Australian Agricultural Company Limited

Good morning and thank you for joining AACO's results presentation for financial year 2022. I'm Hugh Simmons, Managing Director and CEO of AACO. And joining me today is our Chief Financial Officer, Nigel Simmons. I will start our presentation this morning by running through the key highlights of our company's performance. I will then take a closer look at our progress against strategy in FY22 and how it has helped us deliver these results. followed by how our strategy will provide ongoing growth opportunities in the future and after this I'll go through our regional and brand progress for the year in more detail. I'll then hand over to Nigel to take us through the financials, after which I'll briefly discuss sustainability with you and I'll finish that with an update on our operating environment as we move into financial year 2023. Before I continue, let me tell you a little bit about AACO. The Australian Agricultural Company, known as AACO, is one of Australia's largest integrated cattle and beef businesses. Established in 1824, AACO is the oldest continuously operating company in Australia. We own and operate around 6.4 million hectares of land across Queensland and the Northern Territory. At AACO, we undertake three principal activities. Distribution of high-quality ground and beef into global markets. Breeding, growing and feed-bottoming of our animals. and ownership, operation and development as partial properties. And it's important for you to understand our purpose and why we exist. We're evolving together to benefit future generations. To do what we do best we must continuously adapt and change. This is why we've been around for nearly 200 years and it is how we will continue to adapt to the major challenges of the future. The land we nurture, the people we grow, the animals we care for and the exceptional product are the hallmarks of our success and a responsibility we take extremely seriously. Our spirit of craftsmanship, combined with years of experience cultivating cattle on our pristine pastoral efforts, is unique to our country and our company. And we take great pride in that. It's what positions us internationally as the finest producers of Australian wheat here. But we are only today's custodians, and we feel it's our business to leave our world in a better shape for the generations to come.

Now, let's turn through our objective summary on slide number six. I'm pleased to report that we delivered an excellent set of results this year.

They are testament to our focus delivery on strategies, the improved performance of our brands and markets, and our drive to make AHL a simpler and a more efficient business. We delivered an operating profit increase of 105% to $49.9 million, driven mainly by improved operating margins. Average region meat sales price per kilo increased by 21% and cattle sales margins also grew. Our branded beef program continues to show strong progress. West Ham and Darling Gowns now represent 83% of branded meat sales. And we launched our sustainability framework, supporting positive change through our business, industry and communities. On the balance sheet, we successfully refinanced our debt facilities and saw further strengthening of our asset position. In addition to the $264.5 million increase in our past for profit and improvement values, the values I heard also increased by $199 million, helping to drive net assets to $1.36 billion and leading to a significant increase in AOK's NTAs per share to $2.27. Overall, our bottom line statutory net profit after tax increased by $91 million to $136.9 million. This is our strongest net profit result this listing on the ASX. Turning now to slide 7 and a closer look at our progress against strategy in FY22. The results we have delivered this year have come off the bankrupt tree winds under our strategic pillars. ASO achieved significant growth in the branded meat sales with a focus on price premiumisation. That resulted in a further 21% increase in waging meat sales priced per kilogram compared to F421. West Holme and Darling Downs now represent 83% of branded meat sales, an increase of 9% at the same time last year. And we also achieved significant growth in team markets, particularly North America where branded meat sales have increased by 56% versus PCP. We welcomed the successful launch of our Sustainability Framework in FY22, and it's set about building on this platform. In addition to launching that framework, AACO also generated 74,000 Australian carbon credit units through our Beast Cattle Herd Management carbon project. AACO is now an even safer and a better place to work. We've had a 10% improvement in lost time injury frequency rates compared to FY21. and we have gold-level recognition from Mental Health First Aid Australia. Our disciplined focus on costs and the drive to make AACO a simpler and more efficient business has also continued in FY22. This resulted in a 36% reduction in the cost of production in FY22 versus the total comparative period. Moving on to slide 8 and how we're positioned to continue building on our strengths in FY23. Our purpose and vision statement sit at the centre of our plans for growth. Leveraging the foundations put in place to continue delivering under our strategic pillars. A simpler and more efficient America, where we will continue to improve operational efficiencies and develop a data strategy focused on value creation. Delivering full potential from our brands, where we will focus on further building our presence in the USA and drive the growth of Westpac. Executing our sustainability framework, where we will look to accelerate our sustainability program through our five commitments, and work hard to mitigate our climate impact and also produce food in a way that benefits future generations. Developing our natural resources and assets, where we're extending our golf farming trials and exploring the potential for alternatives at that unit. Making AOTO a great place to work, which will focus on connecting our people to our purpose and amazing great leaders. We will invest back into the business under these strategic pillars. In doing so, we will be able to build on our strong FY23 results and further grow the company as we look to our 200th anniversary in 2024.

