Thank you for standing by, and welcome to the Elders' Hy 'twenty one Results Investor Briefing. All participants are in a listen only mode. There will be a presentation followed by a question and answer I would now like to hand the conference over to Mr. Mark Ellison, CEO. Please go ahead.
Thank you very much, and welcome to all for the Elders half year results presentation for FY 'twenty one. Thank you for joining Vanessa and myself for this session. So Vanessa is our Group Financial Controller, and will stand in for our newly appointed CFO, Tanya Foster, until her commencement date of May 31 this year. I'd also like to take the opportunity to acknowledge our previous CFO, Richard Davey, who worked tirelessly over the major turnaround period and made a major contribution through this period with Elders. He'll be with Elders until the end of June this year.
So this is the 1st 6 months of our 3rd APOINT plan. And as you are all aware, the philosophy that Elders has from the first APOINT plan has been to control what we can control and not to dwell too much on what we can't control. And to have a cost and capital structure to allow us to make good returns in bad years and to make great returns in good years. This house result is an example of good 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 stakeholders over multiple years.
The performance of Elders' clear and consistent strategy in multiple diversifications, its high financial discipline and hard working committed team and enduring customer anchor as the most trusted brand in Australian and committed team and
enduring customer
anchor as the most trusted brand in Australian agriculture has been outstanding for the 1st year first half results. The result is strong in safety, sustainability, profit, strong in return on capital, back above the 20% number, strong in cash and strong in strategic delivery. The market conditions and commodity prices have been positive, as we're all aware, although it should be noted that the contribution of market conditions to the result is in the order of 35% of the upside, with bolt on acquisitions contributing some 21% of the results and organic or self help activities, things we can control, contributing some 44% of the growth. This is strongly aligned to the focus of our 3rd APON plan. So the approach for today is that I will provide an overview of the results, Vanessa will go into the detail of our financial performance, and then I'll provide an update on the focus areas of the 3rd AIPON plan and also the outlook.
Just looking at the slide the first slide on Slide 4 in terms of the key highlights. Strong outcomes across safety with 2 lost time injuries for the 1st 6 months and a significant improvement in a number of other areas as we've worked through coming out of the COVID-nineteen period. In terms of financial performance, solid uplift in EBIT of 40%, acceptable and quite good cash flow, operating cash flow given the circumstances and the build up to the winter crop, leverage down and importantly, improvement significant improvement in earnings per share. Elders will pay an interim dividend of $0.20 per share, 20% franked and this is compared to $0.09 at the same time last year. I'd also note that we didn't access any of the government supports such as JobKeeper throughout
this period.
From a strategic viewpoint, on track across a number of the strategic areas. When we look at the Acorn plan, I'll go to the detail of that, but largely on track or ahead of where we believe we would be at this stage. And then the key enabler for this Acorn plan for the 3rd Acorn plan being systems modernization program, and we've completed the service design phase and also look on track as we roll that out throughout this point plan period. So moving to the next slide. And again, on track with our operational safety, our sustainability initiatives, good work there with our the report released last year, our modern slavery statement, ethical contracting framework launched, action plan for 4 months, TCFD recommendations on track and also the ongoing significant contribution that we look to make to regional and rural communities.
Efficiency and growth also on track and with our core relationships across the spectrum of our business on track. So looking at the next slide on Slide 6, and just to highlight of a few of the key financials before Vanessa goes to the detail. You can see underlying EBIT at 73,800,000, some 40% up on last year underlying profit after tax at 67,000,000 41% up on last year operating cash flow of £23,900,000 underlying return on capital at 20.1%. You'll recall that we reset the ROC target for the 3rd April plan at 15% and for the first half, we're operating at the 20.1 percent. Strong growth in underlying earnings per share and a reduction of the leverage ratio.
So with that, I'd like to hand over to Vanessa and she'll go through the detail as we show the strong growth across all products, all geographies, all services. Thanks, Vanessa.
Thanks, Mark. Favorable performance was achieved across most products through a mixture of acquisition, organic and market benefits. As highlighted in gray, performance by product area at a gross margin level was up approximately 18% on the prior comparative period. Retail products increased by 25%, benefiting from our strategic initiatives relating to optimized pricing and backward integration throughput. Favorable fall conditions produced a strong summer crop result, increasing our gross margin and winter crop remains to have a positive outlook.
Wholesale products performed strongly in the first half and is up 68% due to increased sales predominantly from backward integration. High livestock prices have strengthened our agency services business. However, some adverse impacts have been seen within our fee and processing business as the Calara feedlot has endured pricing pressures on their margin. Real estate margin has improved by 27% across most service offerings with earnings from residential being the feature, which is up 70% on the prior comparative period. Financial Services' 10% uplift has mainly come from favorable earnings from equity accounted investments as well as growth from our livestock in transit delivery warranty products and implementation of our new livestock funding products.
