A2 Milk disappoints despite record $1 billion in China sales

The company’s share price has fallen by over 30 per cent so far this year.

A2 Milk said a strong performance in its biggest market - China - helped drive its net profit up by 26.2 per cent to $144.8 million in the June year.

Despite the profit lift, and cracking the $1 billion sales barrier for the first time in the PRC, a disappointing earnings outlook drove a2 Milk’s share price down sharply.

By the close, the stock was down 67 cents, or 12.5 per cent, at $4.68 - its lowest point in over a year.

In its result, a2 Milk said its earnings before interest, tax, depreciation and amortisation (ebitda) were up 11.8 per cent to $219.3m.

The ebitda-to-sales margin rose 0.2 of a point to 13.8 per cent and a2 Milk’s earnings per share jumped 28.7 per cent to 21.2 cents.

After an on-market share buyback of $149.1m, the company still had $757.2m in the bank.

Despite an expected double-digit decline in the China infant formula market in full-year 2024, a2 Milk said it expected to increase its market share there.

The company expects to achieve low single-digit group revenue growth in 2024 and an ebitda margin broadly in line with 2023′s.

Excluding losses from its 75 per cent-owned Mataura Valley Milk, the profit attributable to a2 Milk shareholders was $155.6m.

Brokers Craigs Investment Partners said the result was in line with consensus estimates at the operating level but the outlook was a material downgrade.

Craigs noted a2 Milk is expecting low single-digit revenue growth in full-year 2024, compared with consensus estimates for 9 per cent growth.

A2 Milk’s comment that it expected to see steady gross margins was in line with Craigs’ expectations, “but will disappoint the bulls who had been looking for an increase in gross margin due to falling input costs”.

The fact no share buyback or dividend was announced was also likely to disappoint the market given a2 Milk’s cash reserves, Craigs said.

A2 Milk said its strong full-year result was driven by the execution of its growth strategy, which is mainly focused on capturing the full potential of the China infant milk formula market.

Managing director and chief executive David Bortolussi said growing sales by 10 per cent in a China infant formula market that declined by 14 per cent was a “remarkable achievement”.

“The daigou [grey] market in English-label infant formula declined sharply again this year by almost 40 per cent and we have pivoted further to the more controlled channels, which have performed better and where we continue to gain share,” Bortolussi said.

“The China infant formula market has become increasingly challenging as a result of lower birth rates and increased competitive intensity.

“Notwithstanding, we are well positioned to continue to invest and grow share in full-year 2024 to emerge in a stronger position when the market recovers.

In China, sales were up 38 per cent, driven by record market share for its China label infant formula.

Marketing investment increased 13 per cent to $260m.

Bortolussi told the Herald sales in China were just over $1 billion, and the republic now accounts for 63 per cent of all sales.

Sales of China label - product expressly formulated for the Chinese market - were up 28 per cent.

He said a2 Milk was looking at offering other products in the “adjacent” categories to formula.

“In our categories is a particularly challenging environment because we have two things that are impacting on the environment at the moment; the cumulative impact of fewer newborns over several years, plus the birth rate this year looks like it may be even lower,” he said.

“On top of that we have a market selling prices reducing fairly significantly - that’s mainly related to the market transitioning to a new GB standard product,” he said.

About 85 per cent of the entire Chinese infant formula market is Chinese labelled.

That product needs to conform to the new standard, which meant players were phasing out old stock, which was causing market disruption and leading to lower prices.

In its result, this year’s successful re-registration by China’s regulator, SAMR, of a2 Milk product enabled continued access to the domestic market there.

In its result, A2 Milk said its revenue grew 10.1 per cent to $1.59 billion.

China and Other Asia segment sales were up 37.9 per cent.

Australia and New Zealand sales were down 30.2 per dent due to an “intentional change in distribution strategy”.

Sales in the US were up 27.1 per cent and sales of its majority-owned processor Mataura Valley Milk were up 9.2 per cent.

Liquid milk sales in Australia and New Zealand, and the US, were up 7.1 per cent and 27.1 per cent respectively.

A2 said it was a top-three share gainer in the China infant formula market overall with record market share, particularly in China-label mother and baby stores (MBS) and domestic online.

China-label sales exceeded English-label sales for the first time in 2023, supported by growth in lower-tier cities.

Increased English-label market share in the cross-border e-commerce (CBEC) channel as the number one market share gainer, and increased market share in the combined offline-to-online (O2O) and the “daigou” channels.

A2 Milk, which specialises in dairy product that contains just the a2 protein rather than the combination of a1 and a2 protein in standard milk, said it had started trials to make its own formula at Matuara Valley.

As it stands, its 20 per cent-owned Synlait Milk is a2′s Milk’s sole provider of formula.

A2 Milk’s share price has fallen by over a third so far this year, which Bortolussi put down to deteriorating macro-economic conditions in China.

The former high-flyer’s earnings - while sharply improved in recent years - have been well short of the record June 2020 year profit of $385.8m.

Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.