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Edited Transcript of ELD.AX earnings conference call or presentation 20-May-19 12:01am GMT

Half Year 2019 Elders Ltd Earnings Call

Adelaide Jan 9, 2020 (Thomson StreetEvents) -- Edited Transcript of Elders Ltd earnings conference call or presentation Monday, May 20, 2019 at 12:01:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Mark Charles Allison

Elders Limited - CEO, MD & Executive Director

* Richard I. Davey

Elders Limited - CFO

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Conference Call Participants

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* James Ferrier

Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst

* Paul Jensz

PAC Partners Securities Pty Limited, Research Division - Executive Director of Research

* Philip Pepe

Blue Ocean Equities Pty Ltd, Research Division - Senior Industrials Analyst

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Elders Half Year Results 2019 Investor Teleconference. (Operator Instructions) I would now like to hand the conference over to Mr. Mark Allison, Managing Director and CEO. Please go ahead.

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Mark Charles Allison, Elders Limited - CEO, MD & Executive Director [2]

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Thank you very much, and welcome to everyone for the Elders FY '19 half year results. I'm joined here by Richard Davey -- with Richard Davey, our CFO.

So just as an introduction, we're halfway through the second Eight Point Plan that we put in place in the beginning of FY '18, and our commitment was for 5% to 10% growth at about 20% return on capital through the cycles. So this equates to an EBIT range of between $82 million and $94 million by the end of FY 2020. We also indicated that this would be achieved through a mix of organic growth, so 50% organic growth and 50% bolt-on acquisitions. And during this period, we considered a larger corporate activity as it evolved, but against a very strict and high levels of financial discipline that we've applied to the business over the last 5 years.

So in mid-March, we updated the market about a material downside for this half, and the results, as we go through them, reflect that downside. That's clearly driven by the market conditions that we've had over the last 6 months. And when we look at the rolling numbers, for example, the return on capital numbers, that's reflected from the tough conditions in the second half of last year, which forms the basis of the 12 months rolling average. We -- in that announcement, we flagged that we expected to finish the year between $72 million and $75 million EBIT, and we're very comfortable to continue with that view and feel, with the return to average conditions, that this will still apply. I think we also committed on the 2020 number, the 5% to 10% growth. And we also feel comfortable, in line with -- through the cycles and average conditions qualification, that we'll be in a good position to deliver that commitment.

So if we go to the half year results in review in the first slide. Again, this is reiterating the update that we gave in March with the impact on wool volumes, the reduced summer cropping impact on our retail sales and also, so a magnifying effect that we had with the Titan acquisition where we ran into a buildup for the season particularly through summer crop and buildup into winter crop with that Titan acquisition and carried the additional capital that was involved for that acquisition. So in average season, that capital would have run through the system. But clearly, with the tough first half it hasn't, and this is reflected in a number of the capital numbers. Richard will go through these in detail as we go through the presentation.

The -- in terms of the bolt-on acquisitions, these have continued. In this announcement, we've included the announcement of a further acquisition in the financial services area with the livestock and transit business, and we can talk in more detail around that as we go through the presentation. And finally, in terms of outlook and guidance. As I mentioned, we reconfirmed our view that as we return to average conditions and we had rainfall through the Wheatbelt a few weeks ago, there's a degree of dry seeding, which is a common practice through Western Australia and into South Australia. Clearly, as we go forward, additional rainfall is required. But in the first 2 months of the second quarter, we've seen a strong response to that as we had -- as we thought.

So in terms of our view for outlook, as we move towards the year-end in that range of $72 million to $75 million, we'd see the result of that will be a reduction of inventory and the knock-on impacts of that is reduction in net debt, improvement in cash flow, improvement in leverage ratios and the strengthening of the return on capital as we go through to the end of the year.

So if we go to the summary of half year results. One lost time injury against none the previous 6 months, and our commitment remains to a 0 injury workplace. We've come a long way over the last 5 years, and there was 1 injury at 1 of our people during the first half. In terms of underlying net profit, down 50%; underlying EBIT, down 27%; and operating cash flow, as we just looked at those key points, was an outflow of $13.1 million.