Branch incentive, which is in its 2nd year, has increased in line with EBIT growth in the business. Costs were up 11% or or $16,500,000 on last year. This is comprised of approximately 44% from acquisitions. The remainder relates to increased insurance costs of $1,600,000 system modernization dollars system modernization cost of 1.3 dollars and investment in strategic areas, for example, business improvement, Retail Academy, sustainability and customer solutions to name a few. We also recognized a corporate provision of $2,750,000 for the first time at half year due to strong first half performance and positive outlook for the second half.
Moving on to Slide 8. Now looking at the result by geography. All states are up compared to the prior comparative period. Key drivers of this include improved sales across segments, particularly in rural products. Wholesale products' strong performance translated to an EBIT uplift of $6,700,000 A strong retail products result was a feature in New South Wales EBIT uplift with renewed summer cropping activity, including drought affected areas producing higher sales.
Backward integration initiatives were also a contributor. Queensland and Northern Territory performed favorable in all key product areas and included acquisition growth of $400,000 Confidence in winter crop outlook was a key driver in Victoria and the Riverina results, boosting retail product sales in chemical and fertilizer products. SAA performed strongly on the prior comparative period, in part mostly due to retail products with uplift in both sales and margin and contributed also by the YC Ag acquisition on the 1st December 2020. Tasmania is slightly up on last year. Despite showing some gains in retail product margins, this was partially offset by lower livestock volumes.
Like Queensland and Northern Territory, Western Australia out outperformed the prior comparative period in all key areas with improvement in retail, real estate and livestock. Corporate and other costs increased as a result of investment in new initiatives. Initial system for the group finished at 20.1% at the half and 18.5% over a 3 year average. ROC at the half is 1.2% up on financial year 2020 and 2.1% above the prior comparative period. The key driver of this result pertains to improved earnings across Rural Products, more than offsetting increased acquisitions and working capital.
Average capital increased by $98,300,000 to $483,000,000 for the half. Rural products comprises around 74% of this increase, mostly due to associated with acquisition and organic growth. High livestock prices have impacted average capital across both our agency services and feed and processing businesses, with prices driving an increase in livestock turnover, which in turn has lifted the average working capital. While Pallara feedlot's working capital is largely driven by high inventory due to both price and volume. Moving on to Slide 10.
Operating cash flow for the period was $23,900,000 which equates to cash conversion of 35% on underlying net PAP. This is a typical cash conversion rate to this time of the year and we expect to achieve our target of 80% by year end. Operating cash flow is comprised largely of EBITDA of 94 $300,000 offset by movement in assets and liabilities of $62,200,000 Key drivers of movement include growth in real products with increased debtors for both retail and wholesale and higher retail inventory to support quarter 3 sales and favorable debtors credit. Timing of livestock receipts from large clients during March and higher capital inventory at Calara. Investing and financing cash flow movements relate to the purchase and funding of the Aehr acquisition in the first half last year.
Turning now to Slide 11. Debt levels at balance states have decreased partly due to the impact of AASB 16 leases with lower debt due to payments more than offsetting new additions in the half. There is also lower investing cash flows as stated previously with the prior year including the Aehr acquisition. Average debt is slightly up on the prior comparable period due to increases in our trade receivables facility in line with higher retail product status from sales growth. After removing the impact of AASB 16 leases, all our TD ratios have improved on the prior comparative period, contributed largely by increased earnings.
We are also well placed within our banking covenants with significant headroom in all three as highlighted in the slide. We also have significant undrawn facilities. Turning now to Slide 12. Elgin's will pay an interim dividend of $0.20 per share for the first half, franked at 20%. The increase in the dividend from $0.13 to $0.20 more than offsets the post tax impact of the reduction in franking percentage.
Elders no longer have sufficient franking credits to pay fully frank dividends due to a significant carry forward tax losses that are likely to be fully exhausted around 2025. Consequently, Elders
will not
be in a
position to pay fully frank Elders will not be in a position to pay fully franked dividends until then. Current forecast indicates that a partial franking rate of 20% is sustainable based on dividend forecast from non wholly owned interest and the current number of ordinary shares on issue. Elders has carried forward tax losses of $141,900,000 tax affected, dollars 119,600,000 on balance sheet and $22,300,000 off balance sheet. It is anticipated that all losses will be on balance sheet by year end. Whilst Elders only paid a minimal amount of corporate taxes due to a significant amount of carry forward tax losses, it has contributed to the Australian economy with the payment of payroll tax, FBT and GST.
I will now hand back over to Mark.
Thanks Vanessa. So just moving to the next slide on slide 13. And this is the 3rd 8 point plan that many of you would have already seen at that full year last year. So our ambition through to 2023 with the 3rd 8 point plan is 5% to 10% growth in EBIT and earnings per share through the cycles at above 15% return on capital to have an industry leading sustainability outcomes across our health, safety, community environment and governance and also to maintain the position as the most trusted brand in agriculture and regional rural Australia. It is worth noting that this is the 3rd 8 point plan.
