Thank you for standing by, and welcome to the Elders Limited FY 2022 Results Briefing. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Mark Allison, CEO. Please go ahead.
Thank you very much. We might start the presentation on slide three. Welcome to all for the Elders full-year results presentation for the FY 2022 year. Thank you for joining Paul and myself for this session today. Paul is highly experienced with Elders. A number of you have met Paul previously and he is Group Treasurer and Acting CFO. From an Elders view, this is the second year of our third Eight Point Plan. The Elders philosophy since the first Eight Point Plan has been to control what we can control and not to dwell on what we can't control.
To have a solid capital and cost structure to allow us to make good returns in bad years and make great returns in good years, and that's what we've experienced. The FY 2022 results are example of great returns in good market conditions. 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 shareholders and stakeholders. In summary, we aim to control what we can control. Over the past two years of our third Eight Point Plan, we've experienced strong market conditions across most production enterprises and geographies.
Although this has coincided with the climate impacts, particularly unseasonal flooding, supply chain disruptions, and geopolitical uncertainty. We've also had positive livestock prices, winter crop and summer crop conditions with more recent unseasonal rainfall. In this context, the performance of Elders with its clear and consistent strategy, multiple diversifications, high financial discipline, hard-working and committed team, and enduring customer anchor as the most trusted brand in Australian agriculture, the result is quite outstanding. Throughout this, the result is good in safety, strong in sustainability, profit, strong in return on capital, and strong in strategic delivery.
Our commitment is to provide 5%-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. Over the last five years, we've had a 33% growth across that period at 26% return on capital, 26.2 % that we finish up on this year. The results today are a continuation of our strong delivery of this commitment, with much achieved and much more to achieve into the future. On a final note of introduction, we've also announced that I'll retire from my role of Managing Director and CEO in 12 months from today.
This will see the completion of the final year of the current Eight Point Plan, the completion of three highly successful Eight Point Plans, and 10 years in the leadership of Elders as Chair, Executive Chair and the CEO. From the viewpoint of myself and the board, the timing is right, and this will allow for a leadership refresh and smooth transition to Elders' next phase of growth. The focus of today, however, is our FY 2022 annual results. The approach today is that I'll provide an overview of the results.
Paul will go to the detail on our financial performance, and I understand I'll then provide an update on our outlook and growth initiatives during the final year of our third Eight Point Plan. If we go to slide four as I provide the overview, and the first slide really addresses all of our key stakeholders, starting with people, and you can see the TRIFR at 12.6. I think the critical point here is the 10% reduction over the last five years of our total recordable injuries. From an employee engagement viewpoint, 79%, just to put this in context, because we have had a very, very strong engagement enablement over many years.
That 79% compares with the Australian norm of companies of 65% and the highest performing companies at 73%. A very strong position. When we look at our customers, the stakeholder pillar, you can see the most trusted brand, number one most trusted brand again for the third year in a row, and Net Promoter Score of 49. Again, just to put some context, 49 compares with NAB at -1. It also compares with Medibank Private, sorry, prior to the hacking at 45. Then a company such as Woolworths at 49, equivalent to where Elders sits.
From a community viewpoint, the community, regional rural communities are the core DNA of Elders and have been for 183 years. You can see very strong contribution through donations and sponsorship. 1,000+ local community sports teams and events sponsored and also supporting key initiatives like the Royal Flying Doctor Service and Beyond Blue within regional rural communities. At a shareholder level, we've continued our very strong result. We'll go into the detail of this, but we're sitting with our growth rate at 33% over the last five years and finishing this year at 26.2% as a return on capital.
Moving to the next slide on financial summary. Just to highlight a couple of key points. You can see the underlying EBIT at AUD 232 million at the top end of the range that we communicated earlier in the year at 39% growth on the previous year. Return on capital at 26.2%, so very strong in a difficult market in terms of price inflation and cost inflation. Cash conversion, which as a team we think is quite acceptable given the backdrop and scenario we're confronted with in the market at 75%. Our leverage is 1.2x and, as I mentioned, Paul will to break down each of those components in great detail.
Looking at the next slide on safety, health, and wellbeing. You can see the lost time injuries at six, and it's quite interesting because when we look under the data, we've had a journey from the first Eight Point Plan, where we had 33 lost time injuries, and we got it down to two. Just having a look at the data on what's happening this year with six lost time injuries, five of those six lost time injuries have been contributed from acquisitions or bolt-on acquisitions, so smaller or larger acquisitions.
It's really something as a management team that we're looking very closely into in terms of the safety culture integration of our acquired businesses to ensure that the great work that we've done across the Elders networks is also passed on and contributed in a similar way to the bolt-on acquisitions. I mentioned the total recordable injury frequency trend over the last five years, and also we're much more proactive with expenditure on safety initiatives throughout the business. Looking to the next slide on sustainability. We published our principles and our climate targets over the last couple of years with our sustainability report.
You can see our achievements. We're making good progress across a number of areas. I would note on the net zero Scope 1 and 2 emissions where there's an increase, and this is really reflecting our additional people, our acquisitions and additional fleet, et cetera, that's driving that. In terms of the achievements across on the right-hand side, pretty much on track. We plan to ramp that up further in terms of our initiatives as we've stated through the sustainability report.
I think the final point there with the 41,000+ drums that have been recycled, a great achievement and also from my viewpoint being a signatory to the original drumMUSTER agreement many years ago, you know, very, very good to see those initiatives still, like, giving great outcomes, in terms of recycling of ag chemicals. I'd like now to pass on to Paul, and Paul will move on to slide nine to run through the financial results. Thanks, Paul.