The -- when we go to that return on capital, and it's a rolling 12-month number, it's the first time in 4 years that we've dropped below our 20% target. Our weighted average cost of capital is in the area of 8.5%. So the outcome of 18.4% is still indicative of significant shareholder value creation. However, we have dropped below the 20% target, and we'll be looking forward through, with average seasonal conditions or return to average seasonal conditions, to year-end to an improvement in this number. And then finally, the -- we've announced a fully franked dividend of $0.09 for the half year.

So moving to the priorities. And again, I think I'll move through relatively quickly because the -- I think the key on explanation of the 6 months comes through the detail that Richard will be going through. And as I mentioned, it is very much in line with our market update in March. But when we look at our safety performance, we've continued a number of initiatives, as you'd expect. We've actually moved into a refresh period with WH and S because we've much -- made so much progress, from 34 injuries down to 4 injuries over the last few years. We felt it was time to do a refresh to ensure that we continue to have this area as the highest priority.

In terms of operational performance, we talked through a number of the financials at a high level. It's worth noting the last point there with the significant headroom in financial covenants, and we've actually detailed those covenants for transparency just to ensure that there's full clarity there.

Across key relationships and efficiency and growth, I think the point that I would make there is that we have made a number of investments in both areas in the last 6 months that come through in our cost increase, so relative to previous 6 months. And again, we'll go through these in detail. But it's worth noting that these investments, a number of them, particularly the front-end investments, haven't shown the results or we haven't got the expected outcome because of the seasonal conditions. So I guess we'll see this continue through.

That 40% of those investments, and these are the cost increases that Richard will talk through in the next slide. That 40% were on our IT platform and to reinvest after many years of non-investment or minimum investment and to reset. And I think we're quite comfortable that this was both necessary and a prudent investment. About 35% in front-end people, so particularly in Southern Australia, so this is where we brought people into the business as part of our Eight Point Plan growth initiatives, but the seasonal conditions haven't allowed us to take advantage of that from a revenue viewpoint in the first 6 months. And about 25% in our digital and technology area, and we've -- again, we've done a lot of work and we've talked about it a bit in previous presentations, but conditions and the mid- to longer-term nature of those -- some of those projects mean that they're not reflected in the results in the first half.

So with that, I'll hand over to Richard, and we can dig into the detail of the first half.

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Richard I. Davey, Elders Limited - CFO [3]

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Yes. Thanks, Mark. So now looking at the results in a little more, I said, detail. It was disappointing to be down, I said, last year. I said, I think Mark alluded to retail performance is a real positive considering the drop in ag production over summer. And I think as people have been in these calls recall, we're probably leveraged a little bit to cotton as well which, as you would have -- people would know -- was down about 44%, which I'll touch on again. As I said, we also continue to invest in the growth of the business. And just as -- so going through these numbers, of the $13 million variance, all of this occurred in the second quarter with March making up nearly 45% of that difference.

The waterfall graph provided, I said, breaks down the major movements for the half by product when compared to last year. And given the increasing materiality of acquisitions and more so in the second half, we have separated the impact for the purposes of the above analysis. The majority of the $2.1 million coming from Titan, which delivered $1.5 million in EBIT. Retail earnings was down by 6% from the prior period with the backdrop of reduced summer cropping plantings down 23%. And as I mentioned, cotton production was down 44%. And we also experienced a delay in activity in March coming into that winter cropping window.

Agency services was down mainly in the wool segment from lower wool volumes, approximately 21%. And loss of margin benefited from increased volumes for both cattle and sheep with an increase in drought-related turnoff activity. However, this was offset by lower cattle prices. Financial services margin was back $1.6 million or 9% on last year, of which the majority of $1.2 million is attributed to lower equity earnings from Elders Insurance. Feed and processing is up on last year from high utilization levels with improved efficiency also in our Killara feedlot. Overall SG&A excluding acquisitions was up, in line with new rolls for organic growth, which Mark already mentioned, and increased expenditure in our digital technology and technical areas, which I think I flagged, I said, back in the November, I said, presentations last year.

