A2 sets sights on the USA

Xu Jun, Chairman China State Farms Holdings Shanghai and A2 chief executive Geoff Babidge (R). Along with China and Australia, A2 now hopes to start doing more business in the US.

NZX-listed alternative dairy company A2 Corporation is gearing up to expand its fresh milk business to the United States and says its infant formula launch in China is progressing, with distribution arrangements in place in 13 Chinese provinces.

Managing director Geoffrey Babidge said the United States had the potential to become a bigger market for A2's fresh milk than Australia, where the company estimates its fresh milk now has market share of 8 per cent, by value, of the grocery channel.

"The product is very attractive and the demographic [in the US] is very interested in innovative, healthy and natural food," Babidge said. "We are very positive about the opportunity in North America, particularly the US."

A2 sources its milk from cows selected to produce A2 beta-casein protein, which is claimed to provide health benefits over the more common A1 variety.

Babidge said the company had identified A2 cows it could source its milk from in the US and was close to establishing a subsidiary company in that country.

"We've already been talking with farmers," he said. "We've been talking to potential players who can assist us in contract manufacturing and distribution."

Babidge said it was too early to say when sales might kick off in America.

"We're starting to engage with [US] retailers," he said. "We believe the product will be positively received by the retailers."

The company will promote its milk at a major food show in Anaheim, California, next month.

A2 today announced a 22 per cent lift in half-year sales to $54 million, while earnings before interest, tax, depreciation and amortisation (ebitda) - before share of associate earnings - fell to $2.6 million from $3.4 million a year earlier.

See its latest financial results here.

Marketing costs in the six months to December 31 increased by $3.2 million, largely because of launch costs for A2's Platinum infant formula brand in China, New Zealand and Australia.

A2 shares, which have gained nearly 80 per cent in the past year, were up 4.3 per cent at 97c just before midday.

Babidge said A2's Chinese infant formula sales were "starting to build".

The company's baby milk brand is contract manufactured by Canterbury dairy processor Synlait and A2 has secured state-owned China State Farm as its Chinese distributor.

Two A2 formula shipments - containing $1.5 million to $2 million worth of product each - arrived in China in the second half of last year and sales began in November.

Babidge the first shipment had been fully sold.

"It's early days and sales are starting to build," he said. "China State Farm are building the distributor network - they've now got coverage across 13 provinces and they're appointing sub distributors to handle the product."

Sweeping regulatory changes are taking place within China's infant formula market as the country's government attempts to restore Chinese consumers' confidence in baby milk products following a string of food safety scares including the 2008 melamine scandal.

Domestic manufacturers that cannot guarantee the quality of their raw milk have been shut down, while the bulk importation and repacking of baby milk in China has been prohibited.

Foreign infant formula manufacturers selling product in China must also register with the Chinese authorities by May 1. Officials from China's Certification and Accreditation Administration will arrive in New Zealand next month to audit dairy and baby milk manufacturing plants.

Babidge said the company was monitoring and responding to developments in China's regulatory environment.

"We are hopeful that we will be a winner out of changes that will emerge over time."

A2 launched its Platinum formula in Australasia in September and the company said sales had been more modest on this side of the Tasman than Australia.

The lower sales in New Zealand were a result of distribution challenges - A2 formula was not yet available in Countdown supermarkets, Babidge said.

He said China was the real focus for A2's infant formula business.

"Let's be clear - the main game here is the sale of product into China," Babidge said. "I've always said the sale of product into Australia and New Zealand is complementary to that strategy."

The company said A2 brand sales in Australia, in local currency terms, grew 28.3 per cent in the half-year compared with the same period of 2012.

Momentum in its United Kingdom business continued to build and distribution had increased within the Tesco supermarket chain, the company said.