THE Australian Agricultural Co has announced ‘decisive action’ to stop operational losses at its Livingstone Beef processing plant near Darwin, as part of its 2018 full year results disclosure this morning.
The company will suspend operations indefinitely at the loss-making Livingstone Beef facility – Australia’s newest beef processing facility commissioned under great fanfare in 2016.
The decision follows a strategic review announced by AA Co in early April to assess all available options and determine the optimal path to deliver shareholder value from its Livingstone Beef processing business (see earlier report).
That review included a thorough analysis of the existing Livingstone Beef operations, market environment and outlook, and considered a broad range of potential alternatives.
“The Livingstone Beef facility continues to operate at a loss,” AA Co chief executive Hugh Killen told the market in a statement this morning.
“AA Co has decided to suspend processing operations at Livingstone as soon as practical, having regard to existing employee, customer and other operational commitments,” he said.
The decision 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.”
The company did not rule-out re-opening the plant if circumstances allowed.
Livingstone would be maintained at a level that enabled an efficient plant restart, should prevailing macro-conditions be sufficiently supportive, while minimising costs in the meantime, its statement to the market said.
“AA Co believes there is substantial optionality value in Livingstone Beef. In the right market environment, and with the right operating model, Livingstone Beef can be a profitable operation with significant strategic value. The decision announced today enables this value to be maintained,” Mr Killen said.
The total one-off write-down of $74.9m for Livingstone, including a one-off non-cash impairment of $69.5m with respect to buildings, improvements, plant and equipment and an additional $5.4m provision recorded for an onerous contract (believed to be related to provision of gas for energy generation), is slightly higher than the range expected in the company’s April trading update, following the results of the strategic review.
Big dip in earnings
As flagged in the company’s trading update issued in early April, the overall company-wide results include 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.
The company told the market that overall earnings were impacted by a number of factors, including increased competition affecting certain parts of the product portfolio, reduced volumes due to less reliance on external supply, and increased input costs driven by dry weather.
Overall price growth achieved in the company’s Luxury/Prestige brand (Wagyu) segment had been ‘pleasing’ in the context of increased competitive pressures. The performance of the Westholme and Wylarah Wagyu brands were particularly strong, AA Co said.
“This improvement supports the company’s brand and marketing strategy, and management intends to accelerate this growth through targeted investment behind the company’s strategic brand portfolio.”
Despite the challenging seasonal conditions resulting in higher input expenses, cost of production per kilogram increases were largely a result of the one-off livestock attrition adjustment announced in H1 FY18, and management believed there was potential upside to be achieved through capturing process improvements and efficiencies across the supply chain.
This morning’s statement said the company continued to benefit from a robust balance sheet, with ‘comfortable headroom’ remaining within existing bank facilities. The debt refinancing completed in September 2017 achieved a reduction in the cost of funds and more flexible facility terms.
The balance sheet has been further strengthened by an improvement of 4.5pc in the carrying value of AA Co’s property portfolio (excluding the Livingstone Beef business).
Mr Killen said fundamentally, AA Co was a strong, branded business with an established presence in high-potential, high-value markets, supported by a portfolio of world-class assets.
“However, recent financial performance has been weak due to a range of factors,” he said.
“We need to create a simpler, more productive and more profit-focused AA Co to deliver on the company’s potential. 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,” Mr Killen 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.”
“Significant change is required to improve profitability and cash flow generation across the supply chain, and we have taken decisive action to deliver sustainable, long-term shareholder returns.”
Luxury/Prestige brand segment
The price growth and strong margin performance achieved in AA Co’s Luxury/Prestige brands market continued to validate the company’s brand and marketing strategy and focus on high-value target markets, it said. Performance in the Singapore and Taiwan markets following the launch of Wylarah and Westholme Wagyu continued to be pleasing.
Wylarah and Westholme are expected to be launched in one additional market before the end of the calendar year, and preparations continue in a number of additional markets.
As announced in April, AA Co’s premium supply chain (predominantly, its 1824 brand) has 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 Premium supply chain has been further simplified by selling composite steers instead of processing as 1824 branded beef. Management said it expected the sustainable impact of this decision to be an improvement in Operating EBITDA and Operating Cash Flow.
Volumes sold for the period decreased as an ongoing consequence of the company’s strategic decision to reduce purchases of externally supplied cattle, with sales impacted as a result.
As a long-term strategy, AA Co will continue to prioritise the internal supply chain as the best means of producing the branded product at scale for the high-value Luxury/Prestige segments, while maintaining expected levels of reliability, profitability and efficiency.
Operational review update
The operational review announced in April has been completed, and a comprehensive business improvement program has been defined. Management are now focused on executing this program at pace, and key initiatives are currently underway.
This includes a process & efficiency review of the company’s supply chain announced in April, with a primary focus on identifying opportunities to improve processes, realise cost savings and improve profit margin. The discovery phase of this process has now been completed, and has identified material potential ongoing efficiency savings from realising productivity gains. An implementation plan for capturing these opportunities is currently being prepared.
Cash Flow and Balance Sheet
Operating cash flow for the year just completed was a negative $39.9m, driven by Operating EBITDA as well as other factors, including an increase in working capital of $16.6 million, reflecting a normalisation of historically low working capital level balances following a material reduction at the end of FY17.
Closing net debt was at $348m, representing a gearing ratio of 26.3pc, within AA Co’s stated target range of 20-35 per cent.
Mr Killen said the macro conditions in the first half of the 2019 financial year continue to be 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.
“What sets AA Co apart is our unique ability to produce the highest quality beef at scale. AA Co has a blue-chip portfolio of land, herd and brand assets, which the company has been building and shaping for generations. These are not easily replicable.
“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.
“Over the next 12 months, we will be particularly focused on maintaining our robust balance sheet and prudent debt coverage ratios and optimising our supply chain.
“We plan on continuing to advance plans to extend our brand reach in existing markets, as well as new launches in key high-value markets where that makes commercial sense. Work is already well progressed on building the market data and insights needed to support strong, successful expansion of our brand footprint.”
The AA Co board and its chairman, Don McGauchie will inevitably come under scrutiny over the Livingstone developments at the company’s upcoming annual general meeting, scheduled some time before the end of July. There was widespread doubts expressed about the project’s viability among processing and other industry stakeholders, when it was floated in 2015, and shareholders have challenged the investment in the project at earlier AGMs.
- See yesterday’s related report on AuctionsPlus’s Anna Speer joining AA Co as the company’s new COO