Article from AFR:

This says it all regarding market reaction: the market "can't have its cake and eat it too". "They want revenues to grow (topline) but don't want them to spend" and punish them for investing to grow. Anyone who can look beyond the short term can see A2 are investing to build a bigger brand and be a substantial player in this space. IMO, they have spent the last year researching and understanding the landscape of their two largest markets (not to mention navigating all the Chinese regulations) and putting their money where their mouth is and backing themselves and executing the "blueprint" Jayne talks about. This is what I want them to be doing and they have the cash and clout to do it now. I wish them every success in doing so!


Just my opinion and best wishes to all shareholders

a2 Milk boss says easy daigou sales are in the past

Carrie LaFrenzSenior Reporter

Aug 21, 2019 — 9.16am

Save

Share

The a2 Milk Company boss Jayne Hrdlicka says the easy revenue gains made in Australia and via daigou personal shoppers are a thing of the past and the milk and baby formula maker is building capacity for the long haul in China.

Ms Hrdlicka, who presented the group's full year results on Wednesday, also said she was very clear with the market over the past 12 months about the level of spending needed to underpin future sales in the company, which has grown from $7.3 billion market capitalisation last August to $10.8 billion.

"At the half year we were very clear on the outlook for the full year and we have delivered exactly what we said we would," she told The Australian Financial Review.

"We were clear about investment in marketing and in capability and capacity. Future growth will be more expensive than came in previous years in Australia and in daigou channels."

Citi estimated that while a2 is transitioning away from smaller daigou traders, it still has about 20 per cent of sales exposed to this channel which has come under pressure following new trade laws.

Shares in a2 Milk slid to a six week low, falling more than 13 per cent, or $2.11, on Wednesday to $13.99 after it met its 2019 full year guidance, but fell short of analysts' lofty expectations.

RELATED QUOTES

A2MThe A2 Milk Company

$13.89-13.19%

1 year1 day

Jul 18Nov 18Mar 19Jul 199.0011.0013.0015.00

Updated: Aug 21, 2019 — 4.10pm. Data is 20 mins delayed.

View A2M related articles

Advertisement

The miss defied the company's track record of underpromising and overdelivering.

Despite posting a strong 2019 result with sales up 41 per cent to a record $NZ1.3 billion and net profit surging 47 per cent to a $NZ287.7 million, investors were left unimpressed after a2 delivered a lower-than-hoped outlook for its operating profit margin.

a2 expects 2020 to be broadly consistent with the EBITDA margin of 28.2 per cent achieved in the June half.

a2 Milk CEO Jayne Hrdlicka says it was the right call to exit the UK milk market and she is focused on China and the US, where the growth opportunity is greatest. Chris McKeen

"We are clearly indicating we are competing for a big market position for the longer term, and this takes investment," Ms Hrdlicka said.

She noted that during the second half a2 easily navigated through big changes in e-commerce regulation in China, unlike other companies. Blackmores last week was crunched in the wake of these changes.

Analysts said the trading profit margin outlook was disappointing, and materially below consensus of 31.7 per cent.

“The issue is when you are in a high PE stock and high market expectations, any miss or disappointment the stock gets belted," Morgans analyst Belinda Moore said.

"It is still a great company? Yes, it’s a fantastic brand. They generate strong cashflows, question is what are they going to do with all this cash?"

The balance sheet is strong with no debt, and a substantial cash balance of $NZ464.8 million at year's end.

Ms Hrdlicka would not reveal plans in China for the first half of 2020, but pointed to the recent sponsorship of a reality show with celebrity first-time mothers called The Three of US, which paid off.

“We were very high profile, targeting our core target consumer," she said. "We are thinking differently than traditional marketers had done to engage consumers in China in the past."

The second half marketing spend doubled on the first half, taking full year marketing spend to $NZ135.3 million, representing 10.4 per cent of sales. This will increase to 12 per cent of sales in 2020.

Ms Hrdlikca said she is flagging a period of "investing for growth" and this is "the right thing for shareholders".

One fund manager, who no longer owns the stock, said the market expectations needed to be managed better.

"This is Jayne's first result she owns," he said. "The market wants its cake and to eat it too – it wants top line growth but doing this without spending money on it. I think she has articulated to exploit this opportunity – you have to invest."

"Perhaps they should have explained better to the market. Jayne was scant on detail, and this company is growing strongly and you can lose control on what people's expectations are quickly."

Ms Hrdlicka painted a strong sales outlook for the new fiscal year across key regions thanks to mothers in China buying its baby formula in droves. a2 said its infant nutrition market share strengthened to 6.4 per cent in China over the 2019 fiscal year.

a2's advantage is that its products contain only the A2 beta casein protein type, which is reported to have greater digestive benefits. However, competition is growing as rivals such as Nestle SA launch A1-free formulas in China and at home.

While business in China surged ahead, the UK liquid milk market remains challenging, and a2 decided to pull the plug after six years in order to focus presence in the core regions of China and US.

a2 recently downplayed worries that new Chinese regulations will hurt its position in the biggest formula market in the world, which is seeking to support local players as it looks to become more self-sufficient. China is encouraging more local investment in infant formula as it seeks to bolster the image of domestic products.

Despite this, a2 doubled is distribution this past year to 16,400 mother and baby stores in China and higher sales velocity within existing stores was a strong contributor to the overall growth.

"This channel continues to be an important priority in expanding our brand accessibility and consumer trial. Consequently, significant investment was made in-store to drive education and visibility to shoppers," Ms Hrdlicka said.

"Improving in-store productivity and increasing store distribution will both continue to be important focuses in the coming year."

Australian fresh milk revenue growth of 10.7 per cent and record market share of 11.2 per cent. a2 Platinum formula revenue grew 35.3 per cent and remains the No 1 brand in local grocery and pharmacy channels.

The company remains confident about the opportunity in the US market, where milk revenue more than doubled and distribution expanded to 13,100 stores including Walmart, Costco and Kroger.

While a2 previously flagged the US business would break-even in 2021, Ms Hrdlicka said, "We are not calling out the break-even point because it's not our focus, it's about building a brand."