for cautious optimism based on the seasonal outlook. Notwithstanding the dry start, the outlook for retail products nationally is considered average with favorable conditions in many cropping regions. In the winter crop regions currently under moisture stress, widespread dry selling brings the possibility of stronger demand for post-emergent crop protection products in the second half. We note also that the favorable moisture outlook extends into spring, which has the potential to push livestock turnover to the first quarter of FY '26 should it occur. Turning to Slide 18 to discuss costs, which reduced $8.8 million when adjusted for acquisitions and new business. The primary drivers of the decrease are tight control of discretionary spending alongside a net reduction in FTE following a cost rebasing completed towards the end of FY '24. The increase in cost from Elders Wool resulted from the first full half of operations and is more than offset by a corresponding increase in gross margin. I'll now turn to Slide 19 to discuss return on capital, which improved from FY '24 but remains below Elders' target of 15%. Over the period, return on capital increased from 11.3% to 12.7%, primarily from the improvement in underlying EBIT. When adjusted for the impact of acquisitions and transformational projects, return on capital is 14.9% and close to Elders' target. Moving now to Slide 20 and working capital, where we see an increase in working capital of $45 million from FY '24, notwithstanding a decrease in retail products, working capital of $80 million driven by retail debtor collection, in line with expectations outlined at the FY '24 full year announcement. This was offset by an increase in livestock agency net working capital of $81 million due to high livestock settlements leading into balance date and the timing of balance date itself, which will be further discussed in subsequent slides. Retail inventory was stable compared to PCP, a pleasing result given the late start to winter crop in key cropping regions. This was achieved through active inventory management and specifically the relocation of stock between states. Moving now to Slide 21 and cash flow, where we see an operating cash inflow of $31.2 million, a pleasing result considering the balance date timing impact from livestock agency. The outlook for operating cash flow and cash conversion in FY '25 is considered neutral with livestock net working capital forecast to reduce in the second half but potential for retail debtors to be elevated at full year balance date, if higher post-emergent crop protection sales eventuate. I note that the physical payment of company tax for Elders Limited will not recommence until 2026. I'll now move to Slide 22 to provide a detailed update on net debt and leverage. Waterfall charts provide our best assessment of a normalized net debt and leverage position adjusting for the benefit of capital held at balance date that will be applied to the Delta acquisition, if approved, and also the intra-week timing impacts that livestock agency has on this balance day. Breaking down the movement in net debt, we see a slight decrease from $436.8 million at the end of FY '24 to $423.4 million at half year balance date, acknowledging this includes the benefit of $50 million of equity retained for flexibility in acquisitions. Whilst there is more work to do on net debt, the half year result is considered reasonable given the working capital uplift that occurs at half year preparation for winter crop. Turning to leverage. We see a reduction from 3.1x at the end of FY '24 to 2.4x on a normalized basis. This remains above our target of 1.5 to 2x as the business balances capital expenditures for systems transformation, dividend maintenance and business growth. Further improvement in leverage is within Elders control through moderating the pace of acquisition spend and more selective capital allocation to balance sheet lending and seasonal finance, which comprise a significant portion of trade receivables. Assuming seasonal conditions, Elders expects continued progress in the second half on returning accounting leverage toward our target of 1.5 to 2x. I'll now move to Slide 23, where we see significant headroom across banking covenants. I note that our bank leverage covenant excludes receivables funded through debtor securitization given their self-liquidating nature. For context, client lending comprised approximately 30% and the receivables balance at 31 March or $270 million, almost 60% of the net debt balance. This concludes the financial section of the presentation. I'll now pass it back to Mark, who will provide an update on strategy and outlook.

