15 February 2017
NZX/ASX Market Release
Continuing strong growth in infant formula drives record results for The a2
Milk Company
Half-year earnings exceed those for the full financial year 2016
Overview - financial results for the half-year ended 31 December 2016 (NZ$m)
- Total revenue of $256.1 million - an increase of 84% over the prior
corresponding period (pcp)
- Operating EBITDA1 of $64.1 million - 243% ahead of the pcp
- Net profit after tax of $39.4 million - 290% ahead of the pcp
- Continuing strong growth in sales and market share for a2 Platinum(R)
infant formula in Australia and China
- Sales growth for fresh milk and whole milk powder in Australia
- Broader distribution and growing sales of fresh milk in the United States
- Increased sales and positive operating earnings in the United Kingdom
- Operating cash flow of $38.1 million - $48.1 million more than in the pcp
- Conservative management of infant formula inventory
The a2 Milk Company ("a2MC" or the "Company") delivered a further step upward
in performance in the first half of the 2017 financial year, with operating
earnings and net profit at higher levels than those for the full 2016
financial year.
The half-year performance reflects outstanding results from the Australia/New
Zealand (ANZ) and China businesses, driven primarily by continuing strong
growth in demand for a2 Platinum(R) infant formula. Revenues increased by 62%
and 348% in Australia and China respectively, and Operating EBITDA by 104%
and 1,021% respectively. The growth rate in part reflects inventory shortages
experienced during the pcp.
Results in the United Kingdom and United States also improved. The UK
business increased sales and achieved positive operating earnings in the
period, while the USA business achieved increased distribution and higher
rates of sale in a number of key accounts.
Managing Director Geoffrey Babidge said: "The half-year results show
continued progress against the Company''s objective of building a global brand
based on the health and digestive benefits of nutritional products containing
only the A2 beta casein protein - free of the A1 protein.
"This has involved continuing to grow the established positions in fresh milk
and infant formula in Australia while also investing in the key international
growth initiatives in China, the United States and the United Kingdom.
"The outstanding aspect of our half-year performance was the continuing
growth in a2 Platinum(R) infant formula in both Australia and China, through
a multi-channel strategy involving a combination of local distribution,
ecommerce and overseas shopping (''Daigou'') traders. The growth is driven
predominantly by the growing recognition and trust of the a2(TM) brand
amongst Chinese consumers, reflecting a strong communications platform that
speaks directly to mothers and to health care professionals in both Australia
and China.
"Whilst the growth in demand was evident across the half-year, there was a
marked increase in infant formula sales in the 2nd quarter corresponding with
the phasing of key sales events in China and an increase in market share in
both Australia and China. This was achieved whilst maintaining a prudent
approach to the management of production and inventory in recognition of
foreshadowed changes in regulations for infant formula sold in
China."
The first half FY17 result included:
- ANZ EBITDA of $70.4 million
- China EBITDA of $13.7 million
- UK and USA EBITDA of ($7.7) million
- Corporate and other costs of $12.3 million
- Basic earnings per share (EPS) of 5.51c; and diluted EPS of 5.37c
The increase in corporate and other costs in the half is primarily a result
of increased spend on business development and research and development costs
associated with a higher level of business activity.
Cash on hand at 31 December 2016 increased significantly to $108.4 million,
reflecting the increased earnings, together with pro-active management of
working capital, particularly infant formula inventory levels, during the
period.
As advised at the Annual Meeting in November 2016, provided that current
trends in earnings and cash flow continue and there is no need for
significant capital expenditure, the Board expects to adopt a dividend policy
following the completion of FY17.
Board of Directors
In line with the Company''s previously announced policy of board renewal,
Warwick Every-Burns was appointed an independent non-executive Director of
the Company on 23 August 2016. Mr Every-Burns has been a career Consumer
Packaged Goods (CPG) executive with relevant global experience, including
senior roles with The Clorox Company of the USA, NationalPak (the Glad
Products Company), Unilever and Treasury Wine Estates, and is currently a
non-executive Director of Treasury Wine Estates.
