Australian Agricultural : AACo 2021 Full Year Results Presentation Transcript

FY21 FULL YEAR RESULTS PRESENTATION TRANSCRIPT

Company:

Australian Agricultural Company Limited

Date:

20 May 2021

Time:

10:00am AEST

[START OF TRANSCRIPT]

Operator:

Thank you for standing by, and welcome to the AACo FY21 full year results release.

All participants are in a listen only mode. There will be a presentation followed by a

question and answer session. If you wish to ask a question via the phone line, you

will need to press the star key followed by the number 1 on your telephone keypad. If

you wish to ask a question via the webcast, please enter it into the ask a question

box and click submit. I would now like to hand the conference over to Mr. Hugh

Killen, managing director and chief executive officer. Please go ahead.

Hugh Killen:

Good morning, and thanks for joining us to discuss AACo's full year results for

financial year 2021. I'm Hugh Killen, managing director and CEO of AACo, and with

me today is our chief financial officer, Nigel Simonsz. I'm going to start by taking you

through some of our key outcomes across our full year performance. I then once the

guys through the progress we've made in FY 21. I'll provide a commercial overview,

and drill down into how our brands are driving progress, and we'll then have a look at

how this is playing out by region around the world. I will hand over to Nigel to take us

through the financials in more detail, and I'll finish with an update on our operating

environment as we move into FY 22. Let's turn now to the executive summary on

slide number four.

Hugh Killen:

I'm pleased to report that we've consolidated our first half performance across the full

year. FY 21 has been dominated by uncertainty across many industries. In particular,

food services face ongoing disruption across our key markets around the world.

These risks continue despite progress in virus suppression and vaccination in parts

of the world. In FY 21, our commitment to a simpler and more efficient AACo has

been critical to navigating this uncertainty. This has helped us improve operating

profit and statutory EBITDA in FY 21, compared to FY 20, and we've been able to

deliver a positive operating cash flow result.

Hugh Killen:

Our strong brand portfolio and distribution partnerships have also helped us connect

with new customers and respond to changes in our markets. Overall, this has helped

improve our average price per kilo, and this has been driven by increasing the

proportion of meat sold through our Westholme and Downing Downs brands. The

enduring value of our underlying assets has also delivered important stability through

this period. We continue to see strong improvement in our property values, which

continue to strengthen over the long term. And this has translated into a solid

increase in the net tangible asset value of the business.

Hugh Killen:

Turning to slide five. External forces in recent years continue to impact our results.

Australia's overall cattle herd has declined in response to successive drought and

flood challenges. This is reflected in the marginally lower AACo herd size in FY 21.

While drought conditions have been eased, we continue to see below-average

rainfalls across our properties. And three years on from the devastating Gulf floods,

our properties there are still recovering with limited pasture response. One of the

consequences of these seasonal impacts is low calving rates. These take time to

float through our supply chain before impacting mature animal numbers.

Hugh Killen:

In FY 21, our lower calving rates over the last three years have resulted in reduced

overall meat production volumes, and lower volumes are primarily driven at 21% or

$68.6 million decline in FY 21 revenue compared to FY 22. Lower volumes are

expected to remain into FY 22.

Hugh Killen:

Importantly, our herd rebuild has commenced, with a 47% increase in calves in FY

21 compared to the prior year. As this rebuild floats through our supply chain, we're

likely to continue with some supplemental cattle purchases. More broadly, the

uncertainty which has impacted FY 21 is likely to continue through FY 22. We will

continue to monitor and adjust to changes in our markets, and in the wider economy.

In this context, the key drivers of shareholder value in AACo remain; strong brands

supported by simpler and more efficient business.

Hugh Killen:

Turning now to slide six, and progress made in a challenging year. I want to go into

more detail about these key value drivers and the progress we've made in FY 21.

The pillars for our business remain; our values, our team, our operations, our focus

on customers and consumers, and respecting what makes it possible. The key

elements of our strategy remain; connecting with our customers and consumers by

strengthening our brand portfolio; delivering for our customers by building the best

routes to market; maximising revenue through strategic growth and investment;

getting the most out of our assets and operations to optimise the value of every part

of our business; investing in AACo's next 200 years through a company wide focus

on sustainability; and continuing to strengthen the AACo team through our high

performance culture.