Finance costs are up on last year mainly due to a noncash adjustment. And when I'll get to the cash flow slide, you'll actually be able to see that the actual cash outflow is significantly lower than obviously the finance cost of about -- because of that noncash adjustment. And that's about $1.3 million was that noncash adjustment, which is basically on our long-term liabilities, which is required to be taken through the P&L this period. Lower effective interest has been offset by higher average debt levels in the period.

So moving on to Slide 7 by geography. So looking at the result by geographical area. When you exclude the impact of acquisition, all zones were down. In the north, reduced summer crop production and lower cattle prices had the biggest impact on the result. I think if you've heard me say before in these presentations, being the largest cattle, I said, zone with over 42% of cattles volume, a decrease in price is the largest impact in that zone. Challenging conditions impacting both quality and quantity of wool and lower retail activity with some higher cost, as Mark mentioned, with investment were the main drivers in the south. Western Australia was back on last year with reduced wool bale sale and unfavorable conditions impacting fertilizer earnings. But as I've sort of looked into the April result, that has rebounded in April, particularly in WA.

International was down mainly in the remaining Indonesian business. People might recall that we sold out the major assets in Indonesia, and I guess, work is currently underway to review and right size those operations as we've got -- the back office is a little bit too big now for the size of the remaining business, but we're obviously coming up with a plan sort of now. Corporate and unallocated costs increased to drive Eight Point Plan initiatives mainly in digital technology.

Moving on to Slide 8, capital employed. So return on capital, I said, remained strong despite a challenging past 12 months. And given this is capital in a rolling 12-month basis, this obviously ticked up the last 6 months of F '18, which was, I said, getting tough in certain number of areas and also obviously this tough first half as well. Recent investment, particularly our Titan backward integration strategy, has been impacted by unfavorable seasonal conditions including the delayed break. Carryover inventory, which I think is already been mentioned off the back of a poor winter crop and lower agency earnings, have been the other key drivers.

Average working capital levels, when compared to last year, are up by $69 million. If you exclude acquisition-related working capital, this number falls to 44% or 19 -- $44 million or 19%, and this is mainly from higher livestock agency debtors and increased retail inventory which, I think as Mark already mentioned, we had some inventory carried forward in particular areas from last year. Other capital increased by $42 million from acquisitions, with Titan making up the majority of this. Balance date working capital was up by $96 million, which I will talk to in the context of the cash flow on the next slide.

So turning now to Slide 9, operating cash flow. Operating cash flow for the half was an outflow of $13.1 million and $23 million inflow to exclude the impact of the Titan acquisition. EBITDA and lower retail working capital were positives with higher livestock debtors, increased cattle at Killara and the payment of provisions being the negatives in this result. Interest, tax and dividends of $3 million includes the interest cost of $3.8 million, which I mentioned -- I alluded to before have that, from a P&L point of view, have that noncash item. Positive net dividends was offset by tax paid of $2 million.

Titan-related cash flows, which you'll see has been separated there, of $36 million comprised both of higher inventory and lower creditors. And I think from my point of view when I look at half is really, I said, what I consider sort of timing related particularly with that delay in break. And this will obviously support backward integration initiatives and higher earnings in the second half. CapEx of $2.5 million is -- was higher than sort of previous years in part due to additional investment in Killara, which we'll obviously started to -- continue the investment into that feedlot, which has been performing really well, and IT projects and with similar levels expected in the second half.

So turning now to Slide 10, net debt. Net debt levels both in terms of balance date and average were up year-on-year. Titan-related net debt, the blue part of the graph, includes both investment and inventory buildup to sell in the second half. Other increases came from higher loss of debt as an inventory carried over from last year's winter crop. Whilst our key balance sheet ratios have been impacted by the higher working capital and lower earnings, our banking covenants remained strong and have substantial headroom, which you probably would have seen for the first time, I said, we've included those sort of numbers there. The major difference between the 2 calculation provided in the tables is the exclusion of retail debtors when calculating financial covenants.

