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AACo Abattoir, Beef Business Under Review as Profits Slide

04 April 2018

AUSTRALIA - Three years after opening its $100 million abattoir near Darwin, Australia's largest cattle company has launched a review into the underperforming asset.

ABC Online reports that the Australian Agricultural Company's (AACo) preliminary results on its 2017-18 financial year showed the abattoir was a major contributing factor to the company's sliding profitability.

Significant losses related to the Livingstone abattoir business have cost AACo between $60-$65 million over the last 12 months, part of which was caused by "an onerous contract provision".

Newly-appointed CEO Hugh Killen told shareholders the financial results were "below expectations".

"Livingstone Beef is expected to contribute an operating Earnings Before Interest, Taxes, Depreciation and Amortization loss of $18-$22m [for the 2017-18 financial year]," he said.

"This compares with an operating EBITDA loss of $12.5m [in the 2016-17 financial year]."

As a result, AACo has engaged Deloitte to undertake a "strategic review process" to assess all available options for Livingstone Beef, which employs about 200 people.

When asked if selling the abattoir is an option being investigated, Mr Killen responded in a written statement: "The review will provide an understanding of the broad range of potential alternatives and at this stage we have not ruled anything out.

"We will provide a detailed update on the review at the time of our 2018 financial year results [which will be] announced on May 23.

"While this strategic review is underway, management will continue to focus on the controllable aspects of the production process, including further improving the operational efficiency of the plant."

AACo's financial U-turn in 12 months

Mr Killen said a number of external factors had contributed to AACo's sliding fortunes over the last 12 months.

"AACo's performance has been affected by external challenges such as increased competitive dynamics in certain markets, a higher Australian dollar, higher input prices, and an elevated cattle price environment for Livingstone Beef, " said Mr Killen.

AACo expects "the statutory EBITDA loss in the range of $30 million to $40 million, this compares with Statutory EBITDA of $133.2 million [in the 2017 financial year]", Mr Killen said.

AACo is also looking at improving efficiency in its premium non-wagyu cattle herd as that part of the business has "underperformed expectations".

Mr Killen put that down to two reasons.

"One, its reliance on external service providers in the later stages of the value chain, and two, its level of exposure to commodity beef price fluctuations.

"The first substantive outcome of the review is a decision to simplify this supply chain by transitioning to a cattle sale model, rather than selling beef," he said.

"[That] will increase the profitability and cash flow from this supply chain.

"The change will occur after a short transition period and will be adopted going forward subject to a material change in market conditions."

Wagyu strongest performer

The company's strongest performer has been its luxury wagyu beef, which Mr Killen said "continues to deliver strong margin performance".

"AACo believes there is an opportunity to unlock further margin through cost efficiencies in addition to our focus on driving revenue growth through our branding and marketing," he said.

In 2016 AACo announced its plans to release the Wylarah and Westholme branded wagyu beef and has since launched the product in some overseas markets.

But Mr Killen expects the "next formal brand launch [to happen] before the end of 2018" which he expects will help drive profitability.

Over the past few years AACo has expanded its wagyu herd with 18.5 per cent of its cattle inventory made up of wagyu in 2017.

At 4pm AEST AACo shares were down 7.7 per cent to $1.12.

TheCattleSite News Desk

Top image via Shutterstock



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