Record Australian earnings, exceptional a2 Platinum® infant formula growth, positive progress in international markets
With regard to recent interest in The a2 Milk Company (the Company), the Company provides this trading update in relation to the current performance of the business and the outlook for the year ending June 2016.
The financial information in this update has been prepared on the following basis:
The Company’s growth initiatives continue to progress in a particularly pleasing manner, and the results of this progress are now evident in FY15 trading summarised below. The Australian and New Zealand (ANZ) business is performing strongly and continues to provide a platform for the Company’s international growth initiatives. The underlying trading result for FY15 is ahead of plan with Group revenue of NZ$154 million (39% increase over the prior corresponding period (PCP)). Strong growth is expected to continue in FY16 with budgeted Group revenue of NZ$267 million (73% increase over PCP) and Group Operating EBITDA of NZ$12 million (200% increase over PCP).
The trend in geographic segment financial performance from FY14 (audited), through FY15 (unaudited), to FY16 (budget), is set out in the table below.
 Please refer to the comments in relation to forward looking information which appear on the last page of this release
 Operating EBITDA is a non-GAAP measure and represents earnings before interest, tax, depreciation and amortisation, before non-recurring items and intercompany charges
 FY16B corporate costs include a significant increase in R&D and additional costs to support business growth
Key highlights of the FY15 financial performance are:
The Company has previously advised an FY16 Group revenue forecast of NZ$230 million. The Company is now budgeting FY16 revenue of NZ$267 million which reflects strong recent financial performance and further expected growth throughout FY16. The key drivers of the budgeted FY16 financial performance include:
In relation to financing the business plan, the Company intends to maintain a conservative approach with growth funded from cash flows in the first instance. In addition, the Company has short term debt facilities in place to support working capital requirements.
Infant Formula – a more significant strategic growth driver
Infant formula is emerging as a significant growth driver for the Company. The growth of a2 Platinum® infant formula exceeded expectations in the current year with revenue of NZ$41 million across ANZ and China. The majority of sales occurred within the Australian grocery and pharmacy channels, although the Company believes a proportion may relate to products which are on-sold into China, as is the case with other premium infant formula brands sold in domestic markets.
a2 Platinum® infant formula was the fastest growing brand in the Australian grocery market during the quarter ending 7 June 2015, notwithstanding achieving ranging in a second major retailer group only part-way through the year, and stock shortages due to higher than expected demand.
In response to the growing demand for a2 Platinum® infant formula, the Company extended the existing range of three variants to include a fourth product, effective July 2015.
ANZ – consistently strong performer
The ANZ business continued to deliver very strong revenue and earnings growth on the prior year, with FY15 returning a record result for the region. Total gross revenue in AUD across all product categories increased by ~44% on the PCP. Operating EBITDA before intercompany charges for FY15 was approximately NZ$30 million.
Australian fresh milk sales continued to achieve solid growth of approximately 10% in AUD on the PCP, and achieved a grocery market share of approximately 9.3% (Australian Grocery Weighted Scan MAT) at year end. Further revenue growth was achieved from new products including a full year of a2 Cream™ and the most recent launch of a2 Milk™ whole milk powder in limited release within one major retailer in June 2015. Looking ahead, the Company is optimistic about the growth prospects for whole milk powder as well as for infant formula.
New long term milk supply contracts with key milk suppliers in ANZ have been negotiated to support growing demand moving forward.
Asia – new model and momentum building through e-commerce platforms
As previously advised, the growth of a2 Platinum® infant formula within China was impacted by changes in access arrangements for manufacturers and brand owners from ANZ into China during calendar 2014. The Company’s manufacturing partner Synlait Milk achieved the new form of registration in late September 2014 and shipments recommenced from December. The Company has continued to invest in marketing activity and sales support for distributors during the FY15 year in order to build a solid foundation for future growth in the region.
In November 2014, the Company announced changes to the supply and distribution arrangements in China. The Company assumed direct responsibility for the distribution of a2 Platinum® with a small local team managing a growing network of distributors.
