Australian Agricultural Company Limited (AAC) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Australian Agricultural Company Limited 2020 Annual General Meeting. I would now like to hand the conference over to Mr. Donald McGauchie, Chairman. Please go ahead.

Ladies and gentlemen, good morning. My name is Donald McGauchie. As your Chairman, it gives me great pleasure to welcome you to AACo's 2020 Annual General Meeting. As it's now past 10 AM and I have been advised that a quorum is present, I declare this Annual General Meeting of Shareholders open. The notice of meeting, which was sent to shareholders on the 24th of June, will be taken as read. In the light of the COVID-19 pandemic and the government's restrictions on physical meetings, we decided to hold this AGM virtually. This is the first time that we've held a virtual meeting, and we appreciate it may be the shareholders' first time to participate in a virtual meeting. We are conducting this meeting in this way because our Board members are in remote locations and widely dispersed and unable to travel. We've decided to conduct this AGM via phone as opposed to video due to the lockdown in Victoria, where I am based. It was not possible to have a camera crew attend to film proceedings. Every effort has been made to ensure that this virtual meeting runs smoothly. We have published on our website and on the ASX the virtual meeting online guide, which explains how to attend and participate in the AGM virtually. I'm chairing this meeting via telephone from my farm in rural Victoria. If I encounter technical difficulties that prevent me from presiding as Chair of the meeting, Hugh Killen, our CEO and Managing Director, will take over as Chair of the meeting until I'm able to reconnect. The Board has temporarily appointed Hugh as Deputy Chairman of the company for the sole purpose of allowing Hugh to preside as Chair of this meeting if I encounter technical difficulties that prevent me from presiding. Hugh's appointment as Deputy Chairman of the company will end at the conclusion of this meeting. If we encounter technical difficulties that result in [Audio Gap] able to reasonably participate in this meeting, I will adjourn the meeting for 30 minutes, after which the meeting will be reconvened. If the technical issues continue as a result and a number of members being unable to reasonably participate in the meeting, we will adjourn the meeting to a time and place to be announced and lodge an ASX release after the adjournment that sets out the details and next steps. I would now like to introduce you to the AACo Board who are joining us by telephone today. Mr. Hugh Killen, Mr. Stuart Black A.M.; Mr. Anthony Abraham; Mr. Neil Reisman; Mr. Marc Blazer, Dr. Shehan Dissanayake. Shehan is also standing for reelection. His background and experience has been included in the notice of meeting. Ms. Jessica Rudd, Jessica is standing for reelection. Her background and experience has been included in the notice of meeting. And Mr. Tom Keene is also standing for reelection. Tom's background and experience have been included in the notice of meeting. I'd also like to introduce Mr. Bruce Bennett, our Company Secretary and General Counsel. Bruce will read the shareholder questions received during the meeting. And Mr. Nigel Simonsz, our Chief Financial Officer. We also have with us today Simon Crane representing AACo's auditors, KPMG. Mr. Crane is available to answer questions relevant to the conduct of the audit and the preparation and content of the independent external auditor's report. And Franki Ganter of Allens, our legal advisers; and finally, representatives of Link Market Services Limited, our share registrar. Before moving to the formal part of the meeting, I will address some of the procedural matters. Then we will proceed with the business of the day as set out in the notice of meeting. The financial statements and reports will be discussed first. We will then deal with each of the remaining items set out on the notice of meeting, being the remuneration report and the election of directors. There will be an opportunity for comments and questions in respect of each of these items. Traditionally, the Chairman presents an address at the AGM and the CEO and Managing Director presents the operational report and shareholder update. However, given the virtual format of this meeting, we've taken a different approach this year. My address and Hugh's address were released to the ASX on Monday, and we sent an e-mail to shareholders notifying them. We will not present these addresses live during the AGM. They contain answers to many frequently asked questions so I encourage you to review these matters if you have not already done so. I will now outline the procedural matters for this meeting. At the bottom of the web page under the Webcast Presentation, there are 3 boxes which allow you to: One, get a voting card; Two, ask a question; Three, download the AGM notice of meeting and the 2020 annual report and the virtual meeting online guide. The Ask a Question and Get a Voting Card buttons are replicated at the top of the web page in gold. If you did not submit your question prior to the meeting, you can ask your question during the meeting via the online platform by clicking the Ask a Question button and then select the item of business that your question relates to, write your question and click the Submit button. I confirm you can start submitting your questions via the online platform now. You do not need to wait until we get to the relevant item of business. We encourage you to start submitting questions now. Note that not all questions are guaranteed to be answered during the meeting. We will do our best to address as many as reasonably possible. We ask that you please keep your questions or comments as concise as possible using a maximum of 20 words as a guide. If a question submitted during the meeting has already been answered in the material released to the ASX this week, we will not answer the question during the meeting but will instead refer shareholders to the relevant ASX announcement. After each of the items of business, we will address questions submitted via the online platform during the meeting. Bruce will read these questions verbatim on your behalf. Thank you to those shareholders who took the time to presubmit questions via our share registry, Link. We received several very similar questions on the same subject so we will consolidate these questions into one when we answer them during the items of business. If you are having any difficulty submitting a question, please refer to the virtual meeting online guide, which will be accessed through the online platform. I would now like to briefly summarize the voting procedures which will apply to this meeting. As shareholders, you are asked to participate virtually in this meeting. Each resolution will be conducted via poll. As shareholders are aware, no formal vote is required on item 1 of the agenda. A poll will be conducted at -- on the remaining items 2 to 5. Shareholders had the option of -- to appoint a proxy to the meeting. If you did not appoint a proxy, you may vote during the meeting via the online platform. To register to vote, click on the Get a Voting Card box at the top of the web page or below the slide window. You may submit your votes via the online platform at any time during the meeting starting from now. Following discussion on all items, shareholders will be given time until time that is 5 minutes after this meeting is closed to submit their votes via the online portal. After this time, the polls for each relevant item of business will close. Where undirected proxies has been given in favor of the Chairman, I will vote them in favor of the resolution to the extent permitted. The number of proxies received on each resolution will be displayed in the slide view section of your web browser as we move through the resolutions. Your votes will be counted by a personnel from our share registrar, Link Market Services, after the meeting closes. The results of each poll will be announced via the ASX as soon as possible after this meeting and will also be displayed on our website. If you experience any difficulties using the online platform, the help line number is displayed at the top of the page. You can also refer to the virtual meeting online guide, which is accessible via the online platform. We will now move to the formal items of business at this meeting. Item 1 is the financial statements and reports. The first item of business in the notice of meeting is to consider the financial statements and reports. I now table the directors' statutory report and the financial report for the financial year ended March 31, 2020, and the independent auditor's report on the financial report, this being item 1 on your notice of meeting. These documents were made available to shareholders. The financial statements and reports are placed on the agenda for comment or question only. There is no voting on this item of business. Please note that Simon Crane from KPMG, who oversaw the conduct of the audit, is present. Any shareholder may direct questions to Mr. Crane. Those questions have to be relevant to the conduct of the audit, the preparation and content of the independent audit report, the accounting policies adopted by AACo in relation to the preparation of the financial statements and the independence of the auditor in relation to the conduct of the audit. If you have any questions for the Board or external auditor, please submit them now if you haven't already done so. We will now address some of the presubmitted questions which have not already been covered by the speeches. In the interest of brevity, where we've received several questions from shareholders which are similar, we will choose to answer the one question which best represents the majority.