For the 1st 8 point plan, we took the business from $27,000,000 to $71,000,000 EBIT and above 20% return on capital. The 2nd April 1 plan from €71,000,000 to €119,000,000 EBIT at an average through the period above 20% return on capital. And the plan of 5% growth, which we've exceeded in the last 2, 3 year periods, it looks like it's on track if we're looking at the outlook and the initiatives. But I think it's quite important because there is consideration that Elders is tapering off, and we've turned around, consolidated, and we've had the growth that we can deliver. But clearly, as we look through all the initiatives and our plans, we have really reset the platform for significantly greater growth as we move through this period and through to the next 5 to 10 years for the business.
When we look at the strategic enablers in the Nerd8 Point plan from winning market share, capturing more gross margin, strengthening of our service offerings, optimizing our feed and processing businesses and developing our sustainability program. Details of the achievements in these will be shown on the next slide, and I'm sure we'll go through many of those in detail with the question time. And then the enablers of the 3rd April plan, the systems modernization program that we've started the investment and development of attracting and retaining the best people and then maintaining the very strong financial discipline. So if we move to the next slide and just touch on a few of these areas. And I'll just say a number of these will be fleshed out in much greater detail in questions where there's specific interest.
But it is worth noting that through this period, if we look at winning market share, which is largely around our acquisition or bolt on strategy and capturing gross margin, which is largely around the self help organic growth. Just to reiterate my initial comments, of this half year results, 35% came from the market, 21% from the bolt on aspects and 44% from the self held areas. So in terms of the control of what we control can control, I think this philosophy has been running strongly as you look at the results. From a bolt on viewpoint that you would have noted in the details, we've had 6 greenfield sites established through this period and also 6 bolt ons through this period. Now these spread across multiple products and services and also multiple geographies.
If I refer you to the slide in the appendix, it shows the strategic gaps by geography and by product and service. So you can see that there are multiple further opportunities. When we look at the business development pipeline, currently, there are 17 active candidates in the business development pipeline. And obviously, they all won't come to fruition. But from our viewpoint, they multiple in the area of 500,000,000 EBIT through 500,000 EBIT to 4000000 or 5000000 EBIT.
And we weigh heavily that the people in these businesses fit the culture, fit the values and fit the outlook that we have for the the culture, fit the values and fit the outlook that we have for the business. Just going to another area within the gross margin aspect. The synergies for Aehr, you recall that the average position when we bought Air was that over a 2 year period, we'd extract €8,000,000 of synergies. And given that we part owned Air for the 1st period, we thought it would be split €3,000,000 and 5,000,000 over the 2 year period. For the 1st period, the actual number was in the order of 5,000,000 rather than 3,000,000.
And for the 2nd period, as we're targeting 5,000,000, our sense is that we should be around double that. So the synergies from Air and the ongoing momentum of Air has continued very, very strongly under Elders' ownership. I think the final point I'd make around winning market share and capturing more gross margin. One of our sets of targets and KPIs or the metrics that we measure from the actually, we've put in place the thinking prior to Nutrien buying Ruralco was to gain some of the pullout both as acquisitions, as people and as customers. Last year, for the full year, it was just under 500 customers from Nutrien that come across to Elders.
And it's quite interesting for the first we've always talked about waves of activity in terms of competitive activity for the 1st 6 months of this year, including acquisitions. To be fair, there's over 900 customers have come across in the same period. Similarly, there were 4 acquisitions from the Nutrien stable last year for the whole year. And to this point, we've had 1, but 5 others in play at the moment. And last year, 23 people, so there's a revenue earning front end people, had come across.
And for the 1st 6 months, about 8 people had come across. So there's good progress on those fronts. In terms of the sustainability program, also good progress being made there. And the next slide highlights some of the other issues. We won't move to that as yet.
But the good progress and I think the from an elder's viewpoint, we don't want to be box ticking in this area. We want to be authentic. We want to be real and we want to be practical. And we've got a massive platform of activity and initiatives to allow us to contribute significantly across major areas in the community, in health, in water availability and animal welfare, in energy and waste management, in governments across regional rural Australia, and we'll highlight a few of those in the next slide. And then on the systems modernization program, now Viv de Ross has been appointed as the new CIO, and he's making great progress.
I think there's a very strong comfort level throughout the business in terms of our systems modernization program. And it's rolling out as a 5 year program, so it will run across 8 point plan period as an enabler and into the next. There has been some interest around the phasing of the program and the costs. At this point, we don't have a signed off program, so we can't validate costs and benefits because the business case hasn't been completed and signed off at this stage. But it's worth noting that year 2, we're anticipating 15% of the spend year 3, 36% of the spend.
And over the period of the program, the 5 year period, we're thinking that 30% of the expenditure will be OpEx and 70% will be CapEx. So until we have a sign up program, I think they're the details that we can provide. But I can say that we feel very comfortable that we're on track with this program and see it as a significant platform for our ongoing growth. So moving to the next slide. The in terms of sustainability.
Now the sustainability report was launched last year in the with the annual results. And again, good progress. I know we're in at least one ESG fund already, and we've made good progress there. But if we just take it to the practical and you say what actually is happening, if you look at the community impact, we look at all of the work that we do around Australia with local communities, charities, the Royal Flying Doctors Service program that we were involved with and many, many other activities, which are just part of being I guess, makeup being the most trusted brand in regional and rural Australia, having been around for 182 years. In terms of health and safety, with our Safety Week, AgSafe partnerships, the multiple safety action teams, safety steering committees, etcetera, and also the employee assistance program, which offers counseling for both our people and our communities, significant work there.
