A2 Milk says outlook improving after first-half profit slumps 50%

Monday, 21 February 2022

The a2 Milk Company has stabilised its business, although there are still challenges ahead in its key Chinese market.

The a2 Milk Company posted a better-than-expected first-half profit and said its outlook is improving after it reduced inventory accumulated during the Covid-19 pandemic. Its shares surged 12 per cent.

Profit fell 50 per cent to $59.6 million in the six months to the end of December, the company said in a statement to the NZX on Monday. Revenue slipped 2.5 per cent to $660.5m. The result was better than the $47m profit and $609m revenue expected by analysts.

A2 bought back millions of tins of older inventory and destroyed it to freshen up its stock and reduce the backlog in the system after the Covid-19 pandemic disrupted informal shipping of its product to China, known as the daigou trade. It’s also facing a tougher market within China as a lower birth rate dents demand and competition heats up with local Chinese brands.

“Despite challenging market conditions in China and Cocid-19 volatility, we are making good progress stabilising the business,” said managing director David Bortolussi.

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Shares in A2 have lost 44 per cent of their value over the past year. On Monday, they recorded the biggest gain on the market, closing up 69 cents to $6.31. A2 was the biggest stock traded by volume and value as some investors who had bet they would decline further scrambled to buy the shares.

Bortolussi said the outlook for revenue in the second half of the year had improved, and is expected to be “significantly higher” than the same period a year earlier.

“They’re back on the right foot,” said Fisher Funds senior portfolio manager Sam Dickie. Still, Dickie noted that the market backdrop in China remains “very, very tough”.

A2 warned the improvement in revenue is not expected to translate into higher profits this year as the company spends more on marketing to grow future sales. A2 expects to spend $220m on marketing this year, up from $168m last year.

The infant formula market dynamics in China “continue to be challenging”, the company said. The Chinese birth rate fell 18.1 per cent in 2020, and declined a further 11.5 per cent in 2021 to 10.6 million.

Several years of fewer newborns is having a cumulative impact on the size of the infant formula market, the company noted in a presentation to investors. The overall infant formula market in China fell 5 per cent in volume in the first half, with the decline in early stage products partly offset by growth in later age products, it said.

The value of the infant formula market in China fell 3.3 per cent as the impact of reduced volume and increased promotional activity was only partly offset by the move to higher premium products, it said.

“However the ultra-premium segment in China remained in growth with the A2 protein segment performing significantly above market,” the company said.

The company said its A2 product was one of the few international brands that were continuing to grow market share. Local Chinese brands including Feihe, Junlebao and Yili were also performing well, it said.

Sales of the company’s Chinese label infant formula fell 11.4 per cent to $188.7m in the first half as it reduced the amount of inventory that had built up during the pandemic.

But the company said consumer demand for the product was strong and its market share increased to a new high of 3.2 per cent in December through Chinese Mother and Baby stores, helped by investment in brand ambassadors, mama classes, roadshows and an additional 96 flagship stores.

Dickie said the Chinese label business had the most growth potential for A2 as it expanded into smaller cities where it had less of a presence.

Meanwhile, sales of its English label infant formula, which is generally shipped by resellers from Australia and New Zealand, fell 13 per cent, faster than the 5 per cent slide in the overall market.

Still, the company said there were signs the sales channel was recovering as pricing improved and reseller activity picked up.