a2 Milk Company sees growth despite net profit drop of more than 50%

By Jim Cornall

- Last updated on GMT

The company said its outlook for 2H22 revenue has improved. Pic: a2 Milk Company
The company said its outlook for 2H22 revenue has improved. Pic: a2 Milk Company

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The a2 Milk Company (a2MC) has revealed its 1H22 results, which it said are in line with expectations, and place it in a strong position to execute its strategy and deliver revenue growth in FY22 in a challenging and volatile market.

This is in spite of net profit after tax including the non-controlling interest being down 53.3% to NZ$56.1m (US$37.7m).

In October 2021, the company announced its refreshed growth strategy which has been adapted to the rapidly changing infant milk formula (IMF) market dynamics in China. The company also outlined its medium-term indicative sales and EBITDA margin ambition. With its growth strategy review completed, the company has moved into the execution phase focused on implementing its strategic priorities and related initiatives, which is in its early stages and progressing well.

a2MC said actions taken 4Q21 and 1Q22 to address excess inventory are also proving effective with channel inventory levels reducing to targeted levels, product freshness improving and market pricing increasing across English label and China label IMF, enabling healthier channel economics for participants in the a2MC business system.

The company said market conditions continued to be challenging with the China IMF market declining by 3.3% in value during 1H22 due mainly to the cumulative impact of a lower birth rate, while the Australian and US (premium) liquid milk markets were in growth.

Revenue was marginally lower than 1H21 in line with guidance, down 2.5% to NZ$660.5m (US$443.9m) on the prior corresponding period, and up 24.8% on 2H21.

China label IMF sales were constrained by a2MC in 1Q22 to rebalance distributor inventory levels with sales down 11.4% for 1H22. However, consumer offtake growth in store and online was up double-digits with higher market share.

English and other label IMF sales were down 9.8% in 1H22 compared to the previous corresponding period, with lower market share, but with an improvement in sales trajectory during the half particularly in the ANZ reseller channel.

Earnings before interest tax depreciation and amortization (EBITDA) was down 45.3% on the previous corresponding period to NZ$97.6m (US$65.6m).

The company said its outlook for 2H22 revenue has improved, and is expected to be significantly higher than 2H21. However, it warned this revenue improvement is not expected to translate into higher earnings as the company significantly increases brand and other reinvestment consistent with its growth strategy.

China IMF market dynamics

a2MC said the China IMF market is rapidly changing and continues to be impacted by China’s lower birth rate. Following an 18.1% decrease in births in 2020, there was a further 11.5% decrease in 2021 to 10.6m. In volume terms, the overall IMF market in China decreased by 5.0% in 1H22, driven by the reduction in the birth rate impacting early-stage products, partially offset by strong growth in Stage 4.

Although market performance varied by channel and segment, overall, market value also decreased by 3.3% in 1H22 due to the lower number of births, an increase in competitive intensity and promotional activity impacting average pricing, partially offset by a continuation of the premiumisation trend as well as a mix shift to higher-priced China label channels.

Local competitors continue to gain market share against the traditional multinational brands, driven both by the strength of local brands, as well as an overall mix shift from cross-border to domestic channels.

In 1H22, the ultra-premium segment (where the company’s China label product competes) performed above market and was in growth, while the premium segment performed below market. The A2 protein segment also performed significantly above market.

Despite the challenging China IMF market dynamics, a2MC said performance in 1H22 in China label IMF was encouraging and performance in English label IMF was stabilizing.

Growth strategy

The company communicated its strategic plan to the market in October 2021 and has since been focused on execution. It said early progress has been made against groupwide strategic initiatives.

This includes capturing the full potential in the China IMF market, ramping up product innovation, transforming the supply chain, and accelerate a path to profitability for its USA and Mataura Valley Milk (MVM) divisions.

On 30 July 2021, a2MC completed the acquisition of a 75% interest in MVM, making 1H22 the first time MVM has been included in a2MC’s financial reporting. MVM segment revenue of NZ$38.6m (US$25.9m) and an EBITDA loss of NZ$10m (US$6.7m) were recorded for the five months of a2MC’s ownership.


The company said its outlook for 2H22 revenue has improved. It is still expected to be significantly higher than 2H21, and with growth now expected on 1H22 and for FY22, ahead of initial expectations due mainly to growth in China label and English label IMF.

However, this revenue improvement is not expected to translate into higher earnings as the company significantly increases brand and other reinvestment consistent with its growth strategy.

China label IMF sales are still expected to be up in FY22 and now expected to be significantly up in 2H22 versus 1H22. This is due to 1H22 having been impacted by distributor inventory rebalancing and in 2H22 as the company’s growth strategy starts to have a positive impact on MBS and DOL sales.

In English label IMF, sales are now expected to be up in FY22 and up in 2H22 versus 1H22 due to improved inventory levels and pricing, as well as improved execution in ANZ reseller and CBEC channels driven by the company’s growth strategy.

MVM revenue is now expected to be approximately NZ$100m/US$67.2m (excluding intercompany revenue). An EBITDA loss of approximately NZ$20m (US$13.4m) is still expected for the 11 months post-completion. No material change in EBITDA is expected despite the increase in sales due to an increase in milk costs and a reduction in more profitable nutritional sales.

a2MC managing director and CEO, David Bortolussi said, "Despite challenging market conditions in China and Covid-19 volatility, we are making good progress stabilizing the business.

“Our first half result is in line with expectations, placing the company in a strong position to continue executing our strategy and deliver revenue growth in FY22. The growth strategy we announced in October last year to respond to a rapidly changing China market has been completed and implementation is underway with good early progress across a range of initiatives.”

Bortolussi said, “We remain confident in the long-term China infant milk formula market, and we are growing share in our China label business in-store and online with strong consumer offtake and share growth.

“The actions we took to address excess infant milk formula inventory last year are proving effective, and we are seeing improvements in English label channel inventory levels, market pricing and product freshness.

“Our brand health is strong, and we will continue to increase brand investment, content generation, and activation to drive awareness and conversion.”