A2 Milk sees return to sales growth, ramps up marketing spend

The dual-listed company’s shares on the ASX shot up by 11.1 per cent to $5.89, their highest close in three months, after Mr Bortolussi said the swift action taken to address excess infant milk formula inventory last year is paying off.

“I feel more optimistic about our outlook now than I did three or six months ago,” Mr Bortolussi said.

He pointed to several important factors: the improvement in brand health; China label share gains in mother and baby stores and online; and the English label channel trajectory is improving.

This led to an upgrade in revenue growth expectations for the full year – which will be higher than the $NZ1.21 billion achieved in fiscal 2021 – underpinned by China and English label formula growth in the second half.

Mr Bortolussi noted it was great to see tourists arriving back to Australia with borders re-opening on Monday, but he is not factoring in a major recovery in tourism, or the flow in international students (who acted as daigou) in this calendar year.

Despite challenging market conditions in China and COVID-19 volatility, Mr Bortolussi said a2 Milk is making good progress on its recovery strategy flagged lastOctober, which led him to deliberately constrain product in an attempt to deal with its aging inventory issues.

A2 Milk’s bottom line slumped 53.3 per cent to $NZ56.1 million in the first half, but this was better than analysts had expected.

Revenue was lower, in line with guidance, falling 2.5 per cent to $NZ660.6 million. Earnings before interest, tax, depreciation and amortization fell 55.3 per cent to $NZ97.6 million in the half. EBITDA to sales margin was sliced ​​to 14.8 per cent, compared with 26.4 per cent a year ago.

The Australian and US premium liquid milk markets grew, while COVID-19 and other external factors continued to affect the company’s supply chain.

Wooing China

The China infant formula market is the largest in the world, with retail sales of about $NZ47 billion, but the birthrate was down 11.5 per cent in the calendar year. Chinese consumers are also looking to local competitors such as Feihe and Junlebao over international brands.

Mr Bortolussi said there was likely still “more pressure to come” on the absolute number of new births given social demographics and the impact of COVID-19, which likely delayed some pregnancies.

Mr Bortolussi did not provide firm guidance but expects second-half gross margin percentage to be broadly similar to the first half, given last May a2 Milk implemented prices increases in its English label product.

Chief financial officer Race Strauss added that further cost increases in milk and some packing materials will be recovered by more price increases this half.

BAML analyst David Errington said Mr Bortolussi had done a “terrific job” stabilizing the group in the last six months. “You must take a lot of pride in that, well done,” he said on a call.

Morgans analyst Belinda Moore said given the better than expected first half profit, full-year upgrades are likely to follow, while Citi analyst Sam Teeger said the result, outlook and net cash position has allowed for greater conviction in the new management’s ability to turn around the business, and support his ‘Buy’ rating.

A2 Milk has appointed Sandra Yu, who was the former head of Mead Johnson Nutrition’s Greater China business, has as an independent non-executive director of the company from March 1. Ms Yu replaces Bessie Lee.

The chairman David Hearn is also now considered to be an independent director since Mr Hearn held executive options in prior years, which have now all been exercised, and Mr Bortolussi has full executive control of a2 Milk.

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