Thanks, Mark. I'll commence on slide nine of the pack which displays trend analysis from FY 2018, which is the first year of the second Eight Point Plan and demonstrates the momentum that currently exists within our business. Firstly, sales have increased to AUD 3.45 billion in FY 2022 at a five-year compound annual growth rate or CAGR of 21%. Underlying EBIT has increased to AUD 232 million at a five-year CAGR of 32.6%. Costs have increased to AUD 421 million at a five-year CAGR of 10.7%, but importantly, cost to earn has decreased over the five years from 79% to 64%.
Earnings per share were stable year-on-year due to the inclusion of company tax expense in underlying NPAT in FY 2022. If we adjust for this impact, five-year CAGR is 25%. The macro thematic for FY 2022 provided more tailwinds than headwinds, with area planted for both summer and winter crops similar to prior year but above historic averages. Cattle prices were up year-on-year, although the financial benefit was partially offset by a decline in volumes due to restocking. Fertilizer and AgChem prices increased significantly in FY 2022, but were successfully passed through the supply chain .
I note the wet start to spring delayed some client activity in Q4, which resulted in Q4 EBIT in FY 2022 declining AUD 8 million year-on-year. In summary, conditions in FY 2022 were favorable, and the outlook remains so, but the year wasn't without its challenges. I'll now move to slide 10, which contrasts FY 2022 against prior corresponding periods. Looking at the numbers, sales revenue increased AUD 896 million, up 35% year-on-year, with rural products contributing 91% of that growth. As a result, gross margin increased AUD 123 million to AUD 652.7 million, up 23% year-on-year.
Gross margin percent decreased 1.9% due primarily to the increased ratio of low-margin fertilizer in the total sales mix, as well as a slight reduction in agency and real estate commissions. Underlying EBIT increased AUD 65.6 million, up 39%, and following 38% growth in FY 2021, both well above our target range of 5%-10% growth through the cycles. Underlying NPAT increased AUD 1.1 million to AUD 152.2 million with company tax expense recognized as underlying from October 1st, 2021, complicating the prior year comparison. Operating cash flow was AUD 113.7 million, with a cash conversion of 75.7%, which was down year-on-year due to the working capital investment required to fund growth.
Approximately 53% of growth in FY 2022 came from acquisitions and organic initiatives, both within Elders control, with approximately 47% of growth coming from market drivers, as Mark will speak to later in the presentation. Moving now to slide 11 to discuss gross margin drivers, where pleasingly all product categories increased their contribution in FY 2022. FY 2022 gross margin totaled AUD 652.7 million, up 23% year-on-year. The top four product categories contributed 70% of total gross margin, with all showing growth. Within the retail business, AgChem contributed AUD 172.9 million, up 32.9%. Agency, AUD 147 million, up 4% despite lower volumes due to restocking.
Wholesale contributed AUD 73.1 million, up 19.4%. Real estate, AUD 66.1 million, up 21.5%. Product categories showing the most percentage growth include other retail, which grew 82.3%, assisted by the Sunfam acquisition, and fertilizer, which grew 52.8%, placing downward pressure on gross margin percent, given the comparatively low margin. Moving to slide 12 now, which shows our geographic diversification, which is a key defense against regional variability. Slide 12 shows geographic contributions at EBIT that excludes the wholesale business and also excludes corporate overheads. Pleasingly, all states grew double digits in FY 2022, with exceptional growth achieved in Queensland and the NT, up 60% and assisted by the Sunfam acquisition.
New South Wales is up 53.7% and South Australia up 37.4%. I'll move now to slide 13 to discuss product categories, another pillar of Elders' diversified business model. Growth was achieved across all product categories in FY 2022, with 90% of growth coming from rural products and real estate. Within rural products, retail had an exceptional year, increasing gross margins by AUD 87.7 million or 39%. Key drivers included the Titan backward integration, which added AUD 15.1 million additional gross margin. AgChem increased AUD 43 million and fertilizer an additional AUD 20 million, both supported by an expanded selling network, acquisitions, and favorable seasonal conditions.
Wholesale products increased gross margin by AUD 11.9 million or 19% from expansion of the AIRR network and favorable seasonal conditions. Real estate services increased gross margin by AUD 10.9 million or 21%, with key drivers including broad acre sales up 54% year-on-year, and residential up 21%. Properties under management increased 20% year-on-year, supported by acquisitions. Agency, financial services, and seed processing all contributed growth as well year-on-year. I'll move now to slide 14 to discuss costs, which we're watching closely, given our focus on costs and capital efficiency. Costs grew AUD 57.7 million, up 15.9% to support business growth as well as efficiency projects such as SysMod and supply chain optimization.
Pleasingly, cost to earn reduced from 69% to 64% year-on-year. In terms of key drivers, people contributed an additional AUD 26.2 million in 2022, of which AUD 1.5 million relates to increased performance incentives. Breaking this down, the Elders branch network added 118 FTE to service more clients. Corporate added 58 FTE to support business growth as well as our strategic efficiency projects. Acquisitions accounted for an additional AUD 18.4 million in costs, with 13 acquisitions completed in FY 2022, adding an additional 115 FTE. Other significant contributors include vehicles, fuel depreciation, and also a significant investment in our cyber defense capability.
I'll move now to slide 15 to discuss capital efficiency, which is at the center of Elders' business model. Return on capital increased from 22.5% to 26.2% in FY 2022, increasing the three-year average to 22.2%, which is well above our hurdle rate of 15%. The key drivers include EBIT growth of 39% alongside a reduction in average working capital days. The reduction in average working capital days was supported by a focused procurement management, especially in Q3, and deferred debtors comprising a lower percentage of the total debtor book.
