AA Co investors looking for ‘green shoots’ in half-year results

Jon Condon, 19/11/2018

SHAREHOLDERS will be looking for financial ‘green shoots’ in the Australian Agricultural Co’s half-year results due to be presented tomorrow, following some dramatic changes to the company’s operational model announced back in May.

AA Co has shut down its two-year old Livingstone Beef processing plant near Darwin and dismantled its 1824 grainfed beef program in recent months after racking up eye-watering statutory net loss after tax of $102.6 million for its full financial year announced in May. That included a one-off write-down of $74.9 million for its Livingstone business.

Managing director Hugh Killen told shareholders at the time that significant change was required to improve profitability and cash flow generation across the supply chain, and management had taken ‘decisive action’ to deliver sustainable, long-term shareholder returns.

Those actions followed an earlier strategic review launched in April to “assess all available options and determine the optimal path to deliver shareholder value from the Livingstone Beef processing business.” The review included analysis of the existing Livingstone Beef operations, market environment and outlook, and considered a broad range of potential alternatives.

Suspending operations at Livingstone would enable AA Co to “put a stop to the current operational losses being incurred at the plant, further simplify AA Co’s business model to focus on profitable growth, and allow the company to further consider other credible alternatives that may support shareholder value realisation from the asset in a measured manner,” Mr Killen said at the time.

Big dip in earnings

The overall company results for 2017-18 included operating EBITDA of $13.6 million and statutory EBITDA loss of $35.3m, compared with $133.2m profit for FY17. There was a negative net operating cash flow of $39.9m, compared with positive operating cash flow of $29.3m in FY17.

“We need to create a simpler, more productive and more profit-focused AA Co to deliver on the company’s potential,” Mr Killen told shareholders at the time. “We’re seeing strong performance from our brands in key markets, and our control over our supply chain as an integrated beef producer offers significant potential that is yet to be unlocked,” he said.

“Realising this value will come from aligning and activating our assets to work together efficiently, to produce and deliver our brands at scale. Management is keenly focused on maximising the efficiency and productivity of each asset through robust financial and capital management.”

Closure of grainfed brand program

Another significant part of the restructure announced in May was AA Co’s decision to close its premium beef supply chain (predominantly, its 1824 grainfed beef brand, as distinct from its Wagyu programs) which had “under-performed expectations, primarily due to its reliance on external service providers in the later stages of the value chain and its level of exposure to commodity beef price fluctuations.”

The company planned to offload all cattle that were part of the 1824 supply chain as live cattle, rather than progress them through the grainfed program to slaughter to be sold as boxed beef.

A well-connected company observer told Beef Central this week that for the first six months of this year, in addition to remaining 1824 fed cattle beef sales, that decision would push up to 12 months worth of supply of feeder and backgrounder cattle involved in the program to market.

This would add considerable income for the half year, he said, possibly amounting to 20,000 to 25,000 head of feeder-type cattle, as part of a one-off disbursement.

“It should provide a big cash injection for the first six months of the company’s current trading year, but is somewhat artificial. At a value of say, $800 a head, those cattle could be worth $20 million to the books.”

“Back in May, the company said it expected that cattle sale decision to have a $4-$5 million net positive cash impact, through sales that it otherwise would not have. It means that AA Co’s half-year result tomorrow should have a lot more revenue than what they had in the first six months of last year.”

Further revenue was expected to be seen in tomorrow’s half-year results from monetising stock on hand from the Livingstone plant closure, the observer said. One estimate suggested the company may have had 600-800 tonnes of frozen beef on hand, perhaps worth $3-$4 million.

Last kills apparently took place at Livingstone in August. From last year’s numbers, the Livingstone plant while operating was losing close to $500,000 per week, totalling about $22 million for the year. AA Co’s own northern cull cows that were previously directed into the Livingstone plant are now making their way into external processing plants in northern and central Queensland, and as far south as Victoria – attracting a huge freight bill along the way.

“There’s a risk that some investors might mis-interpret tomorrow’s half year financial results as being better than they actually are – inflated by the one-off sales of store cattle and beef,” the observer said.

FY19 Outlook

Presenting to investors earlier, managing director Hugh Killen said the macro conditions in the first half of the 2019 financial year continued to look challenging, and management remained focused on continued financial discipline and driving internal cost efficiencies through efficient feed use and cattle movements.

“We have taken decisive action to stem the losses confronting the business and are focusing on ensuring the company is on an even-footing from which to realise its strong potential for growth,” he said.

“The decisions we have made as part of our comprehensive change agenda have made an immediate impact on the business and financial performance of the company, and will enable us to ensure we are realising the potential inherent in our unique integrated supply chain,” he said.


  • A summary of AA Co’s half-year results and commentary will be published tomorrow


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  1. Neil Barrie, 20/11/2018

    AACo’s arrogance in not entertaining a service kill component in their processing mix ensured that there was no immediate recurrent cash flow to underpin the business. Any manufacturer with a modicum of intelligence would first ensure that their fixed basic operating costs are covered before you shoot for the higher yielding situations which require greater management input and longer term capital risk.
    They had an excellent service kill market on their doorstep and failed to grasp a one-off opportunity to underpin their business. Build a smaller and more flexible plant that allows scale once goals are being achieved and initial teething issues are bedded down. Technology can be your friend, innovation takes time and understanding, importantly growth and diversification needs an initial solid base on which to prosper. AACo had pipe dreams, and pipes are hollow.

  2. Peter Vincent, 19/11/2018

    “Ensure the company is on an even footing from which to realise its strong potential for growth”….. “Enable us to ensure we are realising the potential inherent in our unique, integrated supply chain” …. the assurances are repeated every year by AACo, the Myer of the bush and it needs a shake-up from someone like Solly Lew.

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