Now Hugh Killen, CEO and MD. Please go ahead.
Good morning, and thanks for joining us to discuss AACo's half-year results for financial year 2021. I am Hugh Killen, AACo's Managing Director and CEO, and with me today is our Chief Financial Officer, Nigel Simmonds. In today's presentation, I'll take you through some of the highlights across our half-year performance. I will outline our swift response to COVID-19, which has had such a significant impact on the world and on our industry this year. I will then take you through the progress we've made against our strategy over the year to date. After that, I'll hand over to Nigel to take us through the financials in more detail, and then I'll provide an update on our operating environment as we move into the second half of the financial year. We'll turn now to the key points for the half-year on slides four and slides five.
The story of AACo's first half is a disciplined response to unprecedented uncertainty in our industry. At the end of last financial year, every one of our markets was impacted by COVID-19 restrictions on dining and hospitality. Despite a good performance in the previous year, we had no certainty about market or seasonal conditions that lay ahead. I'm pleased to report that we responded decisively to the threat of COVID-19 and focused on staff safety and ensuring business continuity, including working closely with state, territory, and Commonwealth governments. We moved quickly in the market, leveraging our global supply and distribution networks, and we maintained a disciplined focus on cost across the supply chain. Together, these responses achieved a positive half result, a positive result for our first half. We've achieved favorable margins compared to the first half of last year. We improved operating profit and cash flow performance.
We secured positive operating cash flow, and we drove improvement in our average price per kilo of beef sold. Our statutory EBITDA result for the half was AUD 15 million. This was an AUD 18 million improvement against the first half of FY20. These results underscore the importance of our strategy in good times and in difficult times. This is important because we will continue to be challenged in the coming months. We have previously announced overall herd reductions following the Gulf floods in 2019 and what are multiple years of drought. Those changes are broadly consistent with the overall shift in the national herd. The nature of our industry and our supply chains mean these reductions will flow through into internal supply production, which will result in lower volume of meat production in the rest of this year.
We'll continue to face genuine uncertainty from COVID-19 in our consumer markets around the world, and we continue to face ongoing risks of seasonal variation at home. More broadly, the global geopolitical environment remains uncertain in ways which have the potential to impact our business. Our positive half-year results in FY21 provide confidence our strategy is the right one for AACo. We are continuing to make progress against this strategy. This strategy positions us well to navigate both seasonal and also market uncertainty. I now want to go through our response to COVID-19 in more detail. As I mentioned before, our primary focus has been staff safety and business continuity. We implemented protocol measures across all of our operations in line with health advice.
We made our plans and procedures available to the wider industry, and we immediately engaged with the state and territory governments to ensure we could safely continue cross-border operations. On the business side, we had to move quickly to protect momentum from FY20. Let me remind you of the context at the time. In March 2020, every one of our 16 food service export markets implemented COVID-19 restrictions on dining and hospitality. Food service has been central to our Branded Beef strategy from the beginning. We therefore had to execute a rebalancing of our sales towards retail channels, and we had to do it smoothly, and we had to do it immediately. I'm very proud of the way our sales and marketing teams responded. They immediately began identifying and assessing market changes and opportunities.
They used their growing knowledge and in-market presence to strengthen existing retail channels and move us into new ones. They identified new direct-to-consumer channels for us to trial, and they leveraged our distributor partnerships on the ground to gather intelligence and also to help us to adjust. In parallel, our team at home built and planned cost discipline measures aimed at optimizing our internal supply chain. We also restricted non-essential operating capital expenditure. We implemented senior executive and board pay reductions for a quarter, and we temporarily reduced working hours for our corporate and commercial team members. In the face of this very significant uncertainty, we also sought and were eligible for government assistance through the National JobKeeper program. Together with our internal response, this support was important in maintaining business continuity.
As a result, we were able to maintain staff and refocus our business to navigate the impacts of the global pandemic. For us, JobKeeper did the job it was intended to do. It helped us avoid significant disruption to our operations, our markets, and to our people. This gives you a picture of the steps we took at the start of the current financial year, and I want to thank the AACo team for their commitment throughout this period. We turn now to slides 8 through to 12 and our progress against strategy in the first half. The steps we have taken have had a positive impact on the first half of this year. We have driven a 14.5% improvement in our average meat sales price per kilo. Over the period, our flagship Westholme brand sales increased from 7% of overall meat sales to 22%.
