Managing director Jason Strong said the company’s strategy of transforming itself from a production-led pastoral company to a vertically-integrated and customer-responsive producer, processor and marketer was being successfully implemented.
Australia’s largest cattle and beef producer saw pastoral operations continue to be affected by the ongoing drought in northern Australia, but the increased focus on driving revenue through selling premium beef to higher-value customers was beginning to produce excellent results, Mr Strong said.
The company’s Branded Beef division posted a 329 percent increase in gross profit to $17 million, up from $4 million for the previous financial year.
“It demonstrates that the company’s strategy of improving the quantity and quality of earnings, by reducing its exposure to volatile domestic cattle markets, is the correct one,” Mr Strong said.
AA Co’s northern beef processing facility, under construction near Darwin and which is on schedule to be commissioned in September this year, would play a crucial role in transforming the company to a profitable business with less volatility, he said.
Mr Strong said the company’s drought management plan and early response to this year’s dry conditions had helped mitigate the adverse effects of these conditions on the result.
“AA Co acted decisively to implement a sales program and reduce its herd by about 86,000 head, which helped reduce the pressure on its pastoral operations,” he said.
While kilograms of beef produced in the pastoral division was down by 28.4 percent, the company’s revenue was down only 6.5pc. Gross margin improved by 2.5pc due to a focus on selling more branded, premium beef and managing expenses in a difficult operating environment, this morning’s statement said.
In line with strategy, this improvement in gross margin was supported by a 67pc increase (25,000 head) in internal cattle transfers to the Branded Beef division to be sold as boxed beef.
Mr Strong said while the overall statutory pre-tax earnings result was a loss of $19.9 million (an improvement of $11.3m compared to the prior corresponding period a year earlier), the group achieved an improvement in net operating cash flow to $18.5m, up $21.2m from negative net operating cash flows in the prior corresponding period of negative $2.7m.
“This result was achieved in difficult operating conditions and with net cattle sales and purchases being largely in-line with budget,” he said.
The company’s focus on reducing costs across the business had resulted in a $6.3m decrease in operating expenses to $82.9m.
An increase in live export import permits to Indonesia and greater competition from other markets late last calendar year resulted in increased export volumes at improved prices in the latter part of the financial year, this morning’s report to the ASX said.
Land value declines
The company’s fiscal year result was also adversely affected by a decrease in the valuation of AA Co’s property portfolio by $37.1m. This was reflected through a decrease in the asset revaluation reserve of $33.5m and a decrease in fair value in the income statement of $3.6m.
Following the successful $299m capital raising completed in October 2013, the company’s balance sheet has been strengthened, with gearing reducing to 23.2pc at 31 March, down from 41pc this time last year.
The company finished the financial year with net tangible assets of $1.40 per share, compared to $1.90 per share at 31 March 2013, reflecting the impact of the capital raising, company performance and the decrease in the valuation of AA Co’s property portfolio.
AA Co’s northern properties continued to endure dry conditions for much of the financial year, this morning’s report said. Better rainfall was recorded by the end of the final quarter.
The drier conditions saw increased cattle sales activity and gave rise to increased feed, transport and other costs.
Branded Beef Operations
AA Co’s Branded Beef division sold 20, 500 tonnes of beef during the year, an increase on the 18,700t sold in the previous cycle.
Revenue improved by 21.6pc to $188.2m and gross margin improved by 329pc to $17m, driven by higher beef sell prices, lower cost of sales and a more favourable A$ /US$ exchange rate.
This reflects the company’s strategy to increase the volume of premium-quality Wagyu beef sold to higher-value customers.
AA Co said it managed its herd effectively during the dry conditions in northern Australia with an accelerated sales program.
The dry conditions necessitated de-stocking across the industry, forcing prices lower than previous years. The company delivered 263,641 head of cattle for either external sale or internal transfer during the financial year, compared to 260,240 head the previous year.
Cattle purchases were reduced to 42,593 head for the year (87,996 head for the prior corresponding period) with the bulk of the cattle purchased being feeders for the company’s grainfed operations.