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Home / The Country

A2 Milk CEO David Bortolussi: 'We still have a long way to go'

Jamie Gray
By Jamie Gray
Business Reporter·NZ Herald·
29 Aug, 2022 05:40 AM4 mins to read

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A2 Milk chief executive and managing director, David Bortolussi. Photo / Supplied
A2 Milk chief executive and managing director, David Bortolussi. Photo / Supplied

A2 Milk chief executive and managing director, David Bortolussi. Photo / Supplied

A2 Milk chief executive David Bortolussi says the company has a long way to go after Covid-19 hit the company hard.

The alternative milk and infant formula company reported a 42 per cent jump in annual net profit to $114.7 million, driven by strong growth in its infant formula business.

At the same time, the heavily cashed up a2 Milk said it intended to return capital through a $150m on-market share buyback.

The company's result showed revenue in the June year grew 19.8 per cent to $1.44 billion - which it said was on the way to reaching its plan of $2b in five years' time.

Earnings before interest, tax, depreciation and amortisation (ebitda) were up 59 per cent to $196.2m while cash on hand came to $816.5m.

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Covid-19 disruption - particularly of the "daigou" trade in infant formula from Australia to China - was a key factor behind a2 Milk's profit after tax sliding 79 per cent to $80.7m in the previous June year.

The daigou trade has many forms but it typically involves individuals or businesses buying English label formula in Australia and sending it back to China.

The trade was severely hit by Covid-19 air travel restrictions.

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The slump prompted a major strategic rethink in October last year by a2 Milk, resulting in the $2b five-year plan.

"We still have a long way to go," Bortolussi told the Herald.

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"We are at the end of our first year of a five-year or more plan to deliver on our ambition, but I think our leading indicators are really strong," he said.

"We are really pleased with the progress that we have made over the last six to nine months."

Covid-affected markets - particularly in the unofficial daigou trade channel to China - meant a2 Milk had to write off millions of dollars' worth of unsold formula last year.

Bortolussi said all the tough decisions that a2 Milk had made on inventory management earlier last year had set the foundation for growth.

He saw the company returning to double-digit growth in revenue and earnings despite significant headwinds.

"We are pleased with the progress that has been made in stabilising the business, refreshing our strategy and improving our execution," he said.

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China-label and English-label infant formula sales were up 12.2 per cent and 11.6 per cent respectively.

Australia-New Zealand and US liquid milk sales were up 1.8 per cent and 30.2 per cent respectively.

Bortolussi said there were signs the daigou channel was stabilising after a challenging year affected by Covid travel restrictions.

While the share buyback was an expression of confidence in the company's strategy, the company would still preserve opportunities to invest in "organic" growth in the business or to pursue merger and acquisition opportunities.

From an M&A point of view there may be some opportunities as the company looked to develop its supply chain capacity in New Zealand and, over time, in China, he said.

In the US, the business had yet to see a significant turnaround in profitability.

Bortolussi said China - the company's biggest market for infant formula - was suffering economic conditions similar to many other countries.

Data out early this year showed China's birth rate plummeted for a fifth consecutive year, hitting a record low in 2021.

"In our category, the market is down in value terms by 3 per cent, but within the segment that we play in - the ultra-premium segment - is up 9 per cent.

"And the a2 protein category that we pioneered has almost doubled in the year to almost 100 per cent growth.

"There are a lot of headlines about the decline in the birth rate - which is true - and it has a compounding impact in the stages from one to four - against those market headwinds, we are gaining share.

"Our share is increasing and the key reason for that is that we are well positioned in the ultra-premium segment in the a2 category.

"I still think we have a huge opportunity to grow the business."

Read More

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Jarden senior analyst Adrian Allbon said a2 Milk had shown strong "execution" of its strategy in a difficult macro environment.

A2 Milk's share price rallied sharply on the result, finishing up almost 10 per cent at $6.00 - their highest point since March this year - but well down on the 2020 record high of $21.51.

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