Australian Agricultural Company Limited

Thank you for standing by and welcome to the AA Co. FY21 Fall Year Results Release. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question via the phone line, you will need to press the star key followed by the number 1 on your telephone keypad. If you wish to ask a question via the webcast, please enter it into the Ask a Question box and click Submit. I would now like to hand the conference over to Mr Hugh Killen, Managing Director and Chief Executive Officer. Please go ahead.

Good morning and thanks for joining us to discuss AACO's full year results for financial year 2021. I'm Hugh Killen, Managing Director and CEO of AACO and with me today is our Chief Financial Officer, Nigel Simmons. I'm going to start by taking you through some of our key outcomes across our full year performance. I then want to go through the progress we've made in FY21. I'll provide a commercial overview and drill down into how our brands are driving progress and we'll then have a look at how this is playing out by region around the world. I will hand over to Liza to take us through the financials in more detail and I'll finish with an update on our operating environment as we move into FY22. Let's turn now to the executive summary on slide number four. I'm pleased to report that we've consolidated our first-part performance across the full year. FY21 has been dominated by uncertainty across many industries. In particular, food services face ongoing disruption across our key markets around the world. These risks continue, despite progress in virus suppression and vaccination in parts of the world. In FY21, our commitment to a simpler and more efficient AATO has been critical to navigating this uncertainty. This has helped us improve operating profit and statutory EBITDA in FY21 compared to FY20 and we've been able to deliver a positive operating cash flow result. Our strong brand portfolio and distribution partnerships have also helped us connect with new customers and respond to changes in our markets. Overall, this has helped improve our average price per kilo and this has been driven by increasing the proportion of meat sold through our Westcombe and Darling Downs brands. The enduring value of our underlying assets has also delivered important stability through this period. We continue to see strong improvement in our property values which continue to strengthen over the longer term. And this has translated into a solid increase in the net tangible asset value of the business. Turning to slide 5. External forces and recidivism continue to impact our results. Australia's overall cattle vert is described decline in response to successive drought and flood challenges. This is reflected in the marginally lower AAPO herd size in FY21. While drought conditions have been eased, we continue to see below average rainfall across our properties. And three years on from the devastating Gulf floods, our properties there are still recovering with limited pasture response. One of the consequences of these seasonal impacts is lower calving rates. These take time to flow through the flood chain before impacting mature animal numbers. In FY21, our lower calving rates over the last few years have resulted in reduced overall meat production volumes. And lower volumes are primarily driven at 21% or $68.6 million decline in FY21 revenue compared to FY22. Lower volumes are expected to remain in FY22. Importantly, our herd rebuild has commenced with a 47% increase in calves at FY21 compared to the prior year. As this rebuild flows through our supply chain, we're likely to continue with some supplemental cattle purchases. More broadly, the uncertainty which has impacted FY21 is likely to continue for FY22. We'll continue to monitor and adjust to changes in our markets and in the wider economy. In this context, the key drivers of shareholder value at AACO remain. Strong brands, supported by simpler and more efficient business. Turning now to slide 6 and progress made in the challenging year. I want to go into more detail about these key values like this and the progress we've made in FY29. The pillars for our business remain. Our value, our team, our operations, are focused on customers and consumers and respecting what makes it possible. The key elements of our strategy remain. Connecting with our customers and consumers by strengthening our brand portfolio. Delivering for our customers by building the best routes to market. Maximising revenue through strategic growth and investment. Getting the most out of our assets and operations to optimise the value of every part of our business. investing in AACO's next 200 years through a company-wide focus on sustainability and continuing to strengthen the AACO team through our high performance culture. Each of these elements have been critical to helping AACO navigate uncertainty in FY21. We've continued to improve product allocation across our brands and markets to secure maximum returns. This has included further streamlining our brand portfolio. In FY21, West Ham and Darling Downs represented 74% of our branded meat sales. In parallel, the strength of our global distribution network has enabled us to access new retail channels and online gourmet marketplaces. This has been vital to connecting with new customers despite the impact of COVID-19 on food service and international travel. And we have strengthened our talent and leadership capability in key functional roles across the business. to keep supporting our branded beef strategy. As a result of this work, we've driven an 8% improvement in overall price per kilo. We've generated $76 million and reduced operating expenditure compared to FY20, and we've progressed our sustainability agenda in FY21, including launching our beef, cattle, herd and management carbon projects. Turning now to slide number 7. Through the challenges of FY21 we have focused on maximising returns from every cut of meat we produce. This means ensuring the right cuts are available for the right market opportunities at the right time. This strategic market allocation has helped drive an 8% improvement in price per kilo compared to FY20. In particular we have focused on adapting to increasing at home consumption. and the rise of the home chef, including partnering with gourmet marketplaces and premium retail specialists. Targeted digital marketing campaigns and improved product branding on menus and also in stores. And increasing the proportion of AACO products moving through West Home and Darling Downs to 74% of all branded beef clothes. Today, 80% of