AA Co shareholders grill board on wide-ranging issues

Jon Condon, 18/07/2016



SHAREHOLDERS at Thursday’s AA Co annual general meeting grilled the board on wide-ranging issues during questiontime, ranging from animal welfare to trade access, the performance of the new Darwin abattoir, the absence of shareholder dividends, and the rationale behind the company’s new brand program.

Here’s a snapshot of some of the topics that were on shareholders’ minds, and the responses from chairman Don McGauchie and managing director, Jason Strong:


Q: We’re talking about being a world-class branded beef company and I look forward to that. So why have there been environmental problems with waste water treatment and odour at the Livingstone processing facility near Darwin?

A: MD Jason Strong said this was a case where the company had to improve, and do things better – and was absolutely achieving that.

“We did not start off well, as far as that side of the establishment of the Livingstone business was concerned. But we’ve taken very positive and deliberate actions in the last 18 months to better manage the environmental footprint of the plant near Darwin. We believe we have not just significantly improved that performance, but it will be an ongoing focus for us, and are very conscious of how important that activity is.”


Q: A small shareholder said he had seen a segment on the Business Channel (cable TV) quoting investment commentator, Howard Coleman from Teaminvest. “Coleman suggested AA Co was not a good investment, and was quite critical of the company’s performance. He is one of those analysts that looks for about ten years of good performance, which AA Co obviously cannot claim in recent years. But he is critical of the company’s past. Do you approach such people and give them a briefing, in circumstances like this?”

Don McGauchie

Don McGauchie

A: “We have a very strong program of engaging with investors, advisors and others, and are currently putting in front of people the program we have developed for the future. I think it is fair to say the market is starting to respond to that*,” chairman Don McGauchie said.

“But there has been checquered history. Part of the issue with a lot of people investing in agricultural enterprises is the seasonal, commodity-based nature of those enterprises, which causes quite significant fluctuation. There is no question that we have been through a long period of very poor cattle prices, so anyone looking back over the last number of years would not have seen a pretty picture.

“But part of the reason why we are changing the structure of the AA Co business, moving to the kind of products we are now selling – taking fuller advantage of this wonderful product we have, and not relying so much on the commodity markets – is to in fact change that view. It will take longer for some people to get that message than others, but I fully-understand how people have gained that impression in the past.”

“Our job is to change that perception. I believe we have started to do that in a very strong way, and we will see a lot more of that as we start to roll out the new commercial beef brands and the success of the marketing and distribution programs in coming months.”

* AA Co shares during Friday trading rose to $1.97, their highest level since 2008.


Q: “The shareholders would like a dividend,” a small shareholder declared. “Dividends were issued for the first few years after the float (2007), then stopped, and they never came back,” he said. “I know you have to build a new abattoir and all the rest of it, but even a small dividend would help – when can we expect one?”

A: “We ask ourselves the same question, all the time,” Don McGauchie said.

“It’s important to stress that we have been investing in this business to develop the brand the marketing and the distribution process in order to get real value out of this business. That means we are not paying a dividend this year, and not making any projections about when we will pay a dividend.

“Our intent is to invest a significant amount more money in the development of this business over the next few years in order to get the value out of the business, in the long term. The opportunities for us to do that are immense. We have a wonderful product – if we can get that product to customers around the world, they will pay for it. We have people in London paying 200 pounds a kilogram for a very small part of the product we sell. We want to get more and more of our beef product into higher price categories, but that requires investment.

“That investment will go into processing, distribution and marketing of that product. That will consume quite a bit of our money in the next little while, so we are in no position at the moment to say when we will pay a dividend. But when we get this business where we want it to be, it is our intention – of course – to reward our shareholders, not just with an increase in share price, but with dividends in due course.”


Q: “Is the Livingstone Beef abattoir operating at full capacity?” a shareholder asked.

A: “It’s running at full capacity, on one shift,” Mr McGauchie said.

“It was designed with a capacity of about 500 head per day, per shift. We have hit that single-shift capacity now, so now we’ll look at how we go beyond that, into longer weeks or double shifts. Those are things we will decide over the next year.


Q: “Can’t you get enough cattle to run a second shift?” the same investor asked.

A: “There are two issues: we have to have enough cattle, and enough people to man it, in order to go beyond a single daily shift,” Mr McGauchie said. “We are looking at where the capacity of cattle is – because bear in mind, across the Territory, and everywhere else in Australia – anybody with a cow is looking to get a calf out of it, not sending it to the meatworks.”

