Elders Limited (ELD) Earnings Call Transcript

Thank you for standing by. And welcome to the Elders Limited Half Year Financial Results FY '19 to '20 Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Mark Allison, Chief Executive Officer and Managing Director. Please go ahead.

Thank you very much. And welcome to everyone for today's FY '20 half year presentation. So if the dream is to live in interesting times, we're all living the dream. And I think the major difference between what's been happening in Metropolitan Australia and cities around the world and what's been happening in regional rural Australia, I think, is clear as we go through the presentation. So we're reporting in the final year of the second Eight Point Plan today and we've got 5 months or so to run on that. Now just to recap, the core philosophies of the first 2 Eight Point Plans have been, since FY '14, have been high financial discipline, safety, EBIT and return on capital as the core metrics. Now clearly, we have multiple other metrics and lead and lag indicators. But they're the 3 focal points for the business: a diversified business model; diversified by product and service, by commercial model, by market segment, by geography; and now with last year's acquisition of AIRR, by channel with retail, wholesale and online channels. Now this provides a significant diversification, which, when coupled with the strong financial discipline around our cost and capital base, allows us to make good money in bad seasons as we saw last year with the near-record profitability through one of the worst droughts in Eastern Australia in 100 years. And finally, and very importantly, in the core philosophies of the first 2 Eight Point Plans is that we're in a very methodical, low pulse rate way, we look to fill the strategic gaps at a geographical and market segment level. And we also look to access further margin pools, particularly in our Rural Products area by backward integration into key product portfolios as we have with the acquisition of Titan in the crop protection portfolio and the acquisition of AIRR, where we've been able to access additional margin pools in battery products and also significantly enhanced purchasing power across the total business in general merchandise products. So the context of today's results -- half year results for FY '20 are the prevailing drought conditions through Eastern Australia as we ran into the first quarter of the year; bushfires in Eastern Australia across a lot of the coastal areas, but significantly for us through Adelaide, the Adelaide Hills and also Kangaroo Island; the emergence of COVID-19 in our Chinese supply chains through Chinese New Year in -- with shutdowns in January; and then drought-breaking rainfall events in Eastern Australia as we ran through late January and February; and then the lockdowns of COVID-19 in Australia for the last portion of March and the last part of the first half. And so with the implications and knock on effects, as we've seen with wool in particular, but in other areas as well, of the COVID-19 implications for the European economies and other markets like the Northern Asian economies, where we export meat and grain with South Korea and Japan. So what I'd like to do now is to just run through the agenda. So I'm joined by our CFO, Richard Davey. And we'll, first of all, have a look at the highlights and delivering against our priorities. And then Rich will go into a deep dive into the financial performance, and then I'll come back and discuss the market outlook and strategic priorities as we go forward. So moving to the first slide, the highlights. We've split them into 3 significant areas. Firstly, on safety, which is a key priority to the business. One lost time injury, which is similar to the same time last year. The lost time injury frequency at 2.2, but running down. We had a cluster of injuries, 3 injuries towards the end of last financial year. So they won't wash out of our frequency until the same period this year. Clearly, during the COVID-19 environment, we've had a further enhanced and heightened focus around our people safety and our client and community safety throughout regional rural Australia. And we proactively established a committee to focus on all of these aspects in March, and we're very, very well placed as we work with the industry to have agriculture deemed an essential industry and to allow through multiple protocols noncontact servicing of our clients throughout regional rural Australia as we're looking to take advantage of good seasonal rainfall. From a financial performance viewpoint, our EBIT of $52.1 million is up 53% on last year, significantly strengthened operating cash flow. And we did have a lot of discussions around that. Richard will spend some time going through the ins and outs of that. And I think our sense is towards the end of this year with a complete 12-month period, our cash conversion will be back to the low 80% that we've talked about previously. Return on capital at 17.7%, which is a pretty solid result, as is the leverage, given that we've given ourselves a 2-year journey back