A2 Milk's first-half profit slumped, but it sees the green shoots of recovery. Photo / Getty Images
A2 Milk's first-half profit slumped, but it sees the green shoots of recovery. Photo / Getty Images
Just 12 months into his tenure as a2 Milk's chief executive, David Bortolussi says "green shoots" are starting to appear for the infant formula marketer after Covid-19 and an upsurge in competition brought a sharp halt to its record of sharp earnings growth.
In its latest result, a2 milk's netprofit dropped by 53.3 per cent to $56.1 million in the first half to December, following on from a 79 per cent slump in its earnings in the year to last June.
Revenue was marginally lower than that the previous first half but was in line with guidance, down 2.5 per cent to $660.5m, but up 24.8 per cent in the second half of 2021.
Bortolussi, who signed up late in 2020 just months before the company's fortunes started to turn, said it had "clearly been a very challenging year for the company".
A2 Milk was struck with the near collapse of the unofficial daigou trade in formula from Australia to China due to Covid-19 lockdowns and travel restrictions.
That meant millions of dollars worth of stock nearing its use-by date had to be destroyed last year.
"It was a very challenging period compared with what it was when I signed up to the role, but I like a challenge," Bortolussi told the Herald.
A2 Milk's English-label infant formula is a product that is likely to have landed in China through daigou trade channel - typically through Chinese students returning home - or through cross-border e-commerce channels.
China-label product is formula that has arrived in the People's Republic via conventional export-import means for sale in stores or on online sales platforms.
Bortolussi said results for the half that showed parts of the business are starting to perform well - the China label business - while English label was stabilising.
"There is a good set of green shoots that give us hope for the future, particularly for the second half and hopefully beyond that," he said.
"We are in a better position than we were six months ago and that's what gives us more confidence."
Competition in the China-label market was heating with the local players such as Feihe were increasing their market share relative to the multi-national players.
"We are one of the few international brands who are gaining market share and we have been doing that for some time now."
"We are well-positioned in terms of where we play in the market and we are gaining share overall."
A2 Milk chief executive David Bortolussi. Photo / Supplied
Bortolussi said the daigou channel still was depressed due to Covid-related disruption.
"But the trajectory - the rate of decline of the overall channel - has declined significantly. It's much more stable."
He expects English-label sales to be up in the second half and for the full year.
The company's outlook for second-half revenue has improved.
It is still expected to be significantly higher than the second half of 2021, and with growth now expected on first-half 2022 and for full-year 2022 ahead of initial expectations due mainly to growth in China label and English label formula.
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, the company said.
The result was well received by the market, with a2 Milk's share price shooting up by 69c or 12 per cent to $6.31 by late afternoon.
Harbour Asset Management senior analyst Oyvinn Rimer said that management had stated that there would be no profit growth coming from the forecast increase in revenue.
He said the rally in the share price suggested the market was "taking a more positive read" on the profit announcement than what was said.
In terms of the daigou trade, Bortolussi does not expect to see a quick return to the peak levels achieved before the onset of Covid-19.
"We are hopeful, but we are not factoring in a major recovery in daigou activity.
"There are signs of improvement but it has a long way to go," he said.
While a2 Milk has more than 10 per cent of the Australian fresh milk market, critics have said the company is too exposed to one product - infant formula - and one country - China - but Bortolussi said a2 would not be changing its focus on the People's Republic any time soon.
"Conceptually, we would love to have more diversification by market and by product category.
"It is still largest, most premium market in the world and it is our biggest opportunity."
Market conditions continued to be challenging with the China infant formula market declining by 3.3 per cent in value during the half due mainly to the cumulative impact of a lower birth rate, while a2's Australian and US liquid milk markets were growing.
While its earnings have taken a hit in recent times, a2 Milk is still flush with cash - $667.2m.
The Mataura Valley Milk (MVM) acquisition and strategic partnership with China Animal Husbandry Group was completed in July 2021 and fully consolidated into the results.