Mel Miles retired as a Director on 23 August 2016 after six years on the
Board, but continues to advise the Company in a consultancy role.
Strategic Agenda Update
The Company continues to focus on building a portfolio of milk-based
nutritional products centred on the unique strengths of the A1 protein-free
proposition. The broader nutritional strategy, from infant through to adult
products, represents a natural evolution that the Company expects to be more
attractive in the medium term than one based purely on traditional dairy.
While fresh milk and infant formula generate most of the revenue and earnings
at this stage of the Company''s development, the product portfolio has been
broadened through the launches of branded whole milk powder in Australia and
China; fresh milk (sourced from Australia) into China; and UHT long life milk
and infant formula in the UK.
Growth in the product portfolio will continue with the planned launch of
additional nutritional products over the next 12 months.
As an outcome of the Company''s growing profile in the USA, an extension of
its distribution footprint is progressing through a major retailer in the
South East from March 2017. This development is referenced more fully in the
relevant section below.
A comprehensive study and strategic review of the infant formula market in
China was carried out in conjunction with a leading in-market consultancy
during the period. The review has assisted in deepening the Company''s
understanding of this market at a fundamental level and has confirmed broadly
the Company''s current approach in China whilst also giving further insight
into future opportunities.
The Company also progressed a review of growth opportunities in the South
East Asian region.
The Company is strongly focused on building constructive relationships with
supply and distribution partners in all markets. A particularly significant
development during the half-year was the completion of a new Supply Agreement
with our supply partner for a2 Platinum(R) infant formula, Synlait Milk. This
new agreement, for a minimum term of five years, provides access to an agreed
level of capacity beyond current requirements, an obligation on Synlait to
supply to order, and does not include "take or pay" provisions.
ANZ
The ANZ business has continued to show very strong momentum, with sales and
operating earnings in Australia considerably ahead of plan and pcp. Total
revenue across all product categories increased by 62% to $206.6 million and
Operating EBITDA by 104% to $70.4 million.
Growth occurred in all categories, but was driven primarily by rapid
expansion in sales of a2 Platinum(R) infant formula, which registered
substantial gains in market share and sales volumes. The brand achieved a
~25% grocery/pharmacy scan market share for the 13 weeks ending 1 January
2017 by value, compared with 16.7% in the comparable period of the prior
year.
a2 Platinum(R) has been the fastest-growing infant formula brand in the
Australian market in both the last quarter and the moving annual total, and
was the No. 2 brand by market share in the latest quarter.
Close attention has been and will continue to be applied to supply chain and
inventory management, taking account of foreshadowed changes in the
regulatory environment. Inventory remained at below average levels for the
industry in part as a result of the continued expansion in sales. There is
also a strong focus on maintaining deep insight into the ''Daigou'' channel,
including pricing, communication and customer management. The Daigou channel
has become a significant and growing sales channel from Australia to
consumers in China.
Sales of a2 Milk(TM) fresh milk increased by 3% over the pcp. Market share by
value was stable at approximately 9.3% (Australian Grocery Weighted Scan 18
December 2016 MAT). a2 Milk(TM) and the a2 Platinum(R) brands enjoyed the
highest level of advertising spend across the fresh milk and infant formula
categories respectively for the 12 months ending 31 October 2016.
Sales of a2 Milk(TM) whole milk powder, launched in June 2015, grew
significantly compared with the levels achieved in the pcp.
China and Other Asia
Sales and earnings from the China business grew very strongly in the
half-year. Total revenue increased significantly to $37.7 million and
Operating EBITDA increased to $13.7 million.
Growth in the half-year was driven by increased consumer demand aided by an
increasing understanding of the unique attributes of nutritional products
that contain only the A2 beta casein protein - free from A1 protein. The
business continues to invest strategically in building that understanding
through a promotional programme that includes extensive online activity and
events in Mother & Baby stores (MBS).
