HIGH cattle prices were primarily to blame for the disastrous financial losses recorded at the Australian Agricultural Co’s Livingstone Beef processing plant near Darwin, chief executive Hugh Killen said yesterday.
As outlined in yesterday’s story, AA Co plans to close its Darwin processing facility before September 30 after racking up eye-watering statutory net loss after tax of $102.6 million for its full financial year, including a one-off write-down of $74.9m for its Livingstone business.
The plant closure was designed to simplify the company’s supply chain and allow it to focus more on its high quality beef brands, the market was told.
During a briefing yesterday after the full financials were released, Mr Killen was asked to outline the fundamental reasons for the plant’s poor performance.
He said a number of plant input costs were challenging, making particular reference to cattle prices.
“One of the key input costs is cattle, and obviously we are operating in a challenging environment in the NT with live export,” he said.
“The Livingstone plant operates in a challenging operating environment, along the entire supply chain from cattle procurement all the way to processing. We have high input costs in the Northern Territory. Cattle prices are higher than they are in southern markets, and overall input costs are higher, from labour all the way through to other agreements we have in place at the plant.”
Mr Killen agreed with an ABC journalists’ summary that inputs were just too dear to make a viable profit at the plant at present.
He stressed that demand was ‘still there’ for product (primarily, commodity type lean grinding beef) from the Livingstone plant, primarily directed into the US market.
“While the operation of Livingstone is not profitable today, there could be an opportunity at some stage in the future whereby market conditions determine that it can again be profitable. It could be that there are different options with different partners, as well. We’re just retaining our options with the plant,” Mr Killen said. “We still believe there is value in Livingstone Beef, however at the moment it is just not economic for us to run.”
In this article published in October 2015, AA Co reported that its newly commissioned plant was ‘adding positively to the company’s bottom line. During the official opening of the new plant in February that year, AA Co chairman Don McGauchie described the facility as ‘transformational’. Then prime minister Tony Abbott described the project as the biggest private sector investment in agriculture in northern Australia ‘for many a long year.’
Beef Central asked Mr Killen whether there were other factors involved in the loss results, and whether an alternate plant management approach could improve outcomes.
“We do, at times, face highly elevated slaughter cattle prices here in the NT, but the plant also operates in a challenging environment from the wet season perspective. So the input costs for the cattle can be higher than in the south, because cattle need to be staged through the wet season. It’s not only the outright cost of the cattle, but the additional cost burden that goes on top, in terms of staging those cattle into the plant at certain times of year,” he said.
In terms of alternate management models, he said Livingstone was a large facility, and he was sure that there were ‘people out there’ who are very adept at managing and operating processing plants, who if they had a look at the site, ‘might want to do something else with it.’
“We would welcome any of those discussions, if and when they arise.”
Mr Killen confirmed that the plant was not being offered for sale.
“But if anyone has a credible offer that they wanted to talk to us about, we may or may not consider it – but it would have to be shown to be giving the best possible return for AA Co’s shareholders.”
Asked whether there had ever been occasions when AA Co’s own northern cattle properties had been asked to supply the Livingstone plant with cattle at discounted prices, as a means of propping up the plant’s operations, he said Livingstone’s operating EBITDA this year, unfortunately, suggested that was not the case.
“AA Co itself supplies about 20pc of the cattle processed through Livingstone. Those cattle are transferred at observable market rates, and the rest are purchased from other cattle producers.”
Asked how much of Livingstone’s cattle price problems were due to the herd reduction that has occurred across large parts of Australia over the past three years, Mr Killen agreed it was an issue.
“Beef processing is a highly cyclical business to be in, and there has been a cow-herd rebuilding going on in the Northern Territory and western Queensland. That’s had an impact, and the total number of cull cows available has been a wider challenge for us,” he said.
Observers say the factors contributing to Livingstone’s unfortunate predicament run a lot deeper than livestock procurement and labour costs, however. Some point to AA Co’s multi-layered and generously-rewarded management profile, and what’s seen as a poor operational set-up and strategy at the plant.