I'll now move to slide 16 in cash flow, where we see operating cash flow fell AUD 28.5 million or 20% year-on-year, resulting in a reduction in cash conversion of 19%. The key driver of this outcome was the investment in working capital required to fund the 40% growth in retail products, given the net 53 working capital days in this business, which required investment of approximately AUD 125 million. The target cash conversion for FY 2023 remains at greater than 90% of underlying NPAT.
I'll now move to slide 17, where we see net debt to the balance date increase AUD 68 million to fund business growth, notwithstanding leverage fell from 1.4x to 1.2x, which remains below Elders target of 1.5x-2x. Balance sheet strength, combined with significant undrawn bank facilities and covenant headroom, provides flexibility for Elders to pursue growth opportunities in FY 2023 and beyond. Turning to slide 18 now, I note a final dividend of AUD 0.28 per share has been declared, taking total FY 2022 dividends to AUD 0.56, 30% franked and up 33% year-on-year.
The dividend payout ratio has been increased to 58% from 43% in FY 2021 and near the top of the policy range of 40%-60% of underlying NPAT. Underlying EPS was AUD 0.973 in FY 2022, with prior year comparison complicated by the inclusion of company tax expense in underlying NPAT as noted previously. EPS would have been AUD 1.341 , up 38.7% on a comparative basis to FY 2021. Onto slide 19 now, to provide an update on our deferred tax assets. As disclosed last year and noted throughout the presentation, Elders now recognizes all tax expense against all underlying earnings, notwithstanding deferred tax assets from historical tax losses are yet to be exhausted.
The deferred tax asset balance decreased by AUD 60 million in FY 2022, leaving a carry forward balance of AUD 50 million into FY 2023. Elders forecast that all deferred tax assets will be fully utilized by FY 2024. This concludes the financial section of the presentation. I'll now pass back to Mark, who will discuss our growth aspirations as well as the market outlook.
Okay, thanks, Paul. We'll move now to slide 21. I thought we'd kick off this section just by recapping the ambitions and the strategic priorities and enablers of the Eight Point Plan. We look at our ambition, as we've mentioned, compelling shareholder returns, 5%-10% through the cycles at 15%+. As we've mentioned, the CAGR for EBIT is 33% over the last five years, and we've finished, we've landed this year at 26.2% for return on capital. Industry-leading sustainability outcomes, and we've made great progress. I really feel that we're at the point of stepping off our sustainability work to the next level as we bring in a new executive general manager in the area.
We also provide even greater focus with a dedicated board committee around sustainability and safety. Pretty exciting to continue on the great progress we've made. Most trusted agribusiness brand for three years in a row we've held this position and coming from a long way back in the early days. It's a great inspiration to all of us that we're seen in that light and we wanna maintain that position. When we look at these strategic priorities, we'll talk to a little bit more detail around firstly, winning market share across product services, geographies, and you can see the progress to this point on that.
Capturing more gross margin in rural products, and we've been driving our backward integration strategy, as many of you are aware, both through the Elders retail business and the AIRR wholesale business, with brand segmentation strategies across both businesses with backward integration. Optimizing our feed and processing business. A great combination of investments both in efficiency in Killara in particular, and that provide efficiency, strong financial outcomes and also great sustainability outcomes with the investment in our pivot irrigation, the solar panels, the efficiency that we're adding into our milling process and the improvements across animal welfare, with bedding and shading that have been put in place. Some great work there. Developing a sustainability program that's authentic and industry-leading.
I think this is the critical point for us. Authenticity, again, is core DNA and has been for many years. Getting real outcomes for the industry that also benefit Elders is critical for us. Our enablers, systems modernization. Many of you, again, have been aware of our program of modernization that has been moving along quite nicely, and we'll talk about that shortly. Attracting, retaining, developing the best people and providing a safe and inclusive working environment. Again, a critical enabler for us, and particularly when we look at accessing a broader labor pool through regional Australia with all the constraints on labor that we've seen across many industries.
Then finally, the aforementioned financial discipline and this really simple concept in agriculture that you diversify significantly across multiple aspects of your business as we've done, and reset your cost and capital base so that you make good money in bad seasons. This has been reflected in the last Eight Point Plan years of performance and delivery. Moving to page 22, and I'll just pick a few of these to comment on, rather than going line by line. In terms of winning market share, 13 acquisitions that we've seen through the business, and we'll talk a little bit more around that in the universe of acquisitions later on.
That's largely across the retail business, but also some great initiatives across our wholesale business with the establishment of the distribution center in Westbury in Tasmania, which will continue to underpin both the Elders branch network in Tasmania and also the AIRR member independent member network in Tasmania. We've done some refurbs on some of the AIRR facilities, but also in Brisbane and Tamworth. We've put in a new facility in Wagga or upgraded facility, and we're looking in Central Queensland in the same way. Going through the capturing more gross margin.
Again, the expansion of our pipeline with 10 new Titan products launched and remembering that the Titan, the active ingredients that go into Titan, our crop protection products, are also cut and paste across the parent crop protection products that are sold through the AIRR wholesale network. So some good product development and the targets there are products that are coming off patent or formulations that are coming off patent. Our first preference is always to make an arrangement with the original discoverer or producer of the crop protection product. If we're unable to do that, then we'll do it ourselves through our formulation technology and sourcing our banks of ingredients. Looking at expanding our service offerings.
The announcement from earlier in the year, the AUD 25 million investment in automated wool handling. I'll talk to it shortly, but you know, a great initiative and an investment in regional rural Australian agriculture that's has not been made before. Clearly again, talking about the DNA of Elders, wool is core DNA. Going through other products in the product offerings with our financial services products and some good success around the Livestock in Transit Delivery Warranty that we put in place a few years ago. Our feed and processing business.