In consequence of these changes and the increasing exposure of the a2 Platinum® brand in China, the Company remains very positive regarding the growth prospects in this market.
a2 Milk™ fresh milk sourced from Australia was launched in China in August 2014 in premium supermarkets and through consumer subscriptions and also on JD.com, China’s largest online direct sales platform. Whilst the immediate direct sales impact is modest, this initiative will help establish the a2 Milk™ brand in China and broaden our trial base.
To take further advantage of the growing e-commerce and cross-border platforms, the Company also recently launched “The a2 Milk Company” store on T-mall Global selling Australasian label a2 Platinum® infant formula direct to Chinese consumers, and further initiatives will follow.
UK – repositioned for growth in speciality milk
During the financial year, the Company repositioned the a2 Milk™ brand in the UK into the premium speciality milk segment away from mainstream dairy and is now represented in the majority of supermarket accounts in the UK. The transition from 2-litre to 1-litre and the associated pricing realignment has significantly improved unit gross margins. The introduction of the new format and shift in shelf location was dependent on the timing of retailer reviews and was finally completed during March 2015. This timing slowed the rebuilding of momentum in the new format, and sales growth in the second half was slower than planned. Notwithstanding this, the Company is confident in the prospects for the UK market.
Following these changes, the Company is also focussed on broadening the product portfolio in the short to medium term with the potential introduction of UHT milk and a2 Platinum® infant formula.
Following the changes implemented during FY15, the Company is forecasting a reduced funding contribution to this business in FY16.
USA – launch into California commenced
The launch of the a2 Milk™ brand in the California region commenced in April 2015. The Company has made solid progress in building retailer distribution and is on plan to achieve around 65% of retail weighted distribution in Southern California by early August. The focus will then turn to achieving similar distribution in Northern California.
Development of the executive team and support structure is almost complete and partnerships have been established with farmers, dairy processors and a network of national sales brokers, all of whom are positive about the prospects of the a2 Milk™ brand in USA.
While it is early in the launch, feedback from retailers and consumers is consistently favourable. After evaluating the early positive trends, the roll-out plans beyond California are now focused on building distribution across a number of national specialty customers, which best align with the brand’s healthy and natural positioning. Already the brand is being distributed on a nation-wide basis by two of the largest natural food specialty chains in the USA, Sprouts Farmers Market and The Fresh Market.
Intellectual property – comprehensive portfolio continuing to build
The Company continues to enhance and extend the scope of its comprehensive IP portfolio and provide support for targeted research and development associated with the benefits of the A2 protein and the absence of A1 protein.
During the final quarter of FY15, the Company filed four new provisional patent applications relating to health benefits, physical properties and testing methodologies for A1 protein free products. These have relevance for both liquid and powder products.
In addition to the publication of the human digestion trial conducted by Curtin University (published in the European Journal of Clinical Nutrition in August 2014), further scientific progress continues to be made. The Company sponsored a human clinical trial in China around the benefits of a2 Milk™ which was recently completed and publication is expected in FY16.
For further information contact:
The a2 Milk Company Limited
Managing Director and CEO
+61 2 9697 7000
Forward looking information
Certain statements in this release constitute forward looking statements and comments about future events, including the Company’s expectations about the performance of its businesses as at the date of this release. By their nature, forward-looking statements involve known and unknown risks, uncertainties, assumptions and other important factors, many of which are beyond the control of the Company and which may cause actual results, performance or achievements to differ materially from those expressed or implied by such statements. Forward looking statements are provided as a general guide only, and should not be relied on as an indication or guarantee of future performance. No assurances can be given that any forward looking statements referred to in this release will be realised. Any forward looking information speaks only as of the date of this release. Past performance is not indicative of future performance and no guarantee of future returns is implied or given. Nothing contained in this release is a promise, representation, warranty or guarantee as to the past, present or the future performance of the Company. The Company makes no representation, and gives no assurance or guarantee that the occurrence of the events expressed or implied in any forward looking statements in this release will occur or that any assumption that underpins any forward looking information is reasonable.
Nothing in this release is a solicitation, invitation, advice or encouragement to buy, sell or hold shares in the Company.
About The a2 Milk Company
About the a2 Milk™ brand