Ann: HALFYR: ATM: FY15 first half results

• Release Date: 25/02/15 08:47
• Summary: HALFYR: ATM: FY15 first half results
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					ATM
25/02/2015 08:47
HALFYR
PRICE SENSITIVE
REL: 0847 HRS The a2 Milk Company Limited

HALFYR: ATM: FY15 first half results

25 February 2015

The a2 Milk Company Limited

FY15 first half results

Strong result in Australia, strategic initiatives gaining traction

Highlights

- Strong growth in revenue - an increase of 38% over the prior corresponding
period (PCP)

- Continued strong growth in Australia in fresh milk and also in infant
formula

- UK business progressing to plan

- a2 Platinum infant formula distribution into China recommencing

- Plans for launch into the USA market in Q4 FY15

Financial Summary

The a2 Milk Company (a2MC or Company) performed ahead of plan during the
period and its strategic growth initiatives continued to gain momentum.  The
Company's strategic plan is based on funding growth in priority international
markets from increasing Australian profits.

Managing Director, Geoffrey Babidge said: "The highlights for the first half
were the stellar result for the Australian business in both revenue growth
and operating earnings and our UK business achieving milestones consistent
with our revised plan. We also focused our efforts on repositioning our China
infant formula business in response to the changes in regulation of imports
during 2014, and further progressed the planning for the launch of a2 Milk
into the USA in coming months. At this stage of the Company's development the
focus is on revenue growth and market building. We are comfortable with
performance being on or ahead of plan against these measures at present."

As foreshadowed at the annual meeting in November 2014, the Company has now
lodged an application for the listing of its securities on the Australian
Securities Exchange (ASX) in addition to its existing NZX listing.  The
Company has separately advised of changes to the Board composition that are
proposed to take place in conjunction with the ASX listing. These changes are
consistent with the process of Board renewal that commenced in 2013.

Mr. Babidge said: "The proposed dual listing of the company on the ASX in the
near future will be another important milestone in the continued development
of the company. The ASX listing will provide a closer alignment between our
capital markets profile and business operations, and we expect it to improve
the liquidity of the Company's shares and access to capital markets over
time."

The unaudited Group profit after tax for the six months ended 31 December
2014 was $125,000 and included:

- Total revenue of $74.79 million, an increase of 38% over the PCP;
- Group EBITDA of $3.27 million before non-recurring items, an increase of
27% over the PCP;
- EBITDA after inter-company charges  for the Australian and New Zealand
operations of $4.88 million, an increase of 113% on the PCP;
- EBITDA associated with establishing the UK business of ($1.92) million,
after inter-company charges;
- EBITDA associated with establishing the China business of ($0.61) million,
after inter-company charges;
- Corporate and other EBITDA after inter-company charges of $0.92 million
(before non-recurring items of $0.76 million); and
- Income tax charge of $1.56 million.

The higher income tax charge represents higher non-deductible expenses
(mainly related to development and ASX listing costs), and UK losses not tax
effected .

The balance sheet at 31 December 2014 includes cash on hand of $9.86 million.
The operating cash outflow for the half primarily reflects an increase in
working capital associated with the growth in infant formula and milk sales.

Management believes that the 2016 revenue projection of $230 million advised
in the 2014 annual report remains appropriate. Whilst meaningful revenue from
China and the UK is yet to emerge, these businesses are gaining traction and
the Australian business continues to outperform expectations. In addition,
sales in the USA market are expected to compensate for any shortfall in other
markets.

Australian growth continues strongly

The Australia and New Zealand business continued to perform strongly, with
sales growth and operating earnings in Australia well ahead of the PCP.
Total revenue growth for the Australia and New Zealand business relative to
the PCP was ~39%. EBITDA before inter-company charges was $13.96 million.

Fresh milk sales of a2 Milk increased on the PCP in AUD by 16% as a result of
continued growth in brand awareness and presence in the retail trade.  In
response to competitor activity, the business continues to actively
communicate the features and potential benefits of a2MC branded products and
the distinction between the Company's products and other dairy products or
brands that contain A1 beta-casein protein.  Latest data shows the market
share of a2 Milk fresh milk in Australia has grown to approximately 9.3% by
value in the grocery channel (Australian Grocery Weighted Scan December 2014
quarter).

Improvement in processing efficiencies at the Company's Smeaton Grange
processing facility partly offset an increase in raw milk costs that took
effect during the period.  The Company's gross margin for the period remained
strong at ~35%.

A further standout for the period was the growth in sales of a2 Platinum
infant formula in Australia in both grocery and pharmacy channels, and also
in New Zealand where sales grew from a low base. Total sales of infant
formula in Australia and New Zealand for the half year were $16.07 million.
Our grocery distribution in Australia was broadened, with ranging in
Woolworths achieved from November 2014 that complemented distribution
previously achieved in Coles and major independents.

The Company continues to build milk supply in New Zealand to facilitate
increased production of infant formula by our manufacturing partner, Synlait
Milk Limited.

