A2 increased its marketing spend by 75% over the corresponding time the previous year, to $45.5 million, mainly in China and the United States, and there will be a further increase in the second half, made possible by the financial gains of the scale it has achieved.
In New Zealand the company has joined with Fonterra to set up a milk pool that will enable direct ingredient supply to A2 in the second half of this calendar year.
But details of that and a similar venture with Fonterra in Victoria aren’t being released yet, A2 managing director Jayne Hrdlicka said.
“We’ve got records for market share in key markets and are ready for a step-change in spending on the brand.”
In the December half-year A2 had revenues of $613m, up 41% on the $434m in the same period a year earlier. Operating earnings (Ebitda) rose 52% to $218.4m and the after-tax profit jumped 55% to $152.7m, up from $98.4m.
A2 shares jumped $1.08 to $13.95 each in NZX trading immediately after the result.
On an Ebitda basis, the operating margin was just over 35%, but that measure is expected to fall to 31% or 32% in second-half trading because of the higher marketing and brand spend, Hrdlicka said.
At balance date, the company had a cash balance of $287.9m, helped by operating cashflow of $112.3m. The group has no borrowings.
The cash figure is down from $340m at last June 30 but since then A2 has paid out another $162m to increase its shareholding in its A2 Platinum infant formula manufacturer Synlait Milk to 17%.
Of the group revenues, $495.5m came from infant formula, an increase of 45% on a year earlier and driven by market share gains in China and Australia.
Liquid milk sales, largely in Australia, rose 20% to $83.4m.
A2’s fresh milk business in the core Australian market rose 11% in revenue terms and it now has a record 10.8% market share of total grocery sales.
The Australian revenue and cashflows were the base on which the international business has been built and the half-year operating earnings of $192m, on sales of $418m, show that to still be the case.
A2 Platinum infant formula continues to grow strongly in Australia and was the market brand leader with a 35.7% share, up from 32% at the end of June.
Milk sales in the US have doubled from previous low levels as the number of stores there selling A2 milk increased to more than 10,000 at balance date and to 124,000 stores since then, including major chains.
A2 Milk hasn’t detailed the figures but total sales in the US/United Kingdom division were $23m in a mix of fresh milk and infant nutrition and it still runs at a loss. Hrdlicka said.
US data indicates the brand development there is similar to A2’s fresh milk experience in Australia. Consumers are trading up from conventional milk and showing high levels of loyalty once they’ve tried the product. The full-year brand-spend in the US will be US$27m.
The UK market for milk is growing off a modest base but the delivery of scale is challenging, the company said.
Progress is being made establishing a presence in Asia markets outside China.
The group made big revenue and earnings gains in China on advances in distribution and market share, for total sales up 50% to $171.7m and operating earnings up 41% to $68.4m.
Infant formula sales rose 83% and market-share in major cities rose to 5.7% on the latest 12-months data, from 4.4% in the prior year and 5.1% at the end of June. In lower tier cities the market share was 5.4%, up from 4.7%.
All market channels into China – e-commerce, daigou (grey market) and bricks and mortar stores – worked well, Hrdlicka said.
E-commerce provides cross-border sales into all Chinese regions and the group now has 12,250 Mother and Baby Stores providing a more interactive shopping experience. The focus on improving in-store productivity has achieved good results.
Chinese consumers are typically deeply loyal and have high trust in the brand.
Because of the high demand for A2 Platinum infant formula, inventory levels at $72.8m at balance date, were lower than targeted levels and the business is taking steps to build inventories to be able to adjust more quickly to demand changes, Hrdlicka said.
She expects second-half revenue growth to continue at current levels but the marketing spend means margins will be lower than in the first-half.
At December 31 A2 had total assets of $795m with shareholders’ funds making up an impressive 81% of the total. Earnings a share for the half-year of 20.9c compare very strongly with the full-year 2018 figures of 27c.