Some veteran processors were mystified as to why the project was not set up, from the outset, as a least-cost hot boning plant suited to efficient generation of frozen lean grinding beef. Currently it is configured for quality beef production, while producing a frozen commodity product, one contact said.
It’s widely understood that Queensland processor Australian Country Choice has visited the Livingstone site in the past few months – apparently to offer guidance about plant set-up and operational strategies. There’s been no suggestion at this stage that ACC has any direct interest in investment in, or management of the facility.
Mr Killen told yesterday’s briefing that he was presenting “a tough set of numbers, that tell an important story.”
However he said the ‘tough decisions’ being made now would redirect AA Co back towards growth.
“Today’s numbers confirm that there is a highly profitable business within AA Co, and our branded beef strategy is the right one. We’re making progress, and are investing heavily in these improvements to drive this forward.”
“The decision to suspend operations at Livingstone is not one we have taken lightly, but it is the right one for the business, and for shareholders.”
“We believe Livingstone has the potential to be a profitable operation, and there is significant strategic value in operating it in the right market environment, and with the right operating model.”
He said the announcements made yesterday recognised management’s commitment to transparency, and also to making the tough decisions to protect value.
Asked whether there was any suggestion AA Co might be waiting for the live cattle export trade to end, in order to re-activate the Livingstone plant, Mr Killen told the briefing the company did not have a view about the livex trade stopping ‘any time soon,’ and was not making any decisions on the basis of livex in any way.
“We’re making our decisions on financial grounds, which is the right approach for our shareholders.”
Industry observers have for some time noted the lack of any meat processing operational expertise at either board or senior management level within AA Co, despite the $100 million investment made in the Darwin processing venture, plus generous government financial support said to be worth tens of millions of dollars towards provision of infrastructure during establishment.
The AA Co board was ‘crying out’ for the addition of a non-competing hot-boning cow processing expert “like a Frank Herd, a Tony Munns, or a Peter Greenham Sr”, to steer the ship in the Darwin project, Beef Central was told – particularly given that some of those names have close alliances with major domestic ground beef customers like the Hungry Jack’s burger chain.
Others pointed to the earlier, questionable decision to hand over AA Co’s domestic marketing responsibility to Australian Wholesale Meats – a move which one wholesale industry contact said took $2-$3/kg off the table in terms of margin for AA Co.
Buried in the 86-page financial report issued yesterday was Livingstone Beef’s sales volume and value results for the year – 21,000t of product (down 17pc in volume on the year before) averaging just $4.39/kg (virtually unchanged from the year before). That average price includes not only trim, but sweet cuts directed into other markets, presumably at a higher price.
Asked to comment on the figure, an experienced export meat trader told Beef Central the average sale price figure for the year looked “odd, to say the least.”
“85CL trim has traded either side of $5/kg for much of the year ended March, and as high as $5.50-$5.60 for periods. And that does not account for the fact that AA Co should be making much better money on the tenderloins and cube rolls it is selling separately; or the fact that much if its product out of Darwin should be higher than 85CL. It just doesn’t add up,” he said.
Editor’s note: AA Co has since clarified the above figure, saying it includes not just beef sales, but other items like offals and by-products. AA Co agreed that its description in the annul results as ‘beef’, rather than the more appropriate term ‘beef and beef products’, left it exposed to misinterpretation.
Brisbane’s Courier Mail this morning carried an item focusing on the boost to salaries of AA Co directors for the year ended March 30 announced yesterday, despite the $103 million loss for the year. Total remuneration for the ten board members rose from $1.55m to $1.9m, the Courier said.
Another five top executives fared even better, with the collective spend on their compensation packages more than doubling from $944,000 to $1.9 million.
Following the disclosures in yesterday’s announcement, AA Co shares closed at $1.10 yesterday, down from a recent high of $2.07 in July 2016.