a2 Milk jumps as CEO signals thicker margins
Evans, Simon . The Australian Financial Review
Jayne Hrdlicka, chief executive of the a2 Milk Company, says profit margins in financial 2020 will be better thanpreviously signalled and that a revamped strategy is building momentum.
The improved outlook led to a 16 per cent jump in the infant formula group's shares in early trading yesterday,before they drifted for a while, to reach 11 per cent higher in afternoon trade at $13.34.It was a welcome change for a2 - its shares had plunged 34 per cent between mid-July and early November.
Ms Hrdlicka said a sharper focus on gross margins was paying off as a combination of improved price yield, areduction in costs and foreign exchange benefits helped the group. "We're managing our costs really well," shesaid.Ms Hrdlicka, who took the helm in 2018, said the company was not letting itself become distracted by theuncertain geopolitical situation, and in particular the tussle between the United States and China.
"We are conscious of geopolitics and we are super-mindful of the dynamics at play around that, but we're not beingdistracted," she said.She said the full-year earnings before interest, tax, depreciation and amortisation margin was now expected in therange of 29 per cent to 30 per cent of sales.It would be even higher in the first half of this financial year, between 31 per cent to 32 per cent, but that would bedragged lower in the second half because a larger proportion of a2 Milk's overall annual marketing spending ofabout $200 million would fall during that period.
A2 was a disappointment in August when it outlined that margins were likely to be only broadly consistent with thesecond-half EBITDA margin in 2018-19 of 28.2 per cent.Ms Hrdlicka said a2 Milk would not be making any forecasts further out than the end of financial 2020.
She said this year's total interim revenue was expected in the range of $780 million to $800 million.The China-label infant nutrition sales forecast was expected to show growth of about 84 per cent and reach $135million.The biggest contributor to sales, the Australian and New Zealand English-label infant formula products, wereexpected to deliver growth of about 9 per cent to $350 million.
The company is also trying to build a significant US business from a low base, and Ms Hrdlicka is forecasting salesof about $27 million in that market for the first half, which represents a growth rate more than double that of theprevious corresponding period.She declined to say when the US business would become profitable, with the focus on fast expansion.
"We'rerunning as fast as we can to get the business to its potential," she said.Ms Hrdlicka said a new advertising campaign and website launched in October in the US was gaining traction andthe distribution reach was growing. The products are in an extra 2000 stores, with expanded distribution in chainsincluding Walmart, Safeway and Sam's Club Warehouse.
The company had a strong performance in the annual November 11 "Singles Day" online sales event in China.Ms Hrdlicka said on JD.com the group's a2 Platinum Stage 3 infant formula was the top-selling infant nutritionproduct in cross-border e-commerce.On the Tmall site, a2 was the No.3 nutrition brand overall across English and China label products.
The company also announced yesterday a two-year extension of a supply agreement with New Zealand's SynlaitMilk for products such as a2 Platinum.The current agreement runs until July 31, 2025, at a minimum.
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