to a higher return on capital and lower leverage after the acquisition of AIRR. And an earnings per share of -- increase of 30% on the previous year. So pretty solid results in what has been a tough and mixed market environment. In terms of our strategy, we've implemented or we established a business improvement area to our business October 1 last year. And we are seeing a delivery of significant business improvement initiatives, whether it be margin capital reduction efficiency. A lot of those -- the majority will be seen in the second half of the year as we've established the function and started to get traction and engagement across the business. But certainly, from our viewpoint, very, very positive. Not so much reflected in the first half, but looking for those results to come through in the second half. And then on an ongoing basis, the successful integration of AIRR and Titan acquisitions. Now it's early stages. We -- the midpoint for synergies from AIRR was around an $8 million benefit over a 2-year period. And we -- given that we've owned AIRR since November and not through the full period, we said that we believe that would be split $3 million this year and $5 million next year. And I think it's fair to say that we're on track and ahead of track with the AIRR integration. With the Titan acquisition, similarly, it's been performing very well. And the original plan of accessing greater margin pools and converting generic products across the Titan brand to access that higher pool has been quite successful this year. And again, we've got good traction, good engagement. All things being equal, by the end of the financial year, Titan will be at just about twice the EBIT it was when we bought the business and with significant benefits to the overall business. In terms of the business development activities, and this includes the bolt-on acquisitions to fill geographical gaps and segment gaps, the -- we have slowed our pipeline. Our pipeline is very active. And we believe that there would be significant opportunities with the Nutrien acquisition of Ruralco. These have been present, although we have purposefully tightened our activity just to ensure that there weren't any blind spots with regard to COVID-19 impacts that we wouldn't be able to accommodate from a capital viewpoint. And finally, the development of the third Eight Point Plan is progressing well. I'll make some comments on it later on in the presentation. But certainly, the -- our thinking, which is the shareholder feedback from 3 years ago, of being able to deliver a 5% to 10% increase in EBIT through the agricultural cycles at a high, in this case, 20% ROC, and for the future, most likely a 15% return on capital, is acceptable for our shareholders and provides a very robust and resilient business model for investors. So then looking at the priorities. Delivery against the FY '20 priorities after 6 months. On the safety performance, I think the -- it's fair to say one time -- one lost time injury is one too many. This is a fall and fractured forearm that occurred during the year. One of our people was dodging a beast in [indiscernible]. Yes, one is one too many, and we're working very, very hard on that. But it is worth reflecting where we came from in FY '13, where there's in the order of 34 lost time injuries in the business. So our desire is to get to 0, and we're working hard on that. In terms of operational performance, as we run through underlying NPAT, up 70%; underlying EBITDA, up 55%; underlying EBIT up 53%; operating cash flow, up 190%; leverage down and close to the target we had with the journey back from the acquisition of AIRR that we-- the commitment we made to our shareholders and investors. And then I think EPS, earnings per share, up 30% on the previous year. So pretty solid and done in a pretty safe, low-risk way as we continue to focus on a very methodical and high financial discipline approach to our business. In terms of key relationships, again, been moving very strongly. I think on the first point, we have worked closely with the industry proactively once we saw COVID-19 impacts in China. And we were able to establish agriculture as an essential industry and from that point, worked as an industry to ensure that we take advantage of the conditions that were prevailing before Australian agriculture. I think very, very important, it's one of the industries that's not impacted significantly, a very important core anchor for the Australian economy to be able to get back on the feet from an economic viewpoint. And with efficiency and growth. As I mentioned, with regard to the first point around AIRR and Titan integration, pretty solid. The new products, particularly the Livestock and Wool in Transit delivery guarantee has been also performing -- been performing very well. And as I mentioned, we've been able to basically be ahead of the plan across a number of the efficiency and growth areas. I'll talk to more detail around some of those issues as we go through the presentation, but I'd like now to hand over to Richard to go to the detail on our financial performance. Thanks, Richard.