On the climate change area, the carbon footprint analysis that we've done, climate change recent opportunities, assessments on the carbon farming advisory services we're providing are just the start. And you'll see us moving more in that area. Water availability as well. If you look at the severe weather events that have occurred, whether it be in the East Coast or North Western Australia, where we play a significant role. And lastly, very, very practical things like extending payment periods, so that's the last thing that people need to worry about.
In fact, I have a story last week from a guy up north in Western Australia where he had one of his producers come in saying, Hey, the place has been blown away. I don't know what bills I owe. Can you tell me because I don't want to be a late payer, even though he was in crisis himself and the guy was brought to tears and we said, We'll waive that and allow you to pay when you can pull this together. So this happens every day with the people wearing pink shirts all around Australia, has for a long, long time. Looking at the waste management area, the drum master program we support reusable shed pellets, the various chemical drum collection program, cleansing and redistribution and the organic waste management program that we have in place in Kalara as well as on the energy front with the solar panels and branches, hybrid vehicles in our elderly fleet, developing an organization wide emissions reduction strategy and setting our targets.
So there's lots of detail around that. But I felt it was worth just highlighting a couple of the areas. That detail is in the sustainability report, and we're happy to talk to any investors who want to talk in detail around those initiatives. So if we move to the next slide on market outlook. And I think the it's fair to say that most people are aware that agriculture and the outlook for agriculture is quite strong.
When we look through rural products, there's a lot of talk around winter crop and at the GrainCorp presentation, Rob talked about outlook and the public figures and the positive nature there. I think it's worth also noting that the strong environmental conditions and rainfall that occurred 6 weeks, 8 weeks ago has also brought a lot of the irrigation country back up to a reasonable position. And we would expect to have a very strong summer crop that flows out through late September, October, November through the East Coast of Australia, and particularly Dubbo North, but also in the Marmaje Irrigation Area. So that outlook remains positive. The agency services through livestock, sheep and cattle, a lot of debate around cattle prices.
And as a simplistic North Queenslander, rather than all the modeling, I just look at all the grass that's available. The national herd is down significantly. We're still drawing significant northern cattle into Vietnam and Indonesia with live export. And there are a lot of producers who have sold cattle at very high prices and can't get back into the market. So in terms of supply, there are Brahmin cattle as far south as Armadale and Glenimans now, gray Brahmin cattle.
Good luck for winter guys. And the sense to me is supply and demand that this remains firm. Our internal position is always to be highly conservative. And what we see cattle prices softening and dropping off, however, it remains a significant safety net for the business. Real Estate, a similar scenario where we had thought that the pipeline and demand may drop off late last year, but it's remained very, very strong as I think we're all aware, and the outlook looks strong.
Interestingly, with the reduction in Chinese investment money coming into Australia through the ramped up FERB conditions, that Canadian money and other money and large family money is actually filling the gap keeping the market quite buoyant. Financial Services moving along nicely. We're ahead of system with the larger loans. And for the on balance sheet, less than $100,000 loans. We've also been had a very, very positive result, largely pitched at the restocker market that Stockco is also involved in.
So this is outside of the Stockco frame. And Feed and Processing, I guess, the one area of the business that has the downside and this is the cost of diversification that where you have upside, you have downside. And Calara, through good seasonal conditions, has grown its own forage, its own forage sorghum and maize that's used in its rations. So that's offset the cost of increased cattle prices by in the order of 25%. So we haven't been able to fully offset the increase of Fevasol.
And that will be reflected in the or is reflected in the results. The Chinese business, ElderSpine Foods, is immaterial and operates at breakeven every now and then, but obviously, a very, very it's never been material in the scheme of things at any rate. So the final comment I'd make around outlook and this may go out of question. Firstly, on the mouse play that's been that's got a lot of media coverage. The as again, you'd be aware, this is mostly in New South Wales.
The government has allocated $50,000,000 to fund 8 grain treatment sites. There's also been fast tracking of the active ingredient registration for control through the APDMA, the regulatory body, for the control of mice. And historically, through mice plagues, as it gets colder, the mice are killed off and it stops and the next cycle occurs 3 or 4 years later. So in terms of impact on Elders for this forum, minimal impact, although we're doing what we can to support our clients in these areas. The second area that I'd like to put focus on is around the geopolitical issues and implications for Elders.
I think everyone's, again, very aware of China, Australia, U. S. Issues. But in terms of implications for Elders, it's minimal. The way our trade and access agreements are set up as Australian agriculture forges ahead to $100,000,000,000 target pre farm gate by 2,030, we've always had a nice diversifying markets.
We've currently got the I think it's the 7th or 8th round of the Indian free trade agreement running through. Clearly, there won't be beef in that agreement, but there is lamb and other commodities in that agreement. We have the EU agreement and the U. K. Free trade agreement also running parallel, which opens up further markets.
