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Tougher global meat trade environment shows up in AA Co half-year results

Jon Condon 15/11/2024

TOUGHER global meat trading conditions were reflected in the Australian Agricultural Co’s half-year financial results and operations update delivered this morning.

The challenging market conditions experienced in recent periods are continuing, with a sharp increase in beef supply in some regions and restrained consumer spending across the global economy, analyst were told.

AA Co’s overall Wagyu branded meat sales price per kilogram was down 17 percent to $17.46/kg for the half-year ended 30 September, compared with the same period last year.

This was a major contributor to a lower operating profit margin, down 7.8 percentage points on last year to 10.3pc and operating profit of $20.2m, down $10m on the same period last year, but still one of the stronger half-year performances of recent times.

The sharp reduction in average value of branded Wagyu beef sold was offset by larger volumes of beef sales – up 37pc on the same period last year in kilograms of beef sold – following the additional capacity of the company’s Goonoo feedlot in Central Queensland coming on-line during the reporting period.

AA Co CEO Dave Harris

“The first half result was impacted by global supply and demand dynamics, which have put pressure on global meat prices,” AA Co managing director David Harris said.

“General cost of living concerns have also impacted some consumer spending habits globally,” he said.

Beef Central wrote about the world trading environment for high quality Wagyu beef in this recent Wagyu feeder steer market update.

At the same time, broader macro-economic influences such as inflation had challenged cost of production for the half-year ended 30 September.

Mr Harris said the offsetting of lower prices achieved for beef by greater volume of beef sales was an example of the different pathways that AA Co could take to improve outcomes, depending on market conditions.

The higher volume of meat sales in the first half were behind a $28.5m improvement in value of total meat sales year-on-year, reaching $195.5m. There was a $1.7m improvement in operating cash flow for the reported period to $4.3m.

Statutory net profit after tax reached $23.6m, up $129m on last year – largely as a result of a $34m unrealised cattle herd value increase, due to rising cattle prices.

As a publicly-listed company, AA Co is required to report herd value, which feeds directly into the statutory numbers, however unrealised cattle prices have only a limited impact on operating performance.

The growth in herd value contributed to in increase in net tangible assets to $2.55 per share. Shares were trading this afternoon at $1.38, little changed since earlier stages this week, before the half-year results were announced this morning.

Mr Harris said as a result of the challenging beef trading conditions and stubborn market environment, the company had responded with a tactical approach to brands in-market, leveraging its global distribution network and diverting supply from one market to another to optimise price and support future growth in key higher-paying regions. Asked which markets he was referring to, he chose not to respond.

Overall, Wagyu meat sales value (price x volume) increased 14pc on the same period last year.

Through the company’s strategic approach to product allocation and investment in its Wagyu brands and marketing activities, AA Co was able to largely maintain its presence in key markets, shareholders were told.

Mr Harris said the strategy of recent years had been designed to build a better beef program at AA Co, including improving both the resilience of its supply chain, as well as the performance of our brands in market.

“We are seeing some of the outcomes of that hard work in these results,” he said.

“Broad macro-economic dynamics don’t change overnight, so it’s no surprise that the market factors that influenced previous results continued into the first half of the year.”

“However, we have positioned ourselves to respond accordingly, with a disciplined approach and a productive and efficient supply chain that has created multiple pathways to positive results.”

“We saw the benefits this period as we were intentional about how we increased volume to offset those pressures. Conditions remain challenging, but we’re satisfied with how we are progressing this financial year.”

Other first half highlights included:

  • Relaunching the Westholme Wagyu brand to better reflect the nature-led focus of the value chain. Launch events on stations, around Australia and in AA Co’s global markets provided new opportunities to engage chefs and increase brand awareness.
  • Increased marketing activity with the Darling Downs Wagyu brand in Korea, including targeted in-store activations that helped drive a 25pc increase in sales.
  • Expanding the distribution of Darling Downs into new markets, including Australia.
  • The relaunch of the 1824 brand as a Wagyu-based entity, which contributed to an increase in branded meat sales. In its first complete reporting period, the 1824 brand had represented 12pc of all branded meat sales.

Innovating in sustainability

During the first half AA Co expanded its approach to sustainability, including investigating new insetting business models, making progress with methane abatement trials and considering new partnership and investment opportunities that will boost sustainability activity and outcomes.

  • More on the company’s progress in the sustainability space on Monday

Operating environment

Industry analysts report that the global oversupply of meat should begin to ease through FY26, as different markets enter rebuild phases, and Westholme, Darling Downs and 1824 remain well positioned, should this eventuate.

Cattle moving through the value chain and into those branded programs are enjoying the cumulative benefits derived from recent positive seasons, while key production drivers in the supply chain are improving.

Mr Harris said: “These interim results show how the company’s strategy has given AA Co a good platform for continued growth.

“The results are a credit to our team and hold us in good stead as we move into the second half.”

Questions:

Questions from analysts at the end of the briefing included a query about whether current meat sales volumes (around 8500 tonnes for the first half  – the highest in a long time) could be seen as ‘the new norm’ going forward, or whether there was a ‘pull forward’ effect going on.

“I’m really comfortable that the production volumes we are putting through are adequate for the business,” Mr Harris said.

“Some of this larger volume being seen is the impact of the expansion at Goonoo feedlot some time ago, that is now starting to work through the business, and normalise,” he said. “There’s no pull forward going on – this is a normal level of production, for the supply chain we have set up for at this present time.”

Another question asked about why average live animal price was lower than the numbers quoted in the Eastern Young Cattle Indicator daily benchmark.

“It’s the challenge of interval reporting,” Mr Harris said. “We had a pretty good wet season last summer, so we were delayed at the start of this year in some live sales programs. But the live cattle sales programs represented a ‘mixed piece,’ covering may categories of livestock through the year including lower value cull cows through to live export – not just young cattle as represented in the EYCI.

“And you really need a full-year to equalise throughout the period. This first half was a mixed spread of cattle.”

Another question asked about more recent Wagyu beef prices, since the end of the previous reporting period.

“A number of of analysts through the recent period have suggested Wagyu beef prices in a lot of markets have dropped from 25pc to 35pc. I think how AA Co’s brands have performed over that period is a testament to the value of our Wagyu brands, our customer relationships and the spread of where we distribute our product around the world. While it’s a disappointing result, relative to the broader market we have out-performed that significantly.”

 

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