I've already spoken to a few of the great initiatives that the team have put together with the feedlots, and we've also taken the decision to close the Elders Fine Foods business in China. That's currently in the process of being closed down. It was significantly hit with the Shanghai lockdowns, where it has a very strong base of food service restaurant and hotel business. We took the decision early in the year to close that business. Sustainability program progress I've made comment on already. Our systems modernization I'll talk to shortly, but we're really moving along now with going live with Workday in February.
Largely, we're on track across those areas of the business. People and safety. I've spoken quite a bit about that and also the cost and capital efficiency that we've talked to, and Paul has also spoken to. Moving to slide 23. Slide 23 looks at the attracting and retaining the best people. You can see our fleet or a gaggle of agronomists, I'm not sure. 200 agronomists that we've now got in the business and with very strong fee for service component of that, where we don't necessarily recommend a product, but we are paid for our advice that we provide. That really underpins our innovation strategy both at Thomas Elder Institute and Thomas Elder Consulting level.
When we look at the engagement and enablement, and I mentioned right at the beginning of the presentation, the context is really important because you look at the numbers and say, "Well, flat in engagement around 76%, 78%, 79%." But then when you see it in the context of the average Australian norm engagement being at 65% and the highest performing companies being at 73%, you can see the strength of the Elders culture and why we've had such strong alignment to the Eight Point Plan implementation and the disciplines that we've put in place.
I think it's something to really reflect on when we look at post the third Eight Point Plan and how deeply embedded the financial disciplines the business case approach the processes and systems that we put in place over the three Eight Point Plans that are now deeply embedded and part of the culture of Elders as we go forward to our next growth period. When we look at enablement, again, you see 77%, 76%, 79%, 82%. Again, referencing in the context of the broader industry, Australian norm is at 67%, so Elders at 82% and the highest performing companies in Australia at 73%.
Again, a worthy note when you look past the third Eight Point Plan, the deep embeddedness of the disciplines that we've driven through the Eight Point Plan across financial, social, values, systems, processes, and how critical that is to Elders as we go through our next growth phase. When we look at our diversity numbers on gender, you can see in the bottom left pie women in leadership positions. We have made great progress from 5% at the start of the Eight Point Plan up to 17%. We're close to 20%, but we've got a lot of work to do here, and I think everyone in the business knows that.
One of the interesting insights is that we have actually been diluting our diversity numbers with our bolt-on acquisitions, which are largely all-male workforces and not having women in leadership roles in the businesses that we're buying. Having said that, we're still highly committed to improving this significantly in line with some of the other areas when we look at the slices in the pies. Okay, moving to slide 24 and the growth opportunities. Quite high level, I think everyone's aware of our strategy and where we drive our bolt-ons, backward integration, organic growth, et cetera.
Just slicing it a different way, firstly in brand optimization and, yeah, it's part of the diversification, but as it is, we've got retail brands with Elders, we've got product brands, we've got the service brands, and we use brand segmentation quite significantly within the business either to hang other products under the Elders brand, like an Arnott's, an Arnott's approach, where it's an umbrella brand, or alternatively, to have dedicated product brands like a Tim Tam brand under the Arnott's umbrella.
We have Titan Ag, Crop Protection, Apparent Crop Protection, Pastoral Ag, Animal Health, independent-owned, Animal Health, et cetera, and seed brands, et cetera, in order to drive greater share of wallet rather than trying to get dominant share under the Elders brand. The brand segmentation approach is a much more successful approach. In terms of branch optimization, we talked about the additional branches that we've added to the network. I think, again, with our approach across all of the business for many years, it's quite methodical and quite practical. To give a great example with Deloraine in Tasmania, it was a.
We did have a lot of customers coming into Launceston that was coming from that area. Then we put a very small pilot shed in Deloraine. It turned out to be very successful. We were able to increase our service levels, and now we're building a brand new state-of-the-art branch to service those clients. That sort of step-by-step approach, making sure that we're client-centric, we give them what they want, and this has been the approach we've taken across Australia. The Tasmanian example is just one example. Strengthening our service offerings, I talked about in the last slide, and driving our innovation, and we've appointed a new AGM strategy, sustainability and innovation.
Our sense is that we're at a stage in regional rural Australian agriculture where we can achieve sustainability and productivity and profitability outcomes all at the same time rather than having to go backwards from a commercial viewpoint to go forward from a sustainability viewpoint. We're very excited with them joining the business in January in that vein, and as I said, looking for a real step up now from great progress that we had made previously. The next slide in 25, we're looking at, you know, the question that's raised, you know, are you running out of bolt-on acquisition opportunities and do you still have gaps?
I think the answer is that there are many, a very large universe of opportunities. The right-hand side, you saw it, the half-year result, just identifying for the independents, whether they're an independent associated with AIRR or with CRT or pure independents through other groups. There are many opportunities for bolt-on acquisitions. I think it's worth noting this year that of the bolt-on acquisitions, we developed 57 financial models on potential acquisitions. I guess we would've been approached by probably 80 or more, and we developed 57 financial models. We issued 27 non-binding indicative offers, which is the next part of the supply chain in acquisitions.
We completed 13 acquisitions, EBIT for the year at AUD 4.2 million and annualized at AUD 8.5 million, with four post-implementation reviews, just to ensure that we have the discipline of what went right and what went wrong. I mentioned earlier the safety integration component that we've identified with some of the bolt-ons. Our sense is that the universe is still large. It's, there's still great opportunities and allows us to make the right decisions for the right reasons, because there are many options to choose from. When we look at slide 26, just looking at the long-term, what's happened with acquisition growth versus tight backward integration and underlying the underlying business.