Turning now to our original performance. As we talked about at the half years,

Strategic revenue management is another core part of our business strategy and operations. This includes a relentless focus on maximising returns to every part of the net that we produce and allocating volume to our global distribution networks to get the right cuts to the market that will deliver the best value at the right time. This approach has been particularly important during the ever-changing landscape that COVID-19 gave us. Now let's have a look at the reasons in more detail, starting with North America. We've had a great year in North America with our branded meat sales increasing by 66% versus the prior year. This has come off the back of price and volume increases driven by return to food service, as well as our focus on targeted allocation of product, increasing webcams brand awareness and helping us manage sales across the entire area of the country. A combination of highly engaging branded content, digital paid and earned media, as well as using the right chef engagement, it's delivering new food for its customers, customer leads and commercial results. Our approach to this market has been intentional. We laid the groundwork for this growth during COVID and have been able to leverage our relationships and distribution network to achieve a 30% increase in branded meat past price per kilo. The USA will remain a key strategic market for AISO and FI23. And the further expansion of West Ham in the US market is a key initiative to delivering a full potential from our brands in the future. Moving now into Asia. Reduced sales value in Asia has come off the back of an intentional reallocation of volume away from retail into food service markets around the world as part of our overall global strategy. Despite higher value cuts being allocated to other markets, it was impressive to see the team still deliver a 6% increase in price. This price increase is mainly being driven by the strength of the Darling Downs brand in South Korea. Improved in-store navigation and brand visibility, which enabled a better shopping experience, helped Darling Downs retain a leading Wagyu market share with our premium marketplace partners, Emart, in FY22. This was supported by improved online and offline brand experience focusing on building education. and we look forward to continuing to support and grow this brand in Korea.

Jumping now to Australia on slide 13. This year the focus in Australia has been on price premiumisation through brands.

