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Edited Transcript of AAC.AX earnings conference call or presentation 19-Nov-18 11:30pm GMT

Half Year 2019 Australian Agricultural Company Ltd Earnings Call

Queensland Jan 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Australian Agricultural Company Ltd earnings conference call or presentation Monday, November 19, 2018 at 11:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Hugh Killen

Australian Agricultural Company Limited - MD, CEO & Director

* Nigel Simonsz

Australian Agricultural Company Limited - CFO

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Conference Call Participants

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* Jonathan Snape

Bell Potter Securities Limited, Research Division - Senior Industrials Analyst

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Australian Agricultural Company Half-year 2019 Results Announcement Investors Conference Call. (Operator Instructions)

I would now like to hand the conference over to Mr. Hugh Killen, CEO. Please go ahead.

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Hugh Killen, Australian Agricultural Company Limited - MD, CEO & Director [2]

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Good morning, everyone. Thank you for joining us this morning for our 2019 half year results presentation. My name is Hugh Killen, and I'm the CEO of AACo.

Here with me today is our Chief Financial Officer, Nigel Simonsz. Today, I'll provide an update on our progress of the past 6 months. Progress that will continue the journey to move AACo from a pastoral beef business to a branded beef business. As you're all aware, it has been a challenging few years for the company. However, I do believe that the significant changes we have made have been the right changes, and we're seeing that in our numbers.

Nigel will run through the financials in more detail, but as an introductory remark, I am pleased with what we've been able to achieve during the half year, particularly considering the macro headwinds that continue to impact the global beef industry and a severe drought across much of the country.

Following the presentation, I'll be happy to answer any questions you may have. So with that, I'll start by running through some of the key highlights that you'll find on Slide 6 of the investor deck.

As you can see on the slide, we have a firm view that our unique value proposition rest in our ability to produce the highest quality beef at scale to support our global premium branded beef business. There is no one else in the world that can produce the same quality of beef with the exceptional eating quality consistently all year round at the volumes that we can.

Our beautiful premium wagyu herd is a standout proposition and when combined with the work we've been doing in the background to optimize our supply chain, we see a really strong future. It's why we're so committed to our premium brand strategy.

Our transition to a premium branded beef business is progressing well, and our footprint in new markets, such as Singapore and Taiwan, is continuing to expand. Excitingly, last month, we executed a successful launch in Dubai, which is a significant achievement as it will provide the ideal platform to continue to expand into a larger, higher-value markets.

On the operational front, the decisions we've had to make over the past 6 months have been difficult. And I'm pleased to report that the suspension of operations at Livingstone is now complete, and we've successfully transitioned out of our 1824 supply chain. We're now focused on returning the business to profitability and our continued drive operational efficiencies throughout our supply chain is already yielding results.

During the period, we identified several opportunities to become more cost-effective and more efficient, and we're now in the process of implementing initiatives to capitalize on these opportunities by streamlining our processes through every single step of the supply chain. Of course, none of these would be possible without the right people, and I'm very proud of the team we've recently assembled to deliver on our next stage of growth.

On that note, we've recently appointed a new Chief Marketing Officer, [Vincent Brun], who will be joining us in January. Vincent has a strong track record in luxury brand marketing and his experience will be pivotal as we continue to execute on our brand strategy. We now have a world-class executive team to lead us towards. This includes Nigel Simonsz, our CFO, whose executive FMCG experience is already reshaping our commercial focus; and Anna Speer, our COO, who is challenging our supply chain to think, act and deliver for our customers.

Now moving on to Slide 7, which touches on some of our financial achievements. In the face of some of the most challenging seasonal conditions we've seen for many years, we're pleased to announce that we've earned an operating profit of $24.8 million for the half and $18 million improvement on the prior comparative period. This translates to a return on capital employed finishing at 1.9% for the period compared to 0.9% for the first half of financial year '18.

At the top line, revenue has improved a 11% to $219 million and meat sales, excluding Livingstone, are up 2.3%. Our noncash unfavorable livestock revaluation has met today with reported statutory EBITDA loss.

This revaluation is primarily due to the decline in the market price of our herd and the decrease in the lower value composite herd numbers. Notably, within that valuation is a 16% increase in wagyu herd numbers. This delivery growth ensures the supply line of our Westholme and Wylarah brands as we expand further into our target markets.