I think just take a little time, and I'm sure you'll get a chance to take a little time to look at this slide because it actually tells a really important story, and confirms our philosophy of controlling what you can control. If you look at the base business over this period since FY 2016 to FY 2022, there has been growth and it's been steady growth. There's no doubt the base business would have ticked along. The big uptick, in fact, the bolt-on acquisitions and the backward integration strategy by FY 2022 is contributing 33% of the total portfolio. I think it just reaffirms what we've said for many years. We control what we control.
Weather goes up and down, rain falls, rain doesn't fall, you know, commodity prices swing around. The reality is that you can have consistent high return growth in agricultural businesses by controlling what you can control. There's a slide later on in the presentation, the last slide actually, that shows that in a very clear manner by highlighting the environmental impacts and the constant growth of Elders through that period. Elders Wool handling on 27 announced earlier in the year. We're moving along nicely and this project, all the machinery's arriving in February, the automation machinery. The sites are being put together now.
I think the one issue on this is that apart from the upside and reinvestment in the wool industry, the one issue that we've been working through is the increase of building materials, and that's reflected against the business case. Even having said that, our feeling is that we're largely on track. We're running an external project assurance peer assessment from now through to January next year, just to make sure that everything is completely under control. It is a great initiative for Elders to be part of in wool. On the systems modernization program, page 26, you'll recall on the right-hand side that we broke the program up into multiple waves that run from FY 2021 through to FY 2025.
The idea here was that in line with controlling what we control, we didn't wanna be locked into a runaway train and not be able to stop or think and reflect and assess. We're doing it very methodically, low pulse rate, wave by wave. We're doing the people foundation, internal financial and people foundation. We started at wave 0, we're now at wave 1. We've worked a coming into place in February. We've narrowed the cost estimates from ±20% to ±10% and still on track, exactly where we were at the beginning. We've also allocated the broad split of CapEx versus OpEx for the project.
Paul can talk in detail to this if anyone would like to in the question session, but the rough split is 60/40 CapEx/OpEx. I think Paul also mentioned earlier, and we have been spending, not surprisingly, even though our systems are older systems, we have been spending quite a bit of time on our cybersecurity, with data security and privacy project, cloud application infrastructure security project, and a cyber resilience project. I guess one of the interesting points from us, and we've had simulated cyber sessions where someone takes over the system and basically what we're seeing unfold in the newspapers.
We've had those simulations internally, and oddly, our old systems and non-integrated systems across a few areas of the business actually do provide a little protection zone at the moment, because it's not all fully integrated. Having said that, we take it very, very seriously, and we've made significant investment to ensure that we have that resilience and security, particularly around privacy, that we need. Moving on to the market outlook and from a market outlook viewpoint, slide 30. This is the update of the half-year slide on the split of where the upside of gross margin comes from.
We've used the same assumptions and allocations as we did in the half-year, so we've got consistency in terms of acquisitions, organic growth and market. As Paul will very quickly point out, this is more art and assumption than hardcore numbers. It really does paint the picture. You can see the allocations down the right-hand side and the basis of it, and we're happy to discuss and debate that. At half-year, we were sitting at 42% of our upside coming out of the market and 58 % out of acquisitions and organic growth.
By the full-year, it's up to 47%, which is, I don't think, is too surprising, really as we did hold back our backward integration due to a desire not to be caught with high unit price owned stock. So we did limit the backward integration once we got to May. Also the market continued to tick along. I think the question in terms of outlook that comes from this is, so what does this mean for the FY 2023 year? Have we peaked? Is this as good as it gets? I think our sense is that well the outcome plan talks about 5%-10% through the cycles, growth through the cycles.
We at greater than 15% return on capital. We hold to that assessment. Clearly, to match last year will be a massive challenge for the business, but we really are targeting getting maintaining our position of 5%-10% through the cycles. When we look at that particular slide in slide 30, if you go to the market part, which is the AUD 46 million of raw product gross margin, it. When we look at that, it's really the nuance that is not fully understood, is still if AUD 20 million of that AUD 46 million is summer crop, it's moved from below average to an average summer crop in that year.
Holding the average is means we don't lose the AUD 20 million. Having said that, until the excessive rainfall, the summer crop looked like it'd be way above average. We'll see how it all washes out part of the plan in terms of replanting of cotton and the windows for planting. On the winter crop, the AUD 26 million component there, it's from average to above average. That's really when we look at it, controlling what we control, that's the gap that we're looking to fill as we go for the next 12 months. With that, just very simplistically, we can take questions on it.
Very simplistically, the bolt-ons are, you know, in the order of AUD 10 million annualized, backward integration in the order of AUD 8 million, and organic growth that we've been having is in the order of AUD 8 million. What we can control and what we can do does theoretically give us the opportunity to fill the gaps, the seasonal gaps, if indeed the winter crop of next year goes back to average. We've got the ABARES number from September, which says that it won't quite go back to average, but you know, that's up for debate, and we'll see the new ABARES numbers out in December.
Going to the next slide, market outlook. I think just to note, the indicators there, I mean, everyone has access, but I think importantly on the next slide is the implications from our viewpoint. You can see the impact on wet weather. Probably worth spending a little bit of time around that because wet weather impact at this time of the year can damage winter crop, which we've seen in areas of New South Wales and Victoria. The implications of downgraded winter crop don't hit Elders this year. They hit Elders the following year from a cash flow viewpoint for the farmers.
Having said that, because our producers have had reasonable seasons over the last couple of years, the thinking is that it may not be a significant impact on cash availability, particularly if commodity prices remain high as they are. The implications for summer crop is that we've had washout of early planted sorghum crops and cotton. The impact on that will depend on how we go if La Niña does start to move away and we go back to dry conditions. In which case there'll be planting, replacement planting, given all the dams are full and all the profiles are full.