So turning now to Slide 11, and I'll hand back to Mark just to, I said, touch on the F '19 outlook.

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Mark Charles Allison, Elders Limited - CEO, MD & Executive Director [4]

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Yes. No, thanks, Richard. So in terms of FY '19 outlook, in line with the update in the March update, as indicated earlier. So probably the only point that I'd highlight through this is the acquisition on the financial services, the additional acquisition with -- in our financial services area. So we'll only get a few months of the year from that acquisition, so it won't be super material. But again, continues to fill out our portfolio in the financial services area. As a result of the expected conditions, as I mentioned, we're still in the range of $72 million to $75 million and see by the end of the year a number of those capital-based issues to be alleviated with the reduction of inventory, the sellout of reduction in net debt, et cetera, and improvement in cash flow.

So moving to the strategic priorities. Happy to take more questions on outlook when we get to the question section, but I think it's reasonably repetitive at this stage. So in terms of strategic priorities, the Eight Point Plan to 2020, we'll continue the very disciplined -- financially disciplined approach we take to the Eight Point Plan. Moving to the 3 years through to the goal, and probably this is a slide that you've seen before.

And if we move to the balanced growth slide, that's the key slide where we see the balance between organic and acquisition growth being very important. At present, and I've talked a little bit about it publicly, in the organic side, there's around $3 million to $6 million of organic growth -- of $3 million to $6 million EBIT of organic growth in the pipeline. And with this -- a big part of this is being assisted with the announced acquisition of Ruralco by Landmark. So we're already seeing some fallout come through to us, and we expect that to continue with a number of discussions in place. It's worth noting that there are 150 towns around Australia -- regional rural Australia that have duplicated premises for Ruralco and Landmark. And following the ACCC assessment which will, I guess, occur in mid-June, we sense that there may be another opportunity or another wave of interest in that organic area.

In terms of acquisitions, bolt-on acquisition pipeline, the smaller bolt-ons, it is around $8 million to $10 million EBIT in that pipeline at present. With the tightening capital positions through the first half, we did slow up some of our activity in the bolt-on acquisition stakes. And now that the seasons are recovering and, as I say, the return to average seasons as we look forward, we'll continue to progress through a number of those bolt-on acquisitions.

So then finally on the strategic gaps before we go to questions. I think the summary of that acquisition and organic growth is that there are multiple gaps throughout our geographically and segment-wise and product-wise cropping segment and product and service-wise. And we continue to see multiple high-quality opportunities. Clearly, one critical point -- one of the critical points of our turnaround -- ongoing management of the business is to ramp with very high financial discipline. So we continue to eject more than we accept. And as I've mentioned, we've also tightened up the filters over this period of first half of the year with the tighter environmental conditions. So we're -- we believe, by the end of the year, we'll be on track for the, as we've given the update, $72 million to $75 million, and there'll be an improvement in a number of those capital-based measures that Richard just gone through for the half year.

So with that, I think we'll go to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Philip Pepe from Blue Ocean Equities.

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Philip Pepe, Blue Ocean Equities Pty Ltd, Research Division - Senior Industrials Analyst [2]

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Appreciate it was a challenging first half. Just on the second half, what have plantings been like so far? You mentioned some dry plantings. And secondly, if the weather doesn't play along, can you take capital out of the business in a hurry? Or do you just wait for the following year?

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Mark Charles Allison, Elders Limited - CEO, MD & Executive Director [3]

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Yes, I think in terms of market conditions, there was a rush around, atleast with -- around the country with that -- with those rainfall events about 4 weeks ago. There is also a bunch of dry seeding, which is common in some of these areas at any rate, particularly Western Australia. I think the -- and it's been reflected in the results for these first 2 months of the second half. So there's no doubt that's taking long. I mean clearly, there needs to be a follow-up event throughout the Wheatbelt to keep it ticking along. And who can predict that, I'm not sure. But -- so we'll be waiting for that event.

