In this instalment of our From the helm series, Bell Direct’s Jessica Amir speaks to Elders’ (ASX:ELD) MD & CEO, Mark Allison.
Elders’ shares have gained over 50% so far in 2020, so it’s no wonder the Consumer Staples business has garnered the attention of the market. Four of its five business divisions are benefiting from increased demand, seasonable changes, and organic growth, which is why Elders also looks like it’s sowing a path for further growth.
Mark reflects on historical results that defied expectations, what to expect from its results in November, and how it’s taking part in growing the Australian Agricultural industry by $40 billion in 10 years.
This interview was recorded on the 7th July 2020.Read Transcript
Jess: It seems Aussie investors have indeed been respecting their elders.
The agribusiness Elders (ASX:ELD) is up 57% so far in 2020 as at the 7th of July, hitting a ten-year high out performing its peers in the staples segment.
Elders is likely to garner even more respect as it’s growing by acquisition and benefiting from weather normalization.
Elders is backed by Bell Potter as a buy.
I’m Jessica Amir with Bell Direct and today I’m joined by the CEO of Elders, Mark Allison. Mark, thanks so much for your company.
Mark: Great to be here.
Jess: So for a bit of fun, let’s kick off with a 60 second elevator pitch.
Mark: Ok, so for Elders when people think of Elders they generally think of a big AG company and then immediately investors think about the ups and downs of AG and how there may be inconsistent returns.
So what you need to think of with Elders is a company that has a highly diversified revenue stream, geographical spread and business model, which allows us to make good money in bad seasons and great money in good seasons and that’s what you’ve seen.
We’re highly focused on return on capital, which means that all of the areas of the business must hit the previous rate of 20% return on capital, which we’ve had for the first two 8-point plans and we’ve just adjusted that for the next 8-point plan to 15%.
But clearly it drives a significant return for investors and a consistent return for investors.
Jess: And Mark your share price looks like it’s been trucking beautifully higher with four of your five key divisions benefiting from tailwind, notably the bulk of your business comes from two key segments, 1 – Rural products, which sells fertilizers and farm supplies and 2 – Your agency division selling livestock, wool and grain.
Give us a snapshot overall how business is tracking, plus where growth is likely to come from over the next year or two.
Mark: Yeah I think that when we look at Elders we look at in three years slices.
And so from being in bad Bank in 2013/2014, we set our first eight-point plan, which took us through to the end of 2017 with significant growth.
When I was chairman Elders at the end of 2013 we announced a $0.5 billion loss and we said in three years we’d have a $60 million EBIT profit at above a 20% return on capital and we’d be paying dividends and have no term debt.
So we over achieved on all of those fronts.
The middle three years and we’re just finishing in 2020, had been around growth and even with that growth just to go to your question, but we’re still sitting at roughly 17%, so 17% market share across the various product category.
So that’s a general market share, which means we’ve got significant area for growth.
Elders this year have been around for 181 years and we still have multiple blue-chip farming areas throughout Australia where we don’t have a strong position.
So our blend of organic growth and bolt-on growth allows us to grow at a high return rate, so we’re not forced to make any acquisitions at higher costs and it allows us to maintain a target of 5-10% growth through the agricultural cycles at above the 20% return on capital, which was the previous commitment and for the next three years our commitment is about 15% return on capital.
Jess: So we’ve touched on growth and tailwinds, now let’s move to the challenges.
What are the biggest obstacles for Elders? It is the biggest, the tension between Beijing and Australia as that could impact your beef, barley and wool sales?
Mark: Yeah I think it can be seen as a significant challenge to Australia and Australian agriculture and you know throughout our history Elders has generally run parallel with Australian agriculture, just because of our exposure to all the areas of Agriculture.
From a China free-trade agreement that was negotiated a few years ago by Andrew Robb and his the minister, that’s been moving along quite nicely and the barley issue, I think the perception of the barley issue in the metropolitan area is quite different to the reality of the barley issue. I sit on the grain growers board, the representative organization that actually developed the submission to counter the anti-dumping claims.
In terms of the impact, that we’ve known about for 18 months, there are alternative markets which have already been found, there’s a discount of $30-$40 a ton for barley in those new markets.
But everyone was aware of that 18 months ago and so as we’re coming close to the decision date, certainly from my view point I was not surprised at all and see no impact at all on our business or our producers.
Those who planted barley, did so in full awareness that there was a possible loss of the market in China, so I don’t see that is a big issue.
In the meat front, we’ve been appetized that we’re banned or excluded from import into China, they were excluded from import for reasons other than geopolitical reasons, so this happened in 2017 and they updated their Quality Assurance and then it was re-opened again.