There's, like, there will be absolutely a lot of very weedy fallow paddocks around the East Coast. So I think the implications difficult to determine. Our question and when we go apply it to livestock as well, our question is, you know, has it moved? It has been slower as we've gone through the first you know the August , September , October period with the wet conditions in the east. Has it just moved? Has it gone? Or will it actually be bigger and stronger given that the winter the soil profiles are very full for winter crop next year?
There'll be weedy paddocks everywhere. I think as we go through all the others, I guess the key point to us is around this financial discipline as we see what happens with the market impacts of the wet conditions. The final slide then before we go to questions, if we look at the historical performance versus weather and world events from the first Eight Point Plan, and you can see all the way through and even with multiple issues occurring, this diversification strategy, multiple diversification strategy, return on capital portfolio management strategy and high financial discipline, even in the worst drought in 100 years in the east, we were still flat or slightly up on growth.
For the FY 2020, FY 2021, FY 2022 period, you know, we're looking at a set of numbers today with 39% growth, and that seems just incredible. It's a credit to the Elders people in what they've been able to do. You look back last year, it was actually 38% growth on the previous year, and the year before was 64% growth on the previous year. In terms of, you know, the grains and we have a good season, the slide actually emphasizes very significantly that you know the 5%-10% growth, we've been hitting a CAGR of 33%, and the 15% ROC target at 26.2 % and controlling what we can control. So with that, I think we'll go to question time and open up the questions.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Philip Pepe from Shaw and Partners. Please go ahead.
Hi, Mark and Paul. Thanks for taking a question. Look, well done on a solid result despite the share price move. Just on the outlook, when you suggested FY 2022 difficult to replicate, did you mean the growth of 39% growth? Or did you mean the actual AUD 232 million EBIT? Like, are you still aiming for 5%-10% increase in the dollars this year?
Yeah. I think the 39% growth may be difficult to replicate. No. In terms of the number of AUD 232 million, our sense is that our plan is to continue to drive this 5%-10% growth through the cycles and at greater than 15%. We look at that number, we look at what might not be there next year in terms of things we can't control, like the winter crop that I mentioned. We say, "Okay, well, we've got a number of other initiatives we do control, like backward integration, organic growth, and the bulk of our acquisitions. Let's drive hard to try to, you know, match the number or beat the number, and do our best." That's our thinking on it.
Understand. Secondly, I guess, the question on everyone's mind, I guess, in terms of the timing of your resignation or retirement, clearly, conditions have peaked, so we'll take that as a given. It was a joke, by the way. In terms of succession planning, though, I mean, you know, you came across from Wesfarmers that had a heavily, you know, return on capital focus, and that drove down from the MD you know, all the way through the company. It seems to me like you've instilled that at Elders.
In terms of what happens in 12 months' time, are there many internal candidates that could put their hand up for the job? How well, how deep in the business is the Eight Point Plan, you know, understood? How, you know, realistically, what are the material changes that may or may not occur in 12 months' time once you leave?
Yeah. Thanks, Phil, and thanks for the "as good as it gets" comment. I'll expect nothing less. I think it is. I think this philosophy is deeply embedded because we go two, three down, maybe four down in the organization, and it's across everything. You know, it's reflected in simple business cases, the business case approach for every decision as opposed to informal cowboy calls as it used to be many years ago in Elders. I think it's deeply embedded, and it's a core part of the strategy. I think by the half-year we should be in a position, so for the May half-year results, I think it would be good.
I mean, we can't guarantee it. It'll depend on a few issues. It'd be nice to have a glimpse of the new strategy going forward, so everyone can have comfort that the financial discipline and the core components of what we've been doing are captured. I think the other point to note is, with our systems modernization project, it actually puts us in a much greater position of enablement for technology and digital online activity and integration of all of our system to further service our clients. It actually sets the strategy out probably for when you look at the Eight Point Plan, it's kind of an operational strategy.
It's pretty 101 and about, you know, revenue being higher than costs and, you know, running costs, cost to earn, reducing, et cetera. I think we now have an opportunity to have a much more sophisticated and more strongly controlled strategy going forward with the systems modernization. In terms of internals, we've got a few internals, although we've, you know, Tom Russo's just been appointed the EGM of the Network, and I think many of you know Tom has done a wonderful job in multiple roles, most recently in real estate. We've got really good continuity across a core part of the business. We have Pete Lowrie as Chief Operating Officer at AIRR.
I think in terms of the thinking, and the board obviously runs the process for selection of a new CEO, and they're well and truly onto it. The idea is to have as broad a number of candidates, internal, external, and to get the best person to take Elders to the next level.
Excellent. Thank you. Well done.
Thanks, Phil.
Thank you. Your next question comes from David Pobucky from Macquarie Group. Please go ahead.
Morning, Mark and Paul. Congratulations on a good FY 2022, and Mark, congratulations on a very successful 10 years of leadership at Elders as well. Just first question, in terms of supply chains and inventory levels, can you talk to those two and how have you managed the risk of margin squeeze with commodity prices coming off to some extent?
Yeah. Thanks, David. I'll field that one. I think firstly, in terms of supply chains, we have, you know, had to procure a little earlier, particularly for winter crop, through Titan Ag, and that has put some pressure on working capital, particularly in the first -half of the year, which you will have seen in operating cash flow. It's less pronounced as we move through the year. We did intervene in terms of inventory procurements in Q3 this year just to slow it down, to basically right-size it at that point in the year. So we've managed it that way.
Looking forward, we do see some easing in both cost and pressure in supply chains that it'll follow a similar path in FY 2023 to ensure that we have the goods that our clients need. The second part of the question in regards to passing on costs, you know, what we have seen, you know, if we look at where the cost has increased the most, we can see fertilizer in terms of pricing, you know, up about 80%. You know, that is linked to the price of gas and therefore to the situation in Ukraine. On the other side of that, what we've seen in the sector is, you know, higher wheat and barley prices.