As with Asia, we intentionally reallocated volume away from this market to higher paying markets, which helped by a 7% increase in the average dollar per kilo in this region. West home sales grew in the order of 80% as we grew pricing off the back of improved brand awareness amongst consumers and its key menu placement were achieved. Australia remains our spiritual home and a key market for the business. Moving now to Europe and the Middle East on slide number 14. As the food service focused market, Europe and the Middle East had robust volume increases in FY22. We're satisfied with the progress we've made in this market. Training and education will be key initiatives in FY23 to improve branding awareness and to share the web game story. I'll now hand over to Nigel, who will run through our financial performance for the full year in more detail. Thank you, Hugh, and good morning, everyone. We appreciate your interest in AECO and what has been a notable set of financial results for FY22. Positively, we've seen higher profitability this year, with an increase in operating profit of 105% to $49.9 million this period, as well as a higher operating profit margin of 18.1%, which is up 9 percentage points this year. A major positive drive-up of our results is an average increase in meat sales price per kilo of 21% versus the prior year. This was achieved with price premiumisation through RAND, and the ability we have to allocate volume and touch across our major markets to achieve the best value. The increase in meat sales price has been instrumental in driving top-line revenue growth of approximately 4%. This helps to offset lower volumes of meat sold during the period, as Hugh referred to earlier. Net operating cash flow has increased by 32% to $24.2 million. and we have seen a significant strengthening of our net tangible assets position, which has increased by 30% versus the prior period. And now, turning to slide 17, where I'll talk to revenue in more detail. Total revenue for the period increased by $10.5 million versus FY21. This result has been driven by higher meat and cattle-style pricing, which was offset by lower volumes sold. Meat sales revenue increased on TCP by $8.5 million to $208.5 million. This was driven by a 21% increase in average weight in meat sales prices realised per kilogram, worth an additional $36.8 million this period. And importantly, this was achieved in the face of an adverse foreign exchange impact of $5 million versus the prior year. And as referred to earlier, this increase in pricing offset a 14% decrease in volume sold during the year, which was worth approximately $28 million. Cattle sales revenue also increased marginally on the prior period to $67.5 million. And this increase was due to a 15% increase in average price worth $8.9 million, which was partially offset by a 11% lower volume sold worth $6.9 million. The cattle price increases are reflective of the record high trading in re-profit cattle market pricing the industry has experienced this year. And now, turning to our profit and loss summary on slide 18. As referred to earlier, operating property improved by 25.5 million to 49.9 million in FY22. This was largely due to a combined increase of 28.7 million in meat and cattle sales growth margins. which came through higher average sales pricing and revenue as referred to earlier. We have also seen a significant improvement in net profit after tax of $91.4 million to $136.9 million this year. And this result was driven by a positive unrealised master market adjustment of $129.6 million to the value of the underlying herd. And now moving to our cash flow summary on slide 19. Another highlight of this year's performance is higher operating cash flow of $24.2 million versus $18.4 million in the prior year. This is our fourth consecutive year of positive operating cash flow generation, and comes off the back of the key drivers highlighted on this slide, including higher revenue receipts and positive movements in net working capital, partially offset by increased operating expenditure, as our key leverage produced during the year increased by 28%. and now turning to slide 20, our balance sheet summary. Our balance sheet has strengthened significantly this year, which has been supported by the continued growth in our pastoral property and improvements portfolio that increased by over $250 million over the year. This positive movement reflects substantial market increases in comparable property sales, as well as our management practices and investment in these properties. We also saw a robust growth in the value of our herd, which increased by $199 million overall this year. This increase was driven by higher Australian cattle market values for both Wagyu and non-Wagyu animals, as well as the increased total headcount following improved branding across the back of investment in the supply chain, and the company's internal breeding program rebuilding from the impacts of droughts and floods in previous years. The growth of the value of our property portfolio and herd has supported an increase in overall unit assets of 30% to $1.36 billion. And InterAriens is now valued at just $2.27 per share. And as mentioned during our half-year results presentation, we successfully completed the refinance of our debt facilities in FY22, which increased our borrowing capacity by another $50 million, bringing our total capacity to $600 million. which leaves us with approximately $231 million in available borrowing capacity at the end of the year. Importantly, our hearing ratio of 22.5% remains well within our targeted range of 22-35%, and we maintain substantial headroom within our covenants. The strength of our underlying assets, combined with the additional optionality of our increased borrowing capacity, positions the business well moving into our next phase growth. With that, I'll now hand back to Hugh to take you through AACO's sustainability framework. Thanks Nigel. FY22 marked the major milestone for AACO with the release of our sustainability framework and five major commitments in November. AACO has in addition to be the sustainability leader in the Australian pastoral sector. which is the first of its kind for the Australian beef industry, is the first step in helping guide our climate and sustainability activities since its launch. We have begun work on each of these commitments that we made at the same time. We are encouraged by the response from the industry and decision-makers in government and will continue to work with our stakeholders to achieve our desired outcomes. As we referred to earlier, this is a priority area in which AOK will leverage these results to invest in this Icon 3. We look forward to giving you a more fulsome update on sustainability as part of the release of the sustainability report later this year.

Moving on now to slide 23 and our operating outlook.