And we also had last year in November, December, the Regional Comprehensive Partnership Agreement through where ANZN countries are signed. So I think from an Australian agricultural viewpoint, there are other markets. Bali has shown that with Vietnamese market. And I think it's also worth noting that our biggest competitors here for a lot of our commodities are kind of bearing down on our traditional markets at any rate. So Canada, in particular, and the U.
S, but also the Chinese beef market is always being targeted by Brazil and Argentina as they've been doing with the Indonesian market. So this is normal business as usual. And in terms of implications for Australian agriculture and for elders, our sense is that it's not material in the scheme of things as we move through these cycles. The other example is around wine and I guess treasury is the one that's been highlighted here. We work closely with Treasury Wine.
They're a great partner, and we've had a long relationship with them. And it's I guess it's the same boat as Australia, finding other markets, diversifying our business as we should be. Losses in Western Australia are quite a unique example where the market was actually created by the Chinese. And we're able to take advantage of it. And as it's turned out, they've taken that market away.
So I'll just finish on there heading to questions. In the appendix, you'll see the business model, our segmentation, our sensitivities, our points of presence, our strategic gaps and also a longer term outlook from Abare to consider. But I think with that, we'll go to questions.
Thank Your Your first question comes from Alex Paton with Citi. Please go ahead.
Good morning, Mark and Vanessa, and congratulations on the results.
Thank you. I've just got
a couple of questions. First one, you mentioned some benefits from additional backward integration throughput. Just keen to hear a bit more detail on how much was due to Titan Ag versus Pastoral Ag? And how you think penetration of your generic sales pools in those two categories is going?
Yes, yes, good question. So predominantly, it's through Titan Ag and Apparent. So the Crop Protection brand is within the Air business. So I think last year, when we kind of watched it all out between the 2 brands, Titanag and Air and Apparent, there was around 25% of the addressable generic market. And for this first half, I think it's fair to say that Ester is at the 30%, 35%.
Correct, Norm.
Yes, yes. So 30%, 35%. Largely, it's coming out of there because we've had both the market growth with the volume of products, a minor impact of products coming off patent, but most of it's come from there. In terms of pastoral ag, the veterinary the animal health products through Ayr have taken an increase. Vanessa might be able to help me on the proportion.
But as you're aware, we kicked that off in full this year. So if you go out into the branch network now, you will see pasture lag products in the majority of our branches having in place our patent animal health products as well.
Got it. And on the pasture lag side, as I understand, you had about 20 parasiticides in that portfolio. How have you seen uptake there and also penetration of that sales pool similar to what you gave for Titan Ag?
Yes. I think the broad if I go to broad numbers, I think the target area there may have been as small as what is that, dollars 20,000,000?
20,000,000, yes.
Yes. So a 20,000,000 target area. And we're addressing that. But I guess, the fundamental difference is that for the Titan Ag percentage margin increase, it's in the 10% to 15%, whereas the Animal Health Products, it's the 20% to 30%. So I think by full year, on the numbers certainly that you've run, I think we'd probably be quite aligned to that, all things being equal.
And then the third area that we haven't budgeted for, we're actually getting some traction is in the general merchandise area.
Okay, great. And just one more on the flagged commodity price increases in the outlook. I assume this relates to the crop protection and fertilizer side of things. Can you maybe elaborate on what kind of pricing techniques we'll see offset these increased input costs? And do you think these costs could be entirely passed on to strong demand environment at the moment?
Yes. I think that's generally what happens, but there's a lag. So the trick for a well managed business, and I guess over many years, I've learned the hard way with glyphosate and with urea and trothlyl and etcetera, is to ensure as the increasing cost profile is there that you're actually passing on the costs. The interestingly, in fertilizer, we've seen it in a number of examples, particularly in the East, where we've been able to commit to volume or tonnage, but not price. And the price is provided to us at a later date because of the increasing price claim with suppliers not wanting to get caught.
For us, the Wonder Watch is gloves at big volume and increasing flame and being insured at the end when the price starts to go down, we're not caught with high priced stock. But largely, it does fluctuate with the market.
Your next question comes from Michael Peat with Goldman Sachs.
Mark and Vanessa. Just first question on the wholesale side of the business. Just trying to get a sense of seasonality there, Mark. What's now we've seen a first full first half result from that business. And you mentioned the extra synergies.
What should we expect for the second half? What's the normal sort of seasonality of this business versus your others?
Yes. I think it generally aligns. What we're seeing there is that under Elders' ownership, they're able to expand and pick up more wholesale customers. Now we're looking at new warehouse distribution facilities in Central Queensland, in Tasmania. The we've got the 2nd year of Western Australia.
And I think what we're seeing is a very strong growth base. In fact, you can see that in the numbers. There has been a very strong growth base. And it's interesting because when we talk around the Air Board and what's happening, it's largely under Eldon's ownership and the governance and the capital availability that we're able to grow at a faster rate with greater confidence. So I would expect that Air put out a target an internal target for the whole business of getting the business to turn out revenue of $1,000,000,000 over a 5 year period.
