Australian Agricultural Company Limited

Thank you for standing by and welcome to the AACo FY21 half-year results announcement. All participants are in the listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Hugh Kinnan, CEO and ND. Please go ahead.

Good morning and thanks for joining us to discuss AACO's Half Year Results for Financial Year 2021. I am Hugh Simmons, AACO's Managing Director and CEO, and with me today is our Chief Financial Officer, Nigel Simmons. In today's presentation, I'll take you through some of the highlights across our half year performance. I will outline our fifth response to COVID-19. which has had such a significant impact on the world and on our industry this year. I will then take you through the progress we've made against our strategy over the years to date. After that, I'll hand over to Nigel to take us through the financials in more detail, and then I'll provide an update on our operating environment as we move into the second half of the financial year. We'll turn now to the key points for the half year on slide four and slide five. The story of AOK's first half is our disciplined response to unprecedented uncertainty in our industry. At the end of last financial year, every one of our markets was impacted by COVID-19 restrictions on dining and hospitality. Despite a good performance in the previous year, we had no certainty about market or seasonal conditions that lay ahead. I am pleased to report that we responded decisively to the threat of COVID-19. We focused on staff safety and ensuring business continuity. including working closely with state, territory and Commonwealth governments. We moved quickly in the market, leveraging our global supply and distribution networks, and we maintained our disciplined focus on cost across the supply chain. Together, these responses achieved a positive result for our first half. We've achieved favorable margins compared to the first half of last year. We improved operating profit and cash flow performance. We secured positive operating cash flows and we drove improvement in our average price per kilo of beef bowl. Our statutory Egypt data results were the half of $16 million. This was an $18 million improvement against the first half of FY20. These results underscore the importance of our strategy in good times and in difficult times. This is important because we will continue to be challenged in the coming months. We have previously announced overall herd reductions following the Gulf floods in 2019, and what are multiple years of drought. And these changes are broadly consistent with the overall shift in the national herd. The nature of our industry and our supply chains mean these reductions will flow through into internal supply production, which will result in lower volume of meat production in the rest of this year. We'll continue to face genuine uncertainty from COVID-19 in our consumer markets around the world. And we'll continue to face ongoing risks of seasonal variation at home. And more broadly, the global geopolitical environment remains uncertain in ways which have the potential to impact our business. But our positive half-year results in FY21 provide confidence. Our strategy is the right one for AACO. We are continuing to make progress against this strategy and this strategy positions us well to navigate both seasonal and also market uncertainty. I now want to go through our response to COVID-19 in more detail. As I mentioned before, Our primary focus has been staff safety and business continuity. We implemented protocol measures across all of our operations, in line with health advice. We made our plans and procedures available to the wider industry, and we immediately engaged with the state and territory governments to ensure we could safely continue cross-border operations. On the business side, we had to move quickly to protect my measurement from FY20, and let me remind you of the context of the time. In March 2020, every one of our 16 food service export markets implemented COVID-19 restrictions on dining and hospitality. Food service has been central to our brand B strategy from the beginning. We therefore had to execute a rebalancing of our sales towards retail channels. And we had to do it smoothly, and we had to do it immediately. I'm very proud of the way our sales and marketing teams responded. They immediately began identifying and assessing market changes and opportunities. They use their growing knowledge and in-market presence to strengthen existing retail channels and move us into new ones. They identify new directed consumer channels for us to trial and they leverage our distributed partnerships on the ground to gather intelligence and also help us to adjust. In parallel, our team at home builds on planned cost discipline measures aimed at optimising our internal supply chain. We also restrict your non-essential operating and capital expenditure. We implemented senior executives and board pay reductions for a quarter, and we temporarily reduced working hours for our corporate and commercial team members. In face of this very significant uncertainty, we also sought, and were eligible for, government assistance through the National Job Keeper Program. Together with our internal response, this support was important in maintaining business continuity. As a result, we were able to maintain staff and refocus our business. to navigate the impact of the global pandemic. For us, JobKeeper did the job it was intended to do. It helped us avoid significant disruption to our operations, our markets and to our people. This gives you a picture of the steps we took at the start of the current financial year and I want to thank the AACO team for their commitment throughout this period. We turn now to slide 8 through the clock and our progress against strategy in the first half. The steps we have taken have had a positive impact in the first half of this year. We've driven a 14.5% improvement in our average meat sales price per kilo. And over the period, our flagship left-home brand sales increased from 7% of overall meat sales to 22%. These results reflect continued growth in the value of our brand around the world. And they reflect our ability to leverage AECO's global supply network to deploy every kilo of product where it will achieve