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

Thank you for standing by, and welcome to the AACO Full Year FY '22 Results Announcement Conference Call. [Operator Instructions] 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 Results Presentation for Financial Year 2022. I am Hugh Killen, Managing Director and CEO of AACo. And joining me today is our Chief Financial Officer, Nigel Simonsz. 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 FY '22 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 up with an update on our operating environment as we move into financial year '23. 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 producers. 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 3 principal activities: distribution of high-quality branded bacon to global markets; breeding, growing and feedlotting of our animals and ownership, operation and development of pastoral 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 meet the challenges of the future. The land we nurture, the people we grow, the animals we care for and the exceptional product we create are the hallmarks of our success and a responsibility we take extreme seriously. Our spirit and craftsmanship combined with years of experience cultivating cattle on our pristine pastoral assets 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 Wagyu. 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 to our executive summary on Slide #6. I'm pleased to report that we delivered an excellent set of results this year by a testament to our focused delivery on strategy, the improved performance of our brands in market and our drive to make AACo 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 Wagyu meat sales price per kilo increased by 21%, and cattle sales margins also grew. Our branded beef program continues to show strong progress. Westholme and Darling Downs 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 $254.5 million increase in our pastoral property improvements value, the value of our herd also increased by $199 million, helping to drive net assets to $1.36 billion and leading to a significant increase in AACo NTA 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 results since listing on ASX. Turning now to Slide 7 and a closer look at our progress against strategy in FY '22. The results we have delivered this year have come off the back of our key wins under our strategic pillars. AACo achieved significant growth in the branded beef business with a focus on price premiumization. That resulted in a further 21% increase in Wagyu meat sales price per kilogram compared to FY '21. Westholme and Darling Downs now represent 83% of branded meat sales, an increase of 9% on the same time last year. And we also achieved significant growth in key markets. particularly in North America, where branded meat sales have increased by 56% versus PCP. We welcome the successful launch of our sustainability framework in FY '22 and have set about building on this platform. In addition to launching our framework, AACo also generated 74,000 Australian carbon credit units through our beef 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 rate compared to FY '21. 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 FY '22. This resulted in a further 6% reduction in the cost of production in FY '22 versus the prior comparative period. Moving now to Slide 8 and how we're positioned to continue building on our strategy in FY '23. Our purpose and vision statement sit at the center of our plans for growth, leveraging the foundation put in place to continue delivering under our strategic pillars, a simpler and more efficient AACo 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 U.S.A. and drive the growth of Westholme. Executing on our sustainability framework, where we will look to accelerate our sustainability program through our 5 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 Gulf farming trials and exploring the potential for alternative asset use, making AACo a great place to work, which will focus on connecting our people to our purpose and enabling great leaders. We will invest back into the business under these strategic pillars. In doing so, we'll be able to build on our strong FY '22 results and further grow the company as we look to our 200th anniversary in 2024. Turning now to our regional performance. As we've talked about at the half year, strategic revenue management is another core part of our business strategy and operations. This includes a relentless focus on maximizing returns from every cut of meat that we produce and allocating volume through our global distribution networks to get the right cuts to the markets 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 regions in more detail, starting with North America. We've had a great year in North America with our branded meat sales increasing by 56% 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 Westholme's brand awareness and helping us to manage sales across the entirety of the carcass. A combination of highly engaging branded content, digital paid and earned media as well as using the right chef engagement is delivering new foodservice 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 35% increase in branded meat sales price per kilo. The U.S.A. will remain a key strategic market for AACo in FY '23. And the further expansion of Westholme into the U.S. market is a key initiative to delivering full potential from our brands in the future. Moving now on to Asia. Reduced sales value in Asia has come off the back of an intentional reallocation of volume away from retail into foodservice 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 teams still deliver a 6% increase in price. This price increase has mainly been driven by the strength of the Darling Downs brand in South Korea. Improved in-store navigation and brand visibility, which enable a better shopping experience, helped Darling Downs return a leading Wagyu market share with our premium marketplace partners, E-mart in FY '22. This was supported by improved online and off-line 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 a price premiumization through brand. As with Asia, we intentionally reallocated volume away from this market to higher paying markets, which helped drive a 7% increase in average dollar per kilo in this region. Westholme sales grew in the order of 80% as we grew pricing off the back of improved brand awareness amongst consumers and its key menu placements were achieved. Australia remains our spiritual home and a key market for the business. Moving now to Europe and the Middle East on Slide #14. As a foodservice-focused market, Europe and the Middle East had robust volume increases in FY '22. We're satisfied with the progress we've made in this market. Training and education will be a key initiative in FY '23 to improve brand awareness and to share the Westholme 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 AACo and what has been a notable set of financial results for FY '22. 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 driver of our results is an average increase in meat sales price per kilo of 21% versus the prior year. This was achieved with price premiumization through brand and the ability we have to allocate volume and cuts 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 helped 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 FY '21. This result has been driven by higher meat and cattle sales pricing, which was offset by lower volumes sold. Meat sales revenue increased on PCP by $8.5 million to $208.5 million. This was driven by a 21% increase in average Wagyu meat prices realized 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 volumes 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 11% lower volumes sold worth $6.9 million. The cattle price increases are reflective of the record high trading and restocker 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 profit improved by $25.5 million to $49.9 million in FY '22. This was largely due to a combined increase of $28.7 million in meat and cattle sales gross 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 unrealized mark-to-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 kilograms 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 seen in comparable property sales as well as our management practices and investment in these properties. We also saw 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 of the back of investment in the supply chain and the company's internal breeding program rebuilding from the impacts of drought and floods in previous years. The growth of the value of our property portfolio and herd has supported an increase in overall net assets of 30% to $1.36 billion, and NTA is now valued at $2.27 per share. And as mentioned during our half year results presentation, we successfully completed the refinance of our debt facilities in FY '22, 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 gearing ratio of 22.5% remains well within our targeted range of 20% to 35%, and we maintained 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 of growth. And with that, I'll now hand back to Hugh to take you through AACo's sustainability framework.

