Strong Wagyu sales drive AA Co’s improved half-year results – despite drought impact

Beef Central, 20/11/2019

THE world’s largest beef producer, the Australian Agricultural Co, reported positive operating profit and cash flow despite ongoing drought conditions, in its half-year results delivered this morning.

The company delivered a statutory pre-tax loss of $3.4 million compared to loss of $82.9m in the same half-year period last year. Underlying operating profit of $9.4 million, and operating cash inflow of $11m, came despite the impact of drought related costs of $36m in the first half of the 2019-20 year.

The one-off benefit realised in the first half of 2019 from winding down the company’s Livingstone Beef plant and the 1824 supply chains meant operating profit and cash flow are down on the same time last year, but the core branded Wagyu range had achieved sales growth just short of 10pc.

That was the company’s strongest half-year of Wagyu meat sales to date, driven by both volume and price increases, aided by currency movements.

Hugh Killen

Managing director Hugh Killen said this growth had underpinned cash flow, which had seen the company deliver positive operating cash flow in three of the last four half-year periods.

“Our ambition to grow our premium brands and pursue our strategy as a branded food business has accelerated in the last six months, with encouraging results,” he said.

“We’re seeing improvements across the business, culminating in our strongest half-yearly Wagyu meat sales and strong growth across key regions.”

Seven brand launches had taken place during the reporting period in the United Kingdom, the United States and Asia, as the company’s premium Westholme brand increased global sales by 106pc on last year. The company also upgraded its distributor partnerships in the UK, Europe and the US while embedding sales and marketing teams across key markets in Europe, Asia and the US.

A key driver of the improved Statutory EBITDA position reported this morning was a slight recovery in Australian Wagyu cattle market prices following the declines experienced in the corresponding period last year.

“Taken together with positive operating profit and operating cash flow for the period, and the ongoing strength of our balance sheet, it has been a pleasing result,” Mr Killen said.

Market growth and the branded beef strategy

Mr Killen said the strong commercial results demonstrated important progress against the company’s global branded beef strategy. In the first half of the financial year AA Co increased sales across Asia by 8pc, Europe and the Middle East by 26pc and North America by 7pc. Wagyu beef sales price per kilogram achieved a 5.9pc increase.

“The feedback from chefs and diners as the Westholme sales have grown has been tremendous. Our targeted engagement with them, both directly and through our distributors, has helped form strong new partnerships and significant potential for future growth,” he told analysts at this morning’s briefing.

“Westholme remains a standout performer and is AA Co’s major value growth engine, while our regional brands continue to support the business’s profitability and transition to new brands.

Drought impact

Mr Killen said the results came despite the heavy impact of increased seasonal costs, above normal conditions.

The company absorbed $36m in drought-related expenses in the first half, with increased costs of production, including feed and transport.

That was up by about $11 million on the same period last year, illustrating how tough conditions are across the country. Overall cattle numbers declined from 423,000 to 408,000 over the six months ended 30 September. The 3pc reduction in herd volume was impacted by strategic destocking leading to increased cattle sales, reduced cattle purchases and elevated cost of production due to drought conditions.

“Our strategic focus on delivering the best possible product and consistency for our customers has seen us continuing to invest in our herd and assets,” Mr Killen said.

“AA Co’s ability to produce quality, without interrupting supply around the world is one of the things that sets us apart. The outcomes achieved by our commercial team, supported by the efforts of our operational personnel, show our approach has worked and has allowed us to weather extreme conditions.”

Global conditions support continued growth

AA Co told analysts this morning that it was poised to take advantage of strong global market conditions for beef.

“The demand for Australian beef is strong, and people across the world are looking for sustainable and safe sources of protein. AA Co delivers this in a way no one else can,” Mr Killen said.

The company said it was identifying new opportunities and had created the right foundations for ongoing growth in existing markets.

“AA Co has an unparalleled provenance. We have built one of the largest Wagyu herds in the world with industry leading quality and genetics. We manage a substantial and diverse mix of native Australian pastures and we have a track record, with deep knowledge, dating back to 1824.

“These assets mean AA Co continues to present a unique value proposition as the only company in the world able to produce the finest quality beef at scale,” Mr Killen said.

“There is still much room for progress, but the results over the last six months should give our shareholders, our community and our industry confidence that AA Co’s strategy is the right one and we are heading in the right direction.”

Flood recovery

AA Co told the market it was spending around $9 million on its Gulf region properties in recovery responses to January’s flood event, mostly on fencing, property infrastructure and water.

About 800,000ha of land on three key gulf properties had been affected.

“The rebuild is applying the key lessons learned from the Gulf flood event,” Mr Killen said.





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