Finished the half with substantial asset headroom on our debt covenants and a gearing ratio of 26.8%, which is well within our target range. Pleasingly, we also saw a $29.6 million in net operating cash inflows compared with a $47.5 million outflow in the prior comparative period.

Now turning now to Slide 8. Our unique brands are our business. Our brands are absolutely AACo's future. They're what we're known for across markets globally, and therefore, aside from our physical assets are a key attribute and value driver for the business. We are completely committed to our branding and marketing strategy. It is critical to our future revenue and our earnings growth, which is why we're so focused on getting it right. And as you can see from our results this half, our plan is working. Reflecting difficult conditions, prices are down, however, we see an increase in overall sales and volumes outweighing this decline. This clearly demonstrates the pricing power that our brands command and it highlights the value proposition that our product offers to our end clients, which brings me to the next slide on our international expansion, Slide 9.

Over the past 6 months, we've experienced encouraging growth in demand for our Westholme and Wylarah products in key markets globally. In Asia, our push into Singapore and Taiwan has been very positive with volumes up considerably from this time last year and that continue to rise. What this highlights is the increasing affluence of Asian consumers with discerning palates who are seeking out higher quality products in greater volumes. This proven trend is a key pillar to our growth strategy, and we'll continue to ensure we're positioned to capture market share as this demographic shift continues to evolve.

We've had a very positive response to our latest launch of Westholme into the Dubai market in October, and we are buoyed by the reception that this product is having more generally. Our conversion rate in this high-value market has been over 60% in the first few weeks, and the momentum is very strong with our distribution partner and AACo working side by side in this market. So what does this look like from a financial perspective?

So if you can now turn to Slide 10. As you can see, operating profit for the half was $24.8 million, which is a major improvement from $6.8 million in the prior period. Net operating cash flow has also improved dramatically to $29.6 million, which is a $77 million lift from the prior corresponding period. This is a clear demonstration of the benefits of our revised strategy and the benefit of the decisions we made last year. I am confident that as we continue to evolve and enhance the business, these numbers will continue to strengthen.

Now with that, I'll hand over to our CFO, Nigel Simonsz, to run through the financials in some detail.

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Nigel Simonsz, Australian Agricultural Company Limited - CFO [3]

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Thank you, Hugh, and good morning, everyone. Turning to Slide 12, our half 1 2019 results. Our results for the period reflect our focus on brand, the tough decisions we've made and the challenging ongoing seasonal conditions we face.

Operating profit has grown by $18 million on the prior comparative period finishing at $24.8 million for the half. Removing the impact of Livingstone, operating profit has improved by $23.3 million on half 1 2018.

Underlying meat sales, which excludes Livingstone, have grown by 2.3% with a key point to note that being the pricing for our Westholme and Wylarah brands has held constant on the prior comparable period despite tough trading conditions.

The decisions to suspend Livingstone Beef operations and the 1824 supply chain have resulted in a significant decline in cattle purchases and increased cattle sales with these cull animals and composites being sold live in the period. Tactically to get ahead of a turning season, we also brought forward sales of cattle originally slated to be sold in half 2. Challenging seasonal conditions have also contributed an additional $28.5 million in station OpEx costs versus the prior comparable period, requiring more animals on the feed at higher grain prices in conjunction with further increasing our prime wagyu herd numbers. These seasonal conditions are ongoing.

$113.6 million statutory livestock heard revaluation resulted in a statutory EBITDA loss of $82.9 million. This noncash revaluation was driven by market value declines across our herd and reduced numbers in our lower value composite herd. As referred to earlier, our focus on our core assets delivered a 16% growth in our high-value wagyu herd numbers. This increase positions us well for long-term continued growth in our luxury and prestige brands.

Despite the decline in the livestock value, our balance sheet remains strong with $902 million in net tangible assets and significant headroom in our debt facilities. Of note, we've also seen a $77 million turn around in our net operating cash flows from the prior comparable period, driven by the reduced reliance on cattle purchases and increase in cattle sales.

