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April 20, 2016 01:58 PM
A2 Milk Company Limited (ASX:A2M) Managing Director and CEO, Geoffrey Babidge discusses the company’s full year growth forecasts
The background to the company is that it was formed in the year 2000 in New Zealand, obviously a very dairy rich country. And the company identified in fact, the very significant importance of the protein produced by dairy cows. And in fact, until about 5,000 years ago, all dairy cows produced milk with only the A2 form of beta-casein protein.
And at that time, there was a genetic change and another protein called A1, was formed. And it’s the A1 protein, which appears now to create many digestion issues for many people. So we have brought the concept of the A2 protein to consumers now in Australia, New Zealand and other international markets. And we’re the only company that’s doing that.
What makes the A2 Milk Company different to any other diary company, is that we’re only engaged in the sale of the value-added A2 dairy products. We’re the only company doing this internationally. And all of our products in factare value-added products, premium priced products and providing the unique benefit of the A2 protein to consumers. And it is all about in fact, providing the opportunity for consumers to come back and enjoy the benefits of diary, when many of them have had issues around dairy sensitivity or diary intolerance.
The first half for FY16 has been an extremely strong set of results, with our revenue we’re just under NZ$140 million. Our earnings before interest tax and amortization EBITDA was just under $19 million. And that was after we invested over $8 million in new market initiatives, particularly in China, the US and the UK. We therefore, produced a net profit after tax of $10 million and we’ve got a very strong balance sheet. We have no debt on the balance sheet. And we had approximately $30 million of cash on hand at the end of December.
The regional performance of the company is very much based initially, on the Australian business. It’s been a very strong business; it’s been growing with a CAGR growth of 45 per cent over the last five years. We have the leading premium dairy milk being sold in grocery, with approximately a 9.3 per cent value share. And it’s a highly profitable business and has been for many years. And that’s the bedrock of the company. We’ve been expanding our activities into other markets and that includes in China, where we’ve been investing in fact for the last five years. And the China business in fact was profitable for the first time, during the first half of FY16.
We have a business growing in the UK. And in fact, during FY16 that business will become cash flow breakeven on a monthly basis, and so that’s positive. And our more recent initiative, a very exciting initiative, is the launch of fresh milk into the US market. And that will be a significant growth driver for our business, moving forward.
Our China business has been growing incrementally over the last four to five years. We particularly have focused initially on the mother and baby channel, which is a bricks and mortar channel. But more recently, we have been focusing on building online sales, both within China and through the official cross boarder channels. And that’s important. There have been some new tax regulations just recently announced, during the last number of weeks. And that’s about bringing into place some alignment of tax rates that apply for products, being imported into China. And in particular for products being purchased under RMB2000, a tax rate of 11.9 per cent will apply.
We believe our business is well positioned to work through the changes in regulation. We’ve got a multi brand, multi channel policy of how we take our product into China,and that’s both ANZ label and China label. So we think we’re well positioned, we very much support the concept that the China regulators are wanting to ensure that the product going into China is of the best quality. And in fact that the tax regime is neutral depending on what channel is being accessed. So we’re positive about the changes and believe that we can work through those regulatory changes, in an appropriate way.
Looking ahead the company has very strong growth prospects, particularly the continuing growth in the Australian market, with a very strong position that we have in both fresh milk and infant formula. But also the significant growth opportunities in both China and the new market that we are currently launching in, in the US. These are very significant. And based on this year’s FY16 forecast of an EBITDA in the range of between $45 million and $49 million, I mean we would be positive that the growth will continue into the future.
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