Wednesday, December 6, 2023

ANZCO completes trifecta for meat exporters

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Impressive profits herald favourable market conditions for red meat in foreseeable future
Investments in value-add meat-based businesses – for instance, high value medical products – contibute to overall performance and, crucially, provide a stable income stream.
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ANZCO’s impressive profit for 2022 completes a very successful trifecta for the meat processors and exporters that publish their results. The year saw a 96% after-tax gain on the previous 12-month period, which had been a company record, although CEO Peter Conley admits the current year will struggle to match it. 

More challenging trading conditions that made their presence felt in the December quarter continued into the first quarter of the 2023 financial year, affected by higher costs and tougher market demand. Reassuringly for exporters and farmers, there has been some improvement in international demand and prices in recent weeks.

ANZCO’s profitability has risen dramatically since the move by its majority shareholder, Itoham Yoneku Holdings, to acquire 100% ownership in 2017 when it posted a $15 million loss. The influence of the change in shareholding is demonstrated by comparing the size and composition of ANZCO’s balance sheet at the end of that year with the latest year’s figure as well as the dramatic improvement in profit. 

In 2018 the company lost $27m, but the ownership concentration started to pay dividends from 2019 with progressive improvements in year-on-year profit. At the time Conley said the turnaround in 2019 was primarily the result of several factors including the simplification of business systems, closure of overseas offices and sale of non-core assets in addition to plant automation and the introduction of a new planning system. 

Since then revenue has risen in common with its competitors, but the most impressive aspect of ANZCO’s performance has been the strategic focus on better understanding its cost structures, what is core business and how to improve the productivity of its assets and workforce. 

In releasing ANZCO’s annual result, Conley paid credit to “a continued focus on core business activities, growing returns from strategic investments and the hard work and dedication of our people who have continued to deliver through challenging times”.

He also noted a strong emphasis on ensuring livestock is procured to meet customer expectations, which has enabled the company to support its key customer relationships and take advantage of strong global demand for premium beef and lamb. 

Investment in its value-added meat-based business, including notably in 2022 the equity-funded acquisition of Moregate Biotech, has contributed significantly to the performance improvement. The Moregate business converts animal co-products into very niche small volume and high value medical products such as blood serum and tissue for wound repairs, which it markets to long-established customers. 

Apart from high profit margins it provides a stable income stream that offsets the volatility of the meat industry’s traditional trading pattern.

Investments in associate companies, including a 12% shareholding of the NZ and Australian Lamb Company in Canada, 14% of the Lamb Co-op in the United States and 50% of Taranaki Bio Extracts, contributed $6.3m to the profit, an increase of $2m on the previous year. 

Conley says the North American business has changed over the past 10 years to become more focused on value added, although it is not possible to remove volatility entirely. However he is satisfied it provides a very valuable return. The other two shareholders, Alliance and Silver Fern Farms, hold the balance of the shares, which implies a proportionately greater benefit to their respective profits.

ANZCO’s positive performance, coming on the back of record profits for both these competitors, signals a highly satisfactory state of affairs for the meat processing and exporting sector, which still faces a number of headwinds, notably the impacts of climate change mitigation. 

The next 10 years and beyond will almost inevitably see a decline in the livestock population, whether because of government mandated reductions to meet stricter greenhouse gas emissions targets, the effect of past and future forestry conversions, and other pressures on land use such as urban sprawl. 

In the not-so-distant past the reaction of the industry was to compete vigorously for throughput, culminating in the least efficient being swallowed up or going to the wall. There is no guarantee this won’t happen again, but present capacity is much more efficient and better utilised than it was, while today’s shareholders will be less willing or compelled to flush their assets down the drain. 

The strength of processors’ balance sheets and, as a result, support of their bankers will enable the industry to manage change in a measured way, rather than being forced into receivership.

The more likely scenario is a combination of gradual efficiency-driven market share gains or losses and capacity adjustments to reflect this transition as well as regional land use changes. Those companies with plants in areas most affected by forestry conversions or other land use factors will come under greater pressure to reduce capacity or close plants. 

This places even more emphasis on the industry’s ability to continue down the value-added path, generating more revenue from less but higher quality throughput. A recent United Nations report forecasts a 14% increase in meat consumption by 2030, predominantly from a wealthier consumer base in Asia and Africa. 

While lab grown meat will undoubtedly take up part of the increase, there are still concerns about just how healthy and environmentally friendly many of these products actually are. Reports from the United Kingdom indicate a substantial drop in sales of alternative protein products, both because of concerns about the ingredients and the taste. 

Despite the need to overcome these challenges, the red meat sector looks to be blessed with favourable market conditions into the foreseeable future, which the processor exporters are well structured to take advantage of.

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