our higher value loin rump cuts are sold under our West Home and Darling Downs brands. This is important because West Ham and Darling Downs have together achieved annualised price per kilo growth of 17% since FY19. And this has underpinned our overall annualised price per kilo growth of 8% over the same period. In addition to West Ham and Darling Downs, our Wallara brand placards are on the world's top fine dining restaurants. This market has been directly impacted by COVID-19 in FY21. while ARA remains a key strategic priority for AATO as the food service sector begins to rebuild. Getting maximum price per kilo has been even more important in FY21 as we face headwinds impacting overall meat volumes. The average F1 wage and life cycle is long at three and a half years from conception and birth through to meat production. This means that when flood and drought impact our carbon rates, This takes time to flow through to reduce meat production volume. In FY21 we really began to feel the effects of successive years of drought and the flood on carving rates, with overall meat sales volume down 19% compared to FY20. Securing premium prices for products through our quality grants is even more important under these circumstances. Moving on to slide 8. On this next slide, I want to explore the benefits of branded beef sales a little more and discuss what this means for AACO moving forward. As a general rule, 15-20% of meat from an animal is the high quality loins and rumps category. These cuts can be sold at a premium price through a strong brand like West Home in Darling Downs. Since 2019, AACO's price per kilo for loins and rumps has improved 10% each year on a compound basis. and at FY21, 80% of AACO loins and rumps were sold under West Home and Darling Downs. Further down the carcass, 35-45% of meat fits into the BBQ and secondary cut category. So far, 63% of AACO's BBQ and secondary cuts were sold under brands. 59% of BBQ cuts are now sold under Darling Downs, and 55% of secondary cuts go into branded sales. ASO has achieved 70% annual compound growth in price per kilo for barbecued and security cuts in 2019, and will continue to increase the proportion of these cuts sold through branded channels. The remaining 35-40% of meat produced is in the trim category. At present, the vast majority of trim is sold as a commodity, with little product innovation or added brand value. This suggests there's potential to improve value derived from this category. and this is an area of potential growth which we'll be exploring in the future. Turning now to slide number nine. You can see how important our brands are to realising the value of the beef we produce. I want to delve a little deeper into how we have built the value of our West Home and Darling Downs brands in FY21. As mentioned above, West Home has grown from 11% of our overall meat sales to 25% in FY21. The team has worked hard to build brand equity and drive awareness, particularly in key markets in the US. As you can see, we have more than tripled its following on Instagram this year, with the majority of the audience being in the US. And in the years just gone, we launched our first paid digital marketing campaign in partnership with chefs in Australia and also the US. We've also pursued new direct-to-consumer channels during COVID-19. We've made West Home available via the Dold's Alley online formal marketplace in the US. In FY21, we partnered with Dole Valley to create online brand content, including using Dole Valley influencers to engage customers. Jumping now to slide 10. In FY21, we've seen the results of the work I discussed last year to reflect our branding career. The team evolved our new packaging and in-store activation across all 141 e-mart stores in South Korea. We saw support of this with a digital campaign for improved brand awareness with really significant results and we've seen high average consumer sales prices in FY21. As we build the value of these brands and deliver more products through them, we will realise more value for our investors and this is particularly important in the face of market uncertainty and headwinds in our wider industry. Turning now to slide number 11. Through FY21, this approach has driven positive outcomes across all our regions, with the acceptance of China, Europe and the Middle East. In North America, branded beef price per kilo is up 14% compared to FY20. This has been driven by successful growth in retail channels during COVID-19. As discussed above, the US has been the major focus of digital and social campaigns to drive brand awareness around West Coast. and we've continued to focus on at-home chefs for meal kit product innovations and online marketplace partnerships, including with high-profile chefs. In FY21, we sold 19% of AACO meat in North America compared to 7% in FY20. In ASA, we achieved 5% improvement in price per kilo compared to FY20. This was driven primarily by the strength of our Darling Downs brand presence in Korea. strong distributor relationships in other markets continue to support solar. We continue to respond to uncertainty in the Chinese market, which has been a traditional destination for ASO's trim products. To date, we have been effective in redistributing retail products to other markets and we will continue to explore these opportunities. You can see the proportion of ASO products sold in China decreased in FY21, offset by growth in the rest of Asia and also in North America. In Australia, we achieved a similar 5% improvement in price per kilo compared to FY20. The biggest driver has been continued improvements in our market allocation and mix. This has involved focusing on high-quality branded products for the Australian market and reallocating other products to high-value markets around the world. We continue to refine and build the value of our quality brands in Australia. This is important for the Australian market, but also because Australia is ASO's spiritual home. Our brand and success in this market is the core objective of our global brand and beef strategy. In Europe and the Middle East, ASO's sales directly felt the impact of COVID-19 on food service in FY21. Our major retail focus in the last year has been in Asia and North America. This has resulted in a drop in the proportion of ASO meat sales going through to Europe. We'll continue to monitor food service opportunities in the region and we are looking forward to the conclusion of free trade negotiations with the UK. With that, I'll now hand over to our CFO, Liza Simmons, who will take us through the financials into more detail.