Yes. Thanks, Mark. So just now on Slide 6. So turning now to the key financial performance items for the half year. So Mark's already mentioned, despite, I guess, dry conditions which continued into the first 4 months of this period, so the business finished really strongly with very good, as said, February and March results. Acquisitions were a key driver of that improvement, with nearly $9 million coming from sort of our new wholesale business, AIRR, which came on board in mid-November. Our sales revenue increased by 26% to $925 million with approximately a 50-50 split between acquisition and organic growth for that particular number. Underlying EBIT was up $18.1 million, as Mark already mentioned, $52.1 million. And I'll cover that in a bit more detail, as said, shortly. Underlying profit after tax of $48.1 million was an increase of $19.8 million from on the previous corresponding asset period. Net debt at balance date was $202 million, down on pcp. People might know, this is up on September -- the levels we were in September, with the settlement of the AIRR transaction occurring in this period. Operating cash flow for the 6 months was an inflow of nearly $12 million, and that was an improvement of $25 million from the prior corresponding period. And that was a result of an increased earnings performance with increased debtors in our retail product with sales that were nearly actually $100 million up in February and March on the pcp. So very strong performance feeding into our debtor book. Underlying return on capital, as Mark mentioned, is currently sitting at 17.7%, which is particularly -- that's good, but I'll go into that in a bit more detail in the coming slides. Our underlying earnings per share was up, as said, by $7.2 million to $0.315. And as Mark already mentioned, leverage decreased to 1.9x, which is underneath the target that we sort of set ourselves last year. And I'll run through other key ratios in the coming slides. One other point to note, for the purposes of the slides being presented, we have excluded the impact of the new leasing standard which came into effect on the 1st of October, and this is to allow more meaningful comparison with the pcp. But noting that the impact, which has been reflected in our statutory accounts, has been outlined in Slides 18 to 19 of this presentation. So now moving on to Slide 7. So looking at the performance now, I said, by product. The waterfall, I said, graph on top highlights the major movement for the 6 months with a focus on gross margin when compared to the previous -- prior corresponding period. The increase for the half was roughly split at this time, I said, 65-35 between acquisition and organic growth, this particular number at an EBIT or a profit level. Just focusing on acquisitions. This added $30 million to our overall earnings for the period. As I mentioned, $8.6 million of this related to the Wholesale Network purchase, which is made up of $17.4 million, as shown in the graph, with $8.8 million in additional cost shown as part of the $12.8 million increase in costs in the graph as well. And new Livestock in Transit product, which Mark mentioned already, which we purchased last year, added an additional nearly $4 million, which is included within that financial services item. Retail earnings recovered from a poor start, driven mainly from the reduced sales, with summer crop plantings down nearly 66%. However, recent rainfall improved soil moisture profile has lifted the winter cropping confidence. And so, as I mentioned already, a strong sales finish to the half. Agency Services gross margin improved, mainly in the livestock part of the business with high prices across both cattle and sheep being the main drivers, with volumes also up. Wool margins was back with both volumes and prices down for the half. Financial Services margin was slightly up due to the acquisition already noted, offset by lower banking margin, in line with our new distribution agreement, which started in March last year with a corresponding reduction in costs. Other, that relates to the accrual of a new incentive program that we put in place which commenced on the 1st of October. And unlike the previous model, this is no longer discretionary aligned to branch performance and achievement of stretch targets, which is why it's coming through now in the results. Costs have increased by $12.8 million, with increased acquisition growth making up $9 million of that number, which I already mentioned, and with geographical footprint growth and additional corporate investment initiatives that Mark already mentioned with the business improvement area. And this was offset by reduced banking costs. Now moving on to Slide 8, looking by the-- business by geography. So