Infant formula drives profits at a2 Milk

By Jim Cornall

- Last updated on GMT

The infant formula sector has proved to be the driving force behind strong results at a2 Milk
The infant formula sector has proved to be the driving force behind strong results at a2 Milk

Related tags Infant formula Milk A2 milk

The a2 Milk Company has posted its financial results for the six months ending December 31, 2015.

The figures show total revenue of $91.8m (NZ$139.1m), an increase of 86% over the prior corresponding period (pcp).

The company announced substantial growth in sales of a2 Platinum infant formula across Australia and New Zealand (ANZ) and China, with total revenue of $48.8m (NZ$73.9m), up 340% on pcp. This compares with previously advised sales for the four months to 31 October 2015 of $25.1m (NZ$38m).

The ANZ and China infant formula revenue accounted for 53% of total Group turnover.

472% EBITDA increase

The reported net profit after tax was $6.7m (NZ $10.1m), compared to $66k (NZ$100k) in the pcp.

The Group operating earnings before interest, taxes, depreciation and amortization (EBITDA) of $12.3m (NZ$18.7m) represented a 472% increase on pcp. This result includes expensing establishment costs in the US and UK markets of $5.3m (NZ$8.1m), record operating performance in ANZ and significant growth in China.

Due to the strong reported results, a2 Milk has revised its full-year forecast upward, with Group revenue in the range of $221m (NZ$335m) to $231m (NZ$350m) and Group operating EBITDA forecast to be in the range of $29.7m (NZ$45m) to $32.3m (NZ$49m).

Infant formula “significant contributor”

Managing director Geoffrey Babidge said, “The Company’s strategic agenda has been focused on growing and broadening the ANZ milk business and developing growth opportunities in select international markets.

“Following a period of development, a2 Platinum infant formula has become a significant contributor to growth and earnings in ANZ and China, which we see continuing. In addition, we see positive prospects for growth of a2 Milk whole milk powder, which was first launched late last financial year.

“We are pleased with the growing level of distribution for a2 Milk in the state of California and the repositioning of our brand in the UK during the period.”

The company stated that an increase in corporate and other costs in the half-year period was primarily a result of higher employee share scheme expenses, increased research and development costs associated with a higher level of activity, and legal expenses.

Strategic Agenda Update

The results published noted that infant formula has emerged as a significant contributor to growth and earnings for the Group as a whole. The Company identified a significant growth opportunity in a2 Milk branded milk powder, which was launched in limited release from June 2015.

The majority of sales occurred within the Australian grocery and pharmacy channels. In addition, direct sales into China increased significantly with strong growth in the cross border ecommerce channels and mother & baby retail stores (MBS), the company said.

It added that its infant formula business in both ANZ and China is being supported by its manufacturing partner in New Zealand, Synlait Milk.  It noted that while it experienced stock shortages, in particular during the first four months of the half, there has been an increased production schedule, with Synlait to meet increased demand.

The Company is in the process of further building milk supply in New Zealand to facilitate further increases in infant formula production during FY17.

The infant formula regulatory environment in China continues to evolve, however the Company said it considers itself well placed to respond to changes in regulation in conjunction with its manufacturing partner.

ANZ experiences growth

Market share of a2 Milk fresh milk in Australia by value has remained stable at approximately 9.3%, with fresh milk sales up 5% over the pcp.

The company said that a2 Platinum has been the fastest growing infant formula brand in the Australian market in the last four quarterly periods. 

In Australia, a2Milk said that fresh milk sales were up 5% over the pcp.

a2 Milk whole milk powder was launched in June 2015, and the company said sales are building in this market and into China, albeit limited in the short term by supply constraints. a2 Ice Cream was launched in two major retailers from August, and distribution has been broadened into a third major retailer from January 2016.

China business increasing

a2 Milk said that the China business returned a positive EBITDA for the first time.

The Company’s China e-commerce strategy is centred on building multiple relationships with profile providers such as Tmall and (China's largest online direct sales platform), and a number of other strategic platforms.

The company said that it has increased its bricks and mortar distribution network to over 1,000 MBS stores served by 32 distributors, with particular strength in East and West China and with further growth planned in the second half. In October, the company entered into an exclusive distributor agreement for five key provinces in China with DKSH (China) Co., Ltd.

New products for UK

In the UK market, distribution grew to around 1,200 stores during the half year. The company plans to extend the product portfolio with UHT long life milk launched from September in selected channels and the commencement of a trial for a2 Platinum infant formula.

Launch in US

The launch of a2 Milk in southern California started in April 2015 and extended into northern California from September. The product is positioned in the specialty milk section, in four variants.

Research and Development (R&D) and Intellectual Property (IP)

The company said that it has continued to develop its IP portfolio and participate in R&D programs characterizing the benefits of the A2 beta casein protein and absence of the A1 beta casein protein.

a2 Milk has commissioned two additional human clinical trials – the first will be led by Professor Peter Gibson in association with Monash University, Australia. The second will be with a US biomedical research center. Further clinical trials to assess the benefits in adults, pre-schoolers, and infants have also commenced in China.

In December 2015, the New Zealand Government awarded the company a $725k (NZ$1.1m) three-year research grant in partnership with AgResearch and The University of Auckland to validate the digestive benefits of A2 beta casein protein. 

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