A2 Milk Company facing stormy weather

Posted by AFN Staff Writers on 25th February 2015
A2 Milk Company facing stormy weather
A2 Milk Company facing stormy weather

Dairy company The A2 Milk Company has recorded a profit after tax for the six months ended 31 December 2014 of $125,000, a drop of 81 per cent on the same period in the previous year.

The Company attributed the drop in profits to one-off costs associated with the listing of the Company on the Australian Securities Exchange (ASX).

The Company reported a income tax charge of $1.56 million for the period, which it said represented non-deductible expenses mainly development and ASX listing costs, and UK losses not tax effected.

The A2 Milk Company reported a total revenue of $74.79 million for the period, an increase of 38 per cent on the previous corresponding period, and Group EBITA of $3.27 million before non-recurring items, an increase of 27 per cent on the previous corresponding period.

“The highlights for the first half were the stellar result for the Australian business in both revenue growth and operating earnings and our UK business achieving milestones consistent with our revised plan,” said Geoffrey Babidge, A2 Milk Company Managing Director.

“We also focused our efforts on repositioning our China infant formula business in response to the changes in regulation of imports during 2014, and further progressed the planning for the launch of a2 Milk into the USA in coming months,” Mr Babidge said. “At this stage of the Company’s development the focus is on revenue growth and market building. We are comfortable with performance being on or ahead of plan against these measures at present,” he said.

Revenue projection for 2016 ‘on track’

The Company said it believed that the 2016 revenue projection of $230 million advised in the 2014 annual report remained appropriate. According to the Company, while meaningful revenue from China and the UK was yet to emerge, these businesses were “gaining traction” and the Australian business continued to outperform expectations. In addition, sales in the US market are expected to compensate for any shortfall in other markets.

The Company said EBITDA after inter-company charges for the Australian and New Zealand operations was $4.88 million, an increase of 113 per cent on the previous corresponding period, while EBITDA associated with establishing the UK business was $1.92 million, after inter-company charges.

EBITDA associated with establishing the China business of was $610,000, after inter-company charges, and corporate and other EBITDA after inter-company charges of $0.92 million (before non-recurring items of $0.76 million).

The A2 Milk Company said its balance sheet at 31 December 2014 included cash on hand of $9.86 million. The Company said the operating cash outflow for the half primarily reflected an increase in working capital associated with the growth in infant formula and milk sales.

Australian growth ‘continues strongly’

The A2 Milk Company said its Australia and New Zealand businesses continued to perform strongly, with sales growth and operating earnings in Australia well ahead of the previous corresponding period. Total revenue growth for the Australia and New Zealand business relative to the previous corresponding period was approximately 39 per cent. EBITDA before inter-company charges was $13.96 million.

Fresh milk sales of a2 Milk increased on the previous corresponding period in AUD by 16 per cent as a result of continued growth in brand awareness and presence in the retail trade.

Concerns over unfair marketing of rival product

In response to competitor activity, A2 said the business continued to actively communicate the features and potential benefits of a2MC branded products and the distinction between the Company’s products and other dairy products or brands that contain A1 beta-casein protein.

Although the Company did not mention other companies specifically in its report, Australian Food News notes that market commentators have said a marketing campaign by rival milk producer Lion may have adversely affected sales of A2 milk. This is because, while the A2 marketing message highlights the absence of A1 protein in the A2 milk, Lion have promoted the fact that their milk includes A2 protein while also containing the A1 protein. This may have confused consumers into misunderstanding the A2 marketing message.

The Company said its latest data showed the market share of a2 Milk fresh milk in Australia had grown to approximately 9.3 per cent by value in the grocery channel (Australian Grocery Weighted Scan December 2014 quarter).

Improvement in processing efficiencies at the Company’s Smeaton Grange processing facility partly offset an increase in raw milk costs that took effect during the period. The Company’s gross margin for the period remained strong at about 35 per cent.

A2 Platinum infant formula growth

A further standout for the period was the growth in sales of a2 Platinum infant formula in Australia in both grocery and pharmacy channels, and also in New Zealand where sales grew from a low base. Total sales of infant formula in Australia and New Zealand for the half year were $16.07 million.

The A2 Milk Company said its grocery distribution in Australia was broadened, with ranging in Woolworths achieved from November 2014 that complemented distribution previously achieved in Coles and major independents.

The Company continues to build milk supply in New Zealand to facilitate increased production of infant formula by our manufacturing partner, Synlait Milk Limited.