Turning to Slide 13, operating expenses. As you will note on this slide, well below average rainfall was seen across all of AACo's southern properties. The lack of rainfall during the half has created a shortage of grass and feed and driven up grain prices. We've responded to these conditions by making the strategic decision to bring forward the sale of composite animals, thereby, protecting capital and avoiding unnecessary expenditure. Furthermore, we invested in the protection of the future supply line of our branded beef by growing our valuable wagyu herd.

With grass and grain shortages, we've repositioned stock to take advantage of our diverse portfolio and place more animals on grain to provide optimal growing conditions during the tough season. Correspondingly, we've seen a large increase in our freight and station operating expenses. The increase in our corporate expenses reflects our continued investment in filling key strategic roles and investment in our IT support systems. This expenditure ensures we have the right team and the right systems to take AACo to the next level.

Now turning to the next slide, 14, cost of production. To protect the future growth of our branded beef business, we allocated additional resources to ensure optimal growing conditions for our valuable wagyu herd during an unusually dry season. The impact of seasonal conditions has adversely impacted cost of production in the half by $0.68 per kilogram.

Turning to Slide 15, in cash flow. Our cash flows, as mentioned previously, have dramatically improved with net operating cash flow seeing a $77 million turnaround. This improvement is due to the decline in cattle purchase requirements and the increase in cull and composite sales.

Turning to Slide 16, and balance sheet. You will see that on our balance sheet remains strong with a $1.3 billion asset portfolio and $902 million in net tangible assets. The statutory revaluation of livestock had minimal impact on our LVR with substantial asset value headroom remaining in our debt covenants. We've finished the period with a gearing ratio of 26.8%, which is well within AACo's target range.

And with that, I'll now hand back to Hugh.

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Hugh Killen, Australian Agricultural Company Limited - MD, CEO & Director [4]

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Thanks, Nigel. Moving now to Slide 19. Looking ahead at the leading global agribusiness, we're committed to running our company in the most sustainable way we can and striving for leading sustainability practices across all of our operations.

With our heritage dating back to 1824 as an agricultural land development company, we've developed a deep respect for the property we cared for, the people we interact with and the animals that are under our stewardship. We also care about supporting and developing the community in which we operate. This year, we'll continue to look for new opportunities to build a more sustainable and responsible business. And on that front, we've implemented the mandatory use of pain relief in all surgical husbandry procedures. We're investing in indigenous education programs in the Northern Territory. We've implemented a diesel to solar program for our bores as and when they become due for replacement, and we're also working to minimize the impacts of our operations by supporting R&D into the reduction of greenhouse gas emissions.

Most importantly, we're also committed to the safety and well-being of our people. They are one of our greatest assets and ensuring they have a safe working environment is an absolute top priority for us.

Now turning to Slide 21. As I touched on earlier, we have faced some extremely challenging seasonal conditions during this period. Indeed, it's been the worst drought in over 100 years in some of the regions in which we operate. These dry weather conditions have impacted many of our properties, and you can see the financial impact in our operating expense line. Obviously, the drought doesn't just affect AACo and accordingly, we're seeing increased cattle sales throughout Australia, which has added further pressure on beef pricing. Unfortunately, it's a similar story in the U.S. and that's made it harder to compete as U.S. beef exports push further into our target markets.

Now continuing onto the next slide, Slide 22. Looking ahead, we expect trading conditions to remain challenging. Unfortunately, there's no signs that the difficult conditions we have faced this year will ease anytime soon with dry conditions set to continue to impact crops in New South Wales and Southern Queensland. This in turn will continue to put pressure on feed prices, which obviously means higher operating expenses for lot-fed cattle. We do remain hopeful that a good wet season in the north will help boost the Australian beef industry.

Looking abroad, we also expect to take ongoing competitive pressure in our global markets as U.S. beef production continues to increase. However, we are up for the challenge and we will continue to respond in kind to these and any other challenges as they arrive.

In closing, despite all the challenges at present, AACo remains a strong business, and we're supported by a portfolio of world-class assets. They're our brands: our growing premium cattle herd and our absolutely world class people. We have a clear focus to move strongly to a branded business, producing the best quality beef at significant scale. And we stand by the strategy as the most effective means to improving the profitability of our company and building lo3G lasting value for all of our shareholders. Thank you.

With that, Nigel and I now are happy to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Jonathan Snape from Bell Potter Securities.