In terms of reducing capital, I think in the acquisition area and for any discretionary capital, we've tightened that significantly in line with the last couple of months. So I'll ask Richard to make any further comments. But I also think in terms of inventory management, we've also significantly tighten that probably in the last 2 months. So it's -- the actions we've taken are largely in place. And really, we'll only loosen those tight controls if we return to average seasons as we're indicating. Richard, would you like to add anything?

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Richard I. Davey, Elders Limited - CFO [4]

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Yes. I think just, Phil, with regards to asset capital, I'm not really seeing anything in the first 6 months that I am, as I said, necessarily concerned. We, from a structure point of view, we obviously flagged, I think, back in November that -- yes, there was some inventory sitting in the system, about -- I think it was about $15 million, and that was sitting in WA and particularly up in northern New South Wales. Yes, and northern New South Wales has had a pretty thorough time in the first 6 months. So that, yes, has moved a little bit, but not significantly.

I think the other area that I did see, as I said, working capital tick up was probably in livestock. And I think what I sort of saying and what I'm sort of understanding about that, that's more to do with sort of seasonal condition and what was happening, particularly that greater drought-related sort of turnout because it was -- cattle was only headed one way and that was headed towards sort of advertising really that was sort of a bit slowing our payments sort of a little bit as all that washes sort of cattle came into that sort of system.

So -- and in terms of Titan and working capital there, relatively comfortable with that. We're probably still, to a certain extent, bedding down how we manage that and how we sort of, I said, fund that. Because one thing I sort of -- it was sort of maybe I alluded to was the fact that normally, we would get credit returns, et cetera, on purchases. But yes, we took the decision just to see how Titan would flow through and we effectively paid for that all upfront and that sort of carried through in sort of average working capital, but I'm just looking at some other ways to find, I said, more efficiently sort of going forward. So I'm not necessarily also concerned with that either.

And in terms of other capital things, I think in terms of managing other businesses and taking capital out, we've obviously taken the capital out of Indonesia. Most of that's -- majority -- I think there's only $1 million up there particularly in retail. China is probably a little bit capital up there and inventory, but we're sort of working through that now. And then in terms of where the other bulk of the capital's sitting now in our business, that sits in Killara and that's had an excellent first half. So -- with a high utilization, high profit. So I wouldn't be necessarily doing that.

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Operator [5]

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Your next question comes from James Ferrier with Wilsons Advisory.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [6]

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Richard, could you just give a little bit more detail on the acquisition activity? I think you mentioned $6 million was spent in the period and Mark also referred to a financial services business. Was that included in the $6 million? Or has that settled post balance date?

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Richard I. Davey, Elders Limited - CFO [7]

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The majority of that would've been sort of smaller bolt-on acquisitions through that -- through sort of the network. And yes, they've already been -- parts of that earnings would've obviously been in the result. But I think there was a small retail lost up, so yes, smaller bolt-ons across sort of the network. In terms of what Mark was mentioning, that's sort of a larger acquisition that will come into the second half, I think, circa $20-sort-of million.

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Mark Charles Allison, Elders Limited - CEO, MD & Executive Director [8]

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Yes. Yes.

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Richard I. Davey, Elders Limited - CFO [9]

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And probably the other one that sort of hasn't been sort of mentioned, which will come through in the second half is an investment in sort of StockCo or an increase in loan, which I think as I've sort of spoken about before, just because of the mechanism and the fact that we're loaning money into StockCo, that comes through operating cash flow. So I think previously we were talking, I said, between -- depending on how the season breaks and where the sort of the debtors sort of roll, cash flow of between -- anywhere between $35 million to $55 million. It might come down by sort of $20 million just reflecting that StockCo loan.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [10]

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Okay. Could you perhaps elaborate a bit that $20 million financial services acquisition that's due to settle post balance date? Can you elaborate on exactly what that business is?

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Mark Charles Allison, Elders Limited - CEO, MD & Executive Director [11]

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Go on.

