Australian Agricultural Company Limited

Thank you for standing by and welcome to the Australian Agricultural Company Limited SY22 Half Year Results Conference Call and Webcast. 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, you will need to press the star key followed by the number 1 on your telephone keypad. To ask a question via the webcast, please place your question into the Ask a Question box and hit 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 thank you for joining AACO's past year results presentation for financial year 2022. I'm Hugh Killen, Managing Director and CEO of AACO and joining me today is our Chief Financial Officer, Nigel Simmons. I will start our presentation today by running through the key highlights of AACO's interim performance. I will then discuss our progress against strategy so far in FY22 and after this I'll go through our regional and grand progress for the half. I'll then hand over to Nigel to take us through the financials, after which I'll briefly discuss our sustainability strategy framework and I'll finish up with an update on our operating environment as we move into the second half of the financial year. Moving on to slide number four. I'm pleased to report that AACO has delivered a strong set of results for the half. Our operating profit increased by 28% to $30 million. We have continued execution of our branded beef strategy. Our team has improved average price per kilo by 9% for a strategic allocation to high-value markets around the world. We have continued to increase the proportion of branded meat sold through our West Ham and Darling Downs brands. And this work, together with continued cost discipline, has helped drive overall improvements in meat sales margins. This has helped push our cattle margins higher as well. We've worked hard to develop our new sustainability strategy framework. I would formally launch this tomorrow. However, I'll make some brief comments about this important work later in today's presentation. On the finance side, we've successfully refinanced our debt facilities, giving AACO increased capacity and flexibility for the future. and this will be integral to our next phase of growth as we build on that strong position today. Our balance sheet has strengthened further from a good position last year. The value of our net assets now exceeds $1.1 billion and AAPO's net tangible assets per share has increased to $1.88. This is all combined to live on the $83 million statutory net profit after tax. which is an $85 million improvement on the first half of FY21. Importantly, we've delivered these results despite lower meat volume sold, which I'll talk to in more detail on the next slide. As discussed at our FY21 full year results presentation, we've seen lower volumes of meat sales this half. This comes off the back of lower carbon levels between 2018 and 2020. as a result of prolonged drought conditions and also the Gulf Flood. Lower volumes have been reflected across the wider Australian beef industry. National herd levels reached 25-year lows in 2020, and the MLA's forecast disorder rates dropped into 36-year lows by the end of 2021, as a result of ongoing supply constraints. These rates are only expected to return to normal in calendar year 2023, and at AACO, we anticipate lower meat sales volumes through the rest of this year and also into FY23. At the same time, our AOK cattle herd rebuild is continuing well. Brandings are up during the half year. Total kilograms produced are also up 31% and this gives us confidence that production is continuing to move strongly in the right direction. Turning now to slide 6 and our progress against strategy in the first half of FY22. Our overall strategic focus is on delivering outcomes in three key areas. Consumer and customer centricity, operational excellence and our team. I'm pleased to report good progress across these areas in the first half of FY22. In terms of consumer and customer centricity, our strategic focus is on building stronger connections with our brands. In particular, we've continued to drive sales through our very strong Westone and Darling Downs brands. In the most recent half year, 83% of our branded meat sales were through these brands, compared to 75% in FY21. The team have been working hard to build brand awareness amongst consumers, and we've seen strong progress through our website influencer strategy, which has multiplied our audience reach by eight times. This work has given important results in North America in particular. where branded meat sales have increased 55% compared to the prior period. And this has been supported by strategic reallocation of higher value cuts into this market at premium prices. And this has supported an overall 9% increase in our average price per kilo of meat sold. Our second strategic focus is operational excellence. This is where we continue to concentrate on creating a simpler and more efficient market. Ongoing cost discipline has continued over half of good results. We've seen 13% lower cost of production this year compared to the first half of FY21. This has included production efficiencies for the supply chain as well as reduced adverse seasonal impacts. Another key efficiency driver within our operations is effective supply and demand planning. We're continuing to become more accurate and forward looking. helping to manage costs throughout the whole supply chain. And importantly, this helps us make better investment and operation in the cities as we grow. We've also continued our focus in creating a high-performance culture where our people can thrive. As part of this, we worked hard in refining our