now looking at the result by geography, the waterfall graph highlights the major movements. But this time, we've actually had -- this is at an EBIT level. All zones except the North were up when compared to the previous corresponding period. I said, continuing dry conditions was again a feature of the result in the north with the summer crop, which is a key part of the zone performance, significantly down. We -- as I said, as mentioned before, we did have -- see improved results in February and March as conditions improved, particularly in the North, which was pleasing. The Southern zone delivered improved performance both in livestock and retail with benefits flowing from our tightened strategy, a key feature of those improvements. Costs were up from increased investment in frontline staff. Central zone and corporate in Tasmania delivered improved results across most products. Real estate and livestock were the standouts in this zone. Western zone has had a very strong start to the year, once again, across most products, with retail sales as the key driver of this increase. Corporate and other costs increased primarily due to investment in new corporate areas, namely strategy and business improvement functions. And there was a couple of unfavorable half year statutory adjustments, in particular, related to, I said, our long service lead provision, which people might note from last year was a negative. Again, last year is the interest rate outlook as it falls, and therefore, the discount, I said, becomes negative. So moving on to Slide 9, return on capital. Return on capital, calculated on a rolling 12-month basis, finished at 17.7%, which is an excellent result considering the impact of below-average seasonal conditions for a significant part of the last 12 months for which it's calculated given we do it on a rolling 12-month basis. Whilst the impact of the poor summer crop and last year's winter crop has weighed on the retail product return, this has been offset by improved, I said, results or returns from both our agency and real estate areas. Average working capital levels when compared to the prior corresponding period were up by $85 million, nearly $86 million. 75% of that increase relates to acquisitions, particularly in our Wholesale Network and Financial Services, as mentioned already. The other 25% has supported, I said, business growth, mainly in retail and agency. Average other capital increased by $124 million, and that's from investment. And I won't -- so that's from the Wholesale Network and the Livestock in Transit product already mentioned. Turning now to Slide 10, just looking at the cash flow. Operating cash flow for the half was an inflow of nearly $12 million, and this is before the lease impact already mentioned. It's an improvement of $25 million compared to the pcp, which was announced a low of $13 million. Improved earnings for the half was offset by the normal build in retail working capital as we enter into the peak selling period for winter cropping. The main driver of this increase that you'll see in that -- the $45 million was due to high debtors with, as I've mentioned, very strong sales in February and March, has fed into higher debtors. Excellent cash flow result from our agency business was a feature with lower working capital coming off higher balances last September. Feed and processing delivered improved cash performance this half with increases in working capital related to higher cattle values at March, not numbers. Interest tax and dividends of $1.8 million comprise interest of $3.6 million. This was offset by dividends received from our insurance, about approximately $2 million from our insurance investment. With minimal taxpayers, we use our tax losses. CapEx of $5.7 million was up on prior year with spending on Killara feedlot and -- of which the 2 -- and this is -- about $2 million related to a silo, I said, replacement from the collapse mentioned last year, which was covered by, I said, insurance. So that's a little bit elevated in this half than what we normally see. Turning now to Slide 11. Just touching briefly on debt. Debt levels at balance date and year-to-date average are reduced from the pcp. All of our key ratios have also improved through a combination of higher earnings, both organically and through the additional earnings from acquisition funded by equity, namely the AIRR. We're well placed within our banking covenants, which we're also taking the opportunity to outline there on those points off to the right-hand side, with significant headroom in all 3, as highlighted. We also have significant undrawn facilities that are in a very good position there as far as that's concerned. Turning now to Slide 12, and I'll hand back to Mark.