optimum value. These outcomes reflect ongoing investment in our sales and marketing teams and our distributive partnerships around the world. They also reflect the work we've done to drive a simpler and more efficient AACo at home. And this has been critical for ensuring we produce the right cuts for the right markets at the right time. A simpler and more efficient AACo has been crucial for our performance on the cost side We've shown strong cost performance this past by streamlining our supply chain. This is predominantly focused on limiting our exposure to external backgrounding and feeding, as well as cattle transport and processing. On slide 9, you can see how material the impact of COVID-19 has been for our business. And you can see where the team's response has produced an important outcome. We've got significant impact from revenue compared to the previous first half. across Asia, Europe, the Middle East and Australia from food service restrictions. But despite this, you can also see the improvement in our average price per kilo of meat sold and positive signs from our markets in North America and in Asia, excluding China. This is a great demonstration of our 10 deficits over the last six months. We're able to execute a shift in strategic allocation of products across a number of markets. Through our long-standing distributor partnerships in Canada, for example, we delivered significant volume in new retail channels under local brands and were able to try our new direct-to-consumer channels across digital platforms with positive take-up under our web-tone brands. In both these instances, our marketing and sales team did a fantastic job. Our distributor partnerships were crucial in identifying and capturing these opportunities and our entire operations team has worked tirelessly to deliver for these new channels. I want to make the point that these responses to COVID-19 were only possible because of the ongoing investment we have made as part of our branded lease strategy. This includes investment in our in-market sales and marketing teams, investment in quality distributor partnerships, and investment in efficiencies through a simpler and more efficient AACO at home. In particular, a strong performance in North America is a demonstration of the agility and resilience we have built into AACO through this investment. and our positive performance in Asia outside of China reflects a number of key initiatives. In particular, I note our Darling Downs brand refresh in South Korea, which is one of our leading and longer-standing retail sales channels. Running through all of this work is our commitment to the customer. From the beginning, our branded beef strategy has been about working with chefs and restaurants and building a connection with our customers. In developing direct-to-consumer sales, we saw the need and the opportunity to refine this approach in a number of ways. We deployed digital campaigns to target and funnel new customers to digital platforms. We created and launched our online video series, Cooking at Home with Westhome. We brought our brand into the home through our Westhome unboxing experience. And we launched the Plate for Good initiative to promote and support restaurants and staff that were so heavily impacted by COVID-19. and we launched our industry-first West Homes labour wheel developed at the University of Queensland to drive our unique brand experience. Our customer-centric marketing approach has been a key response to COVID-19, but it's important to note that this reflects our thinking from well before the pandemic, and as with our retail and direct-to-consumer approach in the first half, this enhanced customer focus will stay with us long after the pandemic. I'm now going to hand you over to Nigel who will take us through our financials for the half year in more detail. Thank you and good morning everyone. And thank you for your interest in what has been a positive half year performance for IACO in the face of great uncertainty and disruption. As you can see, there are some key positive financial highlights in the first half. We have achieved operating profit and cash flow improvements versus the prior year. And this remains the case when we exclude the positive impact of JobKeeper, which Hugh has referred to earlier. JobKeeper assistance totalled $6.7 million for the half, with $4 million of fees and cash payments to the end of September. Overall, our operating profit improvement reflects the continued progress against our brand of beef strategy. This included an average 14.5% improvement in our meat sales price per kilo through continued brand strength customer engagement and the strategic allocation of product. We also reduced operating and corporate expenditure by streamlining costs across the supply chain. This included savings in backgrounding, feeding, cattle transport and processing, along with a disciplined focus on optimising discretionary costs. And this resulted in a $22 million reduction in controllable cash costs. At the same time, adverse seasonal costs were reduced by around $28 million against the same period. This result has allowed AI Co to deliver positive operating cash flow for the half. Our balance sheet remains strong and our gearing ratio has improved. Together, these results have driven a statutory EBITDA result of a $15 million profit, compared to a $3.4 million loss in the first half of last year. And as Hugh has already mentioned, these numbers highlight the resilience of our business. They show that our branded beef strategy is progressing well. And the execution of this strategy has helped us work through the uncertainty of COVID-19 so far in FY21. I'll now turn to our P&L on slide 13. As mentioned before, we achieved a positive operating profit result of $23.5 million compared to $6.3 million in the first half of last year. And excluding JobKeeper, our operating profit is $16.8 million. This was achieved despite a reduction in overall revenue. which means we are generating stronger margins off the lower sales base because we have improved our average meat sales price per kilo, cattle sales pricing per kilo has increased in line with overall market increases, and our disciplined focus on costs and realising efficiencies across our supply chain is working. And as mentioned already, we