And they're running hard on that. In terms of the aligning with the Elders Apollon plan, that fits very comfortably within the graph that we're targeting. But a lot of it's they're picking up new wholesales, they're picking up new geographies, expanding. There's ongoing fallout in that area from CRT. There are a couple of competitive challenges with start ups for wholesale businesses that are also trying to provide an anchor with fallout from Ruralco Wholesale Business and Landmark Wholesale Business.
But there hasn't been great traction at this point. It's not a matter of saying it doesn't happen. You need distribution centers. You need a sophisticated logistics system as Air has.
Yes. I guess, just to follow-up on that, we've got a lot of history on your other segments. But wholesale, is that should that be a bigger contribution in first half or second? Or just to sort of get a broad sense of that.
Yes. I'm just trying to think of the balance. Given that there's a chunk of it, there's 120 members that are like coffee farmers sort of wholesale members, and they wouldn't run seasonally at all. They're strong in New South Wales, so you'd expect through they're strong through New South Wales and Victoria, so you'd expect that to be strong. Maybe we come back to you on and give you a more precise thought.
But it doesn't jump out at me as a significantly different kind of balance apart from the growth aspect.
And just on the synergies, you mentioned that it looks like you're going to be double what you thought initially for year 2, so around £10,000,000 in the 2nd year. So what's actually driven that? Can you give us an idea of what the actual projects or where you've captured that extra money?
Yes. It's across multiple areas, to be honest, and hand in hand with our business improvement area, whether it be the sourcing of the animal health products, whether it be general merchandise. The branch elders branch network is using air warehouses and smaller delivery mechanisms significantly greater. We've got there's a chunk that's been out of our trading terms because we've combined all our trading terms with the 3rd party suppliers. So there are multiple areas.
Vanessa, do you want to highlight some of those areas? I see you've got that in front of you.
Yes, yes. The majority has been through Elders access to air fine power. So we're looking for over the 2 years about 6,000,000 to be contributed from that. And also through higher air ag can margin, that's another big contributor looking at 3,500,000 dollars over
the 2 years. Yes. So what we're seeing, Mark, was a continuation of the momentum from last year with the introduction of the branch network incentives. And so with every branch having its profitability on a dashboard and all the metrics of its profitability and the significant impact of both Titan back integrated products and Aehr sourced products. So Aehr provided all the animal health products, partially ag products and also general merchandise.
And so what there are no barriers to the synergies that we targeted. In many examples where I've done companies previously, there's been an internal fight to deliver synergies because it means that if someone wins, someone loses. But in this case, in the Air Elders case, both we and as you know, the key air managers are significant shareholders and elders as
well. And just a final question, just on return on capital overall for the group. Obviously, sitting nicely above 20% at the moment, which is well above your 15% sort of target minimum, I guess. Any reason why that shouldn't remain there, at least for the second half, given we've got working capital being released in the second half, annualization of some of these acquisitions? All of those should stay around that level.
Is that a fair comment?
Yes. We're predicting it to stay around 20%.
Right. Thanks Vanessa.
Yes, exactly for the reasons you've mentioned. Yes.
That's all I got. Thank you. Thank you.
Your next question comes from James Faria with Wilton. Please go ahead.
Hi, Mark and Vanessa. Thanks for your time this morning. Vanessa, can I ask you to recap a couple of comments you provided on of comments you provided on Slide 7 in relation to the increased costs? I think you gave a little bit of an itemization there. Could you just run through those again?
I missed those unfortunately.
Yes. No worries.
You're on Netflix, James?
What's that, mate?
Were you on Netflix?
Yes. That's right. Yes. Yes. I just got bit distracted.
Yes.
No worries. So in relation to $16,500,000 so approximately 44% is from acquisitions, so around $7,000,000
That's the cost, I think.
Yes, that's right. Yes, the $7,000,000 from acquisition costs, mainly that's the 1.5 months of Aire contributing $3,200,000 and YPA 1.2. And then the remainder was increased insurance costs of 1,600,000 dollars system modernization costs of 1,300,000 and then about 3 or so 1,000,000,000 in relation to other strategic areas, so business improvement, Retail Academy, sustainability and customer solutions.
And we also
have the corporate SIP that we've accrued for the first time this past year of around $2,800,000
Sorry, that was the corporate as in like STI, etcetera?
Yes, correct.
Yes. So Jane, as you recall, historically, we haven't provided for that in the first half. And we took a changed view this year. And I suspect it will be an ongoing position there with making those provisions in the first half as well.
Yes. Okay. That's helpful. Mark, second question, perhaps a little bit more color on the retail products contribution there. The fertilizer component was up 35%, gross margin up 35%.
Volume or margin driven?
I think just to set a bit of a backdrop, well, Vanessa gets the volume margin trade off. So the 1st year after drought, so this will be Eastern Australia. The 1st year after drought, there's normally an accumulation of nutrients in the soil because they haven't been taken out. And I see so the 1st year out is normally a low fertilized year, which was last year, a low nutrient year. And then the 2nd year generally returns to normal or above average.