Thank you, and good morning everyone. And thank you all for your interest in what has been a year of resilience in the face of significant disruption and uncertainty across our key markets. I will now take you through the financial highlights and provide some additional context. I can report that we have consolidated our good first half performance through the full year. And in the full year just gone, AACO delivered positive operating profit for cash flow. This is significant given the continuing impacts of COVID-19 and the impact of recent drought and flood events on overall leaf volumes. Our improved operating profit result reflects ongoing progress against our strategy. And of note, we have realised an 8% improvement in price per kilo, which reflects continued growth in our brand value. This improvement was offset by a 19% lower meat volume available for sale in FY21 compared to the prior year. And we have also achieved a reduction in expenditure of approximately $76 million, which includes $29 million of reduced adverse seasonal costs, $24 million of lower external backgrounding, external feed loss and processing costs as a result of lower volumes. and further significant cost savings realised across the business. Our progress has been supported by our strong balance sheet. Our net assets position remains strong, driving a significant improvement in net tangible asset value per share. And IACO's gearing ratio remains well within our governance, improving 3.1% year on year. We achieved a statutory EBITDA result of 99.3 million. and an improved statutory profit of $45.5 million, up from $31.3 million in FY20. And now, moving on to our profit loss statement on slide 14. Firstly, in regard to revenue, you can see an overall decrease of $68.6 million compared to the prior year, which includes a $29.6 million decrease in total meat sales in FY21. This reflects a 19% drop in meat volume available for sale, which is the result of low calving in response to recent drought and flood events, which have started to flow through to meat production levels. In this context, AACO's overall 8% improvement in price per kilo has been very important to our end of year position. This has allowed the company to report a positive operating profit of $24.4 million in FY21, and 17.7 million excluding dog keeper. AACO's cattle sales volume was lower in FY21 compared to the prior year. This reflects elevated cattle sales last year as a strategic response to drought conditions and these lower sales volumes were offset by higher prices in the market. On the cost side, we have seen the positive effects of our disciplined approach to operating expenditure as well as more favourable seasonal conditions. This has resulted in a combined $76 million reduction in expenditure overall. And as noted earlier, in part, this is the result of streamlining costs across the supply chain, including backgrounding, feeding, cattle transport and processing. We've also had an unrealised fair value gain of $64.3 million this year versus $49.6 million last year. The gain in FY21 was driven mainly by a $91 million increase in cattle values off the back of record prices in the Australian cattle market. This was offset by lower overall kilograms produced as our herd enters the rebuilt stage. Turning now to our next slide where we detail our positive cash flow results. In all, IACO achieved $18.4 million in operating cash flow compared to $20.1 million in the prior year. Our FY21 result was $11.7 million excluding JobKeeper. The key drivers of these results have been better revenue management through strategic market allocation, in turn driving higher prices, continued focus on costs across the supply chain and progress towards a simpler and more efficient AHO right across the business. You will also see on this slide a $33.8 million reduction year-on-year in net financing cash flow. This reflects a deliberate strategy to optimise finance cost payables with no impact on total available borrowing capacity. And now turning to slide 16 and our balance sheet. AACO ended FY21 with a very strong balance sheet position, including over $1 billion in net assets. This is underpinned by strong growth in the value of our land and herd. Wider market forces have driven higher livestock prices in the short term, with positive impacts on rural land values as well. But AACO's overall strategy has been critical in growing the value of these assets over time. This strong balance sheet position means AACO retains comfortable headroom in our existing bank covenants, and this includes approximately $185 million in available borrowing capacity across our debt facilities. and our gearing ratios remain well within our target range. And with that, I'll now hand back to Hugh. Thanks Nigel.