“So we will make the decision about when we move more production through the plant, as the cattle are available, and as the people are available to man the plant. What we want to do is make that work really well.”


Q: “What does the current high price of beef mean for the AA Co profit margin?” a shareholder asked.

Jason Strong

Jason Strong

A: “It’s about the shift in the strategy of the business to get away from the volatility that occurs across the beef supply chain,” MD Jason Strong said.

“The example we have seen across the past three or four years is the validation of that. We had very low cattle prices and high meat prices, creating a disconnect for the production sector from the margin. Now we have a shift to much higher cattle prices, and lower margin on the meat side.

“But across the total supply chain, the margin is probably about the same,” Mr Strong estimated.

“The challenge for us as a business is to have long-term, sustainable earnings. The decision the company made three years ago was to shift away from being exposed to a single, or even a couple of volatile parts of the supply chain (i.e. selling slaughter and live export cattle), in order to try to access the margin that exists across the entire supply chain.”

Mr Strong referred to the Eastern Young Cattle Indicator, warning that it was simply an “indicator of one part, of one part” of the industry. “The EYCI is currently very high, at record levels. So if you were in a business that just sold cattle in those narrow descriptions, it would be a good time. But the fact is that the EYCI has also come off record lows – just a couple of years ago, that made that part of the industry a pretty challenging one to be in.”

“Regarding the question about the impact of those prices on margin, if you are exposed to that as an expense, then it has an impact. AA Co has some exposure, but not a lot. The drive of our model, now, is to be present in all parts of the supply chain, so when all that margin disparity moves up and down the chain, it matters less to us, allowing us to manage it, because our revenue-point is further down the chain.

“That was seen in this year’s financial results, and to some extent in last year’s results, too. We are now a couple of years down this path, where there has been a big shift in where the margin has sat, and we have been able to make improvements over that time.”

“But the individual parts of the supply chain can certainly deliver challenges, if that is all you are exposed to.”


Q: A small shareholder asked whether the board could assure him that all AA Co cattle entering the live cattle export trade were being handled appropriately in importing countries, and were not being ‘slaughtered with sledgehammers’ in Vietnam.

A: Chairman Don McGauchie said the board was certainly concerned about animal welfare in live export markets, and as far as the company knew, no AA Co cattle were being treated inappropriately, anywhere.

“We share completely your broader concern about animal welfare – whether it be on the properties, in our own processing facilities, or where our cattle might end up overseas.”

“The industry is now doing a very good job of ensuring that these incidents don’t occur, and if there are isolated incidents like the one identified in Vietnam, it is attached and dealt with extremely quickly. One of the things this company has done, under the leadership of this board is to require anyone buying our cattle for live export to guarantee that they will be dealt with under the ESCAS rules. We’ve made it very clear that we will not deal with anyone who in any way contravenes those rules.”


Q: What has been the effect of Australia’s recent Free Trade Agreement with China?

A: “Australia now has FTA’s with China, Japan and Korea,” Mr McGauchie said.

“The one that has the most potential for this company is Korea. We were falling considerably behind the US in a competitive sense in Korea, because the US had an FTA that was lowering their tariff on a progressive basis, and it was starting to bite on Australian exports. But Australia’s FTA with Korea now represents a significant advantage to us, which is one of AA Co’s biggest export markets.”

“Japan is the next one of importance. It’s the first time Japan has entered into an agreement with anyone, on an agriculture basis. As AA Co does export some product to Japan, it has some value to us.

“But at this stage, China is not a big export market for this company  – we are looking at higher value market opportunities. But in due course, it could become a more important market for AA Co. It has obviously been a very important market FTA for Australia, so far as the broader beef industry is concerned – just not yet for AA Co.”


Q: The annual report says increase in AA Co’s revenue sales increase to the US this year is 200pc, and the value increase is in fact greater than the net profit. What is the nature of the product sold to the US and how do you see the stability of that market?

A: MD Jason Strong confirmed that the US was now AA Co’s largest single market, taking a full range of products.

“Previously our US sales were largely made up of Wagyu product, but we have now increased our 100-day export product also. But the biggest increase, by far, has come from manufacturing beef type product out of the Livingstone plant near Darwin. Regarding stability issues in the US, our focus is very much on customers rather than countries. The fact that the US is one of our main markets is because of the relationship we have with a small number of very large customers, and the same in Korea. Our single largest customer happens to be in Korea – it’s not because we focus on the Korean market, per se.”

“Australia has a direct trade agreement with the US, so even of the proposed Trans Pacific Partnership does not go ahead because of political reasons, we remain in a strong position in that market.”




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