Yes. Thanks, Richard. I think in terms of the market outlook, I think the -- yes, it is a positive outlook, but expect to see Elders update their assessment of the winter crop in the first week or so of June. But it really does pitch to our earlier comments at the end of last year, where the -- our view was if there are successive positive rainfall events, that it's likely in Eastern Australia, certainly behavior through history is that growers will plant from fence line to fence line and take advantage of the conditions in order to recoup the previous couple of 2 or 3 years of minimal crop and minimal cash flow. I think one of the issues that comes out of that in the Rural Products area is that where land has been less fallow, it has a lower requirement for fertilizer input. So it's like a natural fallow that the drought has caused and so there may be some reductions, and there has been some reductions in fertilizer application. But as the crop progresses and given that we're -- we'll have appropriate follow-up rain through the season, you'd expect a top-up of nutrition and also the use of post-emergent product. And then depending as we run through the end of the season, the final activity that also drives another application of crop protection product. So I think the outlook is positive from a domestic agricultural viewpoint, and we've got the uncertain ongoing -- the ongoing uncertainty in the global markets as we look at the implications. And if we go to agency, particularly for wool, in the European demand of fine wool fabric out of China, that's obviously been significantly impacted, I said, North America. And so we will see some of those knock-on effects. But I think from an Elders viewpoint, the essentials of the business are relatively positive. Rainfall event-driven fee, which has driven restocking, which has obviously put some impetus behind livestock prices, we still have strong markets for both the lamb and for beef. And obviously, the reduced Australian dollar has driven some of the grain activity, but they're also -- with the strong winter crop, we'll see strong grain position towards the end of the year. Outlook as we run through real estate. We think that there will be -- clearly, there's an impact on our franchise -- metropolitan franchise real estate business and -- as there is across all metropolitan areas. But as roughly 1/4 of our real estate business, and with real estate being roughly -- it's probably a little bit less now with the growth of our Rural Products area, maybe 8% or so of our total business, the materiality is not significant in the total scheme of things for the business. Moving through Financial Services. But I think both Richard and I have already made comments on that with the -- particularly with the restocking occurring, the StockCo -- we have 30% investment in StockCo, is moving -- or StockCo as a business is progressing very strongly as is AuctionsPlus, the online lifestyle business, where we're a 50% shareholder. So that's quite positive. From a feed and processing viewpoint, the key business there is Killara, which has been performing very well. The benefit Killara has had at a low-priced cattle going into the business, and particularly where we're backgrounding those cattle, but that will diminish as we run out through -- towards the end of this financial year as cattle prices increase. Although the flip side of it for Killara is that we're able to -- with water and with moisture in the soil, we're able to grow more of our forage and grain on the farm, which we're doing right now, which drops the cost of our feedstocks into that equation. So I think the other issue around Killara are the 4 processing facilities that are currently on hold from a Chinese export viewpoint. And the customers of Killara have been able to reallocate the fertilizers that they're using in order to minimize the impact. And from Killara, we, I said, that's relatively under control. With the Elders Fine Foods business, which is smaller than these -- one of the smallest branches in Australia, retail branches in Australia. Then just for completeness, Elders Fine Foods went into a shutdown in January, around Chinese New Year as the whole China went into shutdown. The biggest part of that business was for high-end restaurants and hotels, as I think many are aware. So during the shutdown period, we refocused the business and opened up the channels of retail and online, and that's now become a very important part of the business as China has recovered. The foodservice area is recovering slowly. But we're growing strongly in the online and retail part of that business. And finally, on cost and capital, obviously, it's tied, as we always are, and we'd like to recover as CPI increases. But it's also worth noting in the order of just under $0.5 million of cost savings through a lockdown of your total business in terms of travel, entertainment, accommodation and all those on costs have been flowing through as well. So moving to the second Eight Point Plan. And really, as we run out through to FY '20 with the key areas, as I mentioned, this 5% to 10% growth of EBIT through the cycles at above 20%. The 20% has been reset when we took the decision to buy AIRR. Although at the half year, we're at 17.7%, which is pretty solid in the year given that basis. Going to the next slide to get a bit more detail around the progress in the Eight Point Plan. That 5% to 10% growth has us in the $103 million to $117 million -- sorry, $115 million scale, which is basically in line with most of the analyst spread of assessments, including the acquisition of AIRR. I think the -- at that 17.7% ROC with the weighted average cost of capital around somewhere between 7%, 8%, something like that. You can see the significant shareholder value that's been gained through the second Eight Point Plan. Now Going to the next slide and just a quick recap on where we've got to with the AIRR acquisition. And I'd have to say, it has been overwhelmingly positive. And I think for a bunch of Elders executives to walk into the room with 500 AIRR members and management earlier in the year and be welcomed as we're all part of the same family, it was quite stunning and it has been reflected in the financial performance and the integration. If we run through what we actually acquired with AIRR, we acquired the wholesale channel. So we acquired further diversification at a channel level, which is very important to us. Included in that, we acquired 100 branches