Thanks, Nigel. FY '22 marked a major milestone for AACo with the release of our sustainability framework and 5 major commitments in November. AACo has an ambition to be the sustainability leader in the Australian pastoral sector. Our framework, which is the first of its kind for the Australian beef industry is a first step and has helped guide our climate and sustainability activity since its launch. We have begun work on each of these commitments that we made at the same time. We're 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 AACo will leverage these results to invest in FY '23. 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 a resurgence in COVID cases and are taking stringent measures to combat this. And the conflict in Ukraine continues to unfold. These pictures 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. U.S. 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 the entire beef supply chain increase. On a positive note, we anticipate to sustain price growth for quality protein into the future. This is expected to be driven by higher beef import demand from China. While beef production is forecast to remain relatively flat as the major beef producing nations enter a phase of herd contraction. The strong rebound in foodservice 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 fueled by the rise of the home share. Importantly, AACos herd rebuilding is continuing to progress well. We've seen increased kilograms produced at 28% this year. The headcount of our herd has increased by approximately 42,000 to 382,000 head, and our brandings have increased materially year-on-year. This positions us well to take advantage of a rise in global demand for quality beef through FY '23 and beyond. Finally, to our closing remarks on Slide #24. In closing, I'd like to thank the entire AACo team for their hard work to produce this result. I'm proud of what they've delivered and thank them for their efforts. We have made material progress executing against our strategy, and we've delivered a strong outcome. We're satisfied with the progress to date a bit more work to do, and we're looking forward to moving into 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 strategy. Thank you for joining us this morning. This ends our presentation. Nigel and I are happy to take any questions.

[Operator Instructions] Your first question comes from John [ Derricks ] from CLSF and he's asked, given higher prices achieved on products, it appeared volumes are down significantly since gross sales only modest -- sorry, since gross sales have only modestly improved. Is this a correct reading? And if so, has volume declined?

It's Hugh here. 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 reduced Wagyu meat sales volume of 14% down. It's come off the back of the historic lower calving numbers we've had over for the last couple of years, also including the drought and Gulf flood event. So this is actually really well in line with the Australian industry reduction in herd. As I said in my closing remarks really importantly from an AACo perspective, our kilos produced this year are up 28%, that's great news, and our herd is growing by 42,000 heads. So as we move into FY '23 and beyond, those increases will stand us in pretty good stead to actually deliver our further revenue going forward. Anything further on that one, Nigel.

No, nothing further to add, Hugh.