So I think the view that there are major impacts on trade in Australia through these decisions, it’s not quite the reality, in fact when the free trade agreement was negotiated a number of years ago, there were levels of volume of red meat or beef into China where tariffs ratcheted up further and we’ve already passed two of those levels, so that means we’re actually way ahead of the volume targets that we assumed back then.
So it’s positive, I think implications of China on tourism and universities is far far greater than their non-Australian agriculture and I think also there may be a lack of full understanding that Australia’s got a highly diversified agricultural export markets and you know like Indonesia has been a key grain market for us for many years, a dominant market.
We’re very strong with red made in Northern Asia so Japan, South Korea and the ASEN countries and China is obviously a wonderful market with great opportunity, but we’re not totally reliant on it from the viewpoint of export income, critical market no doubt.
So I don’t think we see big impacts that maybe we’re hearing about in newspapers in reality.
Jess: The Government has created a massive roadmap to grow the agricultural industry to a $100 billion by 2030.
Right now the AG industry generates $60 billion per year in products, so if everything goes to plan, how will you be a part of this $40 billion in growth in ten years and lead the industry?
Mark: Yeah I think it’s a really really good question because the $100 billion target which is the next farm gate target was initiated by the industry when we were sitting at $60 billion production and we export 40 of that.
So we use about a third for domestic use, so since then with the drought we’ve dropped to some $45-$50 billion production.
So as chair of Agribusiness Australia, we work closely with National Farmers Federation on how we achieve these targets.
In fact we’re launching you a state of the industry report in two weeks where I’ll be talking about the gap and the gap is around when we look at the growth the rates of each of these commodity areas of Australian agriculture, the gap is in the order of $14-$16 billion and we’re now working with the Minister Mr. Littleproud and all the other industry cohorts to see where we can drive benefit.
One of the key issues that we need to understand and Elders can play a significant role here is around 85% of our export commodities.
So the idea that we can do, so this is beef and grain basically, so the idea that we can niche market a way to success it just doesn’t cut it because we’re actually selling big commodities which require minimum quality, timely in an efficient supply chain and best price basically.
So I think there’s a lot we can do in terms of infrastructure development and streamlining supply chains, our online initiatives are quite helpful there and then we have the differentiated crops, animals and products and Elders with a team of 200 agronomists across Australia will play a key role to help the adoption of new varieties, new genetics and better growing systems that will help drive the productivity.
Productivity in Australian agriculture has been flat since about 1997 and so there’s a lot of work to do and certainly elders see that they have a major role and you know the fact that I’m leading this initiative in terms of filling this gap, well we’re calling it mind the gap and that we believe across the industry across the supply chain we all have a significant role to play, one of those roles in brand Australia, which is how we position Australia’s clean green, is to understand the geopolitical implications of Australia criticising customer countries.
Countries that want to buy from us and the impact that that has on our brand.
And so we’ve got a number of initiatives in place but it’s very exciting, Elders has a very very important role as to many of the other Australian AG companies and we’re excited because if you coupled that growth with our current market share of circa 17% there’s a massive area for growth just by doing what we’re doing and then if you had on top of that some of the innovative bolt on acquisition initiatives, some of the fallout from our major competitors merging and also some of the larger acquisition of opportunity like in air for example, I think for Elders we see a very very positive next three years.
Jess: Now just finally Mark before we let you go, moving to what’s next on the horizon your earnings results for the full financial year are set to be handed down in November.
Now Bell Potter is expecting great things, an uptick in earnings and an uptick in profits.
Sticking with the ASX disclosure limits, what can we expect?
Mark: Well I think that all along we’ve said that we will key our forecasts of a bear, rather than our own view and you know 40 years later starting world as an agronomist and the North Queensland sugar cane and cattle guy as I am, I always had a much more optimistic view than that.
I think with the upgrade of a bear’s forecasts it shows us a very environment and we methodically worked through servicing our clients.
AGs been an essential industry, so we’ve been open through the whole period and we’ve had all the blockages and all those sort of things that happened, but from our viewpoint it’s a positive outlook.
We expect by a year in as you saw at the half year, that our cash generation will strengthen and we particularly focused on that.
The backward integration strategies are working and I think you’ll see a continuation of a very positive and focused outcome for us and then we look forward to the next three years we’ll launch our third 8-point plan in November as well when the full year results are out and with that my expectations that we’ll continue to deliver 5-10% growth through the cycles at about 15% return on capital and in doing it in a way we are not forced to make rash decisions or make big bets we can methodically and in a highly financially disciplined way continue to grow and deliver for shareholders.
Jess: Mark Allison the CEO of Elders, thank you so much for your time and for your insights into the industry.
Mark: Thank you very much.
Jess: And thank you for watching, if you want to hear more about Elders head over to Bell Direct’s website or speak to your advisor.Close Transcript