Cost cutting, good meat prices reward AACo as losses shrink to $1.7m

AACo's net loss shrinks to $1.7m after big operating profit rise

Agribusiness
Australian Agricultural Company managing director, Hugh Killen

Australian Agricultural Company managing director, Hugh Killen

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Despite coronavirus setbacks across its high end markets, the Australian Agricultural Company posts an operating profit of $23.5m and doubles cash flow in the first half of 2020-21.

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A keen focus on cost control has stripped about $22 million from the Australian Agricultural Company's operating costs and reigned in the beef business' half-year net losses after tax to $1.7m.

The result - a big improvement from the drought-savaged $14.1m first-half loss posted a year ago - follows a jump in operating profit to $23.5m and a doubling in cash flow to $22.3m for the first half of 2020-21.

Despite multiple market challenges posed by the coronavirus pandemic which has shut down or badly disrupted much of AACo's premium restaurant sales world-wide, the 196-year-old company generated $15m in earnings before interest, tax, depreciation and amortisation, which compared well with a $3.4m EBITDA loss a year ago.

The business was buoyed by a 14.5 per cent rise in the per kilogram price of meat sales and the company's swift focus on retail markets, although meat sales revenue still slipped three per cent and overall revenue was down 21pc because fewer cattle were available for sale.

It will likely be some time before we see the food service sector return to normal - Hugh Killen, AACo

AACo has warned its drought-reduced breeding herd, fewer young stock for slaughter and a likely decline in Australian beef cattle values in the new year would further crimp earnings potential.

Already, AACo's half-year meat production volumes were 9pc below the same period in 2019 with total meat and cattle sales revenue down almost $39m to $144m.

Cattle revenue alone almost halved from $77m to $41m.

The global market outlook for AACo's high value Wagyu beef also remained volatile in the current COVID-19 environment.

"Many restaurants remain closed or are having to adapt to reduced volumes," said AACo managing director Hugh Killen.

"It will likely be some time before we see the food service sector return to normal."

Prospects were further complicated by total sales to China declining because of its recent beef import restrictions, although demand from the rest of Asia was up.

The marketplace

Asia now accounts for about 63pc of AACo's total meat market, which includes China where sales almost halved in the six months to September 30 to represent about 8pc of the company's total market.

Mr Killen said there were many market challenges in the next six months and a number of complexities to work through, including the impact on restaurant dining of the pandemic's second wave during the northern hemisphere winter.

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However, it was a notable achievement to have been able to overcome the initial challenges posed by coronavirus and still report "a positive half".

"The full force of COVID-19 hit the restaurant sector right as we began our financial year, with our 16 food service markets severely impacted in a matter of weeks," he said.

COVID-19 had created an uncertain and unprecedented operating environment, forcing the company to make a big switch in marketing direction towards a greater focus on retail sales.

"We swiftly responded to COVID-19 by taking a number of proactive measures and happily we were able to continue supplying our network of customers around the world, while adapting to COVID-safe protocols," he said.

North American sales had surged to represent 20pc of AACo's total meat market - up from just 6pc a year ago.

Cost control

The coronavirus pandemic's travel restrictions also worked in AACo's favour when it came to cutting costs.

The drive towards a simpler and more efficient business also achieved savings through reductions in external cattle backgrounding and feeding costs, cattle transport and processing

AACo had qualified for $6.7m in government JobKeeper payments during the first half, and JobKeepper had "done its job".

"This support was important. We avoided significant disruptions by retaining a substantial portion of our workforce and refocusing the business during a period of genuine uncertainty," Mr Killen said.

Working hours for corporate and commercial teams were reduced and senior company management and the board of directors took pay cuts

Mr Killen said AACo's focus on branded beef and driving higher margins, while streamlining operations, had made the business more robust and resilient.

Rewarding result

The company's investment in marketing skills during the past two years had paid dividends as the team rapidly worked on its partnerships we have built with distributors and other customers to to grow its footprint in retail channels.

Particularly rewarding was the continued growth of AACo's flagship Wagyu brand, Westholme.

"It is now 22pc of all meat sales, up from 7pc a year ago," he said.

"Our focus on strategic market allocation has resulted in strong price growth, with an increase of 14.5pc in meat price per kilo."

However, beef cattle supply constraints across the Australian herd caused by drought and last year's northern Gulf flooding were continuing to be felt by AACo.

Meat and Livestock Australia expected national cattle slaughter numbers to decline 17pc this year, and keep falling in 2021.

Mr Killen warned staff and management more challenges were ahead, but he was grateful for the hard work and the results achieved so far because "the entire team had been able to adapt under trying circumstances".

"They have my support as we maintain our strategic focus, and resolutely move together into what will be another challenging period for the company."

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The story Cost cutting, good meat prices reward AACo as losses shrink to $1.7m first appeared on Farm Online.

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