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Richard I. Davey, Elders Limited - CFO [12]

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So that's really purchasing back, I’d say, livestock sort of -- what it was?

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Mark Charles Allison, Elders Limited - CEO, MD & Executive Director [13]

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In transit.

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Richard I. Davey, Elders Limited - CFO [14]

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In transit sort of insurance. I think it actually was not called [insurance also]. So that's how it was done post balance date, and we'll get limited earnings sort of this year as we sort of once again bed down the product and sort of, I’d say, take that over. In terms of earnings sort of next year, we're looking at sort of full year is anywhere between sort of $4-sort-of-million. So we'll have a little bit of upside -- uptick in the second sort of half. I'm expecting a maybe circa $1-sort-of-million.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [15]

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Yes. Okay. Okay. And the increased loan to StockCo, what's driving that? Is StockCo's book growing strongly and that's why you're providing more capital into it?

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Richard I. Davey, Elders Limited - CFO [16]

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Yes, a couple of reasons there. In particular, their sort of -- I think they've now completed their refinancing. So we should see also increasing earnings coming through equity share going forward once they get their lower debt asset profile coming through. So -- but this is more to do with a little bit more capital, yes, certainly at the head sort of debt sort of level that we'll be happy to put in there to -- at reasonable asset return. So -- and so I think we're quite comfortable to do it. And you're right. I said, in terms of them recapitalizing their balance sheet and getting their debt structure in place, they've now sort of done that and we're more than happy to actually, I said, put some more money to, yes -- exactly as you mentioned, to effectively fund an increase in that book when obviously the conditions turn and people start to restock.

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Mark Charles Allison, Elders Limited - CEO, MD & Executive Director [17]

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Yes, and it will be a critical product in the market with all the restocking.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [18]

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Yes. Absolutely. Sorry, did you quantify how much additional money you've lent StockCo?

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Richard I. Davey, Elders Limited - CFO [19]

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Yes, so that's -- so additional will probably be about between $10 million and $14 million. But one of the things where I mentioned the $20 million, our expectation was this year in that cash flow that we'd sort of get $10 million of that repaid, but we'd sort of rolled that. So that's what I'm saying in terms of cash flow. My expectation is the fact that there's no kinds of had a really a negative $20 million where I was looking forward before.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [20]

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Right. So when you say $35 million to $55 million for a full year operating cash flow, then you might take $10 million off that given this investment in StockCo?

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Richard I. Davey, Elders Limited - CFO [21]

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Yes, $10 million to $20 million because of the fact that I'd actually anticipated getting that loan sort of back, but I'm not anymore within that headline number we spoke about last year, yes.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [22]

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Okay. Understood.

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Richard I. Davey, Elders Limited - CFO [23]

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Yes, the other thing just with cash flow that I've just sort of touched on, this might haven't been for the other people that might ask questions, the other thing that will be interesting is, given the late seasonal sort of break this year, I guess, a little bit of the unknown I have at the moment is how many debtors will get sort of carried as it passed sort of September. Obviously, we saw that last year happened as well. You might recall, I had those sort of later sort of debtors – and debtors coming in a little bit sort of later. If the season sort of -- as it's sort of panning out, breaking a little bit sort of late and when the activity sort of happens, the expectation will be -- also, it'll be carrying high debtors through as well at the end of September that will sort of fall into November -- October, November sort of time line just because of the way where the sales will fall.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [24]

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Yes. Yes. That makes sense. The Titan contribution, that looked pretty good at 1.5 already given how poor the season was. Mark, does that change your view? I know your guidance is predicated off an average season as far as winter cropping is concerned. But in a structural sense, did you feel that Titan could overachieve that $7 million of EBIT in the full year?