You know, the industry, the supply chain has been able to absorb those costs. They're two sides of the same coin, if you like. At this stage, we haven't seen, you know, pressure on margins. I think as well, I'd say in terms of balance sheet capacity for the sector, you know, we've had two to three really good seasons. You can see that in Farm Management Deposits, which are now, you know, up around AUD 6 billion and, you know, up 10%, year-on-year, you know, there's great capacity out there to absorb this.
Thanks, Paul. One more, if I may. A step up in corporate costs in the year. Do you expect a further increase in FY 2023 off the back of, you know, continual investment in people and strategic initiatives, et cetera?
Yes. I think that there will be. We're just having a look at the cost base now and I'm concerned that, you know, cost and capital efficiency is close to the top of the list for us, you know, behind return on capital. We do expect certainly there to be support costs as we implement SysMod. That will move around the business as various parts of that project get implemented.
Thanks very much.
Thank you. Your next question comes from James Ferrier from Wilsons. Please go ahead.
Good morning, Mark and Paul. Thanks very much for your time this morning. Could I first of all ask about seasonal finance? I think, going back a year or so ago, you started introducing some of that funding on balance sheet as far as livestock was concerned. Can you just clarify where that's at now?
Yeah. We've had a little bit of growth through livestock, under AUD 100,000. I think the average balance through the year was around AUD 17 million. It did drop off towards the end of the year, but yeah, fairly stable and consistent growth there.
Thanks, Paul. With respect to crop inputs and the opportunity to offer extended terms there to customers, and obviously you're funding that on balance sheet. How does Elders manage that in terms of either at a store level or is it centralized credit? How do the economics flow back to Elders as far as, you know, allocating that margin, the extra margin that you'd no doubt achieve in offering extended terms? Does that get booked back into retail products, or is it into financial services or elsewhere? What size would that book be now at crop inputs, seasonal finance book?
Yeah. Good questions, James. Firstly, just in order, so those extended terms are subject to a rigorous credit review process, so that is centralized within the Adelaide head office. In terms of margin, that does get captured within cost of goods sold. Often , the funding charge is just blended into the sale of those products. Sometimes , it's levied separately as interest, but either way, it lands in the same place above the line. What was the final question there?
Just the size of the book, Paul.
Yeah. I can tell you that the size of the book as a proportion of the total debit book has declined year-over-year. I don't have the actual size of the deferred book in front of me, but I would say as well that, you know, we classify anything that is non-standard terms as deferred. You know, that can be relatively short-term extensions, you know, that are beyond 30 days end of month. So that number doesn't really provide much information in terms of, you know, the longer dated elements of that book.
Okay. All right. That's helpful. Second question's around fertilizer. I might be misreading this, but Slide 36 shows fertilizer volumes of about a million tonnes. The same slide in last year's full-year presentation showed about 980,000 or 978,000 tonnes, I think it was. Am I right in saying that fertilizer volumes are up 2% year-on-year?
Yeah, looks like it.
Gross margin up 53% year-on-year from that 2% volume growth?
Yeah. I'm not sure about the gross margin, but just on a broader share issue, fertilizer is one of the areas where we've increased market share, so particularly in Eastern Australia. The issue we had with fertilizer margins is because it's a dollar margin with an increasing revenue in the West. There was significant dilution of margin out of just the absolute calculation.
Yeah. Thanks, Mark. That's sort of what I wanted to follow up on. I'm just curious, because it's been, what, a couple of years since that structure on the West Coast changed. Of that one million tons you're doing, what's the rough split between the East and West Coasts?
Oh, gee, I'd be guessing it might be 20%. I mean, I'd be guessing probably 15%-20%. It may not even be that high.
Yeah. Okay.
Well, we can count them, if you want. Yeah, do you want a closer number?
Yeah, no, that'd be helpful if you could. Thanks very much for your time.
Thank you.
Thank you. Your next question comes from Piers Flanagan from Barrenjoey. Please go ahead.
Morning, Mark and Paul. Thanks for your time this morning. Just a couple from me, if I could. Maybe just firstly on the backward integration, obviously sort of good penetration over this year. Could you maybe just talk through some of the underlying categories where you're seeing sort of the growth between, you know, Animal Health and AgChem?
Yeah. I think this year was a little different because I think I've mentioned that we actually slowed it because we didn't wanna get caught with our own products. We used third-party suppliers towards the end of the season with the price increases, cost increases. I think the way to think about it is the Animal Health is progressing, but it's not the most material part of it. Just focusing on Crop Protection, we started out of our total portfolio, it's only the off-patent products, off-patent at an active ingredient level and off-patent at a formulation level. There's no surfactant patents or mixing patents or formulation patents. With that, we believe we can get to 70%.
The end game is to get to 70% of that addressable portfolio that is all off patent. The thinking there is that we wanted to leave 30% because the proprietary or the multinational suppliers have generic products as well as new technology, new proprietary products. We want to give ourselves room to be able to if we need to bundle some generics in order to get proprietaries that we still have room to do that. We started at 25% with the backward integration of that addressable portfolio a few years ago, took it to 35%. This year we're looking to get to 50%, and I think we pulled 45% or 46%, something like that.
With the idea that we'll continue to develop it for FY 2023 and possibly we may not get to 70% until the year after. But we're largely on track. We did hold it back this year, though, so that we, you know, didn't get caught with owned Titan product with high costs.
Sure. Then Paul, just on your comment, and maybe I misheard this, but did you say sort of Q4 EBIT was down about AUD 8 million year-on-year?
Yes, that's correct.
Yeah, some of the key drivers behind that?