The business has a flexible multi-channel infant formula strategy to achieve
growth - in both China label (predominantly in MBS) and cross-border ANZ
label online with major e-retailers. a2 Platinum(R) achieved ~2.6% value
share in the quarter ending 31 December 2016 within the segment of the market
as measured by Kantar. This share, while growing at a substantial rate, is
modest in the context of the overall market in China and thus highlights a
considerable growth opportunity for the Company.
Promotional activities have included a strong focus on communicating the
benefits of a2 Platinum(R) infant formula through a testimonial approach,
featuring mothers in China and Australia reporting on their own experiences
and on educating health professionals.
The e-commerce strategy is centred on building strong relationships with
profile providers such as Tmall, JD.com, Mia, Kaola, VIP and other strategic
platforms. The promotional calendar has a strong bias towards the first half
of the financial year given sales for the three largest e-retailer events
fall predominately within the first six months.
Sales on ''Singles Day'' more than doubled the levels achieved in the previous
year across the top four e-commerce platforms, while a2 Platinum(R) achieved
the No. 1 sales position in its category on JD.com. Sales momentum continued
during the "12/12" sales event and the initial build for Chinese New Year.
The offline strategy is based on sustainably driving sales in MBS, growing
the number of distribution points and significantly enhancing instore
education and shopper marketing activities through investment in increased
field resources and point of sale materials.
Sales of a2 Milk(TM) branded fresh milk sourced from Australia, in key
premium retail stores and e-commerce platforms, also continued to grow from a
small base.
The Company continues to closely monitor the regulation of infant and other
nutritional products in China and in cross-border trade. It believes it is
responding satisfactorily to the current phase of regulatory activity,
including infant formula registration and labelling guidelines, and is
focused on ensuring it remains well-positioned to deal with future
developments.
USA
The USA business made further progress against the objectives set out for its
launch phase, with pleasing gains in distribution and sales velocity. The
product is positioned in the specialty milk section, which is the
fastest-growing segment of the total milk category.
The a2 Milk(TM) brand was launched in Southern California from April 2015 and
Northern California from September 2015. Two major chains, Trader Joe''s and
Target, began distribution in California during the half year. The business
currently has distribution in about 1,800 stores in California, the Pacific
Northwest and the home market of Colorado.
The sales focus remains on building unit sales per store per week (UPSW)
relevant to the speciality milk category. The business is expected to deliver
a progressive improvement in sales velocity in its key accounts during the
financial year.
Marketing and communication activity increased during the half-year across
digital and social media platforms, through retail promotions and through a
public relations programme. The product range has received mainstream media
coverage, notably through the Los Angeles Times Sunday Section, Fortune,
Bloomberg Newsweek, Mother Jones, Forbes, New Nutrition journal, digital
publications and television stations in Southern California, with reach
extended further through online media.
Supply chain efficiency was enhanced through the engagement of a second dairy
processor, in the Los Angeles basin, allowing the business to ship locally to
the California market. The business also entered into a nonexclusive licence
with its procurement partner, Prairieland Dairy in Nebraska, to build
awareness and distribute fresh milk in the states of Kansas, Missouri and
Nebraska under the a2 Milk(TM) brand.
The market entry strategy for the business has centred on launching primarily
in California and building an understanding of the key drivers for growth in
this market prior to expansion. The Company considers it now has a clearer
view of the key factors for success in this market and other potential state
markets. Accordingly, it is progressing an opportunity to expand its
footprint significantly with a launch into the South East of the USA, in
March, in association with the Publix Group. Publix is a highly-regarded
major retailer with about 1,100 stores,
primarily in Florida, Georgia and the Carolinas. We anticipate ranging in all
stores. To support this launch, the business expects to increase its
marketing spend in the second half.
The Company is very pleased with the opportunity to expand the USA business
beyond the West Coast. We acknowledge that the timing is ahead of plan and
the likely investment in the USA business will consequently be higher than
previously assumed. Accordingly, we now estimate that the level of further
investment in this business over this year and the subsequent two years prior
to positive monthly EBITDA will be approximately US$30 - 35 million. Given
these changes, we have determined it appropriate to writeoff NZ$2.2 million
of capitalised USA intangible assets.