So I'm not sure if you've got the volumes there. My suspicion is it would be volume based, James, but I'll confirm that with you.
Yes. No, that
does make sense.
I'll make sure you'll let James. Don't know if he's And
I guess similarly, the farm supplies component of that profile was up 20% year on year. Is that sort of skewed to crop inputs? Or was there a bigger contribution relatively speaking from aspects like general merchant March last year was an exceptionally strong month. And I'm just wondering how as you look back now, how Elders actually performed in March 2021, just to sort of isolate a month and get bit of a sense of that balance date cutoff? How well does it perform March 2021 versus PCP?
Yes. It's a good question because last year you recall that I think it was early March, New Farm ran out of NCPA and had talked publicly about supply chain issues through China. And there was a bit of a COVID rush by that occurred in March for us last year. And so I think we were quite we believed that this year, we may be down in March because of that, because of the extraordinary buy in last year, but the result was actually at or above. So there's a seasonal impact.
It will be interesting on Thursday, the new terms result for Australia, if they've seen the same.
Yes. Okay. No, that's helpful color. WA, I think on that Slide 8 where you show the geographic splits, there's a $5,100,000 uplift in WA and just thinking about the relative sizes and sort of weightings of the Elders network geographically, the New South Wales to be up 3.7% and WA to be up 5.1% shows you how strong the knockdown spray season was over in WA. Am I reading it correctly in saying that?
Yes, yes. I think so. There's that component, but there's also we brought on significant agency business in WA as well in Broome and also a Rural Products outlet in Broome. And that would also be impacting. And you're also aware that the significant sheep, the Zaverameen sheep have been kind of still flowing to Eastern States from WA.
Of course. Yes. Yes. Okay. That makes sense.
On the Financial Services business, you mentioned that on balance sheet livestock funding that sort of is sitting there side by side with your investment in STOTCO. What's the balance sheet exposure now, the total liability that Elders has in relation to livestock funding on
balance sheet? Yes. So I think the last time we spoke, James, we talked about a $5,000,000 trial and then the $10,000,000 trial. Vanessa, just getting the number in front of her. It will be in that order $10,000,000 or $15,000,000
dollars Yes.
Okay. And
do you have a sense of how large you'd want to grow that?
We debated on a regular basis in terms of how far we go with our balance sheet lending because obviously the impact implications for return on capital. But our thinking is that with the partnership with Stockco, they're dealing with the above business and that's going quite well. And we're really meeting a customer need and it doesn't need to be dominant. But it's an ongoing debate based on our mix of portfolio and returns.
Yes. Okay. Then last question for me. The systems modernization program, if I understood you correctly, you're sort of still in that scoping part of the project. So you don't really want to commit to specifics around total cost and likely benefits.
But I guess, in fact, it's a little bit strange that you've got quite a specific plan in terms of the rollout and the expected staging of the costs. You don't have a cost number that you can give to the market?
Yes. Yes. And the reason that we talked about OpEx versus CapEx and the phasing of those expenditures was that that's been consistent feedback that I've got from shareholders that even if we haven't got a signed up business case, it will be helpful to provide that information. So that's the reason it's been provided, James. So it's basically responding to shareholders' interest.
We haven't the program hasn't the business case hasn't gone to the Executive Committee and hasn't gone to the Board with benefits and costs at this point. And so it would just be a guess. But that's actually the driver behind making those comments.
Yes. Okay. No, that's good. So can we assume that it's probably more likely a November in conjunction with the ELDAR's full year result announcement that you would be likely in a position to give those additional details?
Yes. Yes, that's right.
Yes, okay.
Thanks for your time.
Yes, James, I think the sort of details we'll be giving where that would be implications for our outlook and the Aitken plan. So it will be that sort of level of information.
Yes. Okay. Great. Thank you.
Your next question comes from Philip Pepe with Blue Ocean Equities. Please go ahead.
Excuse me. Hi, guys. Thanks for taking my question. Look, most of mine have been answered, and I was watching Netflix as the other questions are going on.
Just a bigger picture stuff given a lot
of the numbers of questions have been asked. So in the last few years, I mean, you've talked about managing the business through the ag cycle average. First time in a while now, we're coming at the average from above the longer term, whatever you're going to look at ROIC, commodity prices, etcetera. Is there anything you do differently in the next 12 months versus the previous 7 years? And what's the thinking of your potential acquisition target in terms of selling now to you at current multiples versus what may happen if volumes may revert in a couple of years' time?
Yes. Thanks, Phil. Yes, it's a good question because I think the through the all of the affluent plans, at somewhere, we've had some sort of safety net, whether it be a cost lever, whether it be an equity lever, whether it be a seasonal lever. And that's been helpful to allow us to manage the droughts, floods, etcetera, bushfires, etcetera, that we've had. I think from a just on your last question first, In terms of the bolt on strategy that we apply, our the template we're using for these bolt ons is 3 to 5 times multiple of EBIT, the normalized working capital and an earn out period has an average 3 year EBIT as the starting point.
