Elders Limited

Mr Irvine: Our next presentation company is Elders Limited and I think it's Mark Allison walking down towards the front of the stage here, good morning Mark, welcome. I'll pass over to Mark for a moment just to talk you through the Elders story. Please join me in welcoming Mark.

Mr Allison: Okay, thank you very much and great to be here today. So I have 15 minutes to tell you about a 180-year-old company and the alignment of Elders growth throughout its history with Australian agriculture. I'm going to move through pretty quickly so that we do have time for questions, focused firstly on the business model because the business model that we've established from 2013-2014 and the approach to running the business unashamedly on the basis of return on capital with the theory being that if the return on capital is significantly above weighted average cost of capital, that it generates shareholder value. This is how I've run the previous six companies I've been CEO of. I'll give you a little bit of history of my background because I'm one of the CEOs around the ASX space that was tricked into being a CEO. So I had got out of, after running six ag companies in , I'd got out of executive life, become a non-exec director for five years, was asked to join the Elders board when it was in significant trouble, became chairman and then became executive chairman and then when we did a search for a new CEO, the board asked me to be the CEO. So I say that I was demoted to be CEO and since then, we've done the turnaround, 2016 large company turnaround of the year and now we're offering sustained high return on capital growth for shareholders.

So running through the business model, will spend a little time on that, as I say, to start with. It's run on the basis of return on capital and each company I've run has been exactly the same in that respect, with similar results. So we're an agricultural company and Elders growth, which you'll see shortly, has not been agricultural growth where it goes up and down with the season from the cycles. Our growth has been consistent and it's on a base principle that with an ag company you have to have a cost and capital base that allows you to make good money in bad seasons. So it's just a fundamental philosophy again that I've used in every company that I've run. So I should say, I started life as a research agronomist, so grounded in agronomy and base agricultural research. This is the philosophy that good farmers have and that good agricultural companies have.

So when we look across the portfolio in terms of the diversification that's needed to ensure that you can have quality growth over a number of seasonal changes, we have diversification by business model, so we have principal positions and agency positions. We run on the basis of return on capital, we have geographical diversification, so the droughts every four years in Australia don't occur across the whole of Australia every four years. The east coast issues we've had in the last year have been predominantly New South Wales and some southern Victoria, so doesn't happen all around Australia; geographical diversification is critical. Then we have diversification by product and service. So unlike a lot of companies that you would have seen where there's a single focus, we have multiple focuses across our business, as you'll see and it goes from banking to insurance, to real estate, to grain, to wool, to livestock. This is a critical part of our diversification.

In our retail products, for the retail products, predominantly run out of our 220 branches around Australia, so these are all the inputs into a farmer's production function, so fertiliser, ag chem, animal health products, veterinary products, hats, boots, machinery, whatever it may be. This is a traditionally a low return on capital area, largely due to 85% of the products, ag chems and Australian veterinary products are off patent and so the regulatory regime in Australia has lower or shorter time periods for patent protection than other areas around the world. Now in my previous life I was chairman of the regulatory authority because I've served in a number of industry boards. So 85% are off patent and therefore you get direct imports selling direct to farmers and the opportunity for margins for the margins like you'd see in Coles or some of the other retail stores, et cetera, are not there. It's an input to a production function, so farming is a production function, it's not a consumer purchase, so it's price quality and availability because you may have three or four weeks in order to plant your crop, so you need the product there.

So with this area, the return on capital four years ago was around 4%. Weighted average cost of capital today is around 7.5% and so the thought was back then, as I'd done when I ran Landmark, was that we would either increase the return on capital for this area or reduce it as part of the portfolio in order to maintain that target. In 2013-14 when I was chairman, executive chairman and then CEO, we set a target, at that stage there was a minus $500 million loss at that AGM, Elders was in bad bank and had almost gone under. So we set a target of $60 million EBIT by 2017 and a minimum of 20% return on capital. We established a plan in terms of capital light structures for retail, so retail ROC today is at 19% and it's going quite well. In terms of the agency services, this is buying and selling, so this business model is a classic broking model, buying and selling sheep, cattle, pigs, llamas, grain, wool, whatever it happens to be. Now the return on capital here is between 50% and 60%, we pay farmers for the produce in 10 days and we get paid when we on-sell it in 14 days, so there's a four day gap and this is a very high return on capital area.

Then we go into real estate, classic real estate. There are four components of our real estate business, about a quarter of it is regional rural real estate, just your normal, what everyone would identify as real estate, with regional rural Australian residences, businesses, et cetera. A quarter of it is the broad-acre stations or the big properties and interestingly, a lot of those we bought and sold over four or five generations, so there's quite a bit of history from our viewpoint. Then we have rent roll in regional rural Australia, which is about a quarter of it. Then we have a very small franchise real estate business in metropolitan cities and a lot of metropolitan people think of Elders as that company, it's a tiny franchise business, but obviously we've got a much broader business in reginal rural Australia. Obviously return on capital for real estate is very, very high, as you would expect, because there's no capital.