in the produce and hobby farm servicing area, which gave us access to a more stable and high-margin component to that channel. We acquired significant supply chain logistics capability through the 8 warehouses that they run, and we've actually fast-tracked access and use of those warehouses for the Elders branch network in the areas of general merchandise and animal health products. And finally, we acquired the regulatory packages for veterinary products, animal health products, which allows us to access significantly greater margin pool for those products and to use those as the platform to strengthen our Elders Pastoral Ag veterinary products that are now sold or that are being sold through the Elders branch network. So very, very positive. In terms of delivery of the acquisition synergies, what we got for this year would be around $3 million, and we're on track to deliver somewhere between $3 million and $5 million synergies. Increased margins across the Elders Group. You may recall on the acquisition, one of our criteria for a positive corporate acquisition is around low integration risk. And in this case, it wasn't about closing branches, rationalizing people, getting rid of layers of management. It was around accessing the capability of the 8 warehouses and the combined purchasing power in combination with the additional margin pool through the Titan products for AIRR and the AIRR veterinary products for the Titan brand, Pastoral Ag. So everything in our control and very, very positive. And I think that's part of the reasons for the success to this point. Implementation of other initiatives. The number of brands has grown, and I'll give you some numbers shortly on the organic growth component of the business. Private label expansion in animal health and merchandise, as we've mentioned with our backward integration and the Tuckers, which is the hobby farm and produce click-and-collect across member stores. Light touch integration. So Richard and I are on the Board. I'm the chair there. And basically, not a lot else has changed in how it's run. So moving to the progress on the second Eight Point Plan. And obviously, a busy slide, but I really just want to focus on some key areas, and we can pick up the other points of interest in one-to-one meetings or in questions now. The last point in organic, the $3 million to $5 million annualized earnings uplift and $10 million to $20 million capital reduction from the business improvement pipeline. Now I indicated in my introduction that there was a business improvement in areas of the business being established October 1. We've -- it's -- we're now getting momentum, good engagement, and we're comfortable around those sort of numbers at an annualized basis. I think in the organic side, it's also worth noting that we've had quite a detailed plan with regard to potential fallout from the merger of Ruralco and Landmark. And to this point, it's worth noting in our analysis -- and we obviously have KPIs against many metrics in the fallout. So there's -- at this point, 259 new customers have come from this. The -- in terms of additional people, there's 18 additional people who have joined the business. These are quality revenue owners at the front end of the business. And there have been 8 additional wholesale members that have come from CRT to Landmark at wholesale that are now purchasing from AIRR. So we're watching it quite closely. And again, our philosophy is that we would prefer to be approached by potential candidates rather than approach. Because once you chase someone, you're obviously paying a premium, and we need to be respectful and acknowledge the wonderful performance of our own people and not bring people from the outside at premium packages. Okay. So on the final slide before we go to questions, the development of the third Eight Point Plan, and this is obviously the critical next step that takes us through to FY -- the end of FY '23. Our sense is that -- and certainly feedback from multiple stakeholders and multiple shareholders is that the 5% to 10% through the cycles growth target is a reasonable and acceptable target, particularly given the last 2 Eight Point Plans, we've delivered against that or we've exceeded that. We've also focused on the key priorities of winning market share across multiple business areas, as you see with the strategic map or gap analysis. Rural Products gross margin improvement through the backward integration and supply chain efficiency that we've talked about. The expansion of additional offers with our financial services, Thomas Elder Consulting area. The -- continue to targeting with our feed and processing services, which have been going quite well. And then finally, in the strategic priorities, our kind of focus on delivering an authentic industry-leading sustainability program, which we commenced to work on last year, where we don't particularly want to tick boxes for the sake of it and have a glossy brochure. We want to be able to acknowledge the real and significantly important initiatives that we participate in and that we'd lead throughout rural regional Australia and for agriculture on behalf of the total industry. So that's -- there's absolutely no doubt in my mind, as with our safety priorities, a safe business that doesn't hurt people is always, in my experience, of running certain companies is always a highly profitable business and a great business to work in. And we have exactly the same view that an authentic sustainability program is -- drives profitability for all parties and allows for a much, much better business for everyone to be associated with investing and working. On the enablers, the 3 key enablers around IT and data platforms that we have foreshadowed to the market, and we're completing those assessments through to the end of this year, with FY '21 to be a critical year in implementing that systems modernization program. Retaining and attracting, developing the best people in a safe working environment. And of course, the -- one of the cornerstones, if not the cornerstone of Elders since FY '14, is this very high financial discipline that drives all the decisions in the business. So with that, I'd just note Richard's earlier comments. The next couple of slides are the new lease accounting standard impacts on the business that we can comment on or question either one-to-one or in the question time. But with that, I would just like to close off the formal part and then go into some questions. Thank you.