These results reflect continued growth in the value of our brand around the world. They reflect our ability to leverage AACo's global supply network to deploy every kilo of product where it will achieve optimum value. These outcomes reflect ongoing investment in our sales and marketing teams and our distributor partnerships around the world. They also reflect the work we've done to drive a simpler and more efficient AACo at home. This has been critical to ensuring we produce the right cuts for the right markets at the right time. A simpler and more efficient AACo has been crucial to our performance on the cost side as well. We've shown strong cost performance this half by streamlining our supply chain. This is predominantly focused on limiting our exposure to external backgrounding and feeding, as well as cattle transport and processing.
On slide nine, you can see how material the impact of COVID-19 has been for our business, and you can see where the team's response has produced an important outcome. We've got significant impacts on revenue compared to the previous first half across Asia, Europe, the Middle East, and Australia from food service restrictions. Despite this, you can also see the improvement in our average price per kilo of meat sold and positive signs from our markets in North America and Asia, excluding China. This is a great demonstration of our team's efforts over the last six months. We're able to execute a shift in strategic allocation of product across a number of markets.
Through our longstanding distributor partnerships in Canada, for example, we've delivered significant volume in new retail channels under local brands, and we're able to trial new direct-to-consumer channels across digital platforms with positive take-up under our Westholme brand. In both these instances, our marketing and sales team did a fantastic job. Our distributor partnerships were crucial in identifying and capturing these opportunities, and our entire operations team has worked tirelessly to deliver for these new channels. I want to make the point that these responses to COVID-19 were only possible because of ongoing investment we have made as part of our Branded Beef strategy. This is investment in our in-market sales and marketing teams, investment in quality distributor partnerships, and investment in efficiencies through a simpler and more efficient AACo at home.
In particular, our strong performance in North America is a demonstration of agility and resilience we have built into AACo through this investment. Our positive performance in Asia outside of China reflects a number of key initiatives. In particular, I note our Darling Downs brand refresh in South Korea, which is one of our leading and longest-standing retail sales channels. Running through all of this work is our commitment to the customer. From the beginning, our Branded Beef strategy has been about working with chefs and restaurants and building a connection with our customers. In developing direct-to-consumer sales, we saw the need and the opportunity to refine this approach in a number of ways. We deployed digital campaigns to target and funnel new customers to digital platforms. We created and launched an online video series, Cooking at Home with Westholme.
We brought our brand into the home through our Westholme unboxing experience. We launched the Plates for Good initiative to promote and support restaurants and staff that were so heavily impacted by COVID-19. We launched our industry-first Westholme Flavour Wheel, developed with the University of Queensland, to drive our unique brand experience. Our customer-centric marketing approach has been a key response to COVID-19, but it's important to note that this reflects our thinking from well before the pandemic. As with our retail and direct-to-consumer approach in the first half, this enhanced customer focus will stay with us long after the pandemic. I'm now going to hand you over to Nigel, who will take us through our financials for the half year in more detail.
Thanks, Hugh, and good morning, everyone. Thank you for your interest in what has been a positive half year performance for AACo in the face of great uncertainty and disruption. As you can see, there are some key positive financial highlights in the first half. We have achieved operating profit and cash flow improvements versus the prior year, and this remains the case when we exclude the positive impact of JobKeeper, which Hugh has referred to earlier. JobKeeper assistance totaled AUD 6.7 million for the half, with AUD 4 million received in cash payments for the end of September.
Overall, our operating profit improvement reflects the continued progress against our Branded Beef strategy. This includes an average 14.5% improvement in our meat sales price per kilo through continued brand strength, customer engagement, and the strategic allocation of product. We also reduced operating and corporate expenditure by streamlining costs across the supply chain.
This included savings in backgrounding, feeding, cattle transport, and processing, along with a disciplined focus on optimizing discretionary costs. This resulted in a AUD 22 million reduction in controllable cash costs. At the same time, adverse seasonal costs were reduced by around AUD 28 million against the same period. This result has allowed AACo to deliver positive operating cash flow for the half. Our balance sheet remains strong, and our gearing ratio has improved. Together, these results have driven a statutory EBITDA result of a AUD 15 million profit compared to a AUD 3.4 million loss in the first half of last year. As Hugh has already mentioned, these numbers highlight the resilience of our business. They show that our Branded Beef strategy is progressing well, and the execution of this strategy has helped us work through the uncertainty of COVID-19 so far in FY 2021.
I'll now turn to our P&L on slide 13. As mentioned before, we achieved a positive operating profit result of AUD 23.5 million, compared to AUD 6.3 million in the first half of last year. Excluding JobKeeper, our operating profit is AUD 16.8 million. This was achieved despite a reduction in overall revenue, which means we are generating stronger margins off a lower sales base because we have improved our average meat sales price per kilo. Total sales pricing per kilo has increased in line with overall market increases, and our disciplined focus on costs and realizing efficiencies across our supply chain is working. As mentioned already, we have secured an AUD 22 million reduction in controllable costs for this period. These cost reductions, combined with AUD 28 million of reduced adverse seasonal costs compared to half one last year.
