Price hikes ‘not only answer’ to combat soaring costs, says A2 Milk CEO David Bortolussi

The trans-Tasman dairy group’s interim profit soared, largely thanks to China sales, while its CEO cautioned companies about constantly seeking price rises.

A2 Milk chief executive David Bortolussi says companies can’t just rely on price increases to pass on higher costs as the global economy battles persistent inflation.

Mr Bortolussi was speaking as the trans-Tasman dairy company’s interim net profit jumped 22 per cent. He said while A2 Milk hiked prices for some of its products in the past six months it was “not always the only answer” and the company was launching other strategies to keep a lid on soaring costs.

A2 Milk is now forecasting double digit full-year growth. But its profit margin will remain in line with 2022, weighing the company’s share price, which fell 8.6 per cent on Monday.

“We really don’t want to increase pricing. It’s unfortunate that’s happening in the category in the industry globally,” Mr Bortolussi said.

“But price is not always the only answer. We have to think about how we can innovate and expand the portfolio and change the mix of our business over time, continue to work on production efficiencies and supply chain efficiencies and mitigate the pressures that we’re facing.

“So it’s not all about just the product economics when you think much broadly about the total business and how we can mitigate cost pressure on business without driving our pricing too high.”

Inflation in fresh food and groceries has been running rampant, jumping 9.2 per cent at Coles and Woolworths in the December quarter. This compares with Australia’s headline inflation, which jumped to 7.8 per cent in the year to December.

And more hip-pocket pain at the checkout is expected after Coca-Cola announced it will hike prices for its portfolio of soft drinks this year to cope with rising inflationary pressures within its bottling business

A2 Milk’s net profit jumped 22 per cent to $NZ73.8m ($67m) in the six months to December 31. Revenue, meanwhile, vaulted nearly 19 per cent to $NZ783.3m. Mr Bortolussi attributed the gain to a strong uplift in China label infant formula sales, which soared 18 per cent.

This was despite China’s broader infant formula market plunging nearly 13 per cent as the country’s birthrate fell to a record low after doctors advised Chinese women not to fall pregnant within six months of a Covid-19 infection.

But the company is in the process of renewing its China infant formula registration. While Beijing has allowed New Zealand authorities to audit the factory of A2’s contract manufacturer, Synlait, on its behalf, uncertainty remains on final approval, further weighing on the company’s share price.

But Mr Bortolussi said: “Our China team has proved that they’re incredibly capable.

“They’re very agile at adapting to whether it be Covid impacts, channel dynamics, or otherwise and still being able to deliver great results. I’m really encouraged by that.

“I don’t underestimate the challenges ahead, but I think we’re in pretty good shape.”

Mr Bortolussi said while he expected some fluctuation around China’s birthrate, he said the medium to longer term market dynamics were positive.

“There might be some support for the birthrate in the coming year because of the earlier impacts of Covid and people starting to take more proactive steps in their family planning that will lead to an increased birthrate in the near team.

“We hope we’ll get to a degree of normality after that.”

China remains A2’s biggest infant formula market. The company has been battling a pandemic-fuelled collapse of the lucrative reseller or daigou market, which wiped about 75 per cent of its share price from its record high of almost $20 in mid-2020, sparking three class actions in Australia and New Zealand.

Daigou sales remained suppressed from China’s pandemic lockdowns, falling 39 per cent. The company has been shifting more products to cross border e-commerce channels, which firmed 11.7 per cent.

Overall China revenue jumped 54 per cent to $NZ471.6m, while earnings before interest, tax, depreciation and amortisation leapt 87.7 per cent to $NZ111.5m.

“As the China market continues to evolve, we are focused on refining our English label distribution model which resulted in a modest increase in sales with market share increases in the CBEC (cross border e-commerce) and daigou channels,” Mr Bortolussi said.

“We are continuing to invest behind our brand, with an additional increase in marketing investment driving further gains in China brand health metrics and record market shares in China label channels.”

Revenue across its Australia and New Zealand business, which includes fresh milk, UHT and infant formula, fell 24.6 per cent to $NZ213.7m while EBITDA eased 35.6 per cent to $NZ62m.

In the US, revenue jumped nearly 62 per cent to $NZ52.4m, and it cut its EBITDA loss to $NZ12.2m from $NZ16.4m.

Despite gaining temporary approval to export infant formula to the US from the Food and Drug Administration, Mr Bortolussi said the company was not rushing to ship product.

“A2 Milk was one of the last companies to receive enforcement discretion. Subsequently, out of stock levels in the (US) market have improved significantly. At this stage, A2 Milk intends to pursue longer term FDA approval of A2 Platinum whilst carefully considering market entry options. No infant milk formula product has been manufactured or sold to date.”

The company has also completed $NZ90m of its $NZ150m share buyback – flagged last August – and will complete the remaining $NZ60m within the next six months.

Macquarie analysts said A2’s turnaround was “tracking to plan” but “the commentary doesn’t suggest upside to FY23 EBITDA, and uncertainty remains around market impact of re-registrations”.