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Jonathan Snape, Bell Potter Securities Limited, Research Division - Senior Industrials Analyst [2]

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Look, just a couple of questions, if I can. First of all, just around your comments on the live sales, particularly in the first half, I thought that was quite a big number. Are you now through all that cow and do you expect much, if any, in the second half in terms of live sales?

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Hugh Killen, Australian Agricultural Company Limited - MD, CEO & Director [3]

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Jon, as we said in the prepared comments, we -- obviously, we bought some live sales forward in the first half because of the seasonal conditions, and we've managed that accordingly, I think, in the first half. In terms of the second half, we'll deal with live sales if the conditions come to us. I wouldn't categorize that we're finishing the second half from a live sales perspective in any way.

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Jonathan Snape, Bell Potter Securities Limited, Research Division - Senior Industrials Analyst [4]

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Okay. And look, just around -- is there any residual costs associated with Livingstone that you kind of perfected, you're thinking, for the next 6 months? Or is that kind a bit as just repair or maintenance or keeping it?

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Hugh Killen, Australian Agricultural Company Limited - MD, CEO & Director [5]

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Look, Jon, just to touch on Livingstone now. Livingstone is obviously in a suspended state of operation. So as we've discussed before, we've put into a condition that should we choose to restart it, it's in the optimal state to do that, and that will incur some costing of material. Nigel, do you want to talk to those in a little bit?

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Nigel Simonsz, Australian Agricultural Company Limited - CFO [6]

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No, effectively -- hi, Jonathan. Effectively, we are maintaining, as Hugh said, a minimum level of spend, in particular, to maintain our export licenses and to continue to meet environmental conditions. But yes, it continues to remain in a -- in that sort of care and maintenance mode.

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Jonathan Snape, Bell Potter Securities Limited, Research Division - Senior Industrials Analyst [7]

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Okay. And look, just on the luxury prestige pricing per Q, I think in the prepared commentary, you said it was flat. But if I look at the slide deck, it was down quite materially year-on-year, which, given that the dollar sale seems a little bit strange, is there anything in there that we should be aware of in terms of those numbers? Because it went from 15, 16 to, what, 13, 16 per Q.

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Hugh Killen, Australian Agricultural Company Limited - MD, CEO & Director [8]

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Yes. Jonathan, yes, there's been quite a movement in mix, which has contributed to that movement in price. That's probably been the primary factor behind that overall decline. And obviously, that's complemented by the tough macro conditions in terms of global oversupply at the moment. So we certainly expect that to continue. What the key highlight for us is obviously between our Westholme and Wylarah brands, that despite those tough macro conditions, we've been able to maintain price on a like-for-like basis versus the prior period. And that's been a key highlight for us in the first half.

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Jonathan Snape, Bell Potter Securities Limited, Research Division - Senior Industrials Analyst [9]

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Okay. I'm sorry, just one more for me. Around the corporate costs, they're up $4 million year-on-year. And if you annualized it, you're getting up to about a $32 million corporate overhead, which, for a business that's generating the operating earnings, it seems quite high. Are there any plans to try and pull that in? Or do you think it's an appropriate level of the corporate charges for business of this size?

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Hugh Killen, Australian Agricultural Company Limited - MD, CEO & Director [10]

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Jon, it's Hugh here. Look, I won't comment on annualized numbers because I don't think we can just annualize those numbers. There's a couple of things playing out. One is, from a run rate perspective, we've had vacant headcount within the organization for some time and you're starting to see that play through. Secondly, to deliver to our branded strategy, I'll absolutely invest in the right talent wherever I can find that and that comes as a kind of a no compromise for me in terms of really investing and moving the company from a pastoral business to a brand business. And the third piece is that we have to have the right IT systems in support to make that work for us. So I'd like to think as we grow the profitability in the business, the corporate overhead to the ratio will get lower as we become more successful going forward.

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Operator [11]

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(Operator Instructions) There are no further questions at this time. I'll now hand back to Mr. Killen for closing remarks.

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Hugh Killen, Australian Agricultural Company Limited - MD, CEO & Director [12]

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That just leaves me to thank everyone for joining the call today. We are looking forward to delivering further progress in the second half of the year, and we will be coming back to you at the end of the year with further progress. Thank you for joining and speak to you soon. Thank you.