And then the final payment is around, obviously, the final EBIT and then reconcile. So we're quite protected against upturns and downturns in that context. So if it goes up, they win, we win. If it goes down, they lose and we don't win as much. So I'm not so concerned there.
But I take your point on the other areas. The systems modernization program running through as it is perfectly timed to ensure that we have the most efficient platform from a core infrastructure and data infrastructure viewpoint that allows the efficiencies should things change significantly. In terms of the balance of our business, having the wholesale and retail channels to market and having those markets diversified by like townies and hobby farmers versus hard core parcel and hard core cropping business is also helpful. So I think for us, what we need to watch is where the bolt ons go, the geographies and the products to ensure that we're not heavy and we don't over we're not overbuy in more in riskier areas.
Very good. Thank you.
Thanks, Phil.
Your next question comes from David Popaki with Macquarie Group. Please go ahead.
Good morning, Mark and Vanessa. Congratulations on the results. I just had a follow-up on one of the previous questions in terms of seasonality. Could you just clarify if you saw some pull forward in demand in the first half from the second half on the rural product side that would result in your first half SKU not being what you would typically see in an average year?
Yes. Thanks, Dave. So we did last year. And my point was that we didn't this year. What we've seen is a natural there hasn't been any pentagon buying.
There's no there was not the same there hadn't been stock outs that have driven it. And there also hasn't been supply chain issues through China. Apart from the supply chain issues that everyone across all industries are feeling with container availability and the block to ports and the sewers issue, etcetera, etcetera.
Thanks, Mark. That's clear. And second question just on corporate costs. I think you mentioned corporate costs to increase in the second half. Is that versus this first half or versus PCP?
What's the expectation for the full year and for FY 'twenty two? If you can provide that color.
Yes, yes. So it will be similar to the first half performance.
Thanks, Vanessa. Sorry, just one last question. In terms of the summer crop, how much of an earnings benefit do you receive from this summer crop versus virtually no summer crop in the PPP?
So So how much summer crop uplift?
Yes. That's the question.
Yes. So $4,600,000 would be uplift from the prior year.
Great. Thank you very much. That's it for me.
Thanks, Adam.
Thank you. Your next question comes from Paul Jen with PAC Partners. Please go ahead.
Hello, Mark, Vanessa. Just on the ag tech side, just a question around Thomas Elders and your weather zone and other things you've got there. Are you able to give us an idea as to the contribution from your online business now and where you might see that going in the next 2 to 3 years?
Yes. It's not material in the scheme of things to this point. We've done a lot of work. In fact, we had Thomas Elder Institute and Thomas Elder Consulting and CEM for that matter in talking to us last week around the strategy. At this point, there's not as with a lot of these areas, Paul, you'd be well aware, there's a lot of investment.
There hasn't been significant return apart from the Thomas Ella Consulting fee for service activity that occurs around Australia on a regular basis. And that's £3,000,000 or £4,000,000 on average in a good year, which obviously is all is very high ROC. Our question, I know it's a question that you've also been contemplating, is where to go hard, where not to go hard. We've taken the decision to put the AgTech initiatives under our Chief Information Officer, under Viv, and with the great alignment there. And obviously, we're doing work with Telstra and Microsoft and a bunch of others around trying to get greater alignment with our systems modernization and the platforms we're developing for AgTech.
So then the following question then is just with, I suppose, real estate and finance giving about the same contribution around that sort of 8%, 9%. Can you see, I suppose, finance with this work that Viv and the team are doing sort of stepping up with your online business? Is that something where we could see that becoming a significant part of the business?
I think it's a dream. It's a dream. I mean we these like Afterpay well, the multiple financing options that occur in agriculture through most of the commodities, our sense is they must be able to be done much more efficiently, and much more effectively. And but historically, we haven't had our own base system platform to be able to advance them. So we're hopeful that we can move this.
And we've decided to boycott supply chain financing for the moment and just leave that alone.
All right. Thanks, Matt. Thanks, Vanessa. Talk to you later in the week.
Yes. Thanks, Paul. Thanks.
Your next question comes from Jonathan Snape with Bell Potter Securities. Please go ahead.
Yes. Hi. Can you hear me okay?
Yes. How are you doing, Jonathan?
Yes. Good. Thanks, Mark. Just a quick one. On the tax, I just want to pick up on a comment before that was made about that.
I think in your balance sheet you got $22,000,000 unrecognized, which it sounds like you're going to bring the rest of that to account in the next half, which would suggest that you're going to start having a corporate tax expense through the P and L in 2020 2 and 2023, but you probably won't pay cash tax until what about the first half of twenty twenty four. Is that the right way to think about it?
Yes. That's exactly spot on.
Okay. Thank you.
There's a danger telling me spot on. You see Richard would never have done that.
I thought you let him have a farewell tour at least.
Okay. Any other questions?
There are no further questions at this time. I'll now hand back to Mr. Alsman for closing remarks.
Okay. Well, thanks very much. I look forward to talking with you individually around small groups as we run through this week. And thank you for coming into the call.
That does conclude our conference for today. Thank you for participating. You may now disconnect.