Ann: Appendix 4C Commentary, page-226

If you look at the DAIRY RELATED COSTS, you will see that these are increasing, rather than moderating despite the existence of a more controlled, codified and /or efficient herd. The costs summary below is in reference to each 6 monthly reporting period since first being listed. The Dec14 results however have also been normalised in order to reflect like for like.

	Column 1	Column 2	Column 3	Column 4	Column 5	Column 6	Column 7
0	DAIRY RELATED COSTS
1	Item	Dec-14​	Dec-14 Norm​	Jun-15​	Dec-15​	Jun-16​	Dec-16​
2	Feed costs	227,831​	631,713​	1,176,931​	1,029,728​	2,409,529​	1,498,302​
3	Repairs, maintenance and vehicle costs	11,557​	32,044​	98,616​	95,910​	174,957​	140,832​
4	Animal health costs	15,103​	41,877​	59,680​	71,170​	143,137​	80,011​
5	Land holding and lease costs	18,404​	51,029​	48,027​	32,569​	45,743​	45,320​
6	Breeding and herd testing expenses	40,248​	111,597​	22,152​	83,686​	72,797​	107,985​
7	Dairy shed expenses	17,045​	47,261​	30,381​	49,111​	42,070​	62,142​
8	Electricity	5,878​	16,298​	37,723​	76,772​	52,311​	75,113​
9	Other dairy related costs	67,337​	186,707​	138,209​	333,821​	221,761​	732,704​
10	Total	403,403​	1,118,527​	1,611,719​	1,772,767​	3,162,305​	2,742,409​
11	12M progressive	​	Normalised​	2,730,246​	3,384,486​	4,935,072​	5,904,714​

Year on Year DAIRY RELATED COSTS appear to be rising by $1M+ on average, without there being any appreciable increase in herd size.

The biggest blowout in costs relates however to the undisclosed “other” category of DAIRY RELATED COSTS.

Through to Jun16, these costs were averaging in the low to mid-$200K range. However, in H17, these costs blew out by >3x average and by > 3½ times PCP Jun16 result, to >$732,000. On a full blown averaging (with everything in), these costs should be <$333,000, but with outliers applied, the cost range should be sub-$230,000.

Something is seriously wrong with management when the “other” category better than triples in 6 months, is your second largest cost component after feed costs, and is effectively half the feed cost, in circumstances where it should be somewhere between 20 – 30% of feed costs (at most).

The farm management responsibility is farmed out here to “elsewhere”, so arguably there is some serious explaining to be done here. This is all the more evident given that most other cost categories have all been relatively stable over the period (ie: within a broad range of each other).

Given then that the Company has a committed executive in charge, with formal CFO /financial accounting arrangements in place, and with a proper audit function in effect, it should zbe quite easy to provide all shareholders with the required explanation for these cost blowouts. They certainly haven’t been on account of:

• an increased herd size (it reduced in size during H17),
• other substantial work being done (other cost categories were muted to stable in comparison),
• a dramatic change in direction (perhaps, but the new transportation and logistics framework commenced 1/2/17, not during H17),
• a different herd structure being put in place;
• the allocation of CAPEX (given particularly that significant CAPEX had been ongoing since F14 and none of this had led to a similar sort of blowout).

The likely explanation for this though quite simply boggles the mind and so therefore what needs to be explained here should be quite illuminating, if indeed it is ever explained to shareholders,

The DAIRY RELATED COSTS argument however becomes even more streamlined once you start to do some comparisons such as average ng, applying outliers, normalising, etc, as well as applying herd adjustment ratios. Examples of all these can be seen below.

In essence, what is, should not have been, and what should have been has not been occurring, especially so since the acquisition of CDC was first announced. In essence, it seems that the acquisition of the CDC operations has masked what is really going on down at the farm level (ie: nothing to see here; instead you should be over there looking at the really big numbers).

Trouble is, DAIRY RELATED COSTS blew completely out of proportion during F16, jumping effectively by $1.55M+ YoY, and have then continued on further increasing, by another +$1M, despite their having been a subsequent reduction in herd size by 150+ during H17, although as between Dec15 and Dec16, the herd size effectively increased by 500+.

Calibrating for this though, has resulted in looked at what the normalised position should be (ie: outliers applied).