Okay. Thanks, Paul. So if we just move to the next slide, and it's referencing the full Eight Point Plan. I actually just -- I just noted that when I talked about one of the introductory slides, I forgot to emphasize the fact that for the fifth year in a row, Elders is the most trusted brand through regional rural Australia. And that does form a part of our ambition in the Eight Point Plan. So with regard to this slide, we'll focus on the transformational component and the innovate and grow component. I think the numbers that Paul has just run through demonstrate the business as usual and running the existing business with high financial discipline areas. And I'd just also like to note that in terms of the innovate and grow, our backward integration component, which has been delivering a significant part, has hit the 65% level that we targeted for this year, and it looks like running through as we kind of complete the year through this winter crop. In terms of bolt-on acquisitions, there have been 5 completed in this year; $4.3 million of annualized EBIT in that period; and also for the second half of FY '25, we've also got in the order of $6 million of EBIT coming through from last year's bolt-on acquisitions that weren't referenced in the same period last year. So I think from a bolt-on viewpoint, that will be also an upside for the second half. And as we've indicated, in terms of the bolt-on strategy, we've taken the accelerator off that as we look to the player for our capital management. And also, given that we've become or gone, we've strongly been investing in rural services. We're looking at diversifying the bolt-ons that we target now into other areas like financial services, real estate, and to an extent, agency. So there are 6 candidates in our pipeline at the moment for bolt-on acquisitions, but we have actively taken a decision as indicated last November to go slow on that while we can complete all the transformational projects. And hopefully, over the next 12 months, we commence the integration of the Delta Agribusiness acquisition. So going to the next slide in terms of our strategic priorities and the big one has been the systems modernization. Again, we've been very transparent on our progress. and there has been great progress in cost -- transparent on our costs as well. We provide the numbers or the detailed numbers as each business case for each wave is approved by the Board, and we'll do that as we go through to the next waves. Our plan is to complete the rollout of the point-of-sale material through to the end of this year through the Elders branches. And then we attack wave -- we attack Wave 3, Wave 4 concurrently with a view of turning off the legacy system either in the last quarter of calendar FY -- sorry, calendar '26 or the first quarter of calendar '27. Going to the next slide. Terms of strategic priorities, innovate and growth. And you can see the rate enablers we have in the right-hand box there with financial service expansion, real estate expansion. I think we're ripe for large acquisitions at the moment, but really focused on organic growth, efficiency and benefits out of the internal transformational projects we've had like systems modernization benefits, supply chain optimization and as I said, the backward integration that we've been moving along quite nicely. So then we go on to the next slide, which is the market outlook. And I think Paul twisted my arm or I twisted his arm to include those weather maps. But the outlook we're seeing rainfall through Southern Australia now. We consider the impact of late season, the only season winter crop that starts after [indiscernible] and there are always upsides of downsides. You may recall last year with the late season in Western Australia, we thought that they started their dry seeding, and our information is that about 20% of the -- of South Australian Victorian broad winter crop has been dry sown and then wait for the rain to come. So the outcome of last year's late season with Western Australia was a record crop in Western Australia. And it does tend to unfold in a fairly predictable way, the way you don't have fallow spraying and you don't have a heavy pre-emergent use for dry seeding that you do get significant weed infestations and coming up through the crop once there is rainfall as we're seeing it starting to occur now. And therefore, there's a significant post-emergent market that emerges. And with the outlook of weather conditions are normal, also an enhanced serial fungicide market that may emerge. So for us, we need to balance that carefully in terms of our product supply chain and ordering, et cetera, et cetera. But we do have a good process in doing that. If we go to -- sorry, on market outlook. Yes, so basically, the overall market outlook remains quite up and quite positive. And for us, we feel that a lot of the geopolitical issues, domestic issues and seasonal issues that may have thrown us are actually okay as we look forward to the next 6 months. So just to finish off before we open to questions, and happy for any questions to reference items in the appendix, but we are really feeling that Elders are on the cusp of a really solid period. Given that we've done all the heavy lifting around our transformational projects, that spend is coming to an end, and the benefits are starting to flow through as we complete this Eight Point Plan. We note that the first 3 Eight Point Plans delivered well up and above both a growth in the EBIT, EPS and the ROC levels, and taking the active decision to invest to these transformational projects meant that there may be some short-term pain while we wait for the longer -- mid- and longer-term gain to flow through. So just to reiterate, those transformational projects. So we've had Elders Wool and a number of you who have visited the automated facility in Melbourne, but we also have a facility in Perth. We have the Streamline project. Paul's talked to the inventory levels and the efficiencies we've got in there, Streamline. He also spoke to the cost reduction and the FTE position on an apples-with-apples basis. We haven't talked a lot about the feed mill upgrade in our feed processing business. But it's -- the benefits are coming through, and we're seeing those in the numbers now and also the investment in pivot irrigators that we put through the same facility that allows us to get a lower cost and more convenient access to product and grain for the feed mill. SysMod, we've talked a lot about, and it's very pleasing. I proudly put through my first sale last week in Loxton and didn't provide a discount to the staff member that I was doing it for. But yes, it's great. When I was referring to leave the keyboard alone because it was a touchscreen, I came back into 2025. And the final one we haven't talked a lot about is the agri toll formulation facility in Western Australia. So that's up and running. We've done our first batches of trifluralin. So this provides significant supply chain benefit to us with large volume of patent products in Western Australia, which is over 30% of the herbicide market. And that's kicked off. And we're -- as I say, we put the costs in, and then we'll see the benefits flowing over the next couple of years. So from our viewpoint, a solid result for the year. Again, apples-for-apples, one with incentives in, one with incentives out. So we're up more significantly. And then there's another $10 million to $12 million of EBIT that's been forgone with the dry conditions down south for the first half and the wet conditions up north. So with that, now looking forward to the second half and rolling out the rest of the Eight Point Plan. And I think we'll go to questions.