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Mark Charles Allison, Elders Limited - CEO, MD & Executive Director [25]

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Yes, I think what we've seen -- because the -- I guess the big -- a large component of the growth of Titan within the business is actually the implementation of the strategy through the network, particularly where there are previous locally based suppliers to local branches. And I think what we've seen is what started as a slow uptake, a very strengthened uptake of the product and an understanding of the philosophy and the reasons that we want to grow Titan significantly. So I think -- Richard and I both sit on the Titan Board, and it's been quite pleasing to see the uptake and also the expansion of areas from the crop protection areas into product migration in surfactants and also the view to build our animal health product or veterinary product regulatory portfolio as well.

And so I think we're pretty pleased. The -- it's -- I guess, it's one of the cuts both ways part of this fee. The strong adoption in an average season through summer crop would've been representative of very positive result that we'd be reporting today. The weak seasonal conditions with a strong uptake of Titan product has given the working capital issue that we reported today. So -- but all in all, if we think midterm and long term, the up -- the -- I think it's going quite well.

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Richard I. Davey, Elders Limited - CFO [26]

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Yes, and the other thing with regard to a new acquisition and certainly the significance of it, one is probably what a 30 -- 90 that I think, I said, from order to obviously receiving it through the network. We obviously with the capital sort of position we have, we don't want to push it too hard. We'll sort of going to bed down the model as well a little bit. So there's a little bit of work sort of there at the moment. But I think in terms of the first half, we're pleased with it. And sort of now from what I have seen is there's a little bit of stock sitting in sort of the network, which we'll obviously going to push through as well. And I suspect some of that would have been pushed through from -- in Western Australia. Although I notice that there hasn't been significant rain in sort of last sort of few weeks. But I can see obviously a bit of the pattern sort of this out as it coming through.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [27]

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Yes. Yes. Last question for me on the cost. You talked about the $6 million increase in that first half result and what was driving that. Could you give us a bit of comment around your expectations for the second half and probably even into FY '20 to the extent that you have visibility or commitments out that far?

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Richard I. Davey, Elders Limited - CFO [28]

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Yes. So what I'm -- in terms of the second half, certainly, with regards to the IT, we probably had a bit of upfront investment or expenditure that went into it. They are not going to see in the second half. So yes, I think that the numbers that we might have talked about really, that's about $2.5 million up year-on-year of IT expense, but this was before a number of initiatives. So the first thing we had to do is sort of once again bed down a new arrangement particularly with a new IT sort of, I said, provider before we started to push through some initiatives in terms of just tidying up a few bit of excess, I said, licensing, et cetera. We had an excess pieces of equipment around the network. So that's a bit of a push to where I sort of go at the moment in terms of initiative. And I expect that to, I said, come through in the second half. And therefore my IT, I said, cost will be a little bit up, but not significantly up. So I've seen the worst of that in sort of the first half.

In terms of other -- the interesting part that you note, I think I raised it sort of once again last November is we had a reasonably high short-term incentive, which you would've seen also through the cash flow and provisions being paid out. But obviously, that bucket and pool, given where the forecast is, that will be significantly lower. So I'll have reduced obviously [STI] in the second half certainly expenditure. The other -- so I'm reasonably expecting that to be flat in terms of sort of cost with obviously a little bit expenditures still in the south. But the other thing that we will see, and this is probably something I'll spend a little bit more time at the year-end sort of presentation because of the change in our Rural Bank sort of relationship, what you'll see in the second half is the gross margin coming down in banking and you'll see the cost coming down as well. So net-net, we'll be up, but you'll obviously start to see a difference because the structure's different now.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [29]

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Yes. Yes. Understood. So just to clarify on the cost there, you're also thinking a bit more growth in IT cost. But based on where the guidance is, the STI will be down. So overall, second half costs looking pretty flat year-on-year?

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Richard I. Davey, Elders Limited - CFO [30]

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Yes.

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Operator [31]

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(Operator Instructions) Your next question comes from Paul Jensz from PAC Partners.

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Paul Jensz, PAC Partners Securities Pty Limited, Research Division - Executive Director of Research [32]

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Just backtracking a little bit. I missed a bit of the call, so I apologize. Just if you could maybe, Richard, talk through the working capital average because I'm just looking at the return on investment capital coming down. I'm just trying to make sure that things are on track there and whether you do a sort of a monthly sort of take on the working capital and don't do the year-end, or maybe we can talk offline if you've already been through it?

