Bortolussi’s A2 Milk Company Posts Strong Profits, Plans $136M Share Buyback

“We’ve made the right decisions around that, and the focus on go-to-market channels and our execution of all those initiatives is really starting to make good early progress.”

Bortolussi said a2 Milk was on track to meet its medium-term ambition of growing sales to NZ$2 billion or more and improving margins over time, which was noted at investor day last October.

Despite the recent setback by the key US regulator to defer a2 Milk’s entry into the US market, Mr Bortolussi said the outlook for the business this year was positive with revenue and profit growth expected.

He expects high-single-digit revenue growth in fiscal 2023 after posting a 19.8 per cent rise to NZ$1,446.2 billion in sales during 2022. This was supported by sales Chinese and English label formulas increased by 12.2% and 11.6%, respectively.

This financial year gross margin percentage was expected to be in line with 2022 (consensus is 14.3 percent this year) with cost pressures to be offset by price increases, benefit blending and cost mitigation initiatives .

In fresh milk, fluid milk sales from Australia, New Zealand and the US increased by 1.8% and 30.2%, respectively, during the year 2022.

The US business is not yet profitable and has been affected by increased freight rates and higher raw milk costs. Bortolussi expects that business to be profitable by 2025-26, which he says will be driven by price increases and reduced business spending and marketing.

At home in Australia, new product launches, such as a2 lactose-free milk launched this month, will also be important in driving sales.

Group earnings before interest, taxes, depreciation and amortization (EBITDA) increased by 59% to NZ$196.2 million for 2022. EBITDA margin on sales increased by 13.6% compared to 10.2% a year ago.

Net profit after tax rose 52 per cent to NZ$122.6 million. NPAT was slightly lower at $114.2 million when considering its partial stake in milk and nutritional powder maker Mataura Valley Milk, which posted a loss.

The buyback in the market will start at the end of next month and can last up to a year. The program will not exceed 5 percent of the issued capital.

China is better than expected

Analysts were highly appreciative of the results and the turnaround.

Bank of America analyst David Errington said in a call that it appeared Bortolussi now had better control of trading. Citi analyst Sam Teeger said in a note that full-year results were driven primarily by a better-than-expected performance from China.

A2 Milk’s most critical business development focus was ensuring it delivered its full potential in China, the world’s largest formula market valued in the region at $26 billion.

A2 Milk continued to increase its market share in China, despite falling sales to daigou. The Australian Financial Review recently revealed that a2 milk’s biggest customer daigou hadn’t been buying any cans since march.

“We remain committed to the daigou channel and have increased our direct engagement and marketing support with more Daigou supporting the brand,” said Bortolussi.

Marketing increased 36% during 2022 to support business in China.

Bortolussi said the Shanghai closures actually helped sales, leading to some panic buying from March/April onwards. But he expects some of that consumer demand to decline this half. A2 Milk is raising prices to offset rising costs of doing business such as freight.

The number of births in China fell by 11.5% in 2022, and the birth rate is expected to decline further, presenting problems for the entire infant formula industry.

This decrease was partially offset by more households buying formula. But in volume terms, the overall market in China fell 4.3% in fiscal 2022, with several years of newborn declines impacting sales of stage 2 and stage 3 formula cans. it was partially offset by growth in stage 4 cans, which were targeted at young children.

Mr. Bortolussi told analysts it was easy to get caught up in the China birthrate headline, but looking at the segments a2 Milk played in, the premiumization trend continued to rise.

“It’s easy to get caught up in the birth rate shock, but overall, we only have a 4 or 5 percent share of the market, our brand is one of the best known from a consumer standpoint,” he said.

Mr. Bortolussi said that the ultra-premium segment continued to grow, as did the a2 protein category, which puts a2 Milk in a good position as a pioneer in this category.

Sales of labeled infant formula in China are expected to increase this year with significant growth in sales this half, while second half sales growth is expected to be affected by the transition to the new GB registration pending the company.

Mr. Bortolussi cautioned that while its registration process with the China State Administration of Market Regulation for its China-labeled formula product was being processed with its New Zealand partner Synlait, the timing of any approval was uncertain. .

He hopes to get an extension of the current registration next month, but China-labeled formula cans made after February 21 next year must meet the new GB standard.

The company has also announced the appointment of David Wang as a non-executive director, while Vice President Julia Hoare plans to step down after interim 2023 results in February.

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