[Operator Instructions] The first question comes from Philip Pepe with Blue Ocean Equities.

Firstly, well done on a good first half results. In terms of current conditions, I mean, some of your customers have been hit by bushfires and then rain and issues with China. How -- you've talked in other -- in the recent past about some of your customers planting from fence post to fence post, but how quickly does spending typically bounce back after a drought? Is it realistic to expect that back to normal so soon after some pretty difficult conditions? Or will it more likely be spread over the next couple of years?

Yes. I think good question, Phil. Because I think through the drought-hit areas in Eastern Australia, and given that there's a sufficient financial capability and that there are multiple sources of capital for cropping inputs available to -- where there's appropriate risk profiles, I think it bounces back very quickly, and that's been the history. I think in other areas like the dairy areas, through Victoria and New South Wales, coastal areas, and also probably with our more direct experience with Kangaroo Island, there may be -- with bushfire impacts where infrastructure has been impacted, it may take longer. So -- and particularly, I mean, if I'd focus in on Kangaroo Island, particularly where it's a remote and relatively isolated from a supply chain viewpoint area, the infrastructure rebuild may take longer. So it may be 6 to 12 months as opposed to being able to get access to capital, put the planting inputs together, look after the crop and then be able to generate significant cash flow in the November, December period.

Excellent. If I can sneak in a quick second one. This is the last few months of your current 3-year plan. In terms of organic growth for the next 3 financial years, given that we're coming off a reasonably low base with the drought acquisitions aside, is 5% per annum organic and EBIT growth still a target? Or is that a bit low given the base is perhaps lower than what it would have been without the drought?

Yes. I think the diminishing return to scale issue is one that we consider strongly because we're coming from a very low base way back in '14 -- '13, '14, as you know. But I think from an investor viewpoint, that, that was the feedback. That has been the consistent feedback. That if we can consistent -- as an agricultural stock, if we can consistently deliver between 5% to 10% growth with a combination of -- and maintain a high and satisfactory return on capital, that combination for us has to be organic and bolt-on acquisition. It has to be a combination so we don't compromise our return on capital profile. And it's doable, but it does require -- for these sorts of businesses, it does require significant financial discipline in cost and capital management, on bolt-on acquisition template management. So we're comfortable in walking away from anything kind of higher than the 5x multiple, et cetera. And we're a little higher than that if we're looking at a 15% return on capital, but I think it's doable. And it'll be a question that we'll be asking the 100-or-so people we talk to over the next few days on this. Is that acceptable? Is that a return that gives you confidence with an ag stock that we can get out 5% to 10% through the cycle?

The next question comes from James Ferrier with Wilsons.

Richard, well done on the result. First question is about AIRR. Just looking at the segment notes. Note 11, new accounts slowed. I think it was $8.5 million EBIT, $11.2 million EBITDA for 4.5 months. If you just simplistically extrapolated that on a 12-month basis, the run rate is something close to $30 million per annum. I guess you've already alluded to the fact that the synergies are running a little bit ahead of your expectations. But that simple calculation I did there, is there something around the sort of first half, second half seasonality in the business that we should be mindful of? Or is it more reflective of the improvement in cropping conditions we've seen on the East Coast in the last couple of months?

Yes. Certainly. So you're talking in that result, what, 4.5 months ultimately with that sort of result. So you can sort of extrapolate that out. In terms of -- it definitely had, as I mentioned before, had a very good, I said, I think, February and March. I said, numbers, so there was obviously some very good results there, but that was coming off some probably some poor results occurring there. But that's sort of extrapolation. I think it has sort of necessarily the same pattern that we have. So I would expect to have strong April, May and June assuming conditions continue the way they are. And then obviously, after you get out of that peak period and to sort of fall away, but noting that it does have a slightly different mix with regards to its sales, with obviously the heavier mix in -- related to animal health rather than AgChem that we have in the retail area or the channel.

Yes. Understood. That's helpful. Second question is about working capital. Just looking at the financial services business in particular and not so much compared to pcp. But if I compare it to the 30 September balance, I think it was -- $19 million was the capital balance at the end of FY '19, and you're now at $30 million. So it's increased $11 million. But you had an $8 million inflow from StockCo. So basically, it's an underlying increase of $19 million. So what's -- why are you having to put more capital into that business and such a sizable amount of capital?

Yes. So were you looking at the March, I said, number compared? Because you might recall, we didn't put a sort of number of other, I said, loans into StockCo. And we also purchased the Livestock in Transit warranty product in the second half last year, which, I said, increased that capital sort of base. And then as you just mentioned in this particular half, we've repatriated some of that, about $8 million back, I said, in StockCo advances. So that's generally how the capital is going. There's a large increase in the second half last year with the reducing in the first half this year.

Yes. That's -- so the $19 million figure I quoted was the balance at the end of FY '19, which would have captured the Livestock and Wool in Transit acquisition. And then in this 6 months just finished to go from $19 million to $30 million, even with the $8 million inflow from repayment from StockCo, I'm wondering why there's an extra roughly $19 million of capital needed in that business given livestock and wool was already in the original number back at September 30.