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Richard I. Davey, Elders Limited - CFO [33]

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Yes, I think I've touched on it briefly, but that's fine. I'll go through it again. So in terms of average working capital, I guess, there was 2 things that I did see. So really, I did see the average sort of working capital increase particularly in livestock. And as I mentioned before, I did see sort of those high debtors, again, coming through particularly as the stock was going one way and that was going straight to abattoir. So dragged a little bit in terms of that sort of area. And I think also live export was -- had a pretty tough, I said, sort of period as well. So debtor's being dragged a little bit sort of in those sort of areas. So did see average capital up there.

In terms of other areas of the business, sort of retail, one of the things -- just because of the way the season panned out and then obviously the winter cropping sort of come off reasonably rapidly carried -- did carry over between, I think, about $15 million of sort of inventory over. We did see livestock coming through in sort of lower stock turns sort of as well. So not surprising the biggest 2 areas of the business is where I'm seeing a little bit capital coming through. But I'm not considering that type of stuff as structural. I know exactly where the inventory sits in terms of the stock carried over in WA and in around the sort of [B and W] area.

And in terms of the livestock sort of there, I'm seeing that relatively to do with really seasonal just because obviously how tough it was with all the numbers sort of flowing -- that are related. And the other part was just sort of Titan. And once again, we're at that point where we're sort of bedding down that sort of model. And as I said, all of those paying for everything really on cash at the moment, we're sort of tightening a bit of -- looking at a couple of structures in place to improve that and get sort of creditors flowing through again there.

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Paul Jensz, PAC Partners Securities Pty Limited, Research Division - Executive Director of Research [34]

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Okay. All right. That's good flavor. I've already been through that a bit. So essentially, on a month-to-month basis, you look at where your working capital is and you sort of take the pigs and troughs out and try to work out what it would be on an average type basis for that month and you just roll that forward each month and just work out your working capital and that's what's captured in sort of the first half result. Is that...

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Richard I. Davey, Elders Limited - CFO [35]

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Yes.

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Paul Jensz, PAC Partners Securities Pty Limited, Research Division - Executive Director of Research [36]

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Excellent. And the final question, because there's been some good questions before, just on the financial services side. From what I've seen M&A-wise, you're basically bringing a lot of stuff in-house in doing the StockCo. Is there any potential for that to sort of step outside as far as what you're already touching in the financial services? Are there other parts of the supply chain potentially you're looking at outside of what you already do?

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Mark Charles Allison, Elders Limited - CEO, MD & Executive Director [37]

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Yes, I think, Paul, we've got -- we have got a number of areas we're looking at in terms of new product development -- product and service development, but we also have limitations with a number of our agreements, whether it be QBE or Bendigo Bank in where we can go and with exclusive positions, et cetera. But it is an area that we are evaluating whether turning, as an example, turning the extended payment or deferred payment programs for cropping into a specific stand-alone product. But those are the things we do look at on an ongoing basis. It really comes down to the returns and just basically our best use of capital -- most efficient use of capital and risk profile.

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Paul Jensz, PAC Partners Securities Pty Limited, Research Division - Executive Director of Research [38]

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And just last one, if I can, is expansion offshore. You -- I think Richard touched on there's not much capital in Indonesia or China now. Is there anything potentially out there? Or it looks as though domestic first at the present time. Is that correct?

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Mark Charles Allison, Elders Limited - CEO, MD & Executive Director [39]

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Yes, I think in terms of our overseas interest, we're bedding down the Elders Fine Foods model. We need to do further work with the remaining part of the Indonesia business, which is fundamentally an Elders Fine Foods sort of model. But we don't have any ambitious plans at all overseas.

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Operator [40]

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There are no further questions at this time, and that does conclude our conference for today. Thank you for participating. You may now disconnect.

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Mark Charles Allison, Elders Limited - CEO, MD & Executive Director [41]

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Thank you.