The first question relates to the payment of a dividend and comes from [ Dennis and Lorraine Lynch ] who asked. As a long-time shareholder and supporter of an Australian meat producing company, considering the high price of meat, I'm wondering where a profit might be made and a dividend will be paid. Thank you for your question and the other shareholders who sent in similar questions in relation to financial performance and dividends. In answer to this question, I will make the following points. AACo made a statutory profit or net profit after tax of $31.3 million and EBITDA of $80.1 million in FY '20. Therefore, the company did make a profit for the year. However, with the uncertain impacts of COVID-19, the Board has not declared a dividend to shareholders for 2020. We feel it is prudent under the circumstances to preserve cash and use all available resources to invest in the company. I might also add that although we had a successful performance last year, AACo has not paid any performance bonuses to staff and all of the directors and senior executives at AACo took a 20% pay reduction for the 3 months in response to COVID-19 pandemic. As a fellow shareholder, I can emphasize. However, I can't predict when a dividend will be paid. That depends on the company's performance in the future and the need to invest in the company. Other questions we received from shareholders asked about strategy of the business in regards to China. This question from shareholder David Lumley is the following. I suggest that more effort be put into finding markets for beef products in countries other than China. We need a reliable second different market to survive economic downturns. Please examine. In relation to AACo's exposure to China, as we announced in our FY '20 results, China was our second largest customer by revenue, with South Korea being our largest by far. As you would know, since our full year results announcement in May, China has banned 4 beef-producing plants, including one which AACo uses. At that time, we planned to divert the China product into alternative markets. I can now -- I can confirm now we have stopped packing product for China with the exception of trim and have successfully diverted the higher-value products to more profitable and strategic markets. AACo has diverse geographical markets for its products and different sales channels as well. This allows the company to divert product to different countries depending on demand and also allows us to sell into retail, foodservice or direct-to-consumer. Sustainability is another topic which was queried by shareholders. Shareholder Catherine O'Connor asked, what steps are the Board taking to minimize fossil fuel consumption in transport, processing and on-farm operations? Do they see the prospect for dual use of land in terms of energy and beef production? We have a sustainability policy on our website that I encourage you to read. It sets out our guiding principles. As part of that, we have committed to measuring ourselves in a number of key areas to make sure that we are always striving for improvement. We raise our cattle on pristine tracks of land that we carefully maintain and manage that land. We're mindful of our impact on the environment and do everything we can to reduce that. For example, we are currently having a program to convert all of our boards to solar power. With regards to transporting animals, we have consciously decided to reduce the movement of animals significantly in the interest of animal welfare and sustainability and efficiency reasons. Once again, I would encourage you to read our sustainability benchmarking report. We have a commitment to publicly reporting our progress on sustainability because our shareholders and stakeholders demand it and because it is the right thing for us to do. We have also received a question from [ Lonergan Proprietary Limited ] asking, is the company involved in the class action regarding the federal government live cattle ban to Indonesia in 2011 or pursuing any other avenue for compensation? Thank you for your question. AACo was one of many cattle producers heavily affected by the ban, and we've been part of the class action brought by the Brett Cattle Company as the lead applicant. The company fully supported the action brought by the Brett family with the strong support of the Australian Farmers' Fighting Fund, the Northern Territory Cattlemen's Association, the National Farmers' Federation and many others. We are of the view, along with the industry, that the issues that led to the decision to ban could have been rectified without such drastic action by the government of the day. We note the Federal Court's decision on the 29th of June, awarding the Brett Cattle Company about $3 million and the entitlement of graze used to $2.15 per kilogram for steers and $1.95 per kilogram for heifers, which were bound for Indonesia. We are watching the case closely and liaising with the legal team regularly. We are pleased, along with the rest of the industry, to learn that the Commonwealth has decided against appealing the ruling, and we look forward to the resolution of the matter through the court. Now a question from shareholder Kenneth Ryan with regards to AACo's 200th anniversary. He asked, has planning yet began on how AACo might celebrate the bicentenary of the company in 2024 in a fitting manner? Hugh, I might defer to you to answer this question. So over to you, Hugh.