On slide 18, as a nearly 200 year old pastoral business, sustainability is at the core of what we do at AHO. This year we made progress on our sustainability agenda, including greenhouse gas abatement under our beef cattle herd management carbon project. This project is formally registered with the Australian Clean Energy Regulator. Our main focus is improving animal productivity to reduce lifetime emissions by improving how we breed, graze and handle our cattle. We've identified core activities to drive carbon abatement under this project, including improving animal conversion through genomic collection, increasing grazing areas through improved water access points, better pasture control through fencing infrastructure, and reduce paddle handling to improve yard infrastructure. This work aligns with ASA's Animal Health and Welfare Committee, which we also launched in FY21, as well as ongoing progress on our whole program. And in parallel, we're also reducing our reliance on fossil fuels. This includes more than doubling the number of solar-powered balls in our properties. There is more to come in this space for ASA, and we look forward to talking more about this work in our second sustainability benchmarking report, which will be released later this year. Turning now to slide 19 and changing consumer dynamics impacting our business. As we've talked about previously, long-term growth in the global middle class is driving sustainable demand for quality beef. This includes a continued focus on provenance and traceability. More recently, COVID-19 has precipitated growth in the home market, bringing high-quality branded beef into the home. The rest of the consumer channels are also growing through digital platforms, virtual cooking classes and restaurant quality meal kits. These new consumer trends are likely to continue during COVID-19 and also beyond. The vaccine rollout is also continuing around the world and we are watching the impact this is having on the food service market. At the same time, geopolitical uncertainty remains a feature of our market and this includes Chinese processing restrictions impacting beef sales. will continue to monitor these changes as they roll out in FY22 and beyond. Within this context, global wheat demand remains robust and the long-term outlook is largely positive. Population growth and rising household wealth are forecast to continue, particularly in Asia. In 2021, wheat exports are forecast to grow by 2% to 11.1 million tonnes, following declines in 2020. This includes growth in Brazil, India and the US, which will offset declines in Argentina, Australia and New Zealand. This has been driven in part by Chinese demand, where the ongoing impact of African swine fever continues to drive imports. Beyond 2021, cyclical forces in the US and Brazil are likely to limit growth in production and export as those firms move into a rebuild phase. We expect sustainable consumers' demand will continue to grow. There will continue to be a premium on provenance, traceability, quality and product innovation. Australian producers will be well positioned as our local herd rebuilding progresses. Within this context, the cattle industry in Australia is facing a unique set of challenges and also opportunities. Our national herd contracted in 2020 was the lowest level in 25 years. and the natural herd is now expected to grow by 5% in 2021. As producers look to retain their herd in better seasonal conditions, cattle slaughter levels are forecast to reach 36-year lows in 2021. These slaughter rates are not expected to return to average levels until 2023. In April we saw the supply constraints drive the ECU above 900t per kilo for the first time in history, and upward pressure on prices was likely to continue as slaughter rates returned to average levels. Looking forward, external forces will continue to impact AOK's overall meat production volumes in FY22. This will be in the back of the 19% lower meat sales volumes achieved in FY21 compared to FY20. On the other hand, we're already seeing a rebound in targeting rates, which jumped 47% in FY21 compared to FY20. And as we manage this herd rebuild, AOK will conduct some supplemental cattle purchase As always, we'll focus on improving our genetics as well as our land and animal management as we rebuild our herd. To finish, I want to commend the AOK tank for the results they have achieved in a really uncertain environment in FY21. We have faced lower carbon rates between 2018 all the way through to 2020 in response to drought and flood events and in line with the wire industry. These headwinds have started to impact our meat production in FY21 due to our average F1 wagyu life cycle length of three and a half years. This has driven a 19% decline in meat volumes for sale compared to the prior year with consequent impacts on urban use. These lower volumes are expected to continue in FY22. Our herd rebuild has begun with a 47% increase in calving rates in FY21 compared to FY20. We've made some important progress in FY21. in the face of significant disruption to the food service sector. This is reflected in our strong price per kilo and our continued transition to high-value brand sales. This progress puts us in a good position to drive more brand value benefits across more of our cuts and categories. Our strong balance sheet and positive full-year results give us a solid platform and will continue to focus on cost discipline and unlocking value across our entire supply chain. Overall consumer demand for beef remains strong. This is likely to continue to grow over the short to medium term. We'll continue to monitor market conditions and consumer trends on the ground. But our progress to date gives us confidence that ASO is in a strong position to benefit from changing consumer demand and keep driving value for our shareholders. That ends our presentation. I'd like to thank you all for your time and Nigel and I are happy to take any questions.

Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. If you're on a speakerphone, please pick up the handset to ask your question. If you wish to ask a question via the webcast, please enter it in the Ask a Question box and click Submit. Your first question is a webcast question from David Horsett with Tim World Party Limited. The three... With Argentina banning beef exports for 30 days, what will this do to world markets and particularly AAC?

So I was trying to get some context around that in my prepared remarks. I think the Argentina situation is an interesting one. We've seen immediate moves in, especially in the trim complex, prices move higher overnight. If we take a step back and look at where we're at from an Australian perspective, obviously we're in the herd rebuild here, and so supply through the cross-dressing is extremely challenged, and that will continue for a while longer. We've seen Brazil in particular killing 1.5 times its normal kill, so they're quite heavily into their cattle herd as well. And now we're seeing Argentina have significant issues with internal supply and food inflation going into an election year in Argentina. So I think these are all really... The US, on the other hand, has been actually in a cull phase because they're going through a higher significance out there and they've been selling off their herd at a very high rate which has resulted in very good profits for processors over there. So there is forecast to be a break in the season there so you could actually see a turnaround in those dynamics in the US as well. and the demand that we're seeing for red meat globally, in particular out of China, which has significant issues of ASF, as we've talked about, I think there is a chance to see, you know, a continued move higher in global red meat globally over the next six months.

Thank you. Your next question comes from Rodney Rodwell with Oban, Brunswick. and reads, I get the feeling we sell all the products we produce, and so increasing our market penetration adds little until we produce more. Is this true?

So demand for our product is extremely high, Rodney, and as I've been trying to explain in the remarks today, we will have lower supply and the impact of So for us, the important thing is making sure we're getting the right price for every kilo of meat we sell, make sure we get our market allocation and our market mix absolutely correct, which is what we've been doing, which is why we've been able to grow our brand revenue by 17% this year. And I think there is no further opportunity for us to do that, even in an environment where we have lower supply coming through. And I've talked about value as a product in our twin categories, for instance, in opportunities and more there. So while there is more demand than we have from a supply perspective, and that's obviously a good thing, there is opportunity for us in terms of our businesses and our brands to make sure we get our allocation, our mix, even better than it is now, and hopefully can drive prices higher as a result.

Thank you. Your next question comes from Phil Dunn with Dunn Holdings and reads, Does AA Co. offer direct online meat sales into Sydney? If not, who supplies this consumer market?

I feel like I get asked this question a lot and one of the benefits I think of COVID-19 is you can actually get restaurants, you know, people more easily in other markets. So in Sydney in particular, you can go to Have Rec Me and they've got an online marketplace and you can get AACO kind of ferry you can go into their shop and buy from them directly and they'll portion it for you there. So there's a number of areas you can get it. Obviously direct-to-consumer and online is an area that we're focusing in strongly, not just in Sydney but more broadly as well and that will be an area for us to continue to think about and try and approach in a different way going forward. I've talked about this at the heart here as well. There's an online marketplace in the US, there's an example called GoldBelly which is an example of where we're actually going direct-to-consumer.

Thank you. Once again, if you wish to ask a question, please press dial 1 on your telephone or enter it in the Ask a Question box and click Submit. We will now pause momentarily to allow questions to enter the queue. There are no further questions at this time. And that does conclude our conference for today. Thank you for participating. You may now disconnect.