Financial services, we don't take a principal position with our banking business, so we have a partnership with Bendigo. They manage the credit. Previously we'd managed the relationships with 100 bank managers in the bush. With the Royal Commission last year, we opted to divest our relationship management part, which we did, to Bendigo so that you'd have credit management and relationship management in the same entity, which made a whole heap more sense from a governance viewpoint. So in this case we have no capital exposure, we get a trail and get a network access fee and obviously a very high return on capital because no capital exposure. For our insurance business around Australia, we have a partnership with QBE, similar where we get a trail and network access fee and we have no exposure to capital, so again, high return on capital.

The digital and technical service business, again has no significant capital. This is Elders websites, we're the number one weather website in regional rural Australia and we sell advertising on that. We've got 150 agronomists around Australia where we charge fees to give advice to farmers, so all service fee. The final one is our feed and processing business. This is where there is a capital component and that’s the feedlot in New South Wales. We sold our feedlot and abattoir in Indonesia last year and we've got a fine food business in China; we've been there for 14 years. So that's the makeup. The ROC in that area is about 17%.

So then running through pretty quickly then, presence around Australia, 220 branches throughout regional rural Australia, 440 points of presence because we have our insurance businesses may not be in our branch and the real estate businesses tend to be in the main street, so they may not be in our branch, they may be in industrial areas. When you look at the financial progress since we reset the business back in 2013, the target we set of 20% ROC and $60 million EBIT by FY17, we hit $71 million EBIT and 28% return on capital. We also paid dividends for the first time in 10 years and we'll continue to do that; up to 35% of our NPAT we pay out in dividends. Interestingly, there's yin-yang, there's good with bad, so all of the years of struggling and loss period, we had $800 million of tax losses, which means effectively we don’t pay tax for another eight years. So there's good and there's bad, right?

So when you look through then the progress, we reset the target, the eight-point plan that we developed in 2014 and said, we'll have 5% to 10% growth at above 20% return on capital through to 2020, so we're on track for that. Through this period there have been significant droughts and ag commodity issues happening throughout Australia and we've also had issues in Indonesia and some of you may be aware. So we've been able to maintain consistent growth. With this year's dry conditions in eastern Australia, we reset our guidance to between $72 million and $75 million EBIT, but that's with a market that's 10% down on the average and our sense is that if we're heading towards the top of that, we'll have another year of record profit where there's significant drought issue or something happening around Australia in agriculture and to my point, consistent high quality growth. We're on target to hit the 5% to 10% growth at above 20% return on capital by the end of next year and feel comfortable that the business will deliver that.

So then the half year guidance that we gave at $72 million to $75 million, that's unchanged, in fact our year runs October-September, so we've had two more months since the half year and I feel quite confident with the range that we've provided there. Trading update, I won't go to the details, but clearly the winter crop in Australia relies on rainfall through from Anzac Day. It always does rain in Australia, regardless of what you read in the newspapers. I always make a joke of a pot plant dies in an office in Pitt Street or Bourke Street and our share price goes down. We've seen , GrainCorp, AACo and Costa do downgrades while we've said at the top of end of our guidance is a record profitability and our share prices has suffered, it's gone from $9.40 down to $6, although the results are consistent with the performance we've committed previously.

In terms of the strategic priorities, we've got a simple eight-point plan, so in 2013 I got rid of all the consultants when I became Chairman and got rid of investor relations people and thought that people like you would like to hear it straight from the horse's mouth, rather than someone in between and people telling us how to run ag doesn't make sense when people like myself have been around for 40 years with multiple experiences. So we've invested significantly in our digital and technical space. We've got 50% of an online livestock business, eHarmony - Harmony.com for cattle and sheep and 30 years later it's got 3% or 4% of the market, so the traditional means are still important, but it's going quite well. I'm chairman of that business, we've got 20% of an online grain trading business, we've got our retail online businesses, but the reality is that the same farmers and regional rural people around Australia who buy stuff from Amazon or Alibaba or wherever, you can't get 20 tonnes of fertiliser in a FedEx envelope, so there is a logistics component, which has a lot of parts of ag untouched by some of the disruption that you've seen in other areas. The same is true across North America and Europe.

So in terms of balanced growth where you split our growth between acquisition and organic, needing to keep that balance so that our return on capital stays very, very high, the gaps that we have, so 180 years later we've got 15% market share, which is quite amazing. So there are multiple crop segments, market segments that we aren't represented. There's been a recent merger of Landmark, the market leader, with Ruralco that's been announced. So I'm an ex-CEO of Landmark. There will be significant fallout from that and we're already getting significant fallout with people coming across to Elders in regional rural Australia. That will continue. In the year when I was running Wesfarmers Landmark, we bought number two player, we went to 38%, 10 years later the market share was 28%. So I have absolute high confidence that a number of the disenfranchised, synergised people in those two businesses will make their way to the iconic Australian brand, Elders.