guiding purpose and vision, which we relaunched during the half. And we invested in the mental health first aid skills of our people. We also saw a 17% improvement in our lost time increase frequency rate compared to PCP and overall team engagement improved by 3 points per task. Now turning to slide 7 and that commercial review. Strategic revenue management is another core part of our business strategy and operations. This includes a relentless focus on maximising returns from every cart of meat that we produce and leveraging our global distribution network to get the right cuts for the right market opportunities At the right time. In the first half of FY22, this has produced important results. Overall, strategic market allocation has helped support a 9% improvement in price per kilo compared to the prior period. A particular highlight to note is our performance in North America, where our average price per kilo of branded beef salt is up 33% compared to PCP. This reflects a strong demand for higher marginal score loins and rumps in the region. Our team are able to redirect products away from Asia to capture these premium prices. Asia continues to represent our largest meat sales region at 53% of total meat sales revenue in the half. The Australian market is our heartland and very important to who we are as a company and we continue to manage volumes to optimise returns in this market. Across all regions we have seen COVID-19 vaccination rates wind back restrictions and drive a return to food service options for consumers and we'll continue to respond to this situation as it continues to develop. Moving on now to slide 8 and the development of our West Home brand. As mentioned previously, we've seen good progress in the execution of our branded beef strategy over the half year. A key component of this work is our in-market efforts to build brand awareness for West This has included engaging with customers and consumers through digital channels in North America. We've adopted the approach of engaging with chef influencers online, and this has been supported by creation of content designed to spark conversations between chefs. As a result of these campaigns, we've seen positive growth in engagement and audience reach. We've also continued to build brand awareness through our online gourmet e-marketplaces over the half year. and we are leveraging shopper analysis and insights from these sites to further develop our knowledge of consumer habits. Close to the home, we're continuing to refine and build the value of West Home in Australia. This includes continuing to support the food service industry in Australia as it reopens. So far, we've run a number of programs with our Australian food service customers during the half and we'll continue to partner with good initiatives that let us connect with chefs and the wider food service industry at home. Moving now to our Darling Downs brand on slide number 9. Our focus of Darling Downs in the first half of 2022 has been increased consumer engagement in South Korea, where we have launched our first promotion in South Korea to drive user-generated content. Earlier this year, I mentioned our Darling Downs brand refresh in Korea, and this has generated good results in terms of sales. Off the back of these positive results we extended that refresh of our downed brands into Hong Kong. I'll now hand 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 for Aoco. I can report that the business has achieved some notable highlights during the first half of FY22. Firstly, meat sales price per kilogram grew on average by 9% versus the prior period. This was largely off the back of optimising our strategic market allocation of products, combined with continued progress in executing against our brand's deepest values. The increase in price has offset lower volumes of meat sold during the period, as Hugh referred to earlier. The business has delivered increased profitability during the half. This included a 28% increase in operating profit and notably an improved operating profit margin of the percentage of sales of 20.9%. Both of these results were driven by improved sales margins across both meat and cattle sales. And for noting, the prior comparison period included $6.7 million in operating profit and $4 million in operating cash flow relating to JobKeeper. Net operating power flow for the half was a positive $17.3 million for the period. We've also seen a strong 7% improvement in net tangible assets versus year-end FY21, with further strengthening of our balance sheet. And now turning to slide 12, where I'll talk to revenue in some more detail. Overall total revenue has remained largely in line with PTP at $143 million. This result has been supported by higher pricing, which has been offset by lower volume sales. Meat-style breading has remained flat on PCP at $102.9 million, and this has largely been driven by a 9% increase in average regular meat sales price per kilogram, which was worth an additional $8.5 million this period. Notably, this was achieved despite an adverse foreign exchange variance of $6.9 million versus PCP. As referred to earlier, lower calving in previous years continue to impact the business, which has translated into an 8% decrease in volume sold during the half, also worth $8.5 million, which equally offset meat sales price gains. Cattle sales revenue decreased marginally on the prior period to $40.5 million. This has largely come off the back of 17% lower cattle sales volumes, worth $7 million, and this reduced cattle sales volume has been partially offset by a 19% increase in price, worth $6.4 million. The cattle price increases are