Our cost discipline during COVID-19 has also included reduced non-essential travel and expenditure, and pay reductions for our board and senior executive team, along with temporary reductions in working hours for commercial and corporate staff. Now turning to slide 14. I'm pleased to report a positive operating cash flow for the half. This result is AUD 22.3 million compared to AUD 11 million in the prior year, and our result for the first half was AUD 18.3 when we exclude JobKeeper. As we've mentioned previously, this reflects our continued progress against our Branded Beef strategy, efficiency gains and value realization through a simpler and more efficient AACo, the identification and capture of new market opportunities, strategic allocation of product across our markets, and our rapid coordinated response to COVID-19. The same strategic focus will continue to drive us in the future.
We will continue to focus on optimizing cash flow and operating expenses. This will remain particularly important as the world continues to navigate uncertainty around COVID-19. Now to our balance sheet on slide 15. You can see we have maintained our strong balance sheet position at the end of the half. Our gearing ratio has improved compared to the prior period and is well within our target range at 27.7%, excluding the impact of AASB 16. The strength of our balance sheet and assets will continue to underpin our Branded Beef strategy going forward. As we work through the ongoing challenges of COVID-19. With that, I'll now hand back to Hugh to take us through our operating environment.
Thanks, Nigel. Turning now to the outlook for Australian beef. International demand for red meat remains strong. Australian beef continues to benefit from long-term global trends in middle-class demand. This is compounded by the ongoing effects of African swine fever on Chinese pork supply. COVID-19 has changed the food service industry globally, but customers are finding new ways to satisfy their ongoing demand. Menus are adapting to cater for lower in-venue capacities. Customers are increasingly searching out restaurant dining experiences in the home, including through online food marketplaces. The rise of the home chef is being fueled by growing engagement with virtual cooking classes by well-known chefs and rapid growth in the availability of restaurant-quality meal kits for at-home dinner events.
The inherent uncertainty of COVID-19 means we have to be prepared for a start-stop recovery in the global food service channel, and it is likely that consumer behavior will center around the home for the next 12-18 months, where eating in is the new going out. Over the coming period, we also need to be prepared for ongoing uncertainty in terms of access to the Chinese market. In particular, this has potential to impact our premium meat category, where China has traditionally provided stronger prices than other markets. On each of these fronts, the work the team has done in responding to COVID-19 will position us well to continue to benefit from positive long-term trends. We've shown great resilience and capacity for adaption this year, and this can only benefit AACo going forward.
Turning now to the outlook for the Australian cattle industry, which is on slide number 18. There are a number of important dynamics playing out in the Australian cattle industry at the moment. We've recently faced compounding drought cycles and bushfires in key parts of the country, and as a result, the national herd is forecast to reach its lowest level in 20 years. Flowing on from this change, cattle slaughter rates in the eastern states have down significantly compared to the first quarter of calendar year 2019. This is expected to flow into a 17% decline in national slaughter rates in 2020 compared to the 2019 calendar year. On the weather front, forecasts suggest a La Niña event for the current season.
Potential seasonal improvements to reduced slaughter rates could lead to growth in the national herd, and together, these trends are likely to impact prices in the market. Looking forward now from the AACo perspective, which is on slide 19. The impact of prolonged drought conditions from 2018 to 2020 and the bushfires in 2019 are still being felt. At AACo, this has driven a strategic de-stocking program over the last few years, and at the end of last financial year, we announced an overall herd decrease of 19%. Long lead times in our industry from animal conception through to final meat processing means that reduced herd numbers take time to flow through into meat production. We're starting to see this impact at AACo, with reduced meat production volumes in the first half of this year, just down 9% compared to 2019.
This will continue to impact meat production volumes for the rest of FY 2021, both for AACo and also nationally. We also expect cattle sales to reduce nationally should more balanced seasonal conditions emerge. The outlook for markets will also continue to be uncertain as COVID-19 continues to impact the Northern Hemisphere. We note that the global cases increased significantly in October. The northern winter is likely to affect our key European markets, and the impact in North America remains highly uncertain. We're also cognizant that ongoing geopolitical uncertainty has the potential to impact different markets and also different segments. We'll continue to monitor these impacts very closely, and we'll continue to drive growth in retail, online, and direct-to-consumer channels where opportunities are identified. Fundamentally, our first half results tell a story of the resilience of AACo, of our value proposition, our strategy, and most importantly, of our people.
