Australian Agricultural Company is reviewing “all available options” for its new Livingstone abattoir near Darwin as the big beef business makes a dramatic U-turn back to a cattle sale model, revising much of its focus on branded beef marketing.
In response to financial headwinds and flagging profitability, AACo’s new management team says its priority switch can deliver up to a $5 million annual boost to operating earnings and cash flow.
Based on preliminary results for the year to March, AACo has warned shareholders to expect 2017-18 operating earnings before interest tax depreciation and amortisation (EBITDA) to slide to between $12m and $16m – down from $45m in 2016-17.
It expects to post a statutory EBITDA loss of $30m to $40m, compared with positive earnings of more than $133m last year.
The newly devised transition away from retaining brand ownership through the supply chain to instead selling cattle is in stark contrast to what previous management teams claimed had pulled AACo out of negative cash flow in the first place.
The company’s move has been a shock given the substantive industry push within Australia’s beef sector to shift away from the commodity space and into integrated supply chains with end-to-end visibility delivering a product driven by consumer demands.
The key pillars in AACo’s vertical integration strategy of the past three years have been opening its Livingstone processing site south of Darwin and an increasing focus on exporting branded beef such as Wagyu, rather than live cattle exports.
However, significant cost items relating to the Livingstone Beef processing business, officially opened three years ago, have lost AACo up to $65m in the past 12 months.
Newly appointed chief executive officer, Hugh Killen, said the losses reflected “an onerous contract provision” the abattoir was committed to, and an impairment charge against the meatworks’ carrying value.
AACo’s operating cash flows are expected to slip into negative territory of $38m to $42m, after last year’s positive $29.3m cash flow result.
Meatworks under scrutiny
As part of its turnaround plan AACo has engaged help from financial services firm Deloitte to strategically review “all controllable aspects of the production process, including further improving the operational efficiency” of the Livingstone plant.
Mr Killen said the review would assess all available options and determine the optimal path to deliver shareholder value from Livingstone Beef.
We are committed to a simpler, more efficient and more profitable business with financial performance that reflects the extraordinary value of our vast properties, exceptional livestock and market leading brands- Hugh Killen, AACo
A full update on that investigation would be released with AACo’s annual results next month.
He said AACo’s management team had taken such decisive action because it had a “board mandate to closely analyse what we are doing in our supply chains”.
“We are committed to running a simpler, more efficient and more profitable business with financial performance that reflects the extraordinary value of our assets, including vast properties, exceptional livestock and a market leading brand portfolio,” he said.
Quite simply, AACo’s premium (non-Wagyu) supply chain had underperformed, primarily due to a reliance on external service providers in the latter stages of the chain and exposure to commodity price fluctuations.
AACo had undertaken a comprehensive operational review to diagnose its current business model and was now making changes it expected would improve shareholder returns, increase profitability and drive cash flow across its supply chains.
The process and efficiency review of its supply chains would now focus on identifying opportunities to improve processes, realise cost savings and improve profit margin.
The first substantive outcome was the decision to simplify the supply chain and move to a cattle sale model, rather than selling beef.
This was expected to increase the profitability and cash flow from the supply chain.
The changes would occur after a short transition period and would be adopted subject to changes in market conditions.
The coming 2018-19 trading year was expected to benefit from an even greater improvement than the $5m projected earnings boost thanks to one-off timing benefits associated with moving to a cattle sale revenue model.
More efficient Wagyu focus
Mr Killen said while the prestige (Wagyu) supply chain continued to deliver strong margin performance, AACo felt there were opportunities to unlock further margin through cost efficiencies.
These improvements could be in addition to the focus on driving revenue growth through our branding and marketing.
The Wylarah and Westholme brand launch plans continued to progress in multiple markets.
AACo expected to undertake its next formal brand launch before the end of calendar 2018.
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