Ann: HALFYR: ATM: A2 Corporation growth continues

• Release Date: 26/02/14 10:30
• Summary: HALFYR: ATM: A2 Corporation growth continues to plan
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					ATM
26/02/2014 08:30
HALFYR

REL: 0830 HRS A2 Corporation Limited

HALFYR: ATM: A2 Corporation growth continues to plan

Highlights

o Strong growth in Group revenue, up 22.0% on the prior corresponding period

o Increased market share in Australia to 8% by value in grocery
o New UK business structure in place and positive sales trends
o First sales of infant formula to consumers in China and ANZ
o Plans advancing for entry into North America market
Revenues grew strongly over the corresponding half as a function primarily of
ongoing growth in a2(TM) brand fresh milk in the Australian market.  The
revenue growth in AUD on the prior corresponding period was 28.3% and the
a2(TM) brand remains the fastest growing dairy brand in grocery in Australia.
 The launch of a2(TM) Platinum(TM) infant formula to consumers in China,
Australia and New Zealand took place during the half.  New arrangements to
accelerate development of the business in the United Kingdom were progressed
with acquisition of the UK joint venture completed on 1 January 2014.  A plan
to enter the North American fresh milk market is progressing.

Managing Director Geoffrey Babidge said "the continuing strong performance of
the Australian business together with the momentum building around our
priority initiatives in the United Kingdom and infant formula were the
highlights of the first half. Our confidence in the development of the
Group over recent times has enabled the Company to advance North America as
the next priority growth initiative. "

Financial performance

The unaudited Group Profit after Tax for the 6 months ended 31 December 2013
was $643,000.

The trading result included the following key items:

o Sales of $54,008,000, representing an increase of 22.0% over the prior
corresponding period;
o EBITDA before share of associate earnings of $2,576,000 compared to the
prior corresponding period of $3,459,000;
o An increase in marketing cost of $3,167,000 over the prior corresponding
period in particular relating to launch costs for a2(TM) Platinum(TM) infant
formula in China, Australia and New Zealand;
o Share of costs associated with A2 Milk (UK) Limited joint venture of
($1,361,000);
o Income tax credit of $37,000
The appreciation of the NZD to the AUD reduced Group revenue growth by
approximately $6.4m on the prior corresponding period. A second shipment of
infant formula to China took place in November 2013 following our first
shipment in June.
Cash on hand at 31 December 2013 was $13,156,000.  The movement over the
period primarily reflected operating cash inflows from Australia of $6.2m
which contributed to funding the working capital build for infant formula
($4.4m), launch costs for infant formula ($2.7m) and cash investment in the
UK joint venture ($4.5m).

Strategic Agenda

The FY13 strategic agenda centred on the increasing profits from the
Australian business funding revenue growth in the priority markets of the
United Kingdom and China. To the extent revenue growth in the UK is tracking
behind plan, this is offset by enhanced performance in Australia and
additional product and market opportunities being pursued.

During the half the management structure was reorganised into regional and
corporate functions and strengthened with additional experienced executives
recruited to assist the new market initiatives.  This included the
appointments of Susan Massasso as Chief Marketing Officer, Philip Wohlsen as
General Manager Asia and recently Scott Wotherspoon as Chief Executive
Officer in the UK.

The structure and composition of the Board has been also been strengthened
with the recent election of Ms Julia Hoare and Mr David Hearn as
non-executive directors.

Operational Review
Australasia

a2(TM) brand sales in Australia continued to grow strongly with an increase
on the prior corresponding period in AUD of 28.3%.   The Company continues to
be a leader in marketing activities within the milk market in Australia.
These activities together with public relations, health care professional
engagement and social media activity continue to build awareness in the A2
proposition and the brand.  We estimate the market share of a2(TM) brand
fresh milk to approximate 8% by value in the grocery channel (latest quarter
Coles, Woolworths scan) in December 2013.

Growth in volume and continued improvement in efficiencies at the Company's
milk processing facility in Sydney, NSW resulted in an improved gross margin
as a percentage of sales when compared to the performance over last year.  We
continue to focus on enhancements to supply chain processes and building milk
supply to cater for ongoing growth.  As part of this from November 2013,
Brownes Food Operations commenced processing a2(TM) brand fresh milk in
Western Australia under a supply and contract pack arrangement.  The Company
continues to assess ways to enhance processing capability in conjunction with
its other contract processors in Victoria and Queensland.

In September 2013 the Company commenced the distribution of
a2(TM)Platinum(TM) infant formula to grocery and pharmacy stores in Australia
and New Zealand supported by a launch advertising campaign from October.
Early sales performance in Australia is positive whereas sales in New Zealand
are modest given limited grocery distribution achieved to date.

The Company continues to assess opportunities to broaden the portfolio of
a2(TM) brand products and in January 2014 launched a2(TM) Thickened Cream
into the grocery trade in Australia in conjunction with a contract packing
agreement with the highly regarded Australian dairy company, Regal Cream
Products.

