A2 Milk Co sticks with prior earnings guidance
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by
Carrie LaFrenz
The a2 Milk Company has continued to flex its muscles in China, gaining further market share despite the world's biggest baby formula maker Nestle working to chip away at its sales.
China has underpinned the $7.2 billion Kiwi company's enormous growth story, where a2 Milk said market share of its a2 Platinum formula climbed to 5.6 per cent from 5.1 per cent over the first quarter of the new financial year (on a 12-month rolling basis). Distribution in mother and baby stores reached 12,000 sites up from 10,000 in the first quarter of the new fiscal year, it added.
Nestle launched its own version of a2 formula – which contains only the a2 protein – in China in February under its Illuma Atwo brand, and this week the Swiss giant launched its
NAN A2 brand in Australia.
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New a2 boss Jayne Hrdlicka told The Australian Financial Review on the sidelines of the Citi conference in Sydney that the company has put a lot of work into building brand awareness that should hold it in good stead as Nestle releases rival a2 protein products.
"We are very proud of everything the company has achieved in its history," she said. "To have two of the biggest dairy companies [Nestle and a2's alliance partner Fonterra] in the world acknowledging the science is a great thing. That helps build awareness of the category. We have done a nice job building our brand and taking leadership in the category and we will be a disproportionate beneficiary."
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China label baby formula doubled to account for 12 per cent of group formula sales during the first quarter.
In Australia and New Zealand, where it is the market leader, its formula market share was stable at about 32 per cent in grocery and pharmacy in the first quarter, while milk value share was greater than 10 per cent in grocery, moderately higher than the 10 per cent share recorded at the end of the 2018 fiscal year.
Ms Hrdlicka's comments came as a2 Milk stuck with its prior broad guidance for further revenue growth in 2019 underpinned by strong gains in both English and Chinese labelled infant formula, and a push into the United States with milk. The dual-listed company said that revenue for the first three months of the new year has been consistent with expectations. Ms Hrdlicka said there would be a more full update at the November AGM.
In the
2018 financial year, a2 Milk delivered a 116 per cent surge in full-year net profit to $NZ195.7 million ($177.9 million) while sales were up 68 per cent to $NZ922 million.
The stock surged 77¢, or 8.5 per cent, to $9.80 each on the positive update on Wednesday. Rival Bellamy's also jumped $1.02, or 12.5 per cent, to $9.18 after UBS said China infant formula prices had risen after an 18-month decline. UBS also said that French food group, Danone, appears to be losing some ground to a2 Milk.
Ms Hrdlicka said she expects to hear more details around the implementation of a new e-commerce law in China within the next month, which is due to kick in from January and has been an uncertainty for all baby formula players.
"We are really pleased with the new law," she said. "We look at that as an important set of legislation that protects consumers, legitimises the channel and ensures the appropriate regulatory framework sits in place with respect to an increasingly powerful channel to consumers."
At the end of August the Chinese government passed a new law providing the framework to e-commerce trade covering operators, contracts, dispute resolution and promotion for domestic and cross-border transactions (CBEC). The law covers larger platforms such as Alibaba's Taobao but also those selling goods via social networks like WeChat.
A2 Milk said sales more than doubled year-on-year within the US with distribution of its a2 liquid milk climbing to 8000 stores from 6000 over the first quarter, with continued growth in new key accounts like retailing giants Costco and Walmart.
It noted that brand awareness continues to grow off the back of national advertising campaign. It has a planned investment this year of around $US22 million mostly relating to marketing expenditure.
In a note to clients, Credit Suisse said it was a positive start to the new year which should be well-received in the context of recent share price weakness, consumer markets that are opaque and export data which has been volatile.
"We see particular scope for optimism regarding [a2 Milk's] China data points, with the reported share gain highlighting that label-change disruption is behind [the company]; and a 20 per cent increase in MBS [mother and baby store] footprint likely to support revenue growth in [the first half of 2018-19]," it said.
"Balancing this somewhat,
China's e-commerce law changes remain front of mind with increased clarity on the post-January operating environment likely soon."
(20min delay)
