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AA Co delivers half-year loss of $37.7m

by Jon Condon, 15 November 2017

THE Australian Agricultural Co this morning announced pre-tax earnings for the six months to September 30 of $16.1 million, up 16 percent versus the same period last year.

A statutory pre-tax earnings loss $36.5m included a mark-to-market of livestock inventory valuation.

The inventory revaluation occurred in September, around the low-point of the current cattle pricing cycle, analysts were told in a briefing this morning.

A net loss after tax of $37.7m was reported – an $85.6m decline on last year. Total sales revenue of $197m was down 7.9pc year-on-year, in part reflecting a strategic decision to transition to internal supply chains. As part of that process, AA Co earlier this year walked away from long-standing supply agreements with Wagyu cattle producers, without notice.

Meat sales for the half-year reached just short of $170m, down $26m from the previous year, while cattle sales were up $9m to $27.3m.

Macro impacts on the company’s performance over the past six months included increased competition from US beef exports, downwards pressure on commodity beef prices, a stronger Australian dollar and upward pressure on feed prices.

AA Co chairman Don McGauchie

AA Co chair Don McGauchie said AA Co had now come a long way from being a cattle company.

“We made a decision that to drive shareholder value we had to become a branded business. Tough, but highly-considered decisions were made, as we have executed on the strategy. Today’s results demonstrate the progress that has been made and the work still being done. Most importantly the team is consolidating the strategy and ensuring excellence in its execution,” he said.

During the half-year, AA Co continued to execute against its strategy to deliver shareholder value across three pillars of focus: branding & marketing, integrated supply chains and innovation & technology, a statement to the ASX said.

Operational highlights included stronger average sale prices across luxury/prestige and premium brands, and improved operating EBITDA margins from 6.5pc to 8.2pc this year, impacted by higher input costs in certain areas.

On a price per kilogram basis, there was a 15pc increase in value for the company’s luxury/prestige brands, year-on-year, delivered through strategic customer engagement using a partnership-based approach and ‘sales sophistication.’ Volume of luxury/prestige branded beef was down 14pc year-on-year, in line with the company’s decision to reduce external bought cattle supply.

For the next brand segment, now called ‘premium’ brands, price/kg was up 7pc, despite some macro headwinds including greater US export competition, and volume was down 38pc, in line with the strategic decision to reduce reliance on external supply.

Tough trading conditions for Livingstone

AA Co’s Livingstone Beef processing plant near Darwin was impacted by global market dynamics and challenging trading conditions, with higher cattle prices and lower meat prices, shareholders and analysts were told.

This resulted in “significant margin compression,” providing a difficult operating environment, delivering a gross margin loss of $10.3m versus $7.7m GM loss this time last year.

Sales out of Livingstone had declined from $60m last year to around $55m for the first half this year, with the average kill per day steady on last year at around 425 head/day. Volume of beef produced declined from 14,400t to 13,100t, year-on-year.

The company said it planned to focus on operational efficiencies at Livingstone, with cost of conversion reduced by 2pc on last year’s first half, despite lower volumes. There would be an ongoing focus on ‘further initiatives,’ the market was told.

“While there are some external headwinds, we are pleased with the traction we are achieving,” Mr McGauchie told analysts and shareholders. “Our priorities now are completing our executive line-up, continuing the investment in our systems and processes and ensuring that we continue to improve performance across the business,” he said.

“Current external challenges validate AA Co’s strategy to focus on building a branded business.”

Challenges currently affecting the business include increased competitive dynamics in certain markets, a higher Australian dollar and higher input prices, including feed, Mr McGauchie said.

He said AA Co remained committed to execution across three pillars: Branding & Marketing; Integrated Supply Chains; and Innovation & Technology.

Key near term priorities included making key executive appointments and evolving the culture to support the next phase of growth; Investment in increased sophistication of systems and processes; evaluation and optimisation of strategic distributor partnerships; and taking further actions to improve the performance of the Livingstone Beef plant.

Search for a new chief executive continues

Questioned about progress in appointing a replacement for former managing director Jason Strong, who resigned suddenly back in August, chairman Don McGauchie said the process was well-advanced, and the company expected to be able to say something to the market reasonably soon.

“Many of the other appointments to be made are going to be dependent on the filling of that position, because quite clearly, the CEO needs to have a very significant input into the filling of the positions to be managed over the next few years,” he said.

“It means a number of those appointments are largely on hold for the moment while the chief executive position is being filled, but we are moving quickly on doing that – and we are very encouraged by the interest that’s been displayed in the role.”

 

 



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