Turning our attention to the future, there are a number of evolving dynamics that we are following closely. Geopolitical risk is increasing on a global scale. China is experiencing resurgence in COVID cases and is taking stringent measures to combat this, and the conflict amidst Ukraine continues to unfold. These issues are likely to create continued disruption in global supply chains, which we do not see moderating in the next 12 months, and anticipate that this will exert upward pressure on costs. Adding to this, we're observing worldwide increases in inflationary pressures. US inflation figures have hit a 40-year high, and the Federal Reserve has started to increase benchmark interest rates to combat this. Closer to home, the Australian Reserve Bank has also raised rates earlier this month. In this environment, we are likely to see key input costs across entire base supply chain increase. On a positive note, we anticipate sustained price growth for quality protein in the future. This is expected to be driven by higher beef imports demand from China, while beef production is forecast to remain relatively flat as the major beef producing nations enter a phase of herd contraction. A strong rebound of food service will continue in our key markets. This dynamic will support the continued delivery of the full potential of our brands, as we also continue to invest in opportunities fuelled by the rise of the Home Chef. Importantly, Aoco's herb resort is continuing to progress well. We've seen increased kilograms produced for 28% this year. The head count of our herd has increased by approximately 42,000 to 382,000 heads. And our branding has increased materially year on year. This positions us well to take advantage of the rise in global demand for quality beef through FY23 and beyond. Finally, to a closing remark from slide number 24. In closing, I'd like to thank the entire AOTA team for their hard work to produce this result. I'm proud of what they have delivered and thank them for their efforts. We've made material progress executing events in our strategies and we've delivered a strong outcome. We're satisfied with the progress to date but there's more work to do and we're looking forward to moving to the second horizon of our strategy. AACO is growing. Moving forward, our focus is on investing back into the business and continuing to execute against our strategies. Thank you for joining us this morning. This ends our presentation. Nigel and I are happy to take any questions.

Thank you. If you wish to ask a question via phone, 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, type your question in the Ask a Question box and hit Submit. Your first question comes from John Dirks from CLSF, and he's asked, Given higher prices achieved on products, it appears volumes are down significantly since gross sales have only modestly improved. Is this a correct ready, and if so, has volume declined?

Thanks for the question, Donna, for two years.

I'll answer the first part of the question, and Nigel, if you want to expand, you can. Nigel actually referred to this question on slide 17 of our presentation. And in this week, the meat sales bottomed up 14% down. It's come off the back of the historic lower carving numbers we've had over the last couple of years, also including the drought in the Gulf side of it. So this is actually really well in line with the Australian industry reduction in herd. As I said in my closing remarks, really important from an AAPO perspective, our PLOs produced this year are up 28%. That's great news. And our herd has grown by 42,000 heads. So as we move into FY23 and beyond, those are pretty simple standards and pretty good steps actually to deliver a further revenue going forward. Do you think it's further on that one, Mike? No, nothing further from that here. Okay.

Thank you. The next question is a follow-up question from John Dirks. How does the price premium increase of 21% compared to the border market price for red meat, since the latter has also increased substantially?

I think it, again, thanks for the question. I believe it compares very strongly. The overall base price index, if you look at Mercado's data, is up around 12% for the year. And so 21% from an AI perspective is really good in that context. And it really underlines It's one of the flexibilities that AACO has got is that you can go across a couple of different markets. So, you know, depending where you are in that, you know, 100 day cattle, the shorter feed cattle, the margins that are very tight at the moment, given where both feed prices and using prices and cattle prices are. So, even on that, that changes as well. I believe that 21% is a particularly healthy scenario there.

Thank you. Your next question is a phone question from Charlie Kingston, private investor. Please go ahead.

Just a quick question, just considering how good conditions are with the cattle prices and land obviously skyrocketing as per your upward revaluations. I mean, just bearing in mind that, as you know better than anyone, that agriculture is inherently cyclical. Is there an argument to be made that potentially AOTA should be paying a dividend now or paying down some debt or even selling off some land to sort of capitalise on these buoyant conditions and is that a focus for you and the management team?

Charlie, thanks for the question. I think we now have enough time to explain during the prepared remarks today that we want to continue to invest back into the business which is pretty typical for agricultural businesses when you've got the right cash flowing out, trying to be part of the business. We'll continue to do that. It's one of the reasons why we see very good uplift in terms of the valuation of our properties. You're right, it is a really good time to be in agriculture at the moment and I believe the work that we've done at AACO can make the company significantly more efficient and simpler and have the right tools at its disposal. decisions will place us in a very, very strong position when seasonal conditions change in the future and absolutely, that is absolutely going to happen at some point. So the dividend question for you is ultimately that point of support and I know the Chairman will look forward to updating everyone on that at the AGM.

Okay, so there's not a firm target as to if you hit a certain amount of consistent earnings that you will start returning some of that in the form of a dividend or again, as The NTA is going up, but it's certainly not specific to AHO, but you are currently trading a discount to NTA. Is there a prospect of a potential buyback to close that inherent discount, or is that not necessarily a focus?