United Kingdom distribution to plan

The UK business has been implementing the revised business model as outlined
in the most recent annual report.  The model focuses on three key elements:
(i) building distribution in existing accounts and extending into new
accounts, (ii) increasing product awareness in a more targeted manner, and
(iii) enhancing our price positioning and packaging formats to improve
margins.

We are pleased with progress to date, with the new product positioning
receiving broad acceptance across the retail trade.  The new one litre
semi-skimmed format was ranged in J Sainsbury stores (a new customer for
a2MC) from November 2014, and one litre semi-skimmed and whole milk was
accepted for ranging in our existing retail partners Tesco, Waitrose, Ocado
and Morrisons from early calendar 2015. In addition, the product is to be
ranged in Whole Foods Market from February 2015 and a key London wholesaler,
Marigold. In each of the retailer accounts, the product is being ranged in
the speciality milk area.  Distribution of the new one litre product
continues to grow - the product is expected to be ranged in approximately
1,000 retail outlets across the UK, which represents the broadest level of
distribution achieved since entering the market in 2012. We have also
commenced presenting our a2 Milk UHT milk range to the retail trade.

We have worked closely with, and been well supported by, our supply partner
Muller Wiseman Dairies (MWD) in managing the processing and logistical issues
around the packaging change. The quality of packaged product supplied by MWD
continues to be of a high standard.

With the improved distribution platform now in place, our key focus is
building consumer awareness and rate of sales per store in our key customer
accounts.  The new marketing strategy will commence from this month, with a
focus on welcoming consumers who currently limit their dairy intake or
exclude dairy from their diets back to milk through targeted digital media
and marketing activity in-store.

The investment in the UK business during the half was GBP2.2 million, which
is consistent with the FY15 financial plan. Sales revenues, whilst modest,
are forecast to double during the second half.

China infant formula business resumed

As previously reported, the regulatory environment for infant formula sold in
China was evolving during calendar 2014. As part of this, there were changes
to access arrangements for imported product, including a requirement for
manufacturing companies to achieve a new form of registration from May 2014.
Our manufacturing partner, Synlait Milk Limited, achieved the new form of
registration in September 2014.

As a result of the uncertainties arising from these changes, sales of a2
Platinum infant formula to China were on hold from May 2014 until a first
order of approved registered product was dispatched in December 2014.  In
addition, a2MC deemed it appropriate to provide one-off marketing funds to
assist distributors in their selling activities.  Accordingly, we incurred an
elevated level of marketing spend in the half notwithstanding that our sales
were low.

In November 2014, the Company advised of changes to the supply and
distribution arrangements with China State Farm Holding Shanghai Company
(CSF). Under the revised arrangements, CSF has become the exclusive import
agent for a2 Platinum infant formula imported into China and will provide
government advice and support on an on-going basis.  As a result, a2MC has
assumed overall responsibility for distribution of infant formula products in
this market and is assessing new third party distribution arrangements to
expand the network in the near term.  The Company continues to oversee the
marketing and communication activities for the brand and is progressing
development of new marketing initiatives including establishing our own
e-commerce capability for sales into China. The Company considers that these
changes better position the business for success.

The Company continues to develop its plans and structure for sale of fresh
milk and UHT milk in China, with other Asian markets to follow.  As part of
the market entry strategy, from September 2014, a2 Milk branded fresh milk
sourced from our Smeaton Grange facility has been air freighted to Shanghai
for home delivery direct to consumers. It is currently the largest fresh milk
brand by volume being exported from Australia.

USA market entry plan being finalised

As previously advised, the Company has been developing a plan to launch a2MC
branded milk into the USA market during the fourth quarter FY15.  Significant
progress was made during the half in recruiting the core management team,
developing the launch product and marketing plan, identifying milk supply and
commencing discussions with the retail trade.

Our plan centres on a launch into the West Coast region commencing in the
fourth quarter of FY15. Since December 2014, we have completed presentations
to key retailers in this market and progressed the appointment of a high
quality milk processing partner. Whilst the opportunity is potentially
nationwide, our phased entry plan is focused on achieving agreed milestones
in the launch region prior to extending distribution into further state
markets. Taking this into account, the Company will focus its selling
activities in the West Coast region and base its administration activities in
the centrally located State of Colorado in anticipation of further expansion
over time.

Intellectual property and developments in scientific research continues

The results of a human digestion trial sponsored by a2MC and conducted by
Curtin University of Western Australia were published in the European Journal
of Clinical Nutrition in August 2014. This trial provided new support for the
digestive benefits in humans of a2MC products and supported previous findings
in published animal studies. The Company has commenced human studies in a
number of markets to further build on this research.

a2MC remains committed to the continued development of its unique portfolio
of intellectual property. During the half, a2MC acquired full ownership, from
the NZ Milk Institute, of an Australia / New Zealand and China registered
patent that relates to benefits of A2 based formulations containing
additional supplements.

For further information contact:
Geoffrey Babidge
Managing Director & CEO
The a2 Milk Company Limited
+61 2 9697 7000
End CA:00261097 For:ATM    Type:HALFYR     Time:2015-02-25 08:47:14