reflective of the record high trading and restocker cattle market pricing the industry is currently experiencing. Now moving on to cost of production on slide 13. This half, we've seen a 13% decrease in cost of production versus the prior period. This comes off the back of improved seasonal conditions, as well as a 31% increase in kilograms produced this half compared to the prior period, particularly in the breeding part of our business. And more broadly, the business has continued to focus on cost. These results contribute to the overall cost of our F1 wagyu animals, which accumulates over their approximate three and a half year life cycle as they progress through the supply chain. As mentioned earlier, operating profit has improved by $6.5 million compared to the first half of FY21. This was largely driven by improved meat and cattle sales margins through higher average sales pricing. Also, as mentioned earlier, this was achieved despite the adverse foreign exchange variance of $6.9 million in sales. This could be looked at in conjunction with a favourable variance of $4.6 million for primarily in FXT gains and losses versus the prior year. Now moving to slide 15 and our profit and loss summary. In addition to the comments on operating profit drives already noted, we've also seen a strong improvement in net profit uptaps of $85 million versus half one FY21. This result comes off the back of a positive, market to market adjustment in the half of $87 million to the value of the underlying herd. This adjustment was largely driven by current record Australian cattle prices. Now moving on to our cash flow summary on slide 610. The business generated positive net operating cash flow for the period of $17.3 million compared to $22.3 million during half one FY21. The key drivers of this variance are outlined in the waterfall chart on this slide. These include increased cash expenditure, due mainly to higher insurance and freight costs, which were offset by the impact of lower cattle purchases and sustainable net worth and capital moves, and the receipts of JobKeeper in the prior period. And now let's go into the balance sheet on slide 17. IACRO's net assets now exceed $1.1 billion. reflecting strong growth in the value of our herd and land assets. This is translated into a high net tangible assets per share of $1.88. And in all, this constitutes a 7% increase compared to our full year 2021 results and a 22% increase compared to the same time last year. We also successfully completed the refinance of our debt facility here in the half. This has increased our borrowing capacity by another $50 million. and our total capacity is now $600 million, which leaves us with $240 million in available borrowing capacity. Our gearing ratios remain well within our targeted range of 20% to 35%, and we maintain substantial headroom within our covenants. This new refinancing agreement will assist the business through its next phase of strategic growth. And with that, I will now hand back to Hugh to take us through AACO's sustainability strategy framework. Thanks Nigel. I want to briefly touch on our commitment to sustainability. Sustainability has always been at the heart of AECO, as it is for all rural and regional communities. For almost 200 years we have chanced to become the most important country in Australia, and we take this responsibility very seriously. Tomorrow we'll take the next step in this journey and release our Sustainability Strategy Framework. This framework will be used to prioritise the work we do, and the goals we set ourselves as a sustainable business. This will include immediate steps as well as longer term strategies that are our blueprint for action. And this work will underpin the company's future as a food producer and also as a landowner. Moving to our operating environment. We're starting to see a number of important dynamics playing out in the global beef market in FY22. While we seem to focus on more premium and less commoditised products, these dynamics will have important implications for ASO. The first of these dynamics is very strong global demand for beets. Continued protein shortages in China as a result of African swine flu are contributing to this demand growth. And we're also seeing increased demand from developed markets as COVID-19 restrictions are lifted. The second important dynamic we are seeing is clear emergence in strength on supply. Supply from seed export players including Argentina, Brazil and Australia already appear to be restricted and US production and export numbers are forecast to be lower in 2022 and this reflects the likely peak in the US herd rebuild this year. Turning closer to home is slide 21. The national herd rebuild is still going on in earnest as producers look to rebuild stock. Demand exceeds supply in the market, which has helped drive the equity to an all-time high this week. Florida rates are forecast to reduce to 36-year lows this calendar year, and the MLA are suggesting Florida will only return to normal levels in calendar year 2023. Off the back of these macro themes, we expect these high cattle prices to remain for some time. In closing, I'd like to thank the AOK team for their continued hard work through the first half of the year. We've made material progress executing against our strategy and we have delivered a strong result. Moving forward, our focus is on continuing to execute against our brand of beef strategy and this still remains the strongest pathway to delivering long term value for our shareholders. Thank you for your time this morning and this ends our presentation and Nigel and I are happy to take any questions.