We do face continued uncertainty and anticipate declines in meat production volumes as we move forward. The execution of our strategy has delivered strong results so far in FY21, and this strategy puts us in the best position to navigate the uncertainty we face and to continue to deliver real value for our shareholders in good times and also in bad. We thank you for your time today. We can now take some questions.
Thank you. We have a question from Mark Pirie of Berry Finance. Please go ahead.
Mark, I probably had sort of three questions. First of all, this Cooking at Home, that seems like sort of a new strategy. Can you just expand a bit more on that, like sort of offensively, are you investing in things to make that happen? Imagine you've got to pack your stuff up and then get it out there and then, distribution-wise, how it sort of works, like in major centers, is like is it happening in Sydney and Melbourne and those sort of centers? Just give a little more background on that.
Thanks for the questions, Mark. The cooking at home or the rise of the home chef, as I've called it before, it's not saying it's actually unique to Australia. We're seeing that the world over. What we're finding, is as people can't go out or they're increasing lockdown, they've got access to high-quality restaurant food stuff from direct-to-consumer channels. While people can't go out, they still want the restaurant experience at home with their families. We're seeing access to high-quality products such as ours at AACo. It's something that we're seeing around the world.
As I said before in my prepared remarks, we've been running programs such as Westholme at Home, where we work with a number of leading global chefs, especially on digital online platforms, where we show people how to use the product and how to cook with it at home. When they actually order our product through our distributors, we deliver Westholme at Home in a pretty unique, what we call unboxing experience or treat, which really drives consumer engagement with our product. That's working really well for us. I think that's actually probably something that's going to remain post-COVID-19, but we're seeing that globally. In terms of pickup of this, as I said, we're seeing it globally. It's not unique to Sydney, Melbourne, Australia. It's happening all around the world.
I think it's a really good thing that we can connect with our customers in a way that actually drives recognition of our brand outside of just going to a restaurant.
Right. You're sort of plugging into systems out there to get your product out there. You're just sort of delivering it up to the chef, and then they're actually running the distribution and getting the product out to the consumer. That's what's happening, is it?
Well, the way that our model works is that we have key distribution partners in all the major centers where we export to, and we work with our distribution partners to get our product to market, whether that's a chef or that's a consumer or other channels that we sell into. What's been notable in our response throughout the year is our ability to pivot out of what's been largely a food service category into retail, and also we've been testing direct to consumer, as we said before. We work hand in glove with our distribution partners globally.
Right. Okay. Is it still a very small % of sales? Do you have any numbers on that or?
We don't put out our direct-to-consumer sales. What you'll see in our numbers is, and it's unique to our first half this year, is we've actually moved much harder into the retail sales channels as well, and that's obviously as well as direct-to-consumer channels and the fact that our distributors are getting to customers in different ways. The fact that we're selling more into retail has obviously produced a better price per kilo, as we've announced today.
Right. Okay. Yep. Can I ask about slide nine? You've got sort of the regional sales. I think overall sales fell by 38%. Is that on one of the slides, you have the numbers for that? This slide here, it's slide nine, just sort of showing how that's happened across different sort of areas. You're sort of saying overall things got stronger in North America and Asia, excluding China, and then weaker across other areas. That's how you'd interpret that slide, isn't it? Overall, it was 38% down for AACo across everything.
That's AUD 38 million down?
No, 38% down, I think. It's on the slide a bit further on where you've got your sales, I think in the operating environment. Yeah, Nigel, that's slide, page 21. AUD 38.8 million. Okay. Total sales, AUD 144 million, down from AUD 182 million.
That's correct.
Yep. I was just trying to understand how that interacts with slide nine.
You'll see that the decline, so slide nine relates to the meat sales profile and the overall revenue number that you're referring to includes cattle sales as well.
All right. Okay. Yep. Hugh, can I just ask a final question? The Darwin abattoir , is that sort of just sitting in mothballs or is there any sort of update on what's happening with that?
There's no material update with Livingstone Beef for the half year. As we've been really clearly articulating to the market, it's still in a suspended state, and we'll continue to assess our options for the gateway asset as we move forward in the year.
Right. Okay. That's all I had.
Thank you. A final reminder, if you'd like to ask any question, please press Star then One. Let's take a little bit to pause for a moment to see if there are any further questions. There are no further questions at this time. Would you like to make some closing comments?
I'd just like to thank everyone for joining the call today and look forward to speaking to you and updating you in the full year.
Thank you. That concludes today's call. Thank you for joining us. You may now disconnect your lines.