	Column 1	Column 2	Column 3
0	DAIRY RELATED COSTS
1	Item	Ave​	Outliers​
2	Feed costs	1,349,241​	1,234,987​
3	Repairs, maintenance and vehicle costs	108,472​	111,786​
4	Animal health costs	79,175​	70,287​
5	Land holding and lease costs	44,538​	41,972​
6	Breeding and herd testing expenses	79,643​	59,545​
7	Dairy shed expenses	46,193​	46,147​
8	Electricity	51,643​	55,049​
9	Other dairy related costs	322,640​	231,264​
10	Total	2,081,545​	1,851,037​
11	12M progressive	4,163,090​	3,702,074​

What this shows is that, all things being equal, the HY DAIRY RELATED COSTS equation should be ranging around the $1.85M+ mark. Adding 10% to this equation however provides a circa $2M forward, or somewhere between $3.7M à $4.0M, on an annualised basis.

The actual costs however are a further $1.9M à $2.2M above this. In other words, the DAIRY RELATED COSTS are considered way out of proportion with where they should be, even if there were to be further adjustments made on account of trying to normalise for herd size, etc.

Simply put, whether considered as being $1.9M à $2.2M overstated, or even considered at half these number rates, the financial position of AHF would have been substantially different, both at the F16 and the H17 junctures. It isn’t and it wasn’t and much of this comes down to what AHF has failed to disclose or be transparent about.

There is no point in AHF trying to suggest that they have been misunderstood, or maligned in the process when, for example, the “other” category is its second largest DAIRY RELATED COSTS expense, and upwards of >½ the corresponding costs for feed.

Even on a normalised basis, the H17 blow out in “other” costs is >2¼x what its corresponding 6M average suggests, and >3½x what the outlier estimates are suggesting. This isn’t right à not by any stretch of the imagination. So, what have the farms been up to? And more particularly, what have the Board, executive management, and the “family” all been up to?

At a time when this company is calling for increased transparency, the opaqueness of it all is simply quite thundering in all its resonating impact.

If this Company were being followed by investment analysts, or by financial or business journalists, or if financial results’ conference calls were being held, some serious questioning would be under way.

Indeed, as the following demonstrates, the argument of “the herd ate my costs” also doesn’t quite stack up once the herd figures are included as part of the equation. For instance:

	Column 1	Column 2	Column 3	Column 4	Column 5	Column 6	Column 7
0	DAIRY HERD RATIOS
1	Item	Dec-14​	Dec-12 Norm​	Jun-15​	Dec-15​	Jun-16​	Dec-16​
2	Herd size	1,468​	1,468​	1,625​	2,657​	3,302​	3,159​
3	Dairy Related Costs	403,403​	1,118,527​	1,611,719​	1,772,767​	3,162,305​	2,742,409​
4	Ave cost per period (the Cow Cost Ratio)	275​	762​	992​	667​	958​	868​
5	2MVA	​	​	878​	830​	813​	913​
6	3MVA	​	​	439​	569​	840​	852​

What this suggests is that the average cow cost is rising rapidly despite all of that home grown pasture being in place. So, whilst they may all be “happy, contented cows … with smiling faces …. and fully bellies”, the reality is that they are costing more, rather than the same or less, whilst producing less. And for this having occurred, despite the fact that Peter Skene is the CEO (but essentially, CEO of CDC and non communicado /banned from going down to or seeing things, insofar as the farms are concerned), he has nonetheless put his name to the “happy contented cows” argument and so therefore stands right there, at the front of the line of responsibility.

Now, if for any reason, this were to be considered differently, then once again, we should not have seen a blow out in costs during H17, by a factor of >25% as the following otherwise suggests:

	Column 1	Column 2	Column 3	Column 4	Column 5	Column 6	Column 7
0	DAIRY HERD RATIOS (12M prog)
1	Item	Dec-14​	01/06/2015 (N)​	Jun-15 Act​	Dec-15​	Jun-16​	Dec-16​
2	Herd size	1,468​	1,625​	1,625​	2,657​	3,302​	3,159​
3	12M progressive dairy related costs	​	2,730,246​	2,015,122​	3,384,486​	4,935,072​	5,904,714​
4	Dairy Related Costs /per cow	0​	1,680​	1,240​	1,274​	1,495​	1,869​

AHF is not a bad company. Indeed, it isn’t even an awful company. It is however a good company, run by bad management, a bad board and an even worse executive.

For all the accountability that exists out there in the world, very little of it shows up in relation to AHF.

This is therefore a very strong reason why the SP is performing as it currently is because shareholders realise that there is something wrong in respect of an otherwise good company, with a sensible or responsible business model in place, but they can’t however quite put their finger on just exactly what it is that they don’t like about the company, or more the point, its management, its board and its executive.

In times like these, real boards and real management knuckle down, get on with the job, explain things and get things sorted out. With this board, this management and this executive however, this rates as a ZERO in the context of their ongoing compliance with corporate governance, their own board guidelines, and the Listing Rules. Simply put, bad companies don’t exist, but bad management and bad boards do, and therein lies the difference à the good, the bad and the ugly.