Thank you, Donald, and thanks for your question, Kenneth. At the moment, we are really focusing all of our energy on mitigating the uncertainty associated with COVID-19 and getting through this current period. Once the dust has settled somewhat, we will give proper considerations of celebrating AACo's bicentenary in a fitting manner, as it is certainly an important milestone, not only for AACo but also for corporate Australia and I think the agricultural sector more broadly. Donald, back to you.

Thank you, Hugh. We also received some -- a presubmitted shareholder question directed at AACo's auditors, KPMG. Simon Crane from KPMG is on the line. However, these questions are more appropriately answered by AACo management. And therefore, our CEO and MD, Hugh, will answer them right now. Over to you, Hugh.

Thank you, Donald. A question from Mr. [ Gary Azamos ]. He asked 2 questions about our credit facility. He says, in the 2019 report, credit facility B was due on the 8th of September 2020. What was the amount? And what -- was the due date truly correct? He then asked about the 2020 report with credit facility B, $160 million falling due the 8th of September 2021. Is the amount and the due date truly correct? In answer to both questions, [ Gary ], both facility A and facility B agreements are part of the same overarching debt agreements that terminate on the 8th of September in 2022. Facility B is an 18-month rolling facility that is extended every 6 month -- every 6 months as part of this agreement. At 31st of March 2019, facility B's drawn balance was due the 8th of September 2020. These are best due to combine drawn balances as they are part of the same overarching agreement and drawn balances can shift between the 2. Total capacity on facility B was $160 million at March 2019. Total drawn against both facilities was $362.7 million at March 2019, as outlined in note C4 of the annual report. At 31st of March 2020, facility B's drawn balance was due 8th of September 2021. The $160 million refers -- references facility B's capacity at March 2020, not the drawn amount. Total drawn against both these facilities was $380.7 million at March 2020, as outlined in note C4 of the annual report. Thank you for your questions, [ Gary ], and I'll hand it back to you now, Donald.

Thank you, Hugh. We will now address any shareholder questions submitted during the meeting via the online portal. Bruce, are there any questions that have been submitted this morning?

Yes, Chairman. I confirm that so far, we have one question submitted via the online portal. The first question is from John Armstrong, and it relates to China. The question is, what proportion of total meat sales were directed to China in 2020? And is the risk analysis for this market under review?

Thank you, John. I'll pass that question to Hugh to give the answer to that in terms of the actual numbers or as close as we can to the numbers. But bear in mind my previous comment that we certainly have reviewed that situation and are virtually sending no meat to China at all in this year as of now. Hugh?

Thanks, Donald. And John, thank you for the question. As we reported in our results, our total meat sales in FY '20 was just under $230 million at $229.6 million. Our China revenue, which we reported for the first time, was $34 million. And so as a percentage of overall meat sales, I don't believe that China is overweighted. As Donald has just said, we are reviewing our options in relation to China more broadly. I would say that China remains a valid export market for Australian beef in general, and we're hoping that the current situation and some of the challenges we have with the China market more broadly will be resolved soon. Back over to you, Donald.

Thank you, Hugh. Bruce, do we have any other questions submitted this morning?

I confirm there are no further questions on this item submitted on the -- via the online portal.

Thank you, Bruce, and thank you, shareholders. I'll now move to item 2. The second item of business is a nonbinding resolution to adopt the remuneration report. Please note that the vote on this resolution is advisory only and does not bind the directors or the company. However, the Board and the company will take into account any feedback we have received in developing our future remuneration framework. Voting exclusions apply to this resolution as set out in the notice of meeting. I now invite shareholders and proxyholders to submit any questions regarding the remuneration. Bruce, do -- we do not have any presubmitted questions on this item. Do we have any questions that have been submitted this morning via the online portal?

Chairman, I confirm that we have not received any questions via the online portal on this item.