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

Just on Slide 33, you provided some EBIT numbers for the full year, $153 million, $166 million. Just wondering how we should kind of be thinking about those numbers, whether if you just used first half, second half SKU that you've seen in previous periods to effectively illustrate this? Or whether that's how you're kind of thinking about it if the conditions in South Australia and Victoria don't improve over the course of this year, please?

Yes, Paul's just grabbing the slide.

Yes. Yes. Thanks for the question, Will. So your -- can you just run through the actual question again in terms of first half, second half?

Yes, sure. So just if I'm looking at first half '25 EBIT number on your Slide 33 of your deck, it's got that $153 million number and then you've got a return on capital normalization that gets you to $166 million. Just wondering where that $153 million kind of comes from? Like I'm just wondering whether that is sort of a base case you guys are kind of alluding to for this year or whether that's just for illustrative purposes, looking at sort of first half, second half split in previous -- prior periods?

Yes, I'll take that as illustrative, Will.

And if I kind of think about your first quarter and second quarter split for this year versus last year, is it fair to say you've had new contribution first quarter last year and then $38 million, most of that's in second quarter. Is it fair to say that first quarter normalization this year got you back to sort of $32 million for the quarter and so $32 million for the second quarter. Is that how we should kind of be thinking about first quarter, second quarter split in EBIT? Or are they more sort of -- is it more skewed to first half than second -- so first quarter than second quarter this year?

Yes. I think the emphasis last year on providing that first quarter number is a one-off. Obviously, we don't have audited accounts quarter-by-quarter. So we're certainly reluctant to give that detail. Actually, I can't give that detail given the lack of audit. So -- but I think in terms -- from a narrative perspective, Q1 was normalized, notwithstanding seasonal differences between FY '25 and FY '24. Certainly, as the second quarter progressed, we saw an exponential increase in impacts from South Australia and Western Victoria, even Southern New South Wales to a lesser extent.

And can you just delve into your comment around increased competition in crop protection, please? Just wondering where that's coming from and how that's impacting sort of pricing that you're seeing across the market?

Yes. I think it's a really good question because the -- what we're seeing, and we have seen this for many years, that where there are dry conditions and particularly traders who don't have strong balance sheets, they'll have generic products that they're sitting on. And so in localized areas where there are traders in dry conditions, they will discount heavily to liquidate the product. And they're discounting to the broad market. And as a competitive impact, obviously, we've got multiple products. We're not just crop protection. And so we respond in those localized areas. So I think it will -- that is pretty standard across the country. We saw the same -- I recall saying a similar thing this time last year about Western Australia with the late seasons where traders were quitting product. There was an intense local competition, discounting, et cetera, et cetera.

And just one last question for me. I probably should wait until Thursday, but just this commentary around increased competition, does that kind of factor into your discussions with ACCC around Delta acquisition at all? Or any color that you can sort of provide in your ongoing discussions with ACCC to date?

Yes. So we've engaged clearly -- engaged positively with the ACCC team and endeavor to provide our perspective on the market. And I think most players would have a similar view to us that it's highly competitive. There's over 1,500 -- I think my estimate was 1,800 branches around Australia all trying to win business. Some of the areas, for instance, the commentary that I think was in the Fin Review from a grower outside Murray, that grower has 8 different branches that they can choose from 10 minutes from their farm. So it's always been a highly competitive market. It's the most off-patent market in Crop Protection, which is where a big chunk of the focus was. And yes, it's -- that's just the nature of the market. Our backward integration strategy was because you cannot get extra margin from the farmer -- from the front end. So not like a retailer like a Coles, Woolies and the rest of them where you can get extra margin in pricing, we -- our avenue to get extra margin for our shareholders is through taking the margin of our suppliers by backward integrating.