Hugh Killen:

Each of these elements have been critical to helping AACo navigate uncertainty in

FY 21. We've continued to improve product allocation across our brands and markets

to secure maximum returns. This has included further streamlining our brand

portfolio. In FY 21, Westholme and Darling Downs represented 74% of our branded

meat sales. In parallel, the strength of our global distribution network has enabled us

to access new retail channels and online gourmet marketplaces.

Hugh Killen:

This has been vital to connecting with new customers despite the impacts of COVID-

19 on food service and international travel. And we've strengthened our talent and

leadership capability in key functional roles across the business to keep supporting

our branded beef strategy.

Hugh Killen:

As a result of this work, we've proven an 8% improvement in overall price per kilo.

We've generated $76 million in reduced operating expenditure compared to FY 20,

and we've progressed our sustainability agenda in FY 21, including launching our

beef cattle herd management carbon project.

Hugh Killen:

Turning now to slide number seven. Through the challenges of FY 21, we're focused

on maximising returns from every cut of meat we produce. This means ensuring the

right cuts are available for the right market opportunities at the right time. This

strategic market allocation has helped drive an 8% improvement in price per kilo,

compared to FY 20. In particular, we're focused on: adapting to increasing at-home

consumption and the rise of the home chef, including partnering with gourmet

marketplaces and premium retail specialists; targeted digital marketing campaigns

and improved product branding on menus and also in-store; and increasing the

proportion of AACo product moving through Westholme and Darling Downs to 74%

of all branded beef sales.

Hugh Killen:

Today, 80% of our higher value loin and rump cuts are sold under our Westholme

and Darling Downs brands. This is important because Westholme and Darling Downs

have together achieved annualised price-per-kilo growth of 17% since FY 19. And

this has underpinned our overall annualised price-per-kilo growth of 8% over the

same period.

Hugh Killen:

In addition to Westholme and darling Downs, our Wylarah brand focuses on the

world's top fine dining restaurants. This market has been directly impacted by

COVID-19 in FY 21. Wylarah remains a key strategic priority for AACo as the food

service sector begins to rebuild. Getting maximum price per kilo has been even more

important in FY 21, as we face headwinds impacting overall meat volumes.

Hugh Killen:

The average F1 Wagyu lifecycle is long, at three and a half years from conception

and birth through to meat production. This means that when flood and drought impact

our calving rates, this takes time to flow through to reduced meat production

volumes. In FY 21 we really began to feel the effects of successive years of drought

and the flood on calving rates, with overall

Hugh Killen:

... sales value down 19% compared to FY 20. Securing premium prices for product

through our quality brands is even more important under these circumstances.

Hugh Killen:

Moving on to slide eight. On this next slide, I want to explore the benefits of branded

beef sales a little more and discuss what this means for AACo moving forward. As a

general rule, 15% to 20% of meat from an animal is the higher quality loins and

rumps category. These cuts can be sold at a premium price through strong brands

like Westholme ad Darling Downs. Since 2019, AACo's price per kilo for loins and

rumps has improved 10% each year on a compound basis, and in FY 21 80% of

AACo's loins and rumps were sold under Westholme and Darling Downs.

Hugh Killen:

Further down the carcass, 35% to 45% of meat fits into the barbecue and secondary

cut category. So far, 63% of AACo's barbecue and secondary cuts are sold under

brands. 59% of barbecue cuts are now sold under Darling Downs, and 55% of

secondary cuts go into branded sales. AACo has achieved 7% annual compound

growth in price per kilo for barbecue and secondary custody since 2019, and we'll

continue to increase the proportion of these cuts sold through branded channels. The

remaining 35% to 40% of meat produces is in the trim category. At present, the vast

majority of trim is sold as a commodity, with little product innovation or added brand

value. This suggests there's potential to improve value derived from this category,

and this is an area of potential growth which we'll be exploring the future.

Hugh Killen:

Turning now to slide number nine. You can see how important our brands have to

realising the value of the beef we produce. I want to delve a little deeper into how we

have built the value of our Westholme and Darling Downs brands in FY 21. As

mentioned above, Westholme has grown from 11% of our overall meat sales to 25%

in FY 21. The team have worked hard to build brand equity and drive awareness,

particularly in key markets in the US.