Okay. The next question is a follow-up question from John [ Derricks ]. 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 -- again, thanks for the question. I believe that it compares very strongly. The overall beef price index, if you look at Mercados data, is up around 12% for the year. And so 21% from an AACo perspective is really good in that context. And it really underlines our focus on brands and that price premiumization into the markets that we go into. It's one of the flexibilities that AACo has got is we can go across a couple of different markets. I also think the commodity beef market, depending where you are in that 100-day cattle [indiscernible] the margins that are very tight at the moment given where both beef prices and meat prices and cattle prices are. So even on that means as well, I believe that 21% is particularly healthy for AACo.

Your next question is a phone question from Charlie Kingston, Private Investor.

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 AACo should be paying a dividend now or paying down some debt or even selling off some land to sort of capitalize on these buoyant conditions? And is that a focus for you and the management team?

Charlie, thanks for the question. I think you know we tried to explain during the prepared remarks today that we want to continue to invest back into the business, which is, as you know, pretty typical for agriculture businesses when they've got the right cash flowing out and [indiscernible] the business to invest back into operations. 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 to make the company significantly more efficient and simpler and have the right tools at its disposal that will make the right 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's one for the Board, and I am now the Chairman, we'll look forward to updating everyone on that at the AGM.

Okay. So there's no 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, the NTA is going up, but it's certainly not specific to AACo, but you are trading -- are currently traded at discount to NTA. Is there a prospect of a potential buyback to close that inherent discount? Or is that not necessarily a focus for the Board?

My focus at the moment is on the operational side of the 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 2 years have performed very strongly in that regard. We've got more work to do. The company has got more work to investing and we want to continue to improve both assets. So ultimately, share buybacks and those tough things you refer to your question is one for the Board to talk to. It's probably a great question for the AGM.

Okay. And then just finally, just the carbon opportunity. Can you elaborate a bit further on that? There's plenty of I think AACo owns sort of 1% of Australia's land now, or thereabouts and plenty of attention going on carbon farming and rotational grazing, et cetera? How big an opportunity do you see this for AACo?

In terms of carbon and natural capital more broadly across AACo part, it's a key plank of our sustainability strategy. And I think there is a very significant opportunity in the future for AACo in this space and actually for all Northern producers as well, the big landholders. The way that we think about fluorocarbon 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 flight 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 in natural capital as well, and we're really looking forward to talking to the market about that in July when we bring our sustainability strategy forward. But I think the interesting thing for businesses such as ours, there is an opportunity that's much broader than just soil carbon, we've got landscape carbon. We've got a natural capital across our state as well. And I think in the future for AACo, it won't just be base protein soil, I think there's going to be other opportunities that's going to come from our natural estate as well.

Just a follow up on that. I'm sure you follow the Packhorse model, sort of buying land and then potentially going to be rotational grazing, et cetera, and generating sort of carbon credits year in, year out. Is that -- 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 Packhorse model is super interesting. 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 evolution of rotational grazing given our scale is a lot larger. We're doing that now. And I believe that will give us air carbon opportunity in the future as well as we actually register projects and get them through. The big challenge in the Northern production system is to actually got the right size and benchmarking in place in terms of measuring soil carbon, which is ultimately why I didn't put a target into our sustainability framework on day 1, and we'll have that done in the next couple of years. So there will absolutely be an opportunity for the Northern pastorals industry and AACo is just part of that to benefit from those models such Packhorse 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 ranch lands northern environment that we operate in which is why I refer to landscape carbon not just soil. And also there's the whole feed biomass and not just soil carbon and that's all to maintain the cycle that we're on [indiscernible] carbon cycle is actually a key part of our initiatives that we'll be delivering in the next 2 years. From that, it opens up the opportunity to actually reach those projects and create another revenue stream.

[Operator Instructions] Your next question comes from the webcast from Chris [indiscernible]. And they have asked, can you advise the cost breakdown of putting meat onto the plate natural increase, transport, processing abattor -- 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 CFO to speak to about some of the cost reduction metrics. And then depending on how it goes in that when I follow it back up with some of the other parts of the question. Nigel over to you, mate.

Yes, no problem. Certainly, as I said, there's lots of components to the question. But broadly, feedlot costs and the cost 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. And when it comes to the other parts of the supply chain and breading, growing and processing effectively share 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 through our supply chain where the they're fed either on the Darling Downs near Dalby or [indiscernible]. And so we have a relatively -- we'll manage that into our processing partners. And obviously, animal welfare determines what we do in that. So we try and make sure that our cattle are always well attended, and well looked after as we bring them into processing.

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