have secured a $22 million reduction in controllable costs for the period. These cost reductions, combined with $28 million of reduced adverse seasonal costs compared to half one last year. Our cost discipline during COVID-19 has also included reduced non-essential travel and expenditure and pay reductions for the board and senior executive team, along with temporary reductions in working hours for commercial and corporate staff. And now turning to slide 14, I'm pleased to report a positive operating cash flow for the half. This result is 22.3 million. compared to $11 million in the prior year. And our results for the first half was 18.3 when we excluded JobKeeper. And as I've mentioned previously, this reflects our continued progress against our brand-to-beat strategy, efficiency gains and value realisation for a simpler and more efficient AI code, the identification and capture of new market opportunities, strategic allocation of products across our markets and our rapid coordinated response to COVID-19. The same strategic focus will continue to drive us in the future. We will continue to focus on optimising cash flow and operating expenses and this will remain particularly important as the world continues to navigate uncertainty around COVID-19. And now to our balance sheet on slide 15. You can see we have maintained our strong balance sheet position at the end of the half and our gearing ratio has improved compared to the prior period and is well within our target range at 27.7%, excluding the impact of AAFB16. The strength of our balance sheet and assets will continue to underpin our branded beef strategy going forward, and as we work through the ongoing challenges of COVID-19. And with that, I'll now hand back to Hugh to take us through our operating environment. Thanks, Nigel. Turning now to the outlook for Australian beef. International demand for red meat remains strong. Australian beef continues to benefit from long-term global trends in middle-class demand, and this is compounded by the ongoing effects of African swine fever and Chinese pork supply. COVID-19 has changed the food service industry globally, but customers are finding new ways to satisfy their ongoing demand. Menus are adapting to cater for lower in-venue capacities, and customers are increasingly searching out restaurant dining experiences in the home. including through online food marketplaces. The rise of the home chef has been fueled by growing engagement with virtual cooking classes by well-known chefs, and rapid growth in the availability of restaurant-quality meal kits for at-home dinner events. The inherent uncertainty of COVID-19 means we have to be prepared for a start-stop recovery in the global food service channel, and it is likely that consumer behaviour will centre around the home for the next whole 18 months, where eating in is the new going out. Over the coming period, we also need to be prepared for ongoing uncertainty in terms of access to the Chinese market. In particular, this has potential to impact our trim meat category, where China has traditionally provided stronger prices than other markets. On each of these fronts, the good work our team has done in responding to COVID-19 will position us well to continue to benefit from positive long-term trends. We've shown great resilience and capacity for adaption this year, and this can only benefit ASA going forward. Turning now to the outlook for the Australian cattle industry, which is on slide number 18. There are a number of important dynamics playing out in the Australian cattle industry at the moment. We have recently faced compounding drought cycles and bushfires in key parts of the country, and as a result the national herd is forecast to reach its lowest level in 20 years. Flying on from this challenge, cattle slaughter rates in the eastern states are down significantly, compared to the first quarter of calendar year 2019. This is expected to flow into a 17% decline in national slaughter rates in 2020 compared to the 2019 calendar year. On the weather front, forecasts suggest a laminar event for the current season. Potential seasonal improvements to reduce slaughter rates could lead to growth in the national herd and together these trends are likely to impact prices in the market. Looking forward now from the AACO perspective which is on slide 19. The impact of prolonged drought conditions from 2018 to 2020 and the gulf flood from 2019 are still being felt. At AOK, this has driven a strategically stopping program over the last few years. And at the end of last financial year, we announced an overall herd decrease of 19%. Long lead times in our industry from animal conception through to final meat processing means that reduced herd numbers take time to flow through into meat production. We started to see this impact at AOK meat production volumes in the first half of this year, which is down 9% compared to 2019. And this will continue to impact meat production volumes for the rest of FY21, both for AA Cove and also nationally. We also expect cattle sales to reduce nationally, should more balanced seasonal conditions emerge. The outlook for markets will also continue to be uncertain, as COVID-19 continues to impact the northern hemisphere. We note that the global cases increased significantly in October. The northern winter is likely to affect our key European markets and the impact in North America remains highly uncertain. We're also cognisant that ongoing geopolitical uncertainty has the potential to impact different markets and also different segments. So, we'll continue to monitor this impact very closely and we'll continue to drive growth in retail, online and direct-to-consumer channels wherever opportunities are identified. Our first half results tell a story of the resilience of AECO, of our value proposition, our strategy, and most importantly, of our people. We do face continued uncertainty and anticipate the declines in meat production volumes as we move forward. But execution of our strategies delivers strong results so far in FY21. And this actually puts us in the best position to navigate the uncertainty we face and to continue to deliver real value for our shareholders in good times and also in bad. We thank you for your time today. And we can now take some questions.

