The Australian Agricultural Co this morning reported a net loss after tax of $31.6 million for its six months of operations  to September 30.

The result was significantly adversely affected by a 12 percent decline in average liveweight cattle prices during the period, which contributed to a $20.4m drop in revenue for live cattle sales.

Domestic cattle prices continued to be depressed due to the ongoing effects of the previous Federal Government’s June 2011 suspension of live cattle exports to Indonesia and below-average seasonal rainfall in northern Australia, the market was told in a statement issued minutes ago.

 Acting chief executive officer Craig White said the poor result in live cattle operations was partly offset by the continuing strong performance of the company’s Branded Beef division which improved gross margins by 323pc.

“The strong result from our Branded Beef division was driven by a decision to concentrate on higher-value customers and improved yields, initiated by a reinvigorated management team,” he said.

The success of the Branded Beef business continued to validate AA Co’s strategy of moving from being a pure cattle-producer pastoral company to a vertically integrated beef, processor and marketer, Mr White said.

The company’s Darwin beef processing facility, which is now under construction and is expected to be operational during the second half of the 2014 calendar year, would be crucial to both enhancing the group’s profit as well as reducing the volatility of the group’s earnings profile.

“Together with the recently completed $299m capital raising which has substantially strengthened the balance sheet, the company is in a strong position to grasp the opportunities of rising global demand for beef, especially in Asia, and to drive return on capital employed in the business,” he said.

Recent diplomatic moves by the new Federal Government were also promising for an improvement in live export trading conditions with Indonesia.

“While external factors such as the drought and the corresponding low cattle prices have affected the result for this half, the company has been able to effectively manage the things it can control,” Mr White said.

This was demonstrated by a $4.5m improvement in operating cashflow for the half compared to the prior corresponding period, despite a volatile environment with significantly increased feed and transport costs.

 

Seasonal Conditions

Rainfall was well below average for AA Co’s northern Australia properties in the half, with many properties in areas that recorded their lowest rainfall on record.

The 2012/13 wet season rainfall was lower than in the 2007 drought. The drier conditions have continued to drive increased costs for feed, water and transport, the market was told.

 

Branded Beef Operations

AA Co’s Branded Beef division sold 9000 tonnes of beef in the half, slightly down on the 9500t in the prior corresponding period.

However revenue improved by 10.5pc to $83.9m and gross margin by 323pc to $7.2 million following a decision to reduce the volume of 1824 branded beef and concentrate on higher-value customers.

Improved management focus positioned the Branded Beef division to take advantage of better currency conditions, although the Australian dollar remained volatile throughout the half.

 

Cattle Operations

During the first half AA Co delivered 172,517 head of cattle for sale (six months to September 2012 – 147,693 head), at significantly lower prices than the prior corresponding period.

This accelerated sales program was undertaken to manage the continuing drought conditions and the uncertainty in the live export trade. The dry conditions increased destocking across the cattle industry, forcing prices lower than in previous years.

Prices achieved to September 30 averaged $731/head, more than 20pc lower than the prior corresponding period average of $919/head.

Cattle purchases were reduced to 14,453 head for the six months to September 30 (six months to 30 September 2012 – 61,181 head) with the bulk of the cattle purchased to support feedlot operations.

Tonnes produced during the half were 44,700t, down from 57,777t in the prior corresponding period.

 

Darwin Beef Processing Facility Update

At the August Annual General Meeting, the Board announced it had given final approvals for the construction of the $91m Darwin Beef Processing Facility.

Contracts have now been executed with the major plant and equipment providers and construction is well under way and on schedule.

The plant is expected to be operational during the second half of calendar year 2014.

 

Property Portfolio

In May this year AA Co sold part of its Goonoo aggregation in Queensland, totalling 19,400ha, for $23m and Brighton Downs, a 420,000ha station near Winton in Queensland for $11.75m.

The sales reflect the company’s strategy to sell non-core assets and deploy capital in northern Australia.

Following the half-year balance date at September 30, the company last month purchased (subject to regulatory approvals) the adjacent La Belle Downs and Welltree stations in the Northern Territory. The 99,400ha properties are 180km southwest of Darwin and will be complementary to the Darwin beef processing facility, helping ensure continuity of supply during both wet and dry seasons.

 

New CEO

The search process for a new chief executive officer has attracted a field of high-quality candidates.  The process is continuing and the Board will update the market as and when appropriate.