UK
The United Kingdom business achieved a significant improvement in
performance, with increased brand awareness, sales and positive operating
earnings for the half-year for the first time.
Sales of a2 Milk(TM) branded fresh milk grew in excess of 45% on the pcp.
Average rates of sale in-store improved significantly and distribution in key
retailer accounts is now approximately 1,400 stocking points.
This performance was achieved by a continuing focus on consumers and retail
customers, with particular benefit from the ''a2tonishing'' advertising
campaign launched in May 2016 and continued into the half-year. The business
also sought improved point of sale presence through its out-sourced field
team and has recently achieved extra facings in a key account. The in-house
digital team continued to build relationships and activities with consumers
and the health care professional community.
UHT long life milk was launched in September 2016 in selected channels and
grew at a satisfactory rate. The business is pleased with the continued
growth of infant formula sales in the non-grocery segment and will assess the
opportunity in the retail market during the next 12 months.
Research and development (R&D) and Intellectual property (IP)
The Company continues to drive and support R&D around the benefits of A1
protein-free products, and to develop its portfolio of intellectual property
(including brand assets and proprietary know-how).
The breadth and depth of the IP portfolio, coupled with first mover
advantage, continue to support our market position. The patent portfolio
covers a range of compositional benefits and therapeutic uses of A1
protein-free products, with protection for some applications through to 2035.
R&D focus in the half-year included:
- Completion of a significant clinical study undertaken in China (600
participants) that has now been submitted for publication. The study builds
upon digestive benefit findings from successful China pilot study published
in April 2016 and gives further insight into digestive mechanisms;
- Concurrently a study conducted in China amongst pre-schoolers has been
completed and the authors are currently preparing for publication. The
results are understood to be aligned with adult findings around digestive and
cognitive responses;
- A clinical study in association with Monash University, Australia,
examining the benefits of a2 Milk(TM) for IBS (irritable bowel syndrome)
sufferers is under way;
- Clinical examination of benefits to gut and systemic inflammation at a
leading USA institution, Pennington Biomedical Research Centre is under way,
and
- Work pursuant to a New Zealand government grant for research to support
benefit claims in international
markets has commenced.
In October 2016, UK-based Nutrition Journal reported that consumption of a2
Milk(TM) increases the natural production of the body''s key antioxidant -
Glutathione (GSH), widely recognised for its association with a range of
health benefits - in milk-intolerant consumers.
The Australian Federal Court case with the Lion Group initiated in June 2016
is scheduled to be heard in November 2017. The a2 Milk Company is pursuing
Lion over what the Company believes are misleading and deceptive packaging
and advertising claims. Lion has filed a cross claim challenging the way the
Company promotes a2 Milk(TM). With the scientific evidence in support of the
benefits of a2 Milk(TM) continuing to strengthen, the Company is confident in
its position.
Full year FY17 outlook
An update on the Group''s revenue and operating earnings for the four months
to October 2016 was provided at the Annual Meeting on 22 November 2016. The
Company has since delivered a very strong first half and performance in
January 2017 is consistent with plan.
As previously indicated, the Company closely monitors the outlook relating to
the regulatory environment for infant formula in China and likely competitor
activity in each of our markets and consequently continues to adopt a prudent
approach to inventory management.
Given that the timing of major selling events in China is weighted towards
the first half, and as a result of our prudent approach to inventory
management, the Company is anticipating lower infant formula sales during the
second half relative to 1H17, although they will be materially higher than in
2H16. In addition, the investment in marketing will likely be higher in the
second half by up to $15 million, based on the planned phasing of
communication and development activities across the year, in particular for
the USA and China.
For further information contact:
The a2 Milk Company Limited
Geoffrey Babidge
Managing Director and CEO
+61 2 9697 7000
End CA:00296746 For:ATM Type:HALFYR Time:2017-02-15 08:30:08