When we look at our corporate acquisition strategy for any step-out acquisitions, a few criteria and I won't go through them all, but I'll mention the tax one, 100% owned in Australia brings it under our tax umbrella, so we get that immediate uplift, but there are a whole lot heap of other aspects we look for with IP, diversification, et cetera, et cetera. Very, very clinical, we walk away comfortably, there's no emotion, it's all very low pulse rate from my respect. Look at the eight-point plan, how we get to the 2020 target, 5% to 10% growth, just for your info, is $82 million to $94 million EBIT by the end of next year, above 20%. Our internal target is $100 million and again, I feel quite comfortable through the cycles that we'll get there. Looking at agricultural production and why the confidence, so I'm chair of Agribusiness Australia, the industry organisation, we have a goal of $100 billion production in ag by 2030. Last year we were sitting at $60 billion, so that growth is inherent with our agricultural systems. Maintaining our position, we'll have a company like Elders running along in that area. A bit part of it is commodity product, like beef and grain, but the important area for growth in Australia will be the horticultural and specialty crops; that requires significantly higher technical knowledge and advice, which plays to the strength of Elders.

So the market outlook, I won't go through each, but in agriculture some are up, some are down and at the end of the day, we've only ever forecast average seasons. For the last 30 years as a CEO in ag, I've banned weather maps from any management meeting or board meeting we've had, so we talk about the things that we can control and what our shareholders and the other stakeholders in regional rural Australia and people, communities, et cetera, require from us. Outlook, I won't go through the detail, but I will go to summary so we can jump straight to questions and basically the platform is now stable, we have no term debt, so from those early days I vowed as chairman that we wouldn’t have term debtors in an ag company so we've got a securitised working capital facility, no term debt, paying dividends and hitting all of our targets and on the lookout for distressed assets that can come under the tax umbrella so that we can create significant value for our shareholders. So I think I'll just jump straight to questions, if that's okay. Mr Irvine: Perfect, thank you Mark. Let's say thank you to Mark. If you have a question, just raise your hand and we'll get a mic to you. I can hear someone saying yes, I couldn't see your hand, but I heard you.

Question: My name is [Ranvid Johan] and my question is that the land you own is crown land or freehold land? The land for agriculture do you use is crown land or it is freehold land?

Mr Allison: We don’t own any land, it's a capital light strategy. So in terms of our real estate business, this is classic real estate, whether it be accommodation, management, buying or selling, but we don't own any land. So there's no farming.

Mr Irvine: Another one?

Question: Mark, thank you for the presentation, obviously everybody knows Elders from being such an old company, it's been through ups and downs over the years. It's in a very difficult sector or challenging sector because of droughts and the exchange rates that fluctuate quite a lot over the last 18 months or two years, how do you see that impacting the Elders going forward? You had few death scare and I've been in this stock years ago and I got out of it because of the volatility in the primary sector. So can you comment how you see this company in five years' time with the strategies you've put in place, particularly on the digital and any other area with disruptions in places?

Mr Allison: Yeah, so on the first point, I think any industry or any sector is challenging if you don’t understand it. So I wouldn’t even try to get into the previous presentation's space, I wouldn't try to get into the health space, the medical space. From an agriculture viewpoint, if your cost and capital base and this has been the case for every company I've run, the cost and capital base is right, okay, food and agriculture will always be a very strong component and you saw the growth that Australia will extract from this sector. I think it's understanding and what we see, particularly with the market swing, the share price swinging around, is a lack of understanding of the value of diversification and having appropriate cost base, because you have to run ag companies from a financial viewpoint and if you do that, you can make good returns. In terms of the impact of disruption and so Harvard Uni did a case study on Elders and the audience couldn't understand the multiple product approach, because most - so I tried to lighten the moment, I'm from North Queensland, I've got my finger cut off, so I started my presentation with, you know, the most significant digital disruption I've experienced is my finger being cut off and no-one laughed, so then I got serious again. So I tried to be funny.

But in terms of digital disruption in agriculture, for online, for financial products, for insurance products, for online livestock, sorry, there's a need. I think I've closed down four or five online retail businesses over the last 20 years because you need the product, you're talking about S7 poisons, you're talking about chemicals, you're talking about veterinary products that have regulatory requirements and they can't just be sent like consumer items. So I think there's also a significant social interaction component in ag where on multiple occasions where we've had online ordering to reduce the number of direct phone calls, phone calls have stayed the same. So they order online and then ring up and talk because there aren't that many people to talk to. So there are some idiosyncrasies, but I guess the most important point is that we have a toe in each of the key areas of the business within online and digital components and we're investing in it, to be sure, to be sure. Thank you.

Mr Irvine: Okay, thank you Mark. I'm going to use that digital disruption thing, I'm going to make that work for us, don’t worry.

Mr Allison: I can give you a tip if you like.

Mr Irvine: Let's say thank you once again to Mark.

Mr Allison: Thank you.