Hugh Killen:

As you can see, Westholme more than tripled its following on Instagram this year

with the majority of the audience being in the US. And in the year just gone, we

launched our first paid digital marketing campaign in partnership with chefs in

Australia and also the US. We've also pursued new direct-to-consumer channels

during COVID-19. We've made Westholme available via the Goldbelly online

gourmet marketplace in the US. And in FY 21, we partnered with Goldbelly to create

online brand content, including using Goldbelly influencers to engage customers.

Hugh Killen:

Jumping now to slide 10. In FY 21, we've seen the results of the work I discussed

last year to refresh our brand in Korea. The team have rolled out new packaging and

in-store activation across all 141 earmarked stores in South Korea. We saw support

of this with a digital campaign to improve brand awareness with really significant

results, and we've seen higher average consumer sales prices in FY 21. We we build

the value of these brands and deliver more product through them, we will realise

more value for our investors. And this is particularly important in the face of market

uncertainty and headwinds in our wider industry.

Hugh Killen:

Turning now to slide number 11. Through FY 21, this approach has driven positive

outcomes across all our regions with the exceptions of China, Europe, and the

Middle East. In North America, branded beef price per kilo is up 14% compared to FY

20. This has been driven by successive growth into retail channels during COVID-19.

As discussed above, the US has been a major focus for digital and social campaigns

to drive brand awareness around Westholme. And we've continued to focus on at-

home chefs through meal kit product innovations and online marketplace

partnerships, including with high-profile chefs.

Hugh Killen:

In FY 21, we sold 19% of AACo meat North America, compared to 7% in FY 20. In

Asia, we achieved 5% improvement in price per kilo compared to FY 20. This was

driven primarily by the strength of our Darling Downs brand presence in Korea.

Strong distributor relationships and other markets continue to support sales. We

continue to respond to uncertainty in the Chinese market, which has been a

traditional destination for AACo's trim product. To date, we've been effective in

redistributing retail product to other markets, and we'll continue to explore these

opportunities. You can see the proportion of AACo products sold in China decrease

in FY 21 offset by growth from the rest of Asia and also in North America.

Hugh Killen:

In Australia, we achieved a similar 5% improvement in price per kilo compared to FY

20. The biggest driver has been continued improvements in our market allocation

and mix. This has involved focusing on high-quality branded product for the

Australian market, and reallocating other product to higher value markets around the

world. We continue to refine and build the value of our quality brands in Australia.

This is important for the Australian market, but also because Australia is AACo's

spiritual home. Our branded success in this market is a core objective of our global

branded beef strategy.

Hugh Killen:

In Europe and The middle East, AACo's sales directly felt the impact of COVID-19 on

food service in FY 21. Our major retail focus in the last year has been in Asia and

North America. This has resulted in a drop in the proportion of AACo meat sales

going through to Europe. We'll continue to monitor food service opportunities in the

region, and we're looking forward to the conclusion of free trade negotiations with the

UK.

Hugh Killen:

With that, I'll now hand over to our CFO, Nigel Simonsz, who will take you through

the financials in some more detail.

Nigel Simonsz:

Thank you, and good morning everyone, and thank you all for your interest in what

has been a year of resilience in the face of significant disruption and uncertainty

across our key markets. I'll now take you through the financial highlights and provide

some additional context. I can report that we have consolidated our good first-half

performance through the full year. And in the full year just gone, AACo delivered

positive operating profit and cash flow. This is significant, given the continuing

impacts of COVID-19 and the impact of recent drought and flood events on overall

meat volumes. Our improved operating profit result reflects ongoing progress against

our strategy, and of note we have realised an 8% improvement in price per kilo,

which reflects continued growth in our brand value.

Nigel Simonsz:

This improvement was offset by 19% lower meat volume available for sale in FY 21

compared to the prior year. And we have also achieved a reduction in expenditure of

approximately $76 million, which includes $29 million of reduced adverse seasonal

costs; $24 million of lower external backgrounding, external feed lot and processing

costs as a result of low volumes; and further significant cost savings realised across

the business. Our progress has been supported by our strong balance sheet. Our net

asset position remains strong, driving significant improvement in net tangible asset

value per share, and AACo's gearing ratio remains well within our covenants,

improving 3.1% year on year. We achieved a statutory EBITDA result of 99.3 million

and an improved statutory profit of 45.5 million, up from 31.3 million in FY 20.