Thank you. At this time, if you'd like to ask a question, please press star then 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star then 2. If you're on a speakerphone, please pick up the handset to ask your question. To ask a question, please press star then 1. Let's pause to see if there are any questions. We do have a question from Mark Berry of Berry Planning. Please go ahead.

Hi, I just had sort of three questions. First of all, this sort of cooking at home, that seems like sort of a new strategy. Can you just expand a bit more on that, like sort of operationally, are you like investing in things to make that sort of happen? Imagine you've got to package stuff up and then get it out there. Then, you know, distribution-wise, how it sort of works, like in major centres, is it happening in Sydney and Melbourne and those sort of centres? Give a little more background on that.

Thanks for the questions, Mark. The cooking at home or the rise of the home chef, as I've called it before, it's actually, you know, it's not staying fashion unique. We've seen that the world over. And so what we're finding is that people can't go out or they're increasing lockdown. They've got access to high quality restaurant food stuff from direct-to-consumer channels. And so while people can't go out, they still want the restaurant experience at home with their families. So it's something that we've seen around the world. As I said before in my prepared remarks, we've been running programs such as West Home at Home where we work with a number of leading global chefs, especially on digital online platforms. We want to show people how to use that product and how to cook with it at home. And when they actually order our products through our distributors, we deliver West Home at Home in a pretty unique, what we call, unboxing experience, which really drives consumer engagement with our products. So that's working really well for us. I expect that's actually probably starting to remain post-COVID-19, but we're seeing that globally. In terms of take-up of this, as I said, we're seeing it globally. It's not unique to Sydney, Melbourne, Australia, but it's happening all around the world. and I think it's a really good thing that we can still interact with our customers in a way that actually drives recognition of our brand outside of just going to a restaurant.

Right, so you're sort of plugging into like other systems out there to get your product out there. So these shops have got their sort of, you're just sort of delivering stuff to the shop and then they're actually running the distribution and getting the product out to the consumer. That's what's happening, isn't it?

Well, the way that our model works is that we have key distribution partners in all the major centres where we export to, and we work with our distribution partners to get our product to market, whether that's a chef, whether that's a consumer or other channels that we sell into. And so what's been notable in our response throughout the year is that our ability to pivot out of what's been largely a food service category into retail, and also we've been testing direct-to-consumer, as we said before. We work hand in glove with our distribution partners globally.

Right, okay. Is it still a very small percentage of sales? Do you have any numbers on that?

We don't set out our direct-to-consumer sales. What you'll see in our numbers is, and it's unique to our first half this year, is we've actually moved much harder into the retail sales channels as well, and that's obviously as well as direct-to-consumer channels and the fact that our distributors are getting to The fact that the selling warrants and retail has obviously produced a better price per kilo as we've announced today.

Right, okay. Can I ask about slide 9? You've got sort of the regional sales and so I think overall sales fell by 38%. Is that on one of the slides you have the numbers for that? And then this slide here, slide 9 is sort of showing how that's happened across different sort of areas. So you're sort of saying overall things got stronger in North America and Asia, excluding China, and then weaker across other areas. That's how you'd interpret that slide, isn't it? But overall, it was 38% down for AOK across everything.

Sorry, that's $38 million down?

No, 38% down, I think. So you've got a slide a bit further on where you've got your sales, I think, in the operating environment. You'll meet that slide on page 21. Oh, $38.8 million. Okay, so total $144 million down from $182 million.

That's correct.

Yep. And so I was just trying to understand how that interacts with that slide 9.

You'll see that the decline, so slide 9 relates to the meat sales profile and the overall revenue number that you're referring to includes cattle sales as well.

Right, okay, okay. Yep. Can I just ask a final question? The Darwin Abattoir, is that sort of just sitting in lost balls, or is there any sort of update on what's happening with that?

There's no material update with Livingston Beach at the half year. As we've been really clearly articulating to the market, it's still in a suspended state, and we'll continue to accept our options for what we think is a gateway asset as we move forward in the year.

Right. Okay. That's all I have.

Thank you. A final reminder, if you'd like to ask a question, please press star then 1. Mr. Kiven, let's pause for a moment to see if there are any further questions. There are no further questions at this time. Would you like to make some closing comments?

I'd just like to thank everyone for joining the call today and look forward to speaking to you and updating you in the full year.

Thank you. That concludes today's call. Thank you for joining us. You may now disconnect your line.