Thank you. If you wish to ask a question via the phone, please press star 3, 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. We'll pause a moment for any questions to register. Thank you. Your first question comes from Jonathan Snape from Bell Potter. Please go ahead.

Hey, guys. Can you hear me okay? Hey, John. No problem.

Yeah, hey. Look, I've got a couple of questions. One, around the pricing move that you got in the first half, you called out the part of it was, I guess, moving stuff to different markets. How much of that 9% gain do you think was, I guess, the underlying commodity value move relative to, I guess, mix in there? And then how should we be thinking about that in the second half? Like, is there a difference in the mix profile that you've got on hand?

I don't know. I think that's a fantastic question, obviously. One is, you know, there's rising tide. Does the rising tide lift or both? And I think to an degree, obviously, we're seeing very strong demand and dynamics to resonate more broadly. We're obviously getting the benefit of that. But we talk about optimising our revenue and making sure we allocate correctly across the market. That's definitely a factor in it and one of the things we're doing is chasing down opportunity in a very targeted way, which is another reason why you see product move from Asia into the US at the moment. So that gives us the ability to take advantage of the current dynamics but it also gives us the ability to optimise our overall allocation.

Okay. And look, I'm just trying to figure out sourcing. I think you guys flagged back at the full year that there'd be quite a bit of external sourcing of cattle this year. And looking through the numbers, it didn't look like there was much at all, like maybe a couple of million bucks if I was going through the cash flow. Is there a shift in the program, or should I be expecting that there's more external sourcing to come in the second half than maybe we saw in the first half?

I think the first thing is we are, as we've been talking to the market, we've been describing around droughts and floods etc. We purchased $14 million worth of cattle in H1. I'd expect to see some supplementary purchases as we close during the second half of the year. The important thing I think to note John is those purchases are also done on a margin basis as well. Our ability to look through from a margin perspective before we buy those cattle is a really important part of the results as well. Clearly, we'll remain supply constrained as the Australian industry does for the next little while. I think some artillery purchases will be required in the second half of the year, but they're pretty well managed.

Alright, great. That's a good number. That's what five halves of operating profit, if I'm reading it right.

That's right, mate. Yeah, no, it's a really pleasing result under the circumstances, so we're very happy with that. Great. Thank you.

Thank you. Once again, if you wish to ask a question, please press star 1 on your phone and wait for your name to be announced. We'll pause this again for any further questions to come through. To ask a question via the webcast, please type your question into the Ask a Question box and hit Submit. Your next question comes from Paul Jens from PAC Partners. Please go ahead.

Thank you. Paul, how are you?

Well, thanks, Paul.

Thanks, Claire. Similar to what Dana was saying, you've got operating profit over five hours. I just wanted to talk through a few metrics around the cash flow and how you are looking to optimise the operating cash flow and the free cash flow now and into the next couple of years.

I might nod you. You might want to take that question. I think as we've shown over the last few halves, we've continued to demonstrate an ability to deliver a positive operating cash flow, both from that continued discipline on top side, and we've made continued progress on that over the past three years, but also really a relentless focus on maximising value from a revenue perspective that we've derived over the whole of the animals. and clearly the focus for our branded beef strategy remains our primary focus. So really looking at close to revenue and cost side pull to really drive maximum value across the supply chain.

Okay, and I suppose, how far are you through, Nigel and Hugh, on the, I suppose, the higher-end branding of the beast versus, I suppose, the cost-out story? So maybe you can talk about the percentages of the way through on the cost-out story and the percentages of the way through on upgrading to that high-grade, obviously, Costa Wago and other brands.