My focus at the moment is on the operational side of business and making sure that we've got the right capital to invest back into it. That's showing good results over time. The share price obviously over the last two years has performed very strongly in that regard. We've got more work to do. The company's got more work to invest in and we want to continue to improve those assets. Ultimately, share buybacks and those type of things that refer to the questions once the board talks to them, it's probably a great question to be able to answer.

Okay, thank you. And then finally, just a carbon opportunity. Can you elaborate a bit further on that? There's plenty of, I think, 1% of Australia's land mass or thereabouts and there's plenty of attention going in carbon. farming and rotational grazing, etc. How big an opportunity do you see this for AECO?

In terms of carbon and natural capital more broadly, across AECO, it's a key thing about sustainability strategy and I think there is a very significant opportunity in the future for AECO in this space and actually for all northern producers as well, the big land holders. The way that we think about soil carbon is we need to get the technology and the science right to be able to benchmark that properly, and I think in terms of our context, it's not just soil carbon but landscape carbon, and we've got a project that's actually in sight now to do that, and we're working with a number of partners to deliver that. So I think there will be a material opportunity, there will be a material opportunity in natural capital as well, and we're really looking forward to talking to the market about that as well as we bring our sustainability strategy forward, but I think, you know, The interesting thing for businesses such as ours, there is an opportunity that's much broader than just soil carbon, you've got landscape carbon, you've got those natural capital across that state as well. And I think, you know, in the future for APA, it won't just be, you know, it's going to be other opportunities that are going to come from there and that sort of state as well.

Just to follow up on that, I'm sure you follow the packhorse model, sort of buying land and then potentially going to be rotational grazing etc and generating sort of carbon credits year in year out. Is that something you're looking at to sort of generate a more consistent revenue stream for the company?

A simple answer to that would be yes. The PAC course model is completely interesting and I know a lot about it and it works well in the production system it operates in. We're already investing into infrastructure to be able to intensify and our version of rotation will be great given our scale is a lot larger. We're doing that now and I believe that will give us better carbon opportunity in the future as well, as we actually register those projects and get them through. The big challenge in the northern production systems is actually getting the right science and benchmarking in place that sends the measure into all harbours, which is ultimately why I didn't put a target into our sustainability framework on day one, and we'll have that done in the next couple of years. So there will absolutely be an opportunity for the northern parts of the industry, and AACA is just part of that, to benefit from those models, such as and some of the other rotational systems that are put in further south in the southern part of Australia. But going forward, it needs to be fit for purpose in the rangelands, northern environments that we operate in, which is why I refer to landscape carbon, not just oil. The whole feed biomass and not just the whole carbon cycle that we're holding, the carbon cycle, is actually a key part of our initiatives that we'll be delivering over the next few years. From that, we don't deduct the opportunity to actually reach those projects and create another revenue stream.

Thank you.

Thank you. Once again, if you wish to ask a question via the phone, please press star 1 on your telephone. And if you wish to ask a question via the webcast, please type it into the Ask a Question box and hit Submit. Your next question comes from the webcast from Chris Brechenbach from Literature. And they have asked, can you advise the cost breakdown of putting meat onto the plate, natural increase, transport, processing abattoir, sorry, abattoir, Marketing, ETC, a further value-added opportunities, local processing, ETC. So, Cattles Aren't Stressed, ETC.

There's... Thank you for the question there, Chris. There's a lot in that. I might ask the CFO to speak to that from the cultural production metrics, and then, depending how it goes in that one, I'll follow back up with some of the other parts of the question tonight. Yeah, no problem. Certainly, there's lots of components to the question, but... Broadly, feedlots costs and the costs of feeding the animals in that intensive production system represent the greatest component of cost in the animal and roughly about 40% of production costs overall. When it comes to the other parts of the supply chain and breeding, growing and processing effectively shares the remainder of the cost construct of an animal.

I'm just looking at the question.

In terms of local processing, we move all of our cattle down to our supply chain where they're fed either on a darling down to New Galway or a Demeril. And so we have a relatively well-managed list into our processing department. And obviously Animal Welfare keeps everything. We're doing that. So try and make sure that our cattle are always well tended as long as we bring them into processing.

Thank you. There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.