United Kingdom distribution to plan

The Company said its UK business had been implementing the revised business model as outlined in its most recent annual report.

The model focuses on three key elements: (i) building distribution in existing accounts and extending into new accounts, (ii) increasing product awareness in a more targeted manner, and (iii) enhancing the Company’s price positioning and packaging formats to improve margins.

A2 said it was pleased with progress to date, with the new product positioning receiving broad acceptance across the retail trade.

The new one litre semi-skimmed format was ranged in J Sainsbury stores (a new customer for a2MC) from November 2014, and one litre semi-skimmed and whole milk was accepted for ranging in our existing retail partners Tesco, Waitrose, Ocado and Morrisons from early calendar 2015. In addition, the product is to be ranged in Whole Foods Market from February 2015 and a key London wholesaler, Marigold. In each of the retailer accounts, the product is being ranged in the speciality milk area. Distribution of the new one litre product continues to grow – the product is expected to be ranged in approximately 1,000 retail outlets across the UK, which represents the broadest level of distribution achieved since entering the market in 2012. We have also commenced presenting our a2 Milk™ UHT milk range to the retail trade.

The Company said it has worked closely with, and been well supported by, its supply partner Muller Wiseman Dairies (MWD) in managing the processing and logistical issues around the packaging change.

With the improved distribution platform now in place, A2 said its key focus was building consumer awareness and rate of sales per store in its key customer accounts. The new marketing strategy will commence from this month, with a focus on welcoming consumers who currently limit their dairy intake or exclude dairy from their diets back to milk through targeted digital media and marketing activity in-store.

The investment in the UK business during the half was GBP2.2 million, which is consistent with the FY15 financial plan. Sales revenues, whilst modest, are forecast to double during the second half.

China infant formula business resumed

The regulatory environment for infant formula sold in China was evolving during calendar 2014. As part of this, there were changes to access arrangements for imported product, including a requirement for manufacturing companies to achieve a new form of registration from May 2014. A2 said its manufacturing partner, Synlait Milk Limited, achieved the new form of registration in September 2014.

As a result of the uncertainties arising from these changes, sales of a2 Platinum infant formula to China were on hold from May 2014 until a first order of approved registered product was dispatched in December 2014. In addition, a2MC deemed it appropriate to provide one-off marketing funds to assist distributors in their selling activities. Accordingly, the Company said it incurred an elevated level of marketing spend in the half notwithstanding that its sales were low.

In November 2014, the Company advised of changes to the supply and distribution arrangements with China State Farm Holding Shanghai Company (CSF). Under the revised arrangements, CSF has become the exclusive import agent for a2 Platinum infant formula imported into China and will provide government advice and support on an on-going basis. As a result, a2MC has assumed overall responsibility for distribution of infant formula products in this market and is assessing new third party distribution arrangements to expand the network in the near term. The Company said it continued to oversee the marketing and communication activities for the brand and was progressing development of new marketing initiatives including establishing our own e-commerce capability for sales into China. The Company said it considers that these changes better position the business for success.

Continued development of plans for China fresh and UHT milk sales

The Company said it continues to develop its plans and structure for sale of fresh milk and UHT milk in China, with other Asian markets to follow.

As part of the market entry strategy, from September 2014, a2 Milk branded fresh milk sourced from its Smeaton Grange facility has been airfreighted to Shanghai for home delivery direct to consumers. The Company said it is currently the largest fresh milk brand by volume being exported from Australia.

USA market entry plan being finalised

The Company has been developing a plan to launch a2MC branded milk into the USA market during the fourth quarter FY15. It said significant progress was made during the half in recruiting the core management team, developing the launch product and marketing plan, identifying milk supply and commencing discussions with the retail trade.

The Company said its plan centres on a launch into the West Coast region commencing in the fourth quarter of FY15. Since December 2014, the Company has completed presentations to key retailers in this market and progressed the appointment of a high quality milk processing partner.

While the opportunity is potentially nationwide, A2 said its phased entry plan was focused on achieving agreed milestones in the launch region prior to extending distribution into further state markets. Taking this into account, the Company will focus its selling activities in the West Coast region and base its administration activities in the centrally located State of Colorado in anticipation of further expansion over time.

Intellectual property and developments in scientific research continues

The results of a human digestion trial sponsored by a2MC and conducted by Curtin University of Western Australia were published in the European Journal of Clinical Nutrition in August 2014.

This trial provided new support for the digestive benefits in humans of a2MC products and supported previous findings in published animal studies. The Company has commenced human studies in a number of markets to further build on this research.