If you've heard me present this, talking about creating simpler and more efficient AACL, I'll never take away that focus on cost. This is obviously a very cyclical business and you need to make sure you manage it throughout the cycle. So we'll continue to do that piece. As you can see in terms of price per kilo, we've changed the growth in our brands as long as the percentage of meat that's pulled under our brands continues to grow. You know, our focus on, you know, team markets, especially now that COVID's starting to wane, I think will be a key part of the strategy and continue to build brand awareness, especially in those really critical markets such as the US. So I don't know if I'll put a percentage on our journey in terms of brand building, but, you know, that's something that's absolutely key for us. And brands take a very long time to build, but we're starting to see really positive traction in terms of West Home and Darling Downs in particular now. And I think there's a whole lot of opportunity there to continue to grow those brands and the focus we're putting into them. I would say just to echo the point that Nigel was talking about in your first question and focusing across the entire carpet. For us, we need to optimise every kilo of beef that we sell and from a brand perspective, there are absolutely options for us to actually build out and add value in different cuts in different parts of our business outside of just our premium and downsprings as well, which is a key part of our strategy that we'll be working on over the next period.

Thank you all for that detail. And the final area is just the, what sort of operating cash flow to asset sort of ratio are you after? You know, an all-encompassing type number, is that something that's in your board path?

Well, it's something that we know as a board, and many things have been obviously discussed, but I don't think, I don't know if you want me to share here at the heart of your mind.

All right, well, you're going in the right direction. Obviously, there's a bit of a hit there with COVID this past, but, yeah, the general direction is very solid, so well done to you and the team. It's not a mean feat.

No, no, thank you, Paul. I mean, obviously, COVID's been a difficult situation for all companies to manage, but I think that the company's navigated that pretty well, so thanks for your question.

Okay, thank you.

Thank you. Your next question comes via the webcast. The question is, what's the future of the meat processing facility outside of Darwin?

Thanks for the question. Look, I've been on the record a number of times now saying that I believe there is absolutely key strategic value in Livingston as a cornerstone asset, especially for the north. You know, I think I gave pretty good context in terms of my prepared comments and, you know, At the end of the day, I don't think the MLA are forecasting that to return to normal levels until sometime like 2023. So, from my perspective, the fact that the Livingston facility is not operational in that environment is a really good thing. I absolutely, and the company shares this aspiration to have that access. I don't think, given where we are in the cycle at the moment, it's particularly confusing for the start-up, but we are working hard to make sure that when the conditions are right, that the asset is in the right position to be able to restart effectively and efficiently. So it's a supportive comment around the Darwin facility. I think there's a lot of optionality there. We retain that it's a small cost operation to support it, but certainly at the right time, I think it's an asset we'll be looking to run.

Thank you. Your next question via the webcast asks, when will the next revaluation of property assets be completed?

We do a revaluation of our property assets on an annual basis. So, actually, it takes quite a long time to do, actually. It takes a few months for us to run through, given the size of the business. And that starts in the next few weeks. And we don't report our revaluation until the full year on 31st of March.

Thank you. Your next question asks, please explain company attitudes to retaining heifers from a branded program versus feeding them. Are you retaining significantly more heifers?

Look, our focus is always on maintaining AAK's core herd to support our branded beef program. So obviously there's a balance between having the right breeding stock coming through from the heifer perspective and obviously supporting our branded beef business. Now we don't the mix of that, but ultimately given where we've been from a seasonal perspective as well as the industry in terms of the impact of the drought and the flood, we're retaining as many productive females in our herd as we possibly can. So we'll continue to do that. That's a fine balance between actually making sure we've got the right number of cattle in our feedlots for our branded program, but ultimately we want to make sure we have the right cattle on hand from a breeding perspective. productivity of the female herd both in terms of the age of our cow herd and the efforts retained across AAK were very supportive of growing that herd in the right way over the next couple of years.

Thank you. There are no further questions via the webcast. We'll pause a moment for any final questions to come through. Thank you. There are no further questions at this time. And that does conclude our call for today. Thank you for participating. You may now disconnect.