Yes. I'll have to have a look at that because that's not my understanding, certainly. Yes, I said, I'll have to take that off-line and have a look at that number. Most definitely big increase from, I said, in the second half last year and then a reduction, as said, into this year in Financial Services.

Yes. Yes. Just to finish a couple of simple ones. You mentioned, Richard, the incentive program accrual. If I understand it correctly, previously, you've just expensed incentives in the second half. So is this a change in accounting policy view now?

It's a change in the actual program, the incentive program. So as I sort of mentioned, the last, I said, program was all discretionary based on the performance of the overall business and hitting the -- obviously, our stretch targets. The new incentive program that was put in place is, I said, set up to drive asset performance certainly, in particular in the front end of the business, and those are centered around branch performance on stretch targets. So it's more of a mechanical calculation that gets accrued rather than discretionary, I said, and that's just for the front line of the business. Whereas the corporate and the asset part of that program is still discretionary based on, I said, hitting targets, the group target.

Yes. Yes. Understood. And then just finally, a point of clarification to the notes in the accounts around the $2 million increase in bad debt provision. I'm assuming, a, you've taken that above the line. And b, just remind us sort of what you typically provision for on an annual basis just so I can understand the relevance of that $2 million.

Yes. Correct. So I think if you look back over the last 5 years, in particular, we've probably been running around provision for doubtful debts anywhere between sort of $1 million to $2 million. That's probably been the average. And in terms of -- we saw -- we increased the provisioning a little bit last half -- the last half of last year. And that was particularly centered around Northern New South Wales, where we increased it a little bit. So in line with that, the first half, we provisioned approximately $3.5 million in provisioning just for the half. So that gives you a sense of the quantum.

The next question comes from Paul Jensz with PAC Partners.

First, a quick question for you, Richard, if I can, just on the working capital build in the first half. I think there was a statement made of that working out in the second half. Can you work out -- go through that in a bit more detail because you've got around $58 million of extra working capital there from the wholesale and retail business. Can you give us comfort that will work out carefully and sensibly in the second half?

Yes. Sure. So I think the one point to note is with, I guess, the seasonal -- it's a break we had and probably coming off last year where we had a pretty poor break. We saw, I said, sales up significantly in February and March, which, I said, has fed through sort of the debtors. So on a normal sort of debtor profile -- and I think we average around about that 90 days, and I believe, as it is, probably a little bit better than that. The expectation would be that I would sort of collect those debtors into the second half of the year and therefore, that will flow back into the cash flow. That's -- there's some other programs in there, where we, I said, back it off against supply terms, et cetera. But I expect a significant part of those debtors that built up, particularly in February and March, to be collected in the second half.

And maybe yourself or Mark, just comment about, I suppose, the split first half, second half with, I suppose, the fast end of the first half. Just for the EBITDA of the group.

The EBITDA of the group. Yes. It sort of moves around. If you look to the last sort of couple of years, it probably, once again, depends on the relative size of your summer crops and your winter crops and how well the livestock business, in particular, has been going. And I think you probably note in the first half, we did see a pretty strong, I said, agency asset result, which probably, I said, for the first half was pretty strong in that product. But saying that, we obviously had a poor summer crop, and then that was offset by a very strong input. So I think we're probably -- what, last year, we've probably been running at around 50-50, heavenly, but the expectation would be, and I think that's sort of captured in consensus, et cetera, that it might be around sort of that number as well with a stronger, I said, winter cropping outlook. But I think as Mark mentioned, there's probably some headwinds there as well, particularly around the real estate products and, I guess, wool, which we'll take a little bit of that on top of winter cropping, the improvement in winter -- the expectation in winter crop.

Just a final comment, maybe more for Mark, is with the ABARES long-term outlooks and your summaries there and relevant to Elders, coming off of what might be a reasonable 2020, there seems to be some fairly -- some tempered outlooks going forward, but you've still got a fairly positive -- neutral to positive arrow in your view of the world. Can you just match up those 2 statements?

Yes. Sure. Sorry, no, you keep going.

Yes. Sorry. So if -- are you referring to the -- that slide at the back of the pack of the appendices?

Yes.