Single data point ‘doesn’t define A2 Milk’

A2 Milk chief executive Jayne Hrdlicka. Picture. Aaron Francis.

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A2 Milk chief executive Jayne Hrdlicka has warned analysts to be more cautious about their forecasts as the booming company “changes gears” to focus on investing for the future and putting in place the infrastructure required of an ASX top 50 company.

A2 shares have fallen steadily from the $16 mark they reached before the company delivered its annual results on August 20, following news the company’s earnings margin was likely to fall slightly next year because of its investments in growth and a growing marketing spend.

The company forecast EBITDA margins remaining steady with the 28.2 per cent seen in the 2019 half-year, but that was about 13 per cent below where the market had hoped.

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A2 shares reached a record high of $17.25 at the end of July after broker Morgans joined UBS and Goldman Sachs in upgrading their ratings on the stock, on the back of stronger-than-expected market share gains in China highlighted by market research firm Kantar.

“Analysts need to think that as our business is growing and changing in dimension and genuinely delivering on a multichannel strategy into China and growing in America, it is not possible to take one data point and extrapolate what that means for our revenue and our margin flow,’’ Ms Hrdlicka said in an interview with The Australian.

“The analyst community got excited about data released in July. It is one data point. It is an important data point but there are lots of other data points.”

A2 reported a 47 per cent jump in annual net profit to $NZ287.7 million ($269.5m) last year but the result was below market expectations of $NZ297m.

Asked if the company could have better managed expectations, Ms Hrdlicka said: “We have done a pretty credible job of providing a bit of guidance to the market on how to think about our business. We were really clear on the second half and it was the first time we have been that clear. We are investing for the future.

“There is significant opportunity yet to be realised by the company. That is going to require investments in the brand, people and infrastructure. I have been very clear in that message.

“I am not sure what more we could have done. There is a natural adjustment from the way they (the analysts) have expected guidance from the company. We are changing gears with a new CEO.

“We are a much bigger company, in the ASX50, and we intend to be fully clear about where we are heading and give guidance where necessary. And when we are not going to deliver on what we promised, we will be clear about that.”

Ms Hrdlicka, a former Qantas executive who took over the role in July last year from long-serving chief executive Geoff Babidge, said while it was hard to generalise, no investor had expressed concerns about the company’s strategy in post-results briefings over the past fortnight.

“We also had good conversations with analysts. I do think we are being heard,’’ she said.

Last week she headed to North America for briefings with international fund managers.

A2 spent about $NZ20m on consultants last year, contributing to its marketing costs nearly doubling to $NZ135m and they will likely approach $NZ200m next year.

A2 investor Andrew Mitchell of Ophir Asset Management wrote in an online blog after the results that “maybe the money spent on consultants could be better spent internally”, before praising Ms Hrdlicka’s “intent to invest for the future”.

Ms Hrdlicka, who was a consultant at Bain & Co for more than a decade, defended the spending.

“We are an organisation that does not have the people capacity right now. We don’t have all the skills internally. We have augmented that with external support. We will likely conclude it is not economic to be fully self-sufficient in the future so we will always need some external support,’’ she said.

While Bain has been one of the consultants used by A2, Ms Hrdlicka said it was “horses for courses when you are using third parties … You pick people who you think will fit with the culture and you think have the capacity to drive the outcomes.

“We are an unusual company in that we expect to work with people in a fast, outcome-driven way. We are more like a private equity, venture capital business rather than a traditional large corporate.

“We are not an easy company to work for and we work in tight time frames.”

As the company built out its personnel on the ground, especially in China and the US, she is focused on avoiding building an unnecessary bureaucracy.

“I am super-conscious of that not happening. But if you are too lean you can’t get stuff done — we have hit the point of discontinuity on that — it works against you.

“It is an interesting dynamic because the people that have been on the journey for the past three years recognise there needs to be changes. Because the roads in management previously only led to a couple of people.”