Processing

Cost of conversion continues to improve at AA Co’s Darwin plant

Jon Condon, 25/05/2016

THE first full-year of trading for the Australian Agricultural Co’s Livingstone Beef export abattoir near Darwin has continued to contribute positively to the company’s bottom line, financial analysts were told the morning.

AA Co Darwin LivingstoneAs reported separately this morning, AA Co filed a record net profit after tax for the financial year ended March 31 of $67.8 million in delivering its full year results to the market.

Within that, the first full year’s operations at the Livingstone Beef plant has for the first time provided some insight as to the new business’s financial and operational performance.

AA Co’s financials released this morning show that the company’s northern beef division (essentially the Livingstone Beef processing enterprise, and associated depot properties) produced an operating EBITDA loss figure of $9 million for the financial year just completed. That followed a $10m operating EBITDA loss the year before. The EBITDA figure looks all the worse, given the record high grinding meat prices into the US, and ‘rivers of gold’ processors further south were making for much of 2015.

Beef sales for the plant’s first full-year ended March 31 totalled 17,900 tonnes, (CW), worth on average $4.70/kg.

On the production and sourcing side, total throughput for the year was 17,600t, carcase weight equivalent. Of that, slaughter cattle purchases amounted to 14,500t (liveweight basis), at an average liveweight price of $1.71/kg.

Higher cattle costs, softer grinding beef market has impact

During question time, managing director Jason Strong said AA Co’s northern beef division, which included a chunk of livestock supply coming out of the company’s own grassfed division, had experienced a significant increase in cattle purchase costs in the second half of the year, as the market continued to shift in value.

“There was also some pressure on the 90CL grinding beef price in export markets, in which we have seen some improvement in recent weeks,” Mr Strong said.

“We have been reviewing our sales and customer approach for that sort of product over the past few months. But it’s a combination of things – a more sensible return on the Australian currency rate recently (see this morning’s separate story) will also help.”

Mr Strong said the main internal measure used around the Livingstone plant’s performance was the cost of conversion (live animal to boxed meat).

“From an efficiency/improvement point of view, we are certainly very happy with the progress being made in reducing that cost of conversion, on a per kilo basis,” he told this morning’s briefing. He did not offer comparative figures on how that has changed.

An analyst asked whether the 40pc of the cattle volume processed at the plant from external sources was making a positive contribution. “I’m just trying to figure out whether that is making a positive contribution in the second half. I’m trying to figure out how much margin contribution is internal transfers, versus externally sourced volume?” the analyst asked.

“It’s certainly a combination of both, but the biggest one-off shift in the second half was the internal transfer price,” Mr Strong said.

“It’s been an interesting ride with the plant at Livingstone,” he told Beef Central, in response to a question.

“We’re in a pretty good spot with the plant now, and we’re certainly happy with how it is going, and where we ended up at the end of last financial year.”

“On the performance side, it still contributes to the business positively, but we’re very conscious of wanting to make sure we keep talking about ‘performance’ on a supply chain basis.

“The cost of conversion figure continues to reduce in front of what our planned numbers are. From a financial performance point of view, we are very comfortable with the contribution Livingstone is making, and the progress being made on the efficiency side.”

“But it’s still a new plant, and we still have hiccups,” Mr Strong said. “But nothing significant. There’s no major requirement or deficiency that needs to be addressed in the operation of the plant.”

Livingstone was now running largely at a full single-shift, between 460 and 520 head a day.

“The good thing is that carcase weights have been a little higher for this time of year than what they have been previously, so we’re putting through more kilos per beast,” he said.

“We still very much in fine-tuning mode – there’s bits and pieces that you find after a year of operations that you still might change or do a little differently. It’s not unlike a new house.

“But despite that, we’re in good shape and really happy with where it’s at and how it’s performing.”

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  1. Vince O'Brien, 26/05/2016

    I was interested in the Livingstone operation in the first full year …….
    17,600 tonnes cwt was produced, which on the basis of a 260 week-days less 10 public holidays for the Territory would amount to an average day’s production of 70.40 tonnes cwt.
    The full shift killed between 460 and 520 head/day which translates to an average (high) 153kg cwt @ 460 head/day down to 135kg cwt @ 520 head/day for the year. The mean of 490 @ 144kg is worth an average $676.80/head but that number is in itself meaningless.
    60% by volume was AA Co internal transfer which amounts to 10,400t cwt and 60% of the $9m loss or $5.4m translates as a net loss of $75/head if 460/day are processed and $66/head if 520/day die.
    Production was worth a gross $82.72m for the full year to 31 March, resulting in a net trading loss of $9m, so assuming that efficiencies of 2% are discovered and costs inc depreciation increase by 4%, AA Co needs to see the price received rise to $5.20 to break-even.
    If a single shift kills 135,200 pa, I would have thought a trading loss of around $80/head ($11m pa) is acceptable, depending on the cost of trucking to Townsville or Rockhampton. Jason Strong indicated carcase weight lifted during the year which is a bonus, but the kill floor will run red with more than blood if the wet fails again and the average carcase weight drops 15%.

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