Your next question comes from James Ferrier with Wilsons Advisory.

Can I, first of all, ask you about the agency business? And just looking at the livestock volume and price metrics on Slide 31 there and if you contrast that with the gross profit splits within the segment that you've provided earlier in the presentation, implies that the commission rates that Elders achieved on cattle and sheep compressed, say, 20, 30 bps on PCP. Is that the case? And if so, what's happening there?

Yes. Thanks, James. It's a really good question. Yes, it would look that way. But the reason why -- and firstly, commission rates are roughly flat so that they haven't actually compressed. But as Mark referred to, there's about $6 million of incentives sort of going back into the numbers. About $4.5 million of that goes through gross margin. So it's like a sales commission. And about roughly up from memory, $2 million using that agency number. And I suspect that would account for the difference that you're seeing there.

Yes, James, I think you recall when [indiscernible] price went up significantly a couple of years ago, rather than discounting in our commission because the dollars per beast was much higher, but we just put $1 per beast cap at the same commission. So the idea of being when it went down, that we wouldn't see a dilution of commissions.

Yes, I do recall that. And I was just wondering whether there had been any sort of reverse or that all changed to that. But as Paul has described it, that makes sense. Second question is just around to your earlier question, you were sort of commenting on backward integration. So what was the GP contribution from Titan in the first half of FY '25? I think from memory, it was $20 million gross profit in the PCP.

Yes. Thanks, James. I don't have that number in front of me. I'll take that one offline. But yes, it's obviously offset by the gross margin compression out of SA&B, but I'll come back to you with that number.

Okay. Paul, maybe just for the purpose of this call now then, when you look at that contraction in gross profit for ag chem or for crop protection within the Retail Products segment, would you attribute that gross profit contraction to Titan? And the margin that you would attribute to the retail network is preserved? Or have you seen margin contraction across both to backward integration and the retail margin, so to speak?

Yes. It's a really good question and an interesting one. We haven't seen broad-based crop protection gross margin compression. So we've seen it isolated to the dryer areas. And in terms of magnitude, I think it's important to note in that crop protection number and looking at that gross margin slide, so where we're down $6.7 million in gross margin against PCP, the impact from those dry states is roughly twice that. And so that gives you a sense that it is isolated to those areas, both in terms of lost sales, but margin compression on the sales that have occurred.

Yes. Okay. That makes sense. And then lastly, on the working capital front, you talked about that timing impact in livestock. I think it's $35 million was the quantification of that impact. So if you exclude that working capital for livestock agencies back at $109 million, but when you look at it as a percentage of the 12-month rolling gross profit that, that segment generates the working capital that the LAP ratio steps up to 76%. So it just seems like a very big step up in terms of the capital intensity of that segment, whereas historically working capital to gross profit probably runs at 40% to 50%. So what's happening there?

Yes. I think it is just timing. So we had a very large settlement file leading into half year. And then it is very, very volatile, so you can have build into a live export shipment, which might be a $10 million settlement to 1 client. So it does move week to week. It doesn't work to look at sort of the average over 12 months. So what we had around balance date is a very large settlement file over that Friday, Saturday, Sunday, Monday. And obviously, we prepay on Friday, and we paid twice on Monday as well. Often we don't receive until Tuesday, Wednesday, and it just creates this exponential impacts around working capital at that point in time.

Okay. So there's sort of a double timing headwind, if you like, part of which you've quantified and part of which is more BAU and you just left in the numbers?

Yes, that's -- yes, perfectly balanced, yes.

Your next question comes from Evan Karatzas with UBS.

Maybe just following on to that, just working capital beyond agency. I take your point that some of it is timing related, but a portion of it is also the extended terms you're also offering as part of the sort of finance facilities there. Can you just talk to how much more you're willing to, I guess, increase that? I'm not sure where that number is, I haven't look through the accounts, but just how much more you're willing to increase that? I'm just trying to work out when does this stop being, I guess, a headwind for your cash generation.

Yes. Just a point of clarification. So where we're extending terms for livestock, that falls to that financial services part of the working capital table, not in agency itself, but that has increased against PCP. My view is that we're towards the top in terms of balance sheet lending in that financial services space. I'd also look at it from the perspective that we can use that and do in some circumstances as an intermediary lend to clients where we then can take them through the broker model, which is building very quickly. And so it's not necessarily a long-term lens.