Key drivers were, you know, I suppose, certainly livestock. Availability of feed is, you know, very advantageous to putting on more weight. We saw a very different livestock season. You know, that's continued to today with the unseasonal wet conditions. I think, in terms of the other key driver, summer crop was a little earlier last year than this year, you know, once again, you know, due to the conditions.
Great. Just a final one just on M&A, and I think you said you looked at sort of close to 60, and approached by sort of over 80. Maybe just how you're seeing expectations, sort of vendor multiple expectations out there in the market at the moment following a couple of good, you know, broader industry years.
You'll recall that we were targeting 3x-5x times multiple EBIT with the template that we use, you know, with the earn-outs split, et cetera. What we're seeing is that there are a couple of larger ones that we've been looking at. If they're like AUD 300,000 EBIT or AUD 500,000 EBIT, you may be in that realm. Larger ones where there's AUD 5 million, AUD 6 million-AUD 7 million EBIT, we have seen the multiples move up to AUD 6 million-AUD 6.5 million, et cetera. Probably not surprising, but we have seen that tension.
Great. Thanks, Mark. Thanks, Paul.
Thanks. James, on your question around WA fert, my guesstimate was within Koo Wee Rup, I think about 250,000 tons.
Thank you.
I think we're pretty close to the end because we've got a back-to-back coming up. Sorry, yeah. Yeah, back to the moderator.
Thank you. Your next question comes from Richard Barwick from CLSA. Please go ahead.
Oh, hi, guys. I've got a question just trying to to sort of disentangle a little bit around some of your longer term targets. You said that you're holding to the assessment of the 5%-10% growth through the cycle. Where's your sort of definition here of through the cycle? I'm just trying to think. It's, I mean, you're so far ahead of that target, and yet you're sticking to that as a target. How do we even begin to think about that? Where's your baseline, do we think about a 10% CAGR too? I'm just trying to hoping for a little bit of clarity.
I mean, our 5%-10% through the cycles, you may recall, was based on a survey we did of our key investors and fund managers, et cetera. The thinking was for an ag company, if it's above 15% return on capital and through the cycles you're growing at 5%-10%, that's a good outcome. That's embedded in the outcome plan and the way we think, and that's what we've stuck to. In terms of saying, "Hey, it's gonna be 1.2% up on last year or 5% down up on last year," I mean, that's for you guys and ladies to work out and to assess yourself. I mean, from our viewpoint, we're very focused on growth.
Our internally, as I indicated with the breakup of the gaps that we've identified on this last year's performance for next year from a seasonal viewpoint, we've got initiatives in place where we control what we control and we'll do our best to continue to grow. With that commitment to 5%-10% through the cycles. It does, Richard, it doesn't answer your question, but you know, I guess that's why you're paid the big bucks.
If only that was true. All right, I guess another sort of point of clarification then. Mark, I think you said at some point that if the winter crop, so the FY 2023 crop was sort of back to an average, you've got enough within your control to offset that. I understand that component of.
Yeah.
The narrative, but then you've got the other moving parts around the summer crop. Is it fair to say that the movements in the summer crop sort of sit outside that commentary? Winter crop back to, if it's back to normal, you can sort of compensate for that. But if there's some negative moves around the summer crop, then that would be an additional negative to consider.
Yeah. I think that's right. I think it's, you know, it's not just cropping, it's livestock, it's equity. It's, you know, it's all the aspects that are outside our control. My comment on summer crop would be that it went from below average to average and the outlook is above average. We're assuming average, not above average. The question is
Yeah.
Does the overly wet conditions sort of occurred in October and early November change the outlook of summer, of cotton in particular from above average back to average? I'm not sure. We'll go with the ABARES forecast. My gut feel is that it'll still be very strong.
Yeah. Okay. The last one from me is really around some of the your bolt-on acquisitions. Really part of that is part of your branch optimization.
Yeah.
Do you, I guess there's two questions here. When you think about branch optimization, how do you balance up your corporate outlets with wholesale members? I mean, you know, do you hold back or you don't really factor in moving into the territory of some of your wholesale members if you see there's an opportunity for a corporate outlet? I guess part and parcel of that question is, when you're thinking about your bolt-on acquisitions, do you have a preference for some of your wholesale members or do you, would you actually have a preference for an unrelated standalone outlet?
Yeah. Well, when we do the business cases on wholesale members, we've got to back out the profit we already make from them. It makes the hurdle much higher for them. The way to think about it is that we, if we've got three AIRR members that are in the pipeline, the way through our business development committee, and this is the point of embedded systems and processes, what we do is to say, "Okay, is that particular member better as a red branch or as a wholesale branch or." The wholesale network has its own, AIRR has its own retail network as well. We actually decide and then when we buy it's converted into whatever we decide.
In terms of a preference, yeah, it's all around segment-brand segmentation. In a town, if we've got 20% share, the general rule is that, you know, we can throw everything at it, and we probably might get to 21% share. But if in that same town we've got an AIRR member, we can get up to 30% share through getting the margin from wholesale into that member. And the customer's got choice of two options or three options or four options. For rural services, it is, you know, 40 years later, from my experience, it is the way to increase your share of wallet in any town, is to have multiple segmentations.
Okay.
I think.
Great. Thanks very much.
The final point, Richard, is the demographic of the AIRR members is quite a bit different to the demographic of, sorry, the market demographic. Because the Elders network is largely, you know, wheat, sheep, kind of, sort of, like big broad acre segmentations where they're smaller segmentation, smaller operators.
Yeah. Okay. Makes sense. Thanks, Mark.
Thank you. That is all the time we have for questions for today. I'll now hand back to Mr. Allison for closing remarks.
Okay. Well, thank you very much, and Paul and I look forward to catching up with many of you over the next week and look forward to catching up with you then. Bye.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.