United Kingdom

Momentum within the UK business continued to build during the half with sales
and distribution increasing progressively particularly during the second
quarter.  The objective has been to build consumer trial and rate of sale in
key grocery accounts to support existing ranging and justify more substantial
distribution over time.  During the half the business achieved increased
distribution within the Tesco chain, achieved growth through the online Ocado
business and grew rate of sale faster than at any time since launch.  In
addition, our objective to focus on building distribution in the south east
of England was progressed with ranging now extending to around 250 grocery
stores within the M25 motorway region. A print and outdoor advertising
campaign focusing on digestive benefits of a2(TM) fresh milk was undertaken
in November and was a positive for the brand. Further marketing and
communication initiatives are under development led by our recently appointed
Chief Marketing Officer.  Our contribution to marketing costs for the half
totalled 324,000.

During the period, we continued to support our farmer supplier base.  In 2012
the business implemented an incentive scheme (in addition to the A2 raw milk
premium) to support aggregation of a2(TM) herds by 2014. Our share of testing
and conversion costs for the half totalled 37,000.

In November 2013 we announced a change in the structure and operation of the
UK business whereby the Company would fully acquire the interest of Muller
Wiseman Dairies (MWD) in the joint venture for nominal consideration and
enter into a supply and contract pack agreement with MWD on a cost plus
basis. This transaction was concluded on 1 January 2014 and enables the
Company to move in a more focused way on building distribution and sales
whilst continuing to leverage the scale and operational capabilities of MWD.
The UK board of directors was changed with the appointment of William (Billy)
Keane, the former Managing Director of Robert Wiseman Dairies and current
Chairman of Dairy UK as a second Non- Executive Director.  David Hearn
continues as A2C appointed Non-Executive Chairman and Geoffrey Babidge as the
third Director.   We also recently announced the appointment of Scott
Wotherspoon as Chief Executive Officer of the UK business who brings strong
skills in sales, marketing and entrepreneurial businesses to the Group.

The Company is committed to the successful development of what is currently a
small but growing UK fresh milk business and is encouraged by the progress of
recent initiatives.  Following the acquisition of MWD's shareholding, A2C
will solely manage, fund and benefit from the ongoing development of the
business.  The investment in the UK business during calendar 2014 is likely
to be in the order of 5m.

Infant formula into China

During the half, the first sales of a2(TM) Platinum(TM) infant formula to
consumers took place in China.

A key focus has been to support our distributor, China State Farm (CSF) in
developing initial communication strategies through our joint marketing
structure and their recruitment of sub distributors in key provinces in
China. This support has included regular visits to China by Group
management, attendance at launch meetings with potential sub distributors and
participation in a formal launch ceremony held in the Great Hall of the
People in Beijing in October 2013.

A further priority has been to participate with our contract supplier,
Synlait Milk Limited (Synlait) in establishing the a2(TM) Platinum(TM) supply
chain. This incorporates the integrated management of receiving A2 milk from
farm, production of a2(TM) milk powder, blending and packaging of finished
product and delivery to customer.  As part of this, the Company has developed
its own quality processes to manage product integrity throughout the supply
chain. In consequence of implementing the new processes and an ingredient
supply shortage, we experienced delays in a planned shipment to China and
Australia in December.

The launch to consumers in China commenced during November 2013 targeting
baby maternity stores, high end supermarkets and on-line sales.  CSF
continues to build the distributor network and currently has arrangements in
place with sub distributors in 13 provinces in mainland China. a2(TM)
Platinum(TM)  offers the unique natural attributes of an infant formula which
contains only the A2 type of beta-casein protein and is positioned as a
super-premium product.

The regulatory environment for infant formula in China continues to evolve
given the Government's aim to improve product quality and bring confidence
back to the industry.  These changes are currently focused on regulating
participants operating in the domestic market and registering manufacturers
exporting into China.  The Company will continue to closely monitor and
respond to developments.

The regional management structure for Asia has been established to support
the development of the infant formula business initially in China and in
other Asian markets and the launch of additional products such as UHT milk.
At the recent shareholders meeting, approval was given for the Company to
enter into a UHT supply agreement with Freedom Foods Group Limited and
Associates. Planning for UHT milk products is progressing.

North America market entry

The launch of a2(TM) brand fresh milk into the United States market has been
under consideration for some time and is to be the next priority growth
initiative.  Given the UK business is now established and showing growth from
a small base, the Board considers an entry plan for the USA should now be
developed.  The Company has strong intellectual property rights and know-how
in this market and consumer research confirms the attractiveness of the A2
proposition. In addition, the industry and market dynamics are considered
favourable to a market entry strategy for our product.

The plan would involve the Company establishing its activities through a
wholly owned USA subsidiary and recruiting a small management team with
in-market experience.  As part of the development, a2(TM) brand milk will be
showcased at a major natural foods exhibition to be held in California in
March.

Intellectual Capital

The Company continues to invest in its intellectual capital as outlined at
the November annual meeting including development of a global brand vision
and brand marks suite, investment in new patents and participation in ongoing
research and development.

The company is pleased to advise of the acceptance for publication of
research supporting the digestive benefits of a2 dairy products by a leading
international scientific journal.  The collaborative study undertaken by
AgResearch NZ provides insight into the biochemical mechanisms underpinning a
range of digestive benefits from consumers of a2(TM) brand milk and
corroborates the findings from other studies.

For further information contact:
Geoffrey Babidge
Managing Director
A2 Corporation Limited
+61 2 9697 7008
End CA:00247477 For:ATM    Type:HALFYR     Time:2014-02-26 08:30:09