All right. Fair enough. And then the call that you've made for SA and Vic, is it fair to assume those are now, I guess, lost sales? And is there any way you can, I don't know, I guess, quantify what the sales opportunity could be from a higher level of post-emergent spray, please, as well?

Yes. Very difficult to quantify, but I think our very rough estimates of the impact of the dry conditions, not including the floods up north, the dry conditions in the South was around $12 million for the first half. Our thinking in the second half -- I was around country in South Australia last week, and it's still dry as a chip then. But the thinking was that from a fertilizer viewpoint, that given that's been dry conditions, nitrogen -- so nitrogen phosphorus will still be in the soil, so it's probably a reduction in fertilizer for applications. So we'll lose that completely. But the -- I think there's also that there will be heavy weed burdens given that there's been no fallow bring, no pre-emergent and the seeds, given dry conditions stay fertile in the soil. So that will come up with the [indiscernible] coming through now. So from a post-emergent viewpoint, you may recall that the profile, the profitability profile of post-emergent crop protection chemistry is higher than for pre-emergent and for fallow spraying and it's just the product mix of the trifluralin and pendimethalin and glyphosate versus more modern chemistry that's coming through as post emergent. So that's a benefit. And then if the outlook is right and their serial fungicide activity, that profile is also higher than post emergent. So yes, very hard to give you a number, but just to really to paint the picture. But I'd say one casualty though is nitrogen fertilizers side risk, given that the nitrogen will still be in the soil.

Okay. All right. And maybe just a final one, apologies to harp on this. I mean on Slide 33, the $153 million that you sort of put there at EBIT. What actually is that number? I mean how would you generate it? And what exactly are you trying to say there with that disclosure?

Yes. So that's a rolling 12 months...

Not the 12 months. So it's just the actual from last year rolling into the half year. It's just indicative for the ROC. The focus is ROC, not the EBIT forecast.

Your next question comes from Ben Wedd with Macquarie.

Just thinking about the leverage, I think you've got a note in the slide somewhere that you sort of expect leverage to clearly stack towards that 1.5x to 2x range. I'm just interested in sort of quantification where we might get to by the end of the year on that. And then also just sort of as a related point, Paul, I think you referenced client lending as a percentage of the receivables book sort of 30% or so. You sort of said you see that at the upper end. I mean, I guess as you look into the second half, do you think that will remain elevated? Or do you think that sort of comes down? And how much of it is tied into dry conditions that we're seeing now and an unwind of that into the second half?

Yes. Thanks, Ben. So the first one around leverage. Obviously, there's a lot of balance date volatility that will impact that metric. So I'm hesitant to give a number. I think as well this year, one of the unknowns is what we just discussed there in terms of the amount of post-emergent sales, which will occur leading into September 30. So there is the prospect that receivables will be higher at balance date, probably similar to what they were last year just because of the later activity that will occur through the sales profile. So it is difficult to give a number. In terms of the pathway back, and as discussed, we are moderating the pace of our acquisition spend. I noticed well that we're not physically paying tax through FY '25. So cash generation is closer to EBITDA than impact. And obviously, we're coming into our peak earnings months. And so yes, relatively optimistic for leverage. And the second part of your question, Ben?

Yes. Just around that client lending as a percentage of the receivables there, sort of your expectations for that going into the second half.

Yes, probably tied to the answer I just gave, I think, in terms of -- yes, that will be driven by activity in that post-emergent window from July and August.

And then maybe just on the cost base there. I mean it looks as a percentage of revenue if the number, right there, it sort of stayed relatively flat year-on-year. I mean, do you sort of see opportunity to continue moving that down on a, I guess, on a normalized basis, considering some of the benefits from SysMod, Project Streamline, et cetera?

Yes, absolutely over time, as we get to use the technology and obviously, with the spend that's going into Microsoft Dynamics as well. So over time, AI will increasingly be built into that tool. Our expectation around cost over time is that it grows 50% of CPI over time as we get the benefit of the spend in technology.

And then just a quick one on tax rate there. And I think sort of normalized tax rate of just over 23%, relatively less than expectations there. So just any comments around the key drivers?

Yes, I might come back to you on that. I thought it was a bit higher than that, but I'll take it offline.

Thank you. That's all the time we have for our question-and-answer session. I'll now hand back to Mr. Allison for closing remarks.

Okay. Well, thank you very much. And I think there are a bunch of other questions and discussions to happen this week. So Paul and I look forward to catching up with many of